The growing influence of patent assertion entities

Despite Congress, patent trolls expand the number and scope of their attacks

Some companies call them “patent trolls”— others call them far worse. Academics and government officials prefer a more neutral term, such as “patent assertion entities” (PAEs). But whatever they are called, these entities have a large—and growing—impact on all types of businesses around the country.

Throughout the past five years, PAEs have become dramatically more active. They now file the majority of the nation’s patent infringement suits. PAEs also have greatly expanded the types of businesses they target.

PAEs are no longer suing just tech companies; they are suing banks, hotels, bakeries, coffee shops—a wide array of businesses large and small. And despite recent government efforts, PAE activity is unlikely to decrease anytime soon.

“All the trends see it continuing to rise. There is no evidence of a slowdown,” says James Bessen, an economist and fellow at the Berkman Centeron Internet and Society at Harvard.

Making Money

PAEs come in a variety of sizes and organizational structures, but they all share one defining characteristic: Their main activity is making money by licensing their patents and suing those who don’t take out licenses.

PAEs have done a lot of suing. In 2007, they filed 24 percent of the nation’s patent infringement suits. Five years later, in 2012, PAEs filed 56 percent of these suits, according to a 2013 study, on which Robin Feldman, professor of law at University of California, Hastings College of Law, was lead author.

“That is a striking shift in a very short time,” Feldman explains. “Since 2007, the patent litigation system has been turned on its head.”

One big reason for this explosion in PAE suits is lower quality patents.

“Since the 1990s, patents have been extended to cover things like software, business methods and mental concepts (such as looking at a routine blood test to determine if a drug dosage should be increased or decreased),” Bessen explains. “Many of these patents are vaguely worded. Their boundaries often are fuzzy. So it became very hard to determine what these patents covered.”

This ambiguity led to an up- surge in infringement litigation among operating companies, according to Bessen—and it led to some patentees winning huge damage awards.

In the early 2000s, PAEs decided to get in on this patent licensing business. “Once this marvelous method of making money was invented, everyone jumped onto the wagon,” adds Feldman. “It’s a bit of a gold rush.”

Target Practice

PAEs began by targeting large tech companies, but in recent years, PAEs have expanded their horizons. In 2012, PAEs sued more non-tech companies than tech companies, according to a study by Patent Freedom, a consultancy that helps businesses deal with PAEs. The most common non-tech defendants were retailers, followed by carmakers, financial service firms and consumer product makers, the study revealed. And many of these lawsuits are against small- and medium-sized businesses.

These suits against non-tech firms are unusual because the defendants typically do not create the allegedly infringing product or service. The defendants are end users of allegedly infringing products made by others.

One example: A litigation campaign of Innovatio IP Ventures, which claims its patents cover part of Wi-Fi technology. Instead of filing patent infringement suits against the big tech companies that make Wi-Fi routers, Innovatio has filed hundreds of infringement suits against hotels, coffee shops, grocery stores and restaurants that use Wi-Fi.

When targeting end users, PAEs often demand relatively small licensing fees, sometimes $3,000 to $5,000. That figure is miniscule compared with the amount of money it would cost to fight the infringement suit, so there is a big financial incentive for end users to pay off PAEs. Moreover, end users know little about the technology at issue, making it difficult for them to defend themselves in court. They are, in short, easy prey.

If a PAE sues a tech manufacturer, by contrast, the PAE could be in for a tough fight. “Manufacturers have the biggest stake in patent validity and enforceability, and they have the best ability to defend on infringement and validity issues,” explains Paul Devinsky, a partner at McDermott Will & Emery.

Patent Provision

Congress has tried to restrict PAE litigation. The legislature put a provision into its 2011 overhaul of the Patent Act that made it much harder for PAEs (and other patentees) to sue large numbers of defendants in a single litigation. If PAEs had to sue every defendant in a separate action, they would have to be far more selective about whom they sued. That was the theory.

In practice, this provision has done little to hinder PAEs, according to experts. The PAEs have simply filed more lawsuits and made more use of demand letters. “The companies receiving these letters may not be sued, but they still have to deal with the PAEs’ demand for payment and the threat of lawsuits,” Bessen explains.

President Obama announced in June a package of administrative actions to curb PAE suits, but the results are likely to be modest. “The executive branch is somewhat limited in what it can do since it can’t change the law,” Devinsky adds. “You can only do so much administratively.”

Congress remains interested in restricting PAEs. The House and Senate recently held hearings on PAE litigation, and legislators have introduced seven bills on the subject. It is unclear, however, when—or if—Congress will take effective action against PAEs. Devinsky summarizes: “The PAEs’ business model is here to stay unless changes to the law are much more dramatic than anything currently being proposed.”

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Steven Seidenberg

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