The popular name for companies that buy patents for what appears to be the sole purpose of extracting license fees from others by suing over infringement issues, rather than developing the intellectual property (IP) themselves, is “Patent Trolls.” From a legal standpoint, they actually have a somewhat more benign name, patent assertion entities (PAE). 

No matter the name, in a recent joint submission to the U.S. Federal Trade Commission Google, Blackberry, Earthlink and Red Hat, wasted no words in their The comments on denouncing the PAEs for hampering innovation and reducing competition. The submission supports an earlier report by the FTC back in 2011 that found that PAEs do in fact cause economic harm and market distortion.

PAEs are a growing concern

Below are some sobering findings from the filing.

“We believe that many PAE activities are inconsistent with the fundamental goal of the patent system” – that is, “to Promote the Progress of Science and the Useful Arts.”

In particular, PAEs impose an ever-rising “tax” on innovative industries.

• PAEs are filing four times as many cases today as in 2005.
• PAE lawsuits now account for 62 percent of all recently filed patent litigation.
• Big tech companies face hundreds of PAE lawsuits, but small and medium-sized companies are the most frequent targets.
• PAE claims cost U.S. companies $29 billion in 2011 – $80 billion when accounting for all costs, direct and indirect.
• Although the Supreme Court’s decision in eBay limits PAEs’ ability to obtain injunctions in district court, PAEs continue to seek exclusion orders in the ITC.
• PAEs also continue to take advantage of information asymmetries that stem from poor notice and inadvertent infringement to appropriate sunk costs from firms locked into product design choices.

'Patent privateering', in essence the outsourcing of litigation by IP holders of their property to trolls who will do their dirty work for them, was also identified as a major concern. The filing says:

“Today, however, we are witnessing an important shift in the relationship between certain operating companies and PAEs. Some operating companies appear to be outsourcing patent enforcement to PAEs and providing incentives to those PAEs to enforce patents against the transferring company’s rivals. Privateering poses numerous perils to competition, consumers and innovation.”

This practice was identified as so egregious (for several reasons cited in the filling) that the four companies recommended that the FTC employ its authority under Section 6(b) of the FTC Act, 15 U.S.C. § 46, initiate an inquiry into the relationship between PAEs and operating companies – whether as a discrete topic or as part of a broader Section 6(b) inquiry into PAEs. The goal is to stop what the filers say is "asymmetric warfare against competitors," where the company selling the patent hides behind the troll, who cannot be countersued as they don't stand to make money from court action.

Google is so incensed by this latter that it has put forth four different multi-party royalty-free patent licensing alternatives to reduce assertions and litigation from trolls, and increase freedom while respecting valid intellectual property claims. 

It is conducting a survey which closes April 9, and if you’re interested in participating, click on the link above and follow the instructions.

The efforts of the four are laudable. It is clear from the facts cited in the filing that PAEs are much more than pests. They appear to be clogging up the courts with the slowing innovation and ultimately raising costs to consumers as collateral damage. The U.S. patent system, despite a few recent reforms, is broken and is in need of further reform. And while it can be argued that PAEs perform interesting function for obtaining the market value of IP, on the face of it they do appear to create more harm than good and the system needs to eliminate “asymmetries.”

In addition, the practice of privateering is a relatively new twist with some very serious consequences. What is particularly troublesome is not just that major entities can create “plausible deniability” when it comes to using PAEs to slow down the competition, but also that it absolves them of legal liability. On that front it should be noted that even Google’s high-mindedness on the subject should be taken with a grain of salt. The company has promised with its “Open Patent Assertion Pledge” not to sue open source projects using its registered intellectual property, but in 2011 it did provide mobile device maker HTC with five patents to assert against Apple.

Maybe Google has changed its mind about such tactics, because in that particular instance, a judge last year disallowed the move. 

Has all of this risen to the point of spurring FTC or Congressional action in the near-term? So far, not so much. After all, the original findings by the FTC’s own staff on the perniciousness of such practices by PAEs dates back to 2011, and the U.S. Congress certainly seems preoccupied on other business. 

However, it is now springtime in the U.S. capital and the cherry blossoms are in bloom, albeit a bit late this year, which brings hope that the gang of four has sown some seeds that can germinate when the weather and the court dockets get warmer.