Responsible innovation and patent assertion entities

Abstract

The concept of “responsible innovation” extends the traditional definitions of “innovation” to consider the ethical, social, and environmental context within which the traditional innovation operates. From this definition, one can surmise that the controversial issue of “non-practicing entity” (NPE) behavior is deeply embedded in the ethical and legal context of the innovation process, and critically so in the technology commercialization phase. This article conceptually bifurcates NPE and “patent assertion entity” (PAE) behavior in relation to responsible innovation; reviews the economic impact (litigation costs) of PAEs on the US economy; identifies market-based solutions to mitigate the impact of PAE litigation, that is, new options for review of prior art and insurance coverage against PAE lawsuits; and discusses the public policy benefits accruing to PAEs' embracing responsible innovation behavior, while arguing against a “loser pays” provision in legislation addressing egregious behavior of PAEs being considered in the 113th US Congress.

Keywords:

• antitrust policy
• Federal Trade Commission
• non-practicing entity
• patent assertion entities
• responsible innovation
• US Department of Justice

1. Introduction

The accumulation and assertion of patents as an important core component of business models has proliferated in recent years. Recognizing this business model, patent-usage trend, the US Federal Trade Commission (FTC 2011) unveiled the term “patent assertion entities” (PAEs) as a substitute for the pejorative “patent trolls”. A PAE is defined as a business model¹ that “focuses on purchasing and asserting patents² against manufacturers already using the technology (after infringement and lock-in have occurred), rather than developing and transferring technology” to licensees (thus simply transferring a legal right not to be sued for the transfer of money) (FTC 2011). Patent law scholars also call a PAE a “non-practicing entity” (NPE), in contrast to a “practicing” entity, or a firm that uses patents to design or manufacture products or processes (FTC 2011).

While many definitions of “innovation” focus on an iterative process of creative, theoretical ideas and conceptions, patent-protected technological inventions, and commercial exploitation, the concept of “responsible innovation” extends this definition to consider the ethical, social, and environmental context within which the traditional innovation process operates. According to von Schomberg (2010, 5), European Commission Directorate General for Research, Governance and Ethics Unit:

Responsible research and innovation is a transparent, interactive process by which societal actors and innovators become mutually responsive to each other with a view on the (ethical) acceptability, sustainability, and societal desirability of the innovation process and its marketable products in order to allow a proper embedding of scientific and technological advances in our society.

From this definition, one can surmise that the controversial issue of NPE behavior is deeply embedded in the ethical and legal context of the innovation process, and critically so in the technology commercialization phase³ which directly benefits American society. Yet, from the perspective of responsible innovation, NPEs need to be carefully bifurcated into PAE and non-PAE actors.

2. NPEs and responsible innovation

NPEs that are not PAEs (trolls) can include university research laboratories,⁴ licensing agents that offer enforcement and negotiation services for patent owners, development firms that offer their patented technologies for sale or to licensees in advance, and both technology entrepreneurs (some failed) and major technology companies “spinning off” their patents to financially capitalize on their value. Such “firms that aggregate and manage patents can play an important intermediary role, bringing value to society by more efficiently matching inventors to patent users in an otherwise illiquid market, and by legitimately protecting patents from infringement” (EOP 2013, 3).

In contrast, a PAE focuses on aggressive civil litigation, deploying business tactics such as: threatening to sue thousands of companies at once through elaborate “letter campaigns”, without any credible evidence of infringement against the targeted firms; creating “shell companies” that make it difficult for defendants to identify specifically who is suing them (which inhibits sharing legal fees for a common defense strategy); asserting that their patents cover inventions not imagined at the time of the patent grant; and enforcing “weak” patents in litigation, assuming that some companies will financially settle lawsuits instead of risking the outcome of a trial (EOP 2013).

Consequently, PAEs have effectively exploited weaknesses in the US patent system, including ambiguities in patent scope, while learning to manipulate their large patent portfolios to enforce weak patents and multiply successful “holdup” demands against alleged patent infringers (Cockburn 2012; Skitol 2012). Thus PAE behavior, while not illegal, reflects nontransparent, deceptive, and economically costly behavior that contrasts with the intent of responsible innovation.

3. The economic impact of PAEs

PAEs occupy a growing role in patent litigation, as the number of new PAE patent cases increased from 569 in 2008, to 2544 in 2012 (through 1 December 2012) (Victor 2013), with PAEs filing more than 70% of all patent claims in the final three years of their patent term (Love 2012). In the USA, the average cost of a legal defense against a patent infringement lawsuit – in which $1–$25 million is being litigated for damage – is $1.6 million through discovery, and $2.8 million through trial (AIPLA 2012a), with a median of $650,000 for smaller cases, and a median of $5 million per cases exceeding $25 million (AIPLA 2012b). Noteworthy is that PAE litigation is heavily concentrated in the information technology (IT) sector, with approximately 75% of PAE-asserted patents covering computer and communications-related inventions, and 62% specifically covering software-related patents (Bessen, Ford, and Meurer 2011–12) – although there has been a recent upswing in PAE patent litigation activity focused in service-oriented businesses, including airlines, casinos, realtors, restaurants, and supermarkets.

The US Government Accountability Office (GAO) found that NPEs litigated approximately 20% of a representative sample of 500 patent infringement lawsuits brought from 2007 to 2011 (GAO 2013). While the number of overall defendants in these patent infringement lawsuits increased 129% during this period (2007–2011), lawsuits involving software-related patents accounted for about 89% of this increase in litigation activity (GAO 2013).

4. Business and public policy solutions

In a recent study of PAE litigation, Allison, Lemley, and Walker (2011) reported that 92.4% of court litigated judgments were found for PAE defendants, in comparison to 47.3% of non-PAE litigants (in the authors' “once-litigated patent” group) winning their patent infringement cases. This staggeringly low PAE success rate indicates how weak such patent infringement allegations are when litigated versus, for example, those settled prematurely due to an aggressive patentee infringement letter campaign. It is not surprising that this threat of infringement is effective, given that a company that continues developing new products while in litigation is guilty of willful infringement, making it subject to triple financial damages. This weakness in the legitimacy of PAE patents has created market-based solutions capable of contributing to a responsible innovation environment.

In 2011, the US Congress passed the America Invents Act (AIA), which provides the public policy foundation for the emergence of a market-based business model that inexpensively assists defendants to review and invalidate PAE patents. The AIA provides a variety of new options for the review of prior art, that is, any previous patent, technical paper, or public knowledge or the use of an invention which helps determine whether an invention is novel and non-obvious, and thus addresses the critical issues of patent quality and patent infringement enforceability (Milone 2012).⁵

In one relevant example of a market-based, crowd-sourced response, Article One Partners – patent research firm and website founded in 2008 – is where a global community of more than 27,000 high-skilled technical, scientific, or patent professionals in 160 countries are available to research prior art that others, including US Patent and Trademark Office (USPTO), missed exposing for significantly less financial cost than what companies expend in the patent defense litigation process against PAEs (Kharif 2013).

The insurance marketplace is also responding to the threat of patent infringement lawsuits filed by PAEs.

In December 2012, RPX Corporation and Aon Risk Solutions jointly announced that they will begin offering to small- and medium-sized companies, which are often targeted by PAEs, with $1 billion or less in annual revenue up to $2.5 million in insurance coverage against PAE lawsuits. This insurance policy, like many other business insurance policies made available to industry association members at an association-negotiated discount, is an invaluable protection particularly to those computer and information technology-based industry association members who are the target of three-out-of-four PAE infringement lawsuits.

In November 2008, RPX Corporation became the first company to offer a patent aggregation service, that is, a cooperative purchasing effort or “defensive patent aggregation”, whereby the third-party aggregator, for example, RPX, purchases patents or patent rights so as to reduce the risk of and cost of litigation associated with PAE activity, while offering licenses to members of the “defensive patent aggregation” against a fixed annual membership fee. Other forms of defensive patent aggregation include defensive patent pools and buying consortia, such as provided by Allied Security Trust. These market-based solutions, however, have recently come under the scrutiny of both the FTC and the Antitrust Division of the US Department of Justice (DOJ). Some antitrust commentators believe that the Sherman Antitrust Act may also apply to PAEs that have amassed market power through a series of acquisitions or the acquisition of standard essential patents (Hogan Lovells 2012). Some observers also speculate that both the FTC and DOJ will be launching investigations on major defensive patent aggregators (IPNAV 2013).

5. Discussion

As noted earlier, responsible innovation involves “the (ethical) acceptability, sustainability, and societal desirability of the innovation process”. The innovation process also reflects the critical component of “trust”,⁶ which is an attribute closely associated with ethical behavior. Developing trust in the business operating environment ultimately engenders predictability, necessary for the relatively smooth commercial exploitation of technological innovation. To lower the perceived risk in the business operating environment resulting from deceptive PAE business behavior, ethical leadership by PAE management must embrace non-deceptive business practices. Tempering such unethical business behavior as “shotgun” intimidation letter campaigns, as well as embracing transparency of firms bringing patent infringement allegations, will go a long way in mitigating the popular view of PAEs as a “rogue element” in the responsible innovation process. This ethical behavior in turn, if embraced by enough major PAEs, while not eliminating all potential public policy remedies, will help reduce the political pressure to enact the most exacting new federal legislation and executive branch rule-making (or policy interpretation) that can seriously restrict PAE (and potentially non-PAE) future business behavior.

In Europe, the volume of patent litigation is much lower than in the USA, with only one in 1000 European patents contested for invalidity (Edmundson 2013a). The threat of PAEs is presently not a serious issue in Europe, reflecting in part the greater detailed patent application examination process required by the European Patent Office (which serves to narrow the scope of an awarded patent) and, in part, the limited circumstances European software and business practice patents are awarded (Edmundson 2013a). Under the new European Unitary Patent System, expected to be to be launched in 25 of the 27 countries of the European Union (EU) in 2015, EU and patent experts believe that the new rules governing the future Unified Patent Court will discourage PAE's from filing abusive patent infringement cases (Edmundson 2013b). For example, the new Unified Patent Court will require that the losing party in litigation pay the prevailing party's legal fees; there will be no contingency fees for attorneys; and there is no risk of triple damages (as in the US legal system) (Edmundson 2013b).

Borrowing from the EU experience, the recent Innovation Act (House Resolution 3309) attempts to address some of the more egregious behaviors of PAEs. Passed by the US House of Representatives in December 2013 by a bi-partisan vote of 325 to 91, the Innovation Act includes major provisions such as requiring patent plaintiffs to narrowly specify how the defendant allegedly infringed the plaintiff's patent; requiring plaintiffs to name all parties who have a financial interest in the patent infringement litigation (thus eliminating the use of “shell companies”); instituting a “loser pays” system, whereby a plaintiff would allow the defendant to recover litigation expenses; delaying the discovery phase of litigation until the court has addressed legal questions about the validity of the plaintiffs patent claims; and protecting end-users, thus allowing technology manufacturers to defend lawsuits against PAEs on behalf of their customers (Congress.gov 2014). The companion bill in the Senate (Senate 1720 “Patent Transparency and Improvements Act of 2013”) languished in the Judiciary Committee for six months. Without a stakeholder consensus behind the legislation, Senator Patrick Leahy (D-Vermont), the bill's sponsor and committee chairman, indicated he was “taking the patent bill off the Senate Judiciary Committee agenda” (Leahy 2014), effectively killing the bill until a new Congress is convened in January 2015.

While the bill has meritorious provisions, the “loser pays” provision has the potential to have a “chilling” effect on entrepreneurial ventures attempting to enforce their patents. What the US Senate needs to develop in its bill are practical guidelines – based on meritorious criteria – that establish a distinction between a credible patent infringement lawsuit (that is excluded from the “loser pays” provision), and one that lacks “merit” and should be subject to such provisions. Such criteria pose an intellectual challenge, but a workable criteria differentiating between meritorious and non-meritorious patent litigation need to be clearly articulated if this provision is to be fair, and not penalize those entrepreneurial innovators who legitimately believe that their patents are being infringed.

While both the USDOJ and the FTC will pursue inquiries into the antitrust implications of PAE activities, it is unlikely that antitrust policy will ever have a significant impact on such activities due to the narrow circumstances under which such novel approaches to antitrust theory will likely be applied. To support this argument, one antitrust commentator contends that it is not important whether the patented invention is integrated with PAE behavior, but how the PAE's impact on innovation is affected by the total costs imposed on the defendant; the reward to the patentee; and the industry contribution of the defendants and plaintiffs to innovation (Shapiro 2012). Furthermore, it is not a good idea to limit the ability of patent holders to use intermediaries to assert their patents (Shapiro 2012).

In conclusion, the combination of new prior art provisions in the AIA and crowd-sourced patent research sites will promote responsible innovation by assisting to reduce future PAE threats of patent litigation against technology-producing companies in the USA. To lower the perceived risk in the business operating environment from deceptive PAE business behavior, ethical leadership in non-deceptive business practices must be embraced by PAE management. This approach can go a long way to mitigate the view of PAEs as a “rogue element” in the innovation process, and help reduce the political pressure to enact more restrictive federal legislation and executive branch rule-making addressing PAE behavior.

Moreover, procuring a patent infringement insurance policy is a viable enterprise risk management strategy for firm reimbursement of outside legal expenses and damages awarded in a PAE case. Efforts at defense patent aggregation, however, which have the potential to reduce the risk and cost of litigation associated with PAE activity, needs formal guidance and clarification from the US antitrust agencies on their legal status before they will be embraced by the American business sector. Lastly, while much of the proposed Innovation Act, which draws upon EU experiences with PAEs, will help improve the patent litigation environment, a clearly articulated criterion must exist if the “loser pays” provision is to effectively rein in PAE behavior, but not at the expense of legitimate technology entrepreneurs who are defending their patents against alleged infringement.

Notes on Contributor

Thomas A. Hemphill is an associate professor of strategy, innovation and public policy in the School of Management, University of Michigan-Flint. He received his Ph.D. in Business Administration with a primary field in Strategic Management and Public Policy and Secondary Field in Technology and Innovation Policy from The George Washington University, School of Business.

Notes

1. Teece (2010, 174) offers a simple, practical definition of a “business model”: “It outlines the business logic required to earn a profit (if one is available to be earned) and, once adopted, defines the way the enterprise ‘goes to market’.”

2. US patent rights enforcement is undertaken in the Federal court system, with the courts operating under the presumption that patents granted by the USPTO are valid (Yeh 2012, 3). Upon a finding of a patent infringement, a Federal court has the choice of issuing an injunction against the infringer or awarding monetary damages to the patentee (Yeh 2012, 3).

3. An anonymous reviewer argues that “patent trolling might slow down new technology commercialization, which for some precautionary principle advocates could be desirable”.

4. As per an anonymous reviewer, Lemley (2008) notes that universities, by their business behavior regarding technology transfer to patent trolls, will sometimes act as bad actors. He suggests that universities, when transferring technology to the private sector, should not merely maximize their licensing revenue, but ought to have as their goal the maximizing of the social impact of their technology. Engber (2014) reports that James E. Bessen, of Boston University School of Law and Harvard's Berkman Center for Internet and Society, estimates that lawsuits by patent trolls cost the US economy $29 billion every year, but that universities participate in just 1% or 2% of such cases. However, Bessen says this statistic might conceal a bigger problem: “The firms that are doing business with the schools engage in patent mischief of their own. The universities aren't acting as trolls themselves, but their licensing technology to trolls.”

5. AIA's provisions allow for inclusion of unpublished patent applications pending in the USPTO system for less than 18 months, foreign patents and applications, global public use of an invention, pre-issuance submission of prior art by any third-party, post-grant review of a patent inter partes review of previous patents or printed publications, and a post-grant review of covered business method patents (Milone 2012).

6. According to management scholar Hosmer (1995, 393) “trust” is:

  … the reliance by one person, group, or firm upon a voluntarily accepted duty on the part of another person, group, or firm to recognize and protect the rights and interests of all others engaged.