As we just achieved the notable milestone of 2000 patents brokered, I thought I’d take a minute to reflect on the dynamics of an ever changing patent marketplace. Even with its imperfections, I think the patent market has so far benefitted small inventors by providing them a conduit to monetize their innovations that they simply didn’t have before. Anyone who has tried to approach companies to interest them in its invention knows how difficult it is, how long it takes and how rarely it works Working with patent holders, large and small, we can witness that the patent market is all-and-all, an effective alternative divestiture model for innovation and we should continue nurturing this model while addressing some of its current shortcomings.
For one, if we want the patent system to become more effective at furthering innovation, parties need incentives to choose licensing negotiations over litigation. The high stakes of the patent market render costs and risks key concerns for all parties in the patent system. Most Patent Assertion Entities (PAEs) view litigation as their solution of last resort. By rebalancing economic incentives, policy makers can introduce liquidity into the patent market that does not unduly rely on litigation.
Efforts to improve the patent system that target the allocation of economic stakes can be more well-tailored, and hence, effective, than changes that arise from broad categorizations of patent assertion activities. By focusing on changing economic incentives in the patent assertion market, policy makers can pinpoint and deter harmful activities without overreaching and curbing beneficial activities. Often, the best changes come in small, measured steps.
Several proposals and policies already implement the economic incentive approach to improving the patent system. We already commented on the White House proposal to curb patent litigation in our June newsletter
. Recently, Chief Justice Judge Randall Rader, of the Court of Appeals for the Federal Circuit, and co-authors added their own voice to the debate by arguing, in a New York Times op-ed
that federal district court judges should exercise authority under Section 285 of the Patent Act to implement fee-shifting; awarding attorney fees to patent defendants. Section 285 states that in “exceptional cases” courts may award reasonable attorney fees to prevailing parties. “Exceptional cases” may be situations where plaintiffs seek “improper advantage” of differences in the relative cost of patent litigation, between them and defendants, rather than prevailing on the merits. In other words, the judge wants to make people suing for patent infringement pay a high price if they did it somehow recklessly hoping the defendant(s) would prefer to pay than to fight.
Rader’s fee-shifting proposal targets incentives tied to harmful effects often associated with PAEs, but would apply to all patent holders. Fee-shifting may reduce the number of patent lawsuits and improve the quality of patents that are asserted in court. The solution would increase the stakes in litigation for patent plaintiffs, striking at their incentives to file frivolous lawsuits that can abuse the patent system.
By not singling out PAEs, fee-shifting can be promising for patent market liquidity. Potential patent defendants would have to negotiate licensing based on the merits of the patents, rather than refusing to deal with patent holders because of their status as PAEs. Thus, small, independent inventors would still have incentive to monetize their assets through PAEs, knowing that if licensing negotiations fail, they can still have their day in court.
Fee-shifting addresses a subtle issue in the patent market. By neutralizing the imbalance of costs and risks that favor PAEs, rather than attacking PAEs per se, fee-shifting can help the patent system by deterring specific activities that are symptoms of its current weaknesses. While some PAEs are not ashamed to say that they are exploiting loopholes in the law, let’s not forget the basic tenet of patent ownership; patents are negative rights that allow their owner
(not the inventor per se
) to prevent others from conducting infringing activities. Nothing in patent law requires that patent holders make products, bars inventors from monetizing assets through third parties, or forbids litigation as a form of patent assertion.
Changing the basic backdrop of patent law is not warranted by current issues with the patent system that are associated with PAEs. Operating companies also hold patents they do not commercialize, they also “privateer” assets through spinoffs and file their own share of patent lawsuits. According to Professor Mark Lemley, barring activities undertaken by PAEs may be “missing the forest for the trolls
.” In short, everyone is doing it and the difference between PAEs and operating companies is not always that clear. Being a troll is a transient state. Thus, policy efforts to fend off the vilified impact of PAEs should address the patent system in general. PAEs are business models, not categorical villains.
PAEs came to existence because most inventors cannot enforce their patents for lack of resources. Yet, if PAEs seem to harm innovation, it is because they disproportionately expose weaknesses in the patent system, i.e. poor patent quality, complex litigation rules, slow judicial process, etc. Let’s also remind ourselves that PAE’s did not invent and do not hold a monopoly over frivolous lawsuits in America. We have heard the same critics over and over in the realms of personal injury and product liability litigation, to name a few.
Counterbalancing the costs and risks behind harmful activity in the patent market is a productive way to improve the patent system. Already, the America Invents Act (AIA) prohibition against joining separate patent defendants shifts a burden onto plaintiffs that increases their cost to file lawsuits. Further, proposals to require more disclosure in lawsuit pleadings may place additional burdens on plaintiffs while giving defendants more information to answer infringement allegations.
The patent system can continue to benefit from policies that target incentives of parties in the patent market as long as it allows valid patent owners to rightfully enjoy the full benefit of the property they developed or acquired without any bias.
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