The Issue: Trolling, Licensing & Litigating: a 21St Century Patent

Washington Legal Foundation Advocate for Freedom and Justice® 2009 Massachusetts Avenue, N.W. Conversations With... Washington D.C. 20036 202.588.0302 wlf.org sPrInG 2013 the honorable Dick thornburgh thomas L. ewing robin Feldman

The Issue: Trolling, Licensing rency rapidly from a patent infringement & Litigating: A 21st Century case in which Peter Detkin, then head of Intel’s patent department, accused the Patent Paradigm? Dick Thornburgh plaintiff and its counsel Peter niro of K & L Gates LLP being “patent extortionists.” niro then In this edition of Washington Legal sued Detkin for libel, prompting Detkin Foundation’s ConversatIons WIth, for- to look for another term that wouldn’t mer attorney General of the United land him in hot water. the troll term had states and Pennsylvania Governor Dick been around for nearly a decade already, thornburgh leads a discussion with but Detkin’s promotion of the term sig- thomas L. ewing, an attorney and patent nificantly accelerated its use. Ironically, counselor with avencept LLC, and Detkin is now vice chairman at Professor robin Feldman of the Intellectual ventures, which has been University of California hastings described as “a troll on steroids.” a non- College of the Law, on the lucrative prac- practicing entity (“nPe”) is a similar, tice of monetizing patents. rather than Thomas L. Ewing less loaded term that describes compa- Avencept LLC utilizing patents to produce and sell prod- nies that make no products of their own ucts or services, an increasing number of and earn their revenue from technology “non-practicing entities” purchase, hold, transfer, licensing, and litigation. nPes and aggregate patents for the purpose of include universities and companies that earning licensing fees or using the conduct their own research and/or make patents as weapons in litigation. Mr. their own designs but don’t actually make ewing and Professor Feldman discuss the products. a patent assertion entity positives and negatives of such activity; (“Pae”) describes a particular kind of explain the different actors involved, company that makes nothing at all—no from “patent trolls” to defensive patent designs, no research, no engineering— aggregators; and assess legal policy but instead earns all of its revenue by devices which may reduce abuses that Robin Feldman acquiring patents and then licensing or University of California can arise from patent monetization. litigating them. Paes have no ability to Hastings College of the Law grant technology or know-how licenses Governor Thornburgh: the term because they know no more about the “patent troll” is thrown around a lot, so patents they have purchased than the much, tom ewing, that you’ve written it words in the publicly available patent has become passé. Where did the term documents. come from and how does it compare to “non-practicing entity” (nPe) or “patent Governor Thornburgh: Professor assertion entity” (Pae)? Feldman, what do you think of these terms and their connotations? Thomas Ewing: Yes, the term has become meaningless because just about Robin Feldman: I prefer to use the term every defendant in a patent case applies it “patent monetization entity” or “monetiz- to every plaintiff. the term gained cur- er” for short. a patent monetization enti-

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ty is one whose primary focus can be creates a successful product. others, then, described as deriving income from licensing either use patents they already have or and litigation. although product companies patents they acquire to approach the success- do engage in licensing and litigation, when ful product company and extract payment. Fewer new products framed in terms of the primary focus of the entity, it is not difficult to separate the sheep For example, Wired magazine last May will be able to from the goats. interviewed a “reverse engineer” at the enter the market, as rockstar Consortium. according to the innovators are forced the term “patent assertion entity” falls short, engineer, his job is to take apart and examine to factor in the likely in my view, because it could theoretically products like routers and smartphones, look- cost of paying off— exclude those entities who do not assert ing for ways to claim that the product or fighting off— patents directly but transfer patents to third infringes on one of the thousands of patents monetizers. parties. a business focused on buying, sell- in rockstar’s portfolio. rockstar then fol- ing, and licensing patents is quite different lows up with a license demand. Robin Feldman from a product company, regardless of whether the business sues people itself or this type of activity acts as a tax on produc- merely makes money by selling to others tion, extracting value as part of the price of who sue. having a successful product. Fewer new products will be able to enter the market, as the picture becomes more complicated, innovators are forced to factor in the likely however, by the way in which product com- cost of paying off—or fighting off—mone- panies are increasingly using patent bargain- tizers. as a result, this type of tax on producing in their competition strategy. as moneti- tion stifles innovation. zation activity has exploded in the last few years, product companies are spending ever In theory, one could argue that the product increasing amounts of time and resources on company is just being forced to pay what it acquiring, trading, and posturing with should already have been paying. after all, patents. this is being done in some cases to shouldn’t a company who wants to make a defend a company’s products and in others product just look through the Pto database to attack or disadvantage competitors. one to determine who has rights to various scholar estimates that in the smartphone aspects of the product and acquire any nec- wars alone, $1 billion dollars has been spent essary licenses before going into produc- on litigation and $15-20 billion dollars on tion? patent acquisitions so far. this is a remark- able waste of societal resources. this might be true in an idealized world, but the patent system is far from ideal. It is near- Governor Thornburgh: For the sake of ly impossible to identify all of the patents clarity, we’ll use the term nPe here in a that might be asserted against a particular generic sense. robin, a 2012 Congressional product. there are more than two million research service study noted that a major utility patents alone, each with numerous characteristic of nPes is their engagement in claims. Claims are often broad and vaguely ex post facto licensing and enforcement. worded, drafted in the hopes of going after What does that mean and do you consider it products that have yet to be dreamed of at an abuse of our patent system? the time of the patent grant. In my recent book, “rethinking Patent Law,” I describe Professor Feldman: I suspect the phrase “ex the bargain aspect of patents and explain post facto licensing and enforcement” refers why it is simply not possible for a patent to the following type of activity: a company grant to create more than a starting place for

understanding what the patent might cover. ventures, and other mass aggregators, today operate on a scale and at a level of complex- Modern monetization entities have devel- ity that would have seemed unimaginable at oped sophisticated methods to systemize and the turn of the Millennium. exploit this uncertainty. this is not how the patent system was intended to function, and as with opening Pandora’s box, once the I believe it will operate as a serious drag on model became known, others were quick to innovation. enter the field looking for their own tiny slice of the market and their own variation Governor Thornburgh: tom, you’ve writ- on the theme. With little formal or informal ten and spoken quite a bit about what you regulation, patent monetization has the feel call “mass aggregators.” Where do they fit of the Wild West, where early settlers creat- into the nPe debate? ed and enforced their own norms with little intervention from sovereign entities. mr. Ewing: Mass aggregators have resources that rival or even exceed the Governor Thornburgh: Why have we seen resources of the companies they chase down so much nPe-related litigation and licensing for licenses. Intellectual ventures, for exam- controversies swirling around industries like ple, has a patent portfolio that matches, or smartphones and technology-oriented com- nearly matches, the portfolio of IBM, which panies? is generally considered the largest domestic portfolio. Because of their size, the mass Professor Feldman: With technology prod- aggregators enjoy numerous advantages in ucts such as smartphones and computers, an licensing and litigation over traditional inordinate number of patents may relate to patent trolls. here’s just one example: if a any individual device. these include patents patent troll seeks to license just one patent, on the various hardware components, patents then the licensing target typically examines on the software, patents on the methods of the patent in great detail, including a thor- operating the phone and its network, patents ough review of the patent’s official file his- on the methods of constructing the various tory at the UsPto. this review finds every components, and design patents. any one of flaw and potential flaw in that one patent and these patents can be used to demand royal- often provides useful ammunition for lower- ties and hold up the sale of the product. I ing the licensing fee or even making the described above the tremendous uncertainty problem go away. But if a mass aggregator surrounding the meaning and application of asks a company to license 250 patents, it is each patent. Uncertainty breeds opportunity. simply not cost effective to analyze all of expand that uncertainty by increasing the them in detail, and no one does. thus, the number of patents that could relate to the advantages tilt heavily in the favor of the product, and the opportunities increase expo- mass aggregators in most licensing/litigation nentially. scenarios. Governor Thornburgh: nPes and their Governor Thornburgh: What factors have defenders argue that the aggregation, hold- inspired the rise in patent aggregation? ing, and enforcement of patents benefit the patent market and the economy. What are Professor Feldman: Modern patent aggre- those asserted benefits, and do you feel they gation can be traced to the creation of are in fact benefits? Intellectual ventures by former Microsoft executive nathan Myhrvold. Intellectual mr. Ewing: Patent aggregators provide an www.wlf.org © 2013 Washington Legal Foundation 3 THE ISSUE: TRoLLInG, LICEnSInG & LITIGATInG: A 21ST CEnTURy PATEnT PARADIGm?

efficient mechanism for collection of out- that a minor inefficiency in the system standing licensing obligations. Company X becomes highly exaggerated. may have pioneered Field Y and hold that field’s fundamental patents but not be itself the potential harms to the innovation system It is not difficult in a position to license or litigate those are tremendous—resources are diverted patents to the infringers. Company X may from actual companies to speculators who for a patent holder sell its patents to an aggregator who can then themselves create no new innovations. the with a narrow patent set about collecting the infringement “debt” value of patents with genuinely broad claims claim to make a owed by others. In addition, it is theoretical- becomes debased as well because the per- colorable argument ly possible that an efficient patent market ceived legitimacy of the patent system sinks. for infringement such could be established such that companies I think it’s highly unlikely that patent aggre- that the defendant will would proactively seek out patent licenses in gation can substitute in the long run for gen- likely settle simply the marketplace. uine innovation and product development. to avoid the cost Patent aggregation at best serves as a mech- and uncertainty of It is certainly true that the historical industry anism for staving off competitors while the litigation. practice does not facilitate serious licensing companies supplying the mass aggregators discussions outside the courtroom, which is work on restoring their competitive advan- a pity. however for the above to be true, one tage. Thomas Ewing has to make certain assumptions about the patent system, most of which I suspect are Governor Thornburgh: What are the two incorrect. For instance, all patents do not or three major harms that patent trolling have the same scope of claim coverage. behavior causes? over the past 20 years many, many patents with narrow claim coverage have been mr. Ewing: Patent litigation is extremely granted. complicated and therefore extremely expen- sive. Many nPes will settle their cases for the system presently regulates narrow less than the product-producing company claims by assuming that narrow claims are will have to spend defending itself. so, less likely to be infringed. this may be true, trolling encourages certain actors to acquire but given that some 76% of infringement lit- patents that are “just good enough” to merit igations settle before judgment of infringe- a settlement value under the cost of a good ment due to high litigation costs, high dam- defense. the issue of whether the patent is ages, and the threat of an injunction, then actually valid and genuinely infringed may this almost certainly means that many com- never be addressed in court. the practice panies have settled infringement claims in wastes resources that could be better spent instances where no actual infringement has researching new products. the practice also occurred and/or where the asserted patent is stimulates a deep cynicism, which while not invalid. readily quantifiable, nevertheless erodes confidence in the patent system and likely Put another way, it is not difficult for a patent harms the overall innovation system. holder with a narrow patent claim to make a colorable argument for infringement such Governor Thornburgh: the head of one that the defendant will likely settle simply to mass aggregator that you follow closely, avoid the cost and uncertainty of litigation. Intellectual ventures, has said that “we are this scenario can occur with trolls of all promoting innovation by supporting inven- sizes. But assume that the aggregators col- tors.” Does Intellectual ventures actually do lect huge numbers of patents having merely that? “close enough to settle” claims—the result is

mr. Ewing: While I admire Intellectual always compel potential licensees to accept ventures’ (Iv) business acumen, some of its its terms. Iv has a horde of institutional claims might exist more for public relations investors who are likely expecting a very purposes than hard reality. First, the majori- high rate of returns—so, yes, expect more ty of Iv’s patents have come from large lawsuits to be filed. companies and governments and not individual inventors. second, it’s somewhat Governor Thornburgh: In the law review unclear how much financial return small article you authored with tom, The Giants inventors receive from Iv. the company is Among Us, you discuss how patent aggrega- known as an arbitrage buyer, so it’s not like- tors often create so-called shell companies. ly paying top dollar for the patents it obtains What do aggregators gain from doing this? from small inventors. In those instances where the company has a revenue share with Professor Feldman: strategy is the name of a small inventor, it’s unclear to me how the game in patent bargaining. If an entity much the small inventor actually receives wants to launch its patent at a company, a after Iv removes its fees. Iv is a private key strategy question will concern whether company so its books are not open to the the company can launch anything in return. public. apart from all of this, I would be a shell company, which makes no products shocked to learn that any more than a tiny and holds no assets, is in the perfect defen- handful of inventors are sitting in their labs sive position. the company cannot threaten creating new inventions to slip into Iv’s to counter sue with its own patents because waiting hands. the shell company does not make any products that could be imperiled. In the rare and Governor Thornburgh: While often brand- unlikely event that a court were to assess ed as a patent troll, Intellectual ventures has fees or costs against the shell company for brought very few lawsuits. Why has that frivolous litigation or other bad behavior, the been the case, and do you see it maintaining shell company has no assets to go after and that stance or becoming more litigious over the assets of the parent entity are protected. time? shell companies have other convenient mr. Ewing: In recent years, Iv has brought advantages as well. they create confusion an increasing number of lawsuits against a over the identity of the parties involved, wide array of defendants. Iv spent many which can make it difficult for a product years carefully building up its patent portfo- company to know what it is defending lio and possibly didn’t want to scare away against or how to defend. there are cases, potential sellers through aggressive litiga- for example, in which a product company tion. Iv seems to have moved through a has sued the wrong entity in the confusing phase of selling small amounts of patents to mix of subs. third parties who then filed infringement suits. this practice might have facilitated Most important, shell companies camou- Iv’s licensing of the vast majority of flage the overall strategy of the parent orga- retained patents. since 2010, Iv has begun nization from the curious eyes of govern- filing infringement actions under its own ment regulators, antitrust lawyers, and irri- name. the company would certainly prefer tating academics. this can make it difficult licensing over litigation due to the expense for authorities to spot individual behaviors, of litigation. Given all the advantages that or patterns of behavior, that may be anticom- large patent holders have over defendants, it petitive or otherwise inappropriate. silence is somewhat interesting that Iv cannot and obfuscation are excellent shields. www.wlf.org © 2013 Washington Legal Foundation 5 THE ISSUE: TRoLLInG, LICEnSInG & LITIGATInG: A 21ST CEnTURy PATEnT PARADIGm?

Governor Thornburgh: You also discuss heavily upon patents. What function does an how some aggregators sell or license their aggregator serve for such companies, robin? patents to other aggregators or nPes. What do they gain from that? Professor Feldman: Patent litigation is the transfers among bane of every company’s existence these Professor Feldman: aggregators, at certain days. Wouldn’t it be nice if, in the middle of patent aggregators times, have chosen not to sue anyone direct- a litigation, a product company could search may be part of larger ly, but, as tom stated, to transfer patents to through some vast library of patents and find business strategies others who will sue. the perfect patent to threaten one’s oppo- that have the potential nent? some aggregators do just that, allow- to be entirely innocent reasons to avoid filing lawsuits directly can ing their members to purchase patents from or anticompetitive. include avoiding the risks and costs of litiga- the library, which are immediately asserted tion, remaining in the shadows, and even the as counterclaims in the member’s ongoing Robin Feldman Pr advantages of declaring that one does not patent litigation. We call this “Just in time assert the patents in one’s portfolio. as I Patenting.” noted above, however, it is not clear to me that a monetizer who sues product compa- Patent aggregators can also serve as a form nies directly has a different economic effect of a patent defense club by giving their than a monetizer who simply makes money members a blanket license to all of the by selling to others who sue. the future patents in an aggregator’s portfolio. With value of the lawsuit presumably is included this in mind, aggregators may buy up poten- in the selling price to the third parties, and tially troublesome patents, putting them out the effect in either case will be to operate as of harm’s way—at least from the perspective a tax on innovation. Conceivably, one might of their members. try to argue that certain aggregation approaches result in a lower tax than others. From society’s perspective, however, this I am not certain that is accurate, but regard- aspect of the patent defense club is potential- less, a tax on production is a tax on produc- ly dangerous. a club like this can be the per- tion. From any perspective, a tax on produc- fect weapon to bash those who are not mem- tion is bad for innovation and bad for the bers. suppose my competitors are in the consumer. patent defense club and I am not; the club can transfer its patents to a nasty third party, on a more complex level, transfers among reserving a license for all club members. at patent aggregators may be part of larger this point, the only company the nasty third business strategies that have the potential to party can go after is me. Under these cir- be entirely innocent or anticompetitive. For cumstances, my competitors will have suc- example, transfers among patent aggregators ceeded in using their defense club as a cartel could represent nothing more than innocent to bash the competition. thus, patent defense portfolio re-evaluation. on the other hand, clubs have the potential to allow horizontal they could represent an effort by larger play- collusion and cartel-like activity. the poten- ers in the industry to divide up markets and tial anticompetitive effects of such a struc- maintain power. Properly evaluating such ture should be enough to raise concerns from behavior will require greater disclosure and antitrust authorities. monitoring than the current system provides. Finally, aggregators offer the prospect of Governor Thornburgh: aggregators like lucrative returns for their product company Intellectual ventures have received invest- investors. Where else these days can one ments from major corporations which rely find investments for hundreds of millions of

dollars with a promised return on venture should not impede such transitions. capital levels? Governor Thornburgh: Federal antitrust someone, however, has to pay the piper. officials have been sending signals that they From society’s perspective, the cost of these may assess whether the Federal trade sky-high returns is likely to be paid in the Commission or the Department of Justice form of higher consumer prices and lower may have a role in addressing abuses of innovation. nPes. Is there a role for competition law?

Governor Thornburgh: tom, if the activity mr. Ewing: Yes, there appears to be a role of mass aggregators and patent assertion for antitrust jurisprudence in the patent entities do harm to innovation in america, exploitation business. among other things, how can you discourage such behavior with- the vast majority of trolls are organized as out causing harm? Would any cures be worse limited liability companies, and most states than the proverbial disease? provide the maximum level of privacy for LLCs. this means that the public has no mr. Ewing: Yes, many of the proposed cures idea who actually funds the majority of are likely worse than the disease. an array patent exploitations and what ties they might of quick fixes and pet solutions have been have to other entities. It’s not hard to imag- proposed and/or implemented thus far. I ine that a god’s eye view over the whole of don’t believe the solution involves changing the patent exploitation landscape would how patents are granted apart from stopping reveal some obvious antitrust issues. apart the issuance of patents with overly narrow from this funding issue, some of the patent claims, but some significant changes to aggregators appear to have relationships patent licensing/litigation seem warranted, with operating companies that could similar- especially in terms of damages calculations. ly raise antitrust issues. It’s difficult to imagine a robust system in which litigation is not quick and affordable. Governor Thornburgh: robin, is there a I have no easy silver bullet to propose, but I good fit here for the business of “patent would suggest that the solution lies in return- trolling” and antitrust laws and theories? ing to first principles—why do we have a For instance, what type of “markets” could patent system in the first place? If our nation antitrust officials define, which is always the maintains a patent system as a support to its first step when assessing business behavior vital innovation system, then I would sug- for competitive impact? gest that therein lies the guiding principle behind the solution. I strongly doubt that the Professor Feldman: antitrust agencies have optimal solution will come from any one identified three types of market to consider industry group or any group of incumbent in analyzing intellectual property markets— actors. this is one area where everyone’s goods markets, technology markets, and voice needs to be heard. among other innovation markets. each of these cate- things, today’s seemingly small, insignifi- gories, however, is grounded in the relation- cant voices are quite likely to be tomorrow’s ship between a particular piece of intellectu- tech giants, and the booming voices of al property and the market for the good pro- today’s giants are just as likely to be little duced with that intellectual property. more than fond memories tomorrow. new competitors replacing old ones has been the With patent rights floating unmoored from nature of innovation throughout its history, any underlying products, we are seeing the and changes to the patent system probably development of a different market, which www.wlf.org © 2013 Washington Legal Foundation 7 THE ISSUE: TRoLLInG, LICEnSInG & LITIGATInG: A 21ST CEnTURy PATEnT PARADIGm?

can be described as the market for patent one who frightens the greatest number of monetization. one can acquire power within companies in the most terrifying way. When the market for patent monetization and cre- that happens, product companies may sim- ate negative effects in various product mar- ply capitulate when the aggregator knocks kets without necessarily holding market on the door, regardless of the merits. society power in any individual product market. to should seriously consider whether this is the properly cabin anticompetitive behavior in type of business model that should be nur- this market, antitrust authorities will have to tured in a competitive economy. recognize the market for patent monetization as its own market, along with identifying any Governor Thornburgh: tom, robin, thank submarkets that may develop across time. you for participating in this project. ______Federal antitrust agencies also may need to reconsider the general principal they have WLF’s ConvERSATIonS WITH provides a expressed that intellectual property licensing forum for leading experts from business, is procompetitive. With the market for patent government, academia, and the legal pro- monetization, patent licensing is the poten- fession to discuss current legal policy tial vehicle for much anticompetitive mis- issues. In these conversations our partici- chief, ranging from raising rivals’ costs, to pants give frank thoughts on a wide range defensive leveraging of existing monopoly of important contemporary subjects. power, to horizontal collusion among competitors that can include market division and WLF is a national, non-profit, public other cartel-like behavior. interest law and policy center. We publish timely legal studies, engage in innovative Finally, antitrust authorities must think care- litigation, and communicate directly to fully about the implications of the business the public. To receive information about model encouraged by the phenomenon of WLF publications, contact Glenn Lammi, patent aggregation. to put it bluntly, the Chief Counsel, Legal Studies Division. most successful aggregator is likely to be the

The Honorable Dick Thornburgh is a former attorney General of the United states, two-term Governor of Pennsylvania, and Under-secretary-General of the United nations. he is currently of Counsel to the law firm K&L Gates LLP and Chairman of Washington Legal Foundation’s Legal Policy advisory Board.

Thomas L. Ewing is an attorney and counselor on intellectual property law and business with avencept LLC, a strategic IP consulting firm. Mr. ewing routinely advises international organizations, government agencies, universities, law firms, multina- tional corporations and financial institutions.

Robin Feldman is a Professor of Law at the University of California hastings College of the Law, where she also directs the school’s Law and Bioscience Project and Co-Directs the Privacy and technology Project. along with Mr. ewing, she authored a 2012 Stanford Technology Law Review article, “the Giants among Us,” which helped to inspire this ConversatIons WIth.