Patent Alliances That Aggregate Patent Rights for Their Members’ Use but Do Not Offensively Assert the Acquired Patents Against Third Parties
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QIONG QI* ABSTRACT In recent times, patent litigation involving Non- Practicing Entities (“NPEs”) has increased drastically over the last decade, at an average rate of 24% per annum. Patent Assertion Entities (“PAEs”), a subcategory of NPEs, are responsible for approximately one-fifth of the total patent suits in federal courts with firms accruing around $29 billion of direct costs due to these assertions of patent rights. NPE assertions have become such a critical problem that even United States President Barack Obama mentioned them in his State of the Union address. Although legislative reform is a widely recognized solution to NPE patent assertion problems, Congress has been notoriously slow to act in the area of patent reform. Consequently, industries have looked to potentially quicker solutions, such as the formation of patent alliances that aggregate patent rights for their members’ use but do not offensively assert the acquired patents against third parties. Such alliances, however, pose their own unique challenges in creating an efficient defense against NPE patent assertions. This article examines the business models of two established Patent Alliances, AST and RPX; both endorse the non-assertion philosophy yet use different business * Research Fellow, The John Marshall Law School; Juris Doctor 2015, The John Marshall Law School. The author would like to thank Prof. George Fisher of Stanford Law School for his comments and Prof. Doris E. Long of The John Marshall Law School for her suggestions on an earlier version of this work. models to achieve their defensive goals. This article contends that operation under a principle of non-assertion serves as a major source of economic inefficiencies in the alliances, resulting in higher licensing costs for practicing entities, as well as a potential hotbed for antitrust violations. This article asserts that upon modifications to AST’s and RPX’s current business models, efficiency can be improved. Nevertheless, these patent alliances still have highly questionable, long-term viability because of the impracticality in their preemptive purchasing strategy and the difficulty in managing a large member pool to support this strategy. In addition, without reassessing the non- assertion goals, and modifying current practices implementing such goals, even the modifications proposed to strengthen patent alliances may ultimately prove an ephemeral solution to the problem. CONTENTS ABSTRACT ...................................................................... 71 I. BACKGROUND ..................................................... 78 A. An introduction to the U.S. Patent System. .......... 79 B. An introduction to Non-practicing Entities and Patent Assertion Entities. .............................................. 82 C. An introduction to Defensive Aggregation and Patent Alliance. ............................................................. 87 D. Allied Security Trust ............................................. 88 E. RPX, Inc. ............................................................... 94 II. ANALYSIS .......................................................... 98 A. Inefficiencies in AST’s Business Model ............... 99 B. Profit-Driven Features in RPX’s business model 108 C. Inefficiencies in RPX’s business Model ............. 110 D. Common risks to both AST and RPX ................. 113 III. PROPOSAL ....................................................... 114 A. “If we are to better the future, we must disturb the present.” ...................................................................... 115 B. “If we were all better people, the world will [not] be a better place.” ............................................................ 117 C. “In the long run we are all dead.” ....................... 120 IV. CONCLUSION ................................................. 124 INTRODUCTION “If we were all better people the world would be a better place.”1 This optimistic view of the world however, seems to lie behind most efforts to deal with the problems of Non-Practicing Entities (“NPEs”)—so called “patent trolls” in common parlance—under U.S. patent law.2 The hope is 1 David K. Levine, What is Game Theory?, DEPARTMENT OF ECONOMICS, U.C.L.A., http://levine.sscnet.ucla.edu/general/whatis.htm [https://perma.cc/YC68-CDKV]. 2 The term “NPE” has an indistinct and shifting definition. For example, PatentFreedom defines NPE as “any entity that earns or plans to earn the majority of its revenue from the licensing or enforcement of its patents”. All About NPEs, PATENTFREEDOM, https://www.patentfreedom.com/about-npes/background/ (last visited Oct. 8, 2013). By contrast, others use the term NPE to refer to the entities who use abusive tactics to enforce sometimes questionable patents against smaller entities. See infra Part I.B. Others use the term “patent assertion entity” (“PAE”) to refer to a subcategory of NPEs which adopt aggressive patent assertion strategy in their business model. See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-13-465, INTELL. PROP.: ASSESSING FACTORS THAT AFFECT PAT. INFRINGEMENT LITIG. COULD HELP IMPROVE PAT. QUALITY 2n.6 (Aug. 22, 2013), available at http://www.gao.gov/assets/660/657103.pdf [hereinafter 2013 GAO REP.]. These diverse meanings underscore some of the difficulties in dealing with NPEs. For ease of convenience, this article will generally use the term NPE to refer to those entities that adopt that by making all patent holders “better people”3—because they do not assert patent rights in the abusive manner that some NPEs do—the world will be a “better place.” On a literal basis, NPEs are patent holders that do not practice the inventions on whose patents they hold. Such NPEs can serve as licensors, but they can also lie in wait and cause disruption when they eventually spring forth to assert their rights. We can still vividly remember the famous Blackberry shutdown saga in which Research in Motion (“RIM”), manufacturer of the Blackberry device, was forced to settle the case with “a tiny patent-holding firm” for $612.5 million so as to avoid a catastrophic shutdown of its widely used wireless device.4 Yet on the more quantitative side of the story, statistical data has shown that NPE activities have flourished in recent times. According to one source,5 patent litigation involving NPEs has increased drastically over the last decade, at an average rate of 24% per annum since 2004.6 According to another study, “Patent Assertion Entities” (“PAEs”)—a subcategory of NPEs that adopt aggressive aggressive (and often abusive) patent assertion strategies. For a more detailed discussion on definition of NPE, see infra Part I.B. 3 Game Theory defines “better people” as people who are more altruistic, or more generous. See Levine, supra note 1. 4 Unless otherwise indicated, all amounts are in U.S. dollars. Mark Heinzl & Amol Sharma, RIM to Pay NTP $612.5 Million To Settle BlackBerry Patent Suit, WALL ST. J., Mar. 4, 2006, available at http://online.wsj.com/news/articles/SB114142276287788965 [https://perma.cc/UT9L-SDHV]. 5 Litigations Over Time, PATENTFREEDOM, https://www.patentfreedom.com/about-npes/litigations/ (last visited Oct. 8, 2013). 6 PatentFreedom defines NPEs as “any entity that earns or plans to earn the majority of its revenue from the licensing or enforcement of its patents”. All About NPEs, supra note 2. This definition of NPE is essentially that of PAEs discussed below. See infra Part I.B. patent assertion strategies as a business model7—are responsible for approximately one-fourth of the total patent suits in federal courts.8 Yet the latest PricewaterhouseCoopers (“PwC”) Patent Litigation Study continues to observe the trend in which the median damage awards for NPEs is significantly higher than that of practicing entities,9 at $8.9 million, and $2.0 million, respectively.10 By 2011, the median total litigation cost for a small or medium sized company has been estimated at $318,000 and $646,000, respectively.11 Firms accrued approximately 7 For detailed discussion on NPE subcategories, see infra Part I.B. 8 2013 GAO REP., supra note 2, at 17. The GAO study was conducted using data from other sources such as Lex Machina and RPX database. Id. at 49. Therefore, its finding is independently derived from those relied upon in PatentFreedom, which maintains its own database. See e.g., PATENTFREEDOM, supra note 5. 9 PwC’s definition of an NPE includes non-offensive entities in addition to PAEs. PRICEWATERHOUSECOOPERS, 2013 PATENT LITIGATION STUDY: BIG CASES MAKE HEADLINES, WHILE PATENT CASES PROLIFERATE 34 (2013), http://www.pwc.com/en_US/us/forensic- services/publications/assets/2013-patent-litigation-study.pdf [hereinafter 2013 PWC REP.]. Surprisingly, there seems to be very little concern from academia and the industry with which to provide a definition for practicing entity. Generally speaking, a practicing entity is one which works the patented invention by making, using, offering to sell, selling, or importing into the U.S. the invention. See generally, 35 U.S.C. § 271(a) (2012). It is the opposite of a non-practicing entity. See infra Part I.B. 10 PRICEWATERHOUSECOOPERS, 2015 PATENT LITIGATION STUDY: A CHANGE IN PATENTEE FORTUNES 4 (2015), available at https://www.pwc.com/us/en/forensic- services/publications/assets/2015-pwc-patent-litigation-study.pdf. 11 James E. Bessen & Michael J. Meurer, The Direct Costs from NPE Disputes 15 (B.U. Sch. L. & Econ. Res. Paper No. 12-34, 2012),