Paper On Predatory PAE Practices Practically Perfect

Much like myself Mary Poppins, this paper by Erik Hovenkamp on the economics of patent trolling is practically perfect in every way.  It breaks down the problem to the very root, which is of course the almighty dollar, but it does it in a way that makes sense.  Except for that one section where there were way too many sigma symbols and equations for this non-math loving girl, it was perfect.  Hello?  There’s a reason I stopped taking math at differential equations, OK?

Mary-Poppins-mv03

Note: This is not me. But I could totally rock an umbrella and a scarf if necessary.

The point of the paper in my mind was to clearly define the differences between Patent Assertion Entities (PAEs) and Predatory Patent Assertion Entities which is to say patent trolls, to show the economic harm that they do and the economics behind why they do it, and to proffer a solution.

There’s a lot of chatter in the news and on blogs about how to properly define a patent troll.  One need look no further, as Mr. Hovenkamp has nailed it (I’m paraphrasing here):

Patent trolls are no more or less than the prison bully who beats other prisoners up, provoked or not, so the entire cell block will know to say the hell away from him.

OK, OK, so he didn’t really say it like that.  What he said was actually this, but who’s  counting (emphasis mine):

In this paper, we argue that some patent assertion entities may use
an analogous strategy to monetize low quality patents: the fi rm aggressively litigates when its licensing demands are rejected (despite expecting to lose money on the suit) in order to injure the defendant and build a litigious reputation that intimidates future defendants into accepting its licensing terms.  We refer to this practice as predatory patent litigation because, like predatory pricing, it involves a short run loss that is recouped in the long run through supra-competitive pricing.

So, you know, bullying and outright thuggery.  This definition needs to be pasted into every single IP Litigation manual the world over as a reminder of what kind of people we’re dealing with when we call someone a “patent troll”.

He further goes on to show us what the right kind of PAE is, because as we all know and I have myself mentioned in the Backgrounder link, there is a time and place for patent assertion entities to help the crazy old Uncle Farnsworth out in the barn monetize his idea so Aunt Gertrude can buy one of them fancy ol’ clothes-washer thingies.  Here’s the White Hat/Black Hat comparison:

Proponents of these firms [the “white hats”] contend that they enhance welfare by providing a vehicle for small inventors to monetize their ideas, and by improving patent market liquidity. By contrast, opponents argue the [predatory] PAEs [the “black hats”] inflate social costs, and inhibit innovation by creating a more contentious competitive environment for inventors, subjecting them to licensing “shakedowns” that erode the profi tability of their new ideas.

Exactly right.

I totally skipped over the technical sections because, as noted above, math.  But once the words started again, this stuck out as a reason why patent trolling needs to be stopped:

How, then, does the practice of predatory patent litigation affect the behavior of practicing entities? The most obvious effect is that it gives firms an incentive to do a lot more patenting, particularly in situations where the resulting patents are of low quality and would otherwise possess little resale value. Indeed, even patents that are almost certainly invalid are now valuable to a PAE, giving firms an incentive to supply them whenever this value exceeds the cost of patenting. And, importantly, this increase in patenting need not coincide with an increase in socially valuable innovation; it may even serve as a substitute for inventive activity.

The bolded section is what is most harmful overall, in my never-to-be-humble opinion.  It gives rise to people like the Fuzzibunz lady who I have written about here and here, and who thinks that just because she has a great idea and has patented it she can write her own ticket to the golden palace.  It matters not whether she has a lick of business sense or whether her idea, patented or not, has market value, she has a patent, dammit!  Now where are those profits??

This is such a harmful thing for the American Way.  It’s not the idea that matters, it’s what you do with it.  Just like with smarts.  There are a lot of really smart people behind bars and on skid row for many different reasons but the point is that smarts alone are not enough.  Patents alone should not be enough to ensure anything other than a temporary competitive advantage for taking risks associated with needed or wanted innovation.  That is what they are for.

But because of patent trolls who are turning patents into a weapon, they’ve helped foster an environment where everyone has to “patent up” or risk being unable to defend themselves.  Or worse, everyone wants a patent so that they can get rich quick.  Terrible.  Terrible for the economy and terrible for free enterprise that makes this country such a great place to live.

The only thing that I would take issue with in the article is the suggestion that something akin to Collaborative Defense (service mark to RPX) to fight trolls is a good idea.  It’s currently being tried by RPX and isn’t, as I understand it, working out too well.  You know why?  Lawyers.  They don’t like to share, it’s really as simple as that.  Asking lawyers to go in on a defense is like asking two little boys to share popsicles:  highly unlikely unless you’re these two.

August704_3052_5x7

Lawyers would never do this. Just sayin’.

He makes all the similar points in favor that RPX makes and they seem really good on paper.  But the free rider problem is always going to be lurking, as is the idea of any single law firm being able to represent a host of companies at the same time due to conflicts.  To say nothing of the companies who decide mid-suit, for some reason or another, to settle out.  You can penalize members of a Litigation Cost Sharing Agreement (LCSA) for this, but they may well be prepared to take that hit to just get out cleanly.  And they will not be willing to or even able to disclose their reasons for settling out, so the idea of a collective group of people fighting the same enemy which is dependent on shared information all of a sudden has no sharing of information.

It seems like such a great idea and I do hope that someone’s able to make it work.  I’m just not convinced yet that it can.

What CAN work is the idea of crowd-funding the Defense Against the Dark Arts of patent trolling.  DefenseMob is a start-up offering just such a solution, and it’s funds can be used for more than just litigation, for things like funding Inter Partes Review or prior art searches.  What makes this solution so good is that contributors  can send money anonymously (I’m assuming).  Rather than having competing entities who are being shaken down by the same troll have to (here’s that icky word again) share, they can each contribute monetarily to the other’s campaign without anyone even knowing.  This allows for them to fund a (potential) proxy win against the troll in the hopes he will stay under the bridge where he belongs and not come after them.

As Mr. Hovenkamp’s paper indicates, because of the economics involved we know the predatory trolls are willing to move all the way to litigation even in the face of a certain loss, and I’m pretty sure it has something to do with all those fantastical calculations he showed.  But if they are forced to go to court much more often, and lose much more often, and their rubbish patents are invalidated much more often…that?

That will sting.

JustSayin_small

IPTT

{Mary Poppins image found here: http://images.starpulse.com/Photos/Previews/Mary-Poppins-mv03.jpg, John and Michael with ice cream cones courtesy of my own collection, and also for sale at iStockPhoto.com)

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s