An Overview of the “Patent Trolls” Debate
Released: 2013-04-16T00:00:00

Summary: Congress has recently demonstrated significant ongoing interest in litigation by "patent assertion entities" (PAEs), which are colloquially known as "patent trolls" and sometimes referred to as "non-practicing entities" (NPEs). The PAE business model focuses not on developing or commercializing patented inventions but on buying and asserting patents, often against firms that have already begun using the claimed technology after developing it independently, unaware of the PAE patent. PAEs include not only freestanding businesses but patent holding subsidiaries, affiliates, and shells of operating companies that want to participate in the PAE industry and/or a new means of countering competitors. The proliferation of PAEs was among the central factors raised in support of the most recent patent reform legislation, the Leahy-Smith America Invents Act of 2011 (AIA). However, the AIA contains relatively few provisions that arguably might impact PAEs, apparently because of lively debate over what, if anything, should be done about them. In the 113th Congress, the Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act of 2013 (H.R. 845) has been introduced in an effort to affect the number of lawsuits filed by PAEs.

PAEs emerged alongside the burgeoning tech industry around the turn of the 21st century and gained notoriety with lawsuits claiming exclusive ownership of such ubiquitous technologies as wireless email, digital video streaming, and the interactive web. They have had the attention of Congress, the press, and the public since at least 2006, when a successful PAE suit almost caused the shutdown of BlackBerry wireless service. Such victories in court are rare for PAEs; they lose 92% of merits judgments. But few cases make it that far. The vast majority of defendants settle because patent litigation is risky, disruptive, and expensive, regardless of the merits; and many PAEs set royalty demands strategically well below litigation costs to make the business decision to settle an obvious one. For most PAEs, the costs of litigating and losing are more than offset by the licensing fees they can gain by demonstrating their tenacity to future defendants.

According to one estimate, PAEs generated $29 billion in direct costs from defendants and licensees in 2011, a 400% increase over $7 billion in 2005, and some researchers suggest these costs are primarily deadweight, with less than 25% flowing to support innovation and at least that much going towards legal fees. Another study reported that 62% of all patent suits filed in 2012 were brought by PAEs. Critics assert that PAEs undermine the purposes of patent law—promoting innovation by providing incentives to invest in development and commercialization of inventions—and injure companies that play a vital role in the American economy. However, defenders of PAEs argue that they actually promote invention by adding liquidity options, managing risk, and compensating small inventors. The Federal Trade Commission and several leading scholars suggest that these benefits exist but are significantly less than the costs they impose. What remains unclear is the extent of imbalance between costs and benefits and whether Congress could recalibrate it to advance the goals of patent law while avoiding unintended consequences.

This report reviews the current debate and controversy surrounding PAEs and their effect on innovation, examines the reasons for the rise in PAE litigation, and explores the legislative options available to Congress if it decides that these are issues that should be addressed.


subsections: section_title: Introduction
paragraphs: Congress has recently demonstrated significant ongoing interest in the issue of "patent assertion entities" (PAEs), which are popularly referred to as "patent trolls." The Leahy-Smith America Invents Act of 2011 (AIA) included an order for further study of PAE litigation, and in March 2013, the House Judiciary Subcommittee on Courts, Intellectual Property and the Internet held a hearing on "abusive patent litigation" and PAEs. Furthermore, in July 2012, both the House and the Senate held hearings regarding patent disputes at the International Trade Commission (ITC), which has seen a surge in patent complaints as federal courts have become less patent holder-friendly after passage of the AIA in 2011 and a landmark Supreme Court ruling in 2006. The much-publicized proliferation of PAEs was among the central factors that prompted the AIA, but at the end of the day, Congress passed a few provisions arguably addressing PAEs while leaving several other PAE-related issues unresolved, apparently in light of lively debate over what, if anything, should be done about them.

The PAE business model focuses not on developing or commercializing technologies but on buying and asserting patents against companies that have already begun using them, often after independently developing them without knowledge of the PAE's patent, according to a report by the Federal Trade Commission (FTC). PAEs emerged alongside the burgeoning tech industry around the turn of the 21 st century and gained notoriety with lawsuits claiming exclusive ownership of such ubiquitous technologies as wireless email, digital video streaming, and the interactive web. They have had the attention of Congress, the press, and the public since at least 2006, when a successful PAE suit almost caused the shutdown of BlackBerry wireless service.

Such victories in court are rare for PAEs. According to one empirical study, they lose 92% of merits judgments, but few cases make it that far. The vast majority end in settlements because litigation is risky, costly, and disruptive for defendants, and PAEs often offer to settle for amounts well below litigation costs to make the business decision to settle an obvious one. 

Observers expect that the AIA will reduce the volume of meritless lawsuits, but not dramatically. While the provisions for post-grant examination and transitional scrubbing of business method patents will help with assertions of invalid patents, they do not address the supposed use of valid patents to extract undue royalties from defendants that are either locked in to the patented technology or not infringing the patent at all. Additionally, post-grant examination is not available for patents granted prior to the AIA, and the AIA's restrictions on joinder do not apply in a case brought before the ITC (thus, PAEs could still name multiple parties as respondents in a single ITC complaint even if they have no relation to each other).

Reform advocates fear that PAEs impede innovation, undermine the patent system, and wreak havoc on businesses that play a vital role in the American economy. According to one study, PAE activity cost defendants and licensees $29 billion in 2011, a 400% increase over $7 billion in 2005, and the losses are mostly deadweight, with less than 25% flowing to innovation and at least that much going towards legal fees. Another recent study suggests that PAE activity could harm competition to the extent that operating companies use or "sponsor" PAEs as a means of imposing costs on rivals and achieving other anticompetitive ends.

Defenders of PAEs argue that they actually promote invention by increasing the liquidity and managing the risk of investments in applied research and invention, as well as by compensating small inventors. PAEs' strongest allies include universities and other non-practicing entities that benefit from having PAEs as buyers for their patents and are not as vulnerable to lawsuits because they ordinarily do not make or sell anything that could be infringing. Other defenders of the status quo raise concerns about unintended consequences and collateral effects of changes to the law.

The Federal Trade Commission and numerous scholars suggest that PAE activity does indeed have beneficial effects but that, under current law, these benefits are significantly outweighed by the costs. What remains unclear is the extent of the imbalance between costs and benefits and whether Congress should attempt to rebalance any disparity. In Section 34 of the AIA, Congress instructed the Government Accountability Office to study the costs, benefits, and consequences of litigation by "non-practicing entities" and "patent assertion entities" and report back with findings and recommendations on how to "minimize any negative impact" of such litigation by September 2012; however, as of the date of this report, the study has not yet been released. 

This report reviews the current debate and controversy surrounding PAEs, examines the reasons for the rise in PAE litigation, and explores the legislative options available to Congress if it decides that PAEs are an issue that should be addressed. 

section_title: Patent Law Fundamentals
paragraphs: Patent law finds its constitutional basis in Article I, Section 8, Clause 8, of the U.S. Constitution and its statutory basis in the Patent Act of 1952. Patents provide the right to exclude others from making, using, selling, or importing claimed inventions for a limited period of time, generally 20 years. Inventors may acquire patents by submitting an application to the U.S. Patent and Trademark Office (PTO), where officials will examine it to determine whether the statutory requirements are met. This process is commonly known as "prosecution."

Applications consist of "claims" establishing the metes and bounds of the patent property right, which is typically broader than the specific invention, and a "specification" that describes the claimed invention. The specification must be detailed and concrete enough to enable others to make and use the invention without undue experimentation. Claims must consist of a patentable subject matter—"any new and useful process, machine, manufacture, or any composition of matter, or any new and useful improvement thereof"—rather than abstract ideas or law of nature, and satisfy substantive requirements of novelty, nonobviousness, and utility. 

The patent holder may enforce its rights by filing infringement suits in federal court against anyone who makes, uses, sells, or imports the patented technology, regardless of whether it was copied or developed independently. Courts presume that patents granted by the PTO are valid, but accused infringers may introduce evidence of invalidity or unenforceability. The patent holder bears the burden of establishing infringement by each alleged infringer. Patent litigation is very expensive; the average suit in which $1 million to $25 million is at stake costs $1.6 million through discovery and $2.8 million through trial.

Upon a finding of infringement, a federal court may issue an injunction if doing so seems more equitable than simply awarding monetary damages. The statute also provides for the award of damages "adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer." The U.S. Court of Appeals for the Federal Circuit has national jurisdiction over most patent appeals from the district courts. 

A patent holder can also enforce its rights by filing a complaint with the International Trade Commission (ITC), which may issue an exclusion order blocking importation of the infringing product into the United States. The ITC is not authorized to issue damages, however.

section_title: The "Patent Trolls" Controversy
paragraphs: Skyrocketing rates of patent litigation since the turn of the 21 st century have often been tied to the rise of "patent assertion entities" (PAEs), businesses modeled on "purchasing and asserting patents against manufacturers who may be using the technology" rather than developing or commercializing the technologies themselves. They are frequently accused of being classic arbitrageurs, taking advantage of the "large gap between the cost of getting a patent and the value that can be captured with an infringement action" in the information technology (IT) sector.

PAEs are frequently referred to as "patent trolls," after the villains of folklore known to lie in wait under bridges they did not build, then emerge from the smog to demand tolls from unsuspecting travelers. The term "troll" is controversial because it is both pejorative and ambiguous, often used imprecisely for any opportunistic or unpopular patent holder. But it is best understood as an epithet for PAEs, which object to the label and argue essentially that the fees they collect are legitimate and needed to fund investment in infrastructure—that if they did not take tolls, bridges would be fewer in number and lower in quality. 
subsections: section_title: Enforcement by PAEs
paragraphs: PAEs seek to license their patents primarily ex post facto —often after defendants have independently invented and begun using a technology allegedly covered by their patents, and frequently only after it has become ubiquitous or standard-essential in an industry. 

Indeed, the average patent asserted by the most litigious PAEs is not litigated for the first time, or assigned to its final owner, until seven years into its term, according to a study by Professor Michael Risch. By contrast, product firms tend to assert their patents early in the patent term, and Professor Brian J. Love finds that the gap in litigation timing is such that "the average product-company patent has been shelved by its owner before the average NPE patent has even been asserted."

PAEs suggest that they simply enforce patent property rights against infringers, but much of the controversy surrounding their activities comes from the impression that they lack valid claims to the royalties they demand and receive. Studies suggest that PAEs rarely prevail on the merits. Their win rate in cases decided on the merits is just 8%, versus 40% for other entities, according to a study by Professors John R. Allison, Mark A. Lemley, and Joshua Walker. But they persist with litigation nonetheless, apparently supported by the licensing fees obtained by posing a credible threat of extended litigation.

Contrary to popular belief, however, PAEs do not lose more because their patents are weaker or more likely to be invalid, according to Villanova University Law Professor Michael Risch. In fact, he finds the patents asserted by the most litigious PAEs to be on par with other patents by objective measures of quality and value, and no studies supports the idea that they are especially prone to invalidation, relative to other patents. Rather, PAEs often fail to show infringement, perhaps because they seek and depend upon overly broad constructions of what their patent claims cover. 

section_title: PAEs vs. Other Non-Practicing Entities
paragraphs: PAEs describe themselves as critical intermediaries. Some claim to offer "department stores" for patents, providing one-stop shopping for licensing and purchase. Others suggest they serve key functions by enabling individual inventors, who generate about 12% of patents, to earn returns despite lacking the resources to enforce or commercialize their patents themselves.

No one doubts that an efficient patent system needs intermediaries who reduce transaction costs between those who invent things and those who develop and commercialize them. Many observers note, however, that PAEs "do not seem to operate that way," and that other non-practicing entities (NPEs) serve these functions more efficiently and without "trolling" tactics. PAEs are alleged to be one-of-a-kind in that they are said to speculate on patents—they bet on how much more a patent will be worth in the future, when it is asserted, and focus on high-risk high-yield acquisitions.

Other NPEs with licensing-based business models include technology development firms and licensing agents, but PAEs differ from these in that they generally offer licenses only after infringement and lock-in have begun. The FTC explained that while other NPEs transfer technologies that they or their clients invented and developed so that licensees can benefit from not having to develop them in-house, PAEs transfer nothing but a legal right not to be sued for using a technology that the licensee may have already invested in developing on its own, without help from the PAE or its patents. PAEs also diverge from other NPEs that enforce patents because they focus on acquiring patents outright and asserting them on their own behalf, as opposed to providing services and collecting fees or a slice of the litigation award. 

section_title: The Impact on Innovation
paragraphs: PAEs have frequently been accused of imposing a "tax on innovation" and undermining or impairing the incentives that patent law aims to create. Yet PAEs have also been defended on the grounds that they actually promote invention by adding liquidity, absorbing some of the risk otherwise borne by investors, and getting more royalties for small inventors. Without a doubt, PAEs both add to and subtract from the incentives of patent law, but the FTC and many experts in the field indicate that they currently do more harm than good to innovation and the patent system. The extent of this imbalance—and whether Congress could or should recalibrate it to "support the beneficial effects, and lessen the detrimental ones"—remains unclear, however. 

To the extent that PAEs wait to seek licenses until defendants have sunk costs into a product or invested in developing a disputed technology on their own, the FTC suggests that they can deter innovation by raising costs and risks for the companies and investors that actually bring products to market. Investment decisions must factor in the likelihood that PAEs will later emerge and demand royalties or bring costly litigation, directly reducing returns on investment. Faced with lower profit margins and uncertain but potentially significant risk, manufacturers may find that some R&D projects, features, and product improvements are simply not worth doing, even if beneficial to consumers. Similarly, startups and small businesses may have a harder time getting funding from venture capitalists and other investors who anticipate future PAE demands. 

There are also opportunity costs as productive entities divert funds from R&D to deal with PAEs. In addition to the obvious diversion to pay licensing fees and legal costs, there has also been a shift towards investing in PAEs instead of startups or other ventures. Some investors buy stakes in PAEs to hedge against the limitless risk of being sued by PAEs—strengthening them to deal with the damage they may experience elsewhere. One high-tech entrepreneur explained that "[i]f patent laws continue to be as they are, this is the only way I can see that allows any level of protection." Other investors have simply realized that PAEs offer great returns on investment—better than many startups—and shifted funding in their direction. 

On the other hand, PAEs argue they actually promote investment in invention. Nathan Myhrvold, CEO of PAE giant Intellectual Ventures, styles his company as pioneering a "capital market for inventions akin to the venture capital market that supports start-ups and the private equity market that revitalizes inefficient companies." The most recognized benefit of PAE activity is increased liquidity and better risk management for investments in applied research and invention. By enlivening a secondary market for patents, PAEs provide an exit option and/or extra revenue stream for a variety of patentees. They absorb and manage the high risk by spreading it across large portfolios of patents and extracting value out of otherwise low-value or dormant patents.

Patentees who do not or cannot commercialize in the "primary" market for technology might recoup their costs and perhaps see some returns by selling their patents to PAEs and retaining a cut of future royalties. PAEs suggest this function is especially essential for small inventors and NPEs that would otherwise have a hard time getting any value from their inventions.

NPEs that routinely obtain and sell patents in the secondary market—universities in particular—benefit directly from, and in proportion to, PAE activity. The more licensing fees PAEs obtain, the more these inventors earn from their patents, and the greater their incentives to invent. 

The FTC, however, warns that an increase in the volume of inventions attributable to PAEs should not be taken as a trump card: "Paying inventors only to invent and patent may generate more i n vention and patents , but it may not generate more innovation . Invention is only the first step in a lengthy and expensive development process to bring an innovation to market." 

PAEs may create disincentives for firms to invest in the rest of the process to turn inventions into products and bring them to market. The more a firm invests in R&D, the more likely it is to be sued by a PAE. And each extra dollar PAEs pay out for patents in the secondary market may deduct from the profits of firms that actually commercialize and make use of patented technologies.

James Bessen and Michael J. Meurer have reported that of the $29 billion PAEs cost defendants in 2011, no more than 25% of it flowed back to innovation—the rest they categorize as deadweight loss. In other words, this report calculated that only a fraction of defendant losses go towards the benefits PAEs assert. Empirical research has also raised doubts about how much PAEs actually help small inventors and startups. Another Bessen-Meurer study indicated that less than 2% of losses in wealth caused by PAEs passed through to independent inventors, which according to other studies supply only 29% of PAE patents; 43% come from large firms. PAEs also impose costs upon small- and mid-sized businesses, which comprised 90% of defendants sued by PAEs in 2011 and bore 37% of the direct costs, according to Bessen and Meurer. 

section_title: Behind the Rise of PAEs
paragraphs: Experts attribute the proliferation of PAEs over the past 10 to 15 years to the explosion of the information technology (IT) industry and patent law's struggle to adapt to the unique issues presented by this new frontier of innovation. They indicate that the PAE business model is not about licensing patents generally but high-tech patents in particular, including those on software and business methods or processes related to software, as well as computers and electronics. 

Why do high-tech patents attract and enable PAEs? First, inadvertent infringement is said to be inevitable due to notice failure and the so-called "patent thicket," among other things. Second, uneven bargaining power enables PAEs to negotiate excessive royalties from infringers and undue royalties from non-infringers. The high value that can be extracted from patents that have been plausibly or actually infringed, together with the relatively low cost of acquiring and warehousing them, invites arbitrage.
subsections: section_title: Notice Failure
paragraphs: There is virtually universal agreement that "notice failure" in the IT sector has contributed to the rise of PAEs, as well as the rise in patent litigation generally. In an optimal patent regime, patent property rights are clearly defined and easily determined so the world is on notice as to their existence, scope, and ownership. This "notice function" enables people to avoid infringement, negotiate permission to use others' IP, and maximize efficiency, such as by not keeping all inventions as trade secrets or doing R&D on inventions already claimed by someone else. 

The relative success of the patent system for pharmaceuticals has been linked in part to a manageable volume of clearly defined claims. By contrast, the notice function has broken down in the IT sector. There are two aspects to notice failure: (1) claims have "fuzzy boundaries" that cannot be reliably determined, much less known in advance, without litigation; (2) it is economically infeasible or irrational for defendants to search through existing patents to avoid infringement.

section_title: Section 112 of the Patent Act
paragraphs: Several provisions of §112 are supposed to filter out abstract or ambiguous patents and ensure the world is on notice as to what each patent covers. The FTC and many observers indicate that these requirements have been less stringently applied and enforced in the IT industry than other sectors where notice failure is less of a problem. 

First, the "definiteness" requirement limits the ambiguity of the patent "claim" language, which establishes the metes and bounds of the patent property right. Claims must "particularly point[] out and distinctly claim[] the subject matter which the applicant regards as his invention." Yet critics say the provision has had no teeth since 2001, when the Federal Circuit replaced a test requiring claims to be "plain on their face" with one under which claims are only invalid for indefiniteness if "insolubly ambiguous" and subject to "no narrowing construction." The test, deemed a "disaster" by some, dramatically widened the "zone of uncertainty which enterprise and experimentation may enter only at the risk of infringement claims." 

Second, the boundaries set by the patent claims are sharpened by looking at the accompanying disclosures, which according to the FTC should explain what the claims cover in a more detailed and concrete way so as to clarify ambiguities around the outer edges that may exist or arise later. It must include a specific "written description" of the claimed invention and enough explanatory details to "enable" others in the field to make and use it. Here, too, observers assert that IT patents undergo less stringent review than other types of patents, and some suggest that this permits more abstract patents and inventions that exist only on paper. If §112 rules are loosely enforced and ambiguity does not put patents at risk of later invalidation, patentees may have less incentive to write definite claims and concrete, detailed disclosures (because every detail added may cabin their patent property right later). 

section_title: The Patent Thicket
paragraphs: According to commentators, several conditions in the IT sector make it economically and/or practically infeasible or irrational for manufacturers to find and clear all patents incorporated in a given product. They report that, as a result, in most cases, "the first notice of the patent [is] the filing of the lawsuit," at which point it is too late to design around the technology or negotiate a reasonable royalty rate because the producer has become locked in. The leverage this gives to PAEs will be discussed further below. This section explains why it is often said that virtually all IT products inadvertently infringe some patent(s) and why the industry has apparently taken to ignoring patents altogether. 

Commentators indicate the IT sector is mired in what they call a "patent thicket," meaning a "dense web of overlapping [IP] rights that a company must hack its way through . . . to actually commercialize new technology." According to many observers, the set of potentially relevant patents for any IT product is overwhelming due to both the number of (overlapping and possibly invalid) patents granted in this area and the number of components incorporated in each product. 

Even for products with relatively few patents to review, commentators indicate that their "fuzzy boundaries" would still make it a futile endeavor, and under the doctrine of willful infringement, a risky one. That doctrine has been criticized for creating perverse disincentives by exposing defendants who looked at patents they are later found to infringe to enhanced damages, adding to the cost, risk, and duration of litigation. If those issues were addressed, a full search would still entail huge costs for marginal returns, insuring against neither infringement nor litigation. 

Even the most thorough search will leave some stones unturned—those pending at the PTO. Between the application and issuance dates, patent claims cannot be accessed or checked by other firms, which meanwhile might develop and market infringing products. Strategic use of continuation practice to keep patents pending and hidden longer at the PTO has become an increasingly common and criticized practice. 

Finally, clearing the patent thicket does nothing to prevent weak or baseless suits brought only to extract a settlement from the defendant. Recall that PAEs lose 92% of merits judgments and settle the vast majority of their assertions. These figures may be attributable to uneven bargaining power, which is the subject of the next section. 

section_title: Uneven Bargaining Power
paragraphs: PAEs occupy highly advantageous bargaining positions, and their leverage over defendants has been attributed to an asymmetry of costs and risk that breaks down into three factors: high litigation costs and no way to dispose of weak suits early; the risk of potentially debilitating liability for defendants; and the lack of any major risk or disincentive for PAE plaintiffs to litigate.

First, patent litigation is expensive, and there is no quick or affordable way to get rid of a patent suit except to settle. Defendants frequently find settlement the most cost-effective option, even if they are certain that they are not infringing. The AIA provisions increasing the speed and availability of post-grant examination is expected to ameliorate this issue somewhat for invalid patents granted after 2011. Defendants will be able to challenge a patent's validity, but not its scope or the claim of infringement, at a much lower cost than they can in court, where they must overcome a presumption of validity by clear and convincing evidence to get a patent invalidated.

Second, where injunctive relief is available to PAEs, what commentators call the "patent holdup" problem arises as PAEs leverage the threat of an injunction in royalty negotiations to "capture far more than the intrinsic value of their invention." Those wielding this power have described it as a "Damocles sword." Patent holdup is said to be particularly acute in the IT sector because products incorporate dozens or even thousands of patented features or components, and the owner of any one of them can keep the entire product off the market. 

In 2006, the Supreme Court took a step towards fixing the so-called holdup problem with its decision in eBay v. MercExchange , which enabled lower courts to deny injunctive relief to PAEs and issue only monetary damages for infringement. The case overturned a longstanding "general rule" of the Federal Circuit that injunctions issue automatically upon a finding of infringement. Courts now apply a four-factor balancing test that tends to weigh against PAEs. Indeed, few injunctions have been granted in patent infringement cases since eBay . 

Scholars have raised concerns that PAEs have now shifted their holdup efforts to the International Trade Commission (ITC), a quasi-judicial federal agency that grants "exclusion orders" that stop the import of infringing products into the United States. The ITC has responded to the concerns with data showing that just 8% of post- eBay ITC investigations arose from complaints by PAEs, only one of which obtained an exclusion order. But both sides may be correct if, as the scholars suggest, each of the PAE complaints ensnares entire industries by asserting that industry standards, adopted and incorporated by all manufacturers, infringe their patents.

Third, by contrast to their targets, PAEs have nothing to lose and much to gain by litigating aggressively. Unlike most other patentee-plaintiffs, PAEs pursuing infringement suits "do not risk disruption to their core business" because "patent enforcement is their core business." 

Because PAEs are NPEs that do not make or sell anything, they are not subject to counterclaims that they infringe on defendants' patents. By contrast, when a product firm sues another firm for infringement, the defendant can dig up or acquire a patent that the plaintiff's products might infringe and counterclaim. The resulting dynamic of mutual assured destruction makes bargain power more even, settlement more likely, and litigation far less appealing. Compounding that leverage, the PAE business model creates unusual incentives for PAEs to forge ahead with weak suits (rather than calling it a loss or accepting a lowball settlement) to reinforce their bargaining position with future targets. The ability to extract licensing fees depends upon posing a credible threat of costly litigation.

PAEs also have less to lose than other plaintiffs if a patent is invalidated or narrowly construed. Although PAEs lose future revenue when a lucrative patent is invalidated, this cannot deter them from litigating because the whole value of a PAE's patents depends upon its demands being backed by a credible threat of litigation. Additionally, by the time a validity judgment comes down, the PAE will often have already extracted royalties from other defendants, and these licensing and settlement agreements are often one-time, non-refundable deals.

The joinder limitations included in the America Invents Act might reduce the leverage PAEs can exert. Section 19 of the AIA restricts the ability to sue multiple unrelated defendants for infringement in the same case or same trial "based solely on allegations that they each have infringed the patent or patents in suit," which had become a common practice among PAEs. PAEs must now incur more costs per defendant they sue and face multiple assessments of validity, each with potential collateral estoppel effect. Commentators have predicted that Section 19 will have an impact but not a tremendously significant one, potentially reducing the number of defendants getting sued while increasing the number of suits filed. But if the threat of litigation that gives force to a PAE's licensing demands becomes less credible because it cannot follow through with suing all firms that refuse to buy a license, then its leverage is reduced.

section_title: Legislation in the 113th Congress
paragraphs: On February 27, 2013, Representatives Peter DeFazio and Jason Chaffetz introduced the Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act of 2013 ( H.R. 845 ), which is intended to make PAEs responsible for paying alleged infringers' court costs and attorney's fees if they lose their infringement case in court. A previous version of the SHIELD Act had been introduced in the 112 th Congress but did not see action. The Patent Act currently provides a court with the power to award reasonable attorney's fees to the prevailing party "in exceptional cases." The SHIELD Act of 2013 would amend the Patent Act by inserting a new Section 285A, which would require a court, in an action involving the validity or infringement of a patent, to award full litigation costs (including reasonable attorney's fees) to the prevailing party asserting that the patent is invalid or not infringed, if the court determines that the party alleging infringement does not meet one or more of the following three conditions: 

1. The party is the inventor, joint inventor, or the original assignee of the patent; 2. The party can provide evidence of substantial investment made by the party in the exploitation of the patent through production or sale of an item covered by the patent; or 3. The party is an institution of higher education or is a technology transfer organization whose primary purpose is to facilitate commercialization of technology developed by such institution.

Thus, the legislation attempts to specifically target PAE litigants by providing a "negative definition" of a PAE (though it never explicitly uses such term); a party that does not satisfy any one of the conditions listed above would be liable to the alleged infringer for full litigation costs, if the party loses the lawsuit. The SHIELD Act would require the party asserting invalidity or noninfringement to file a motion with the court requesting a judgment that the adverse party does not meet any one of the above conditions. Within 120 days of such motion, the court would need to make a determination as to whether the adverse party meets at least one of these conditions. If the adverse party fails to meet a condition, the party would be required to post a bond in an amount set by the court to cover the alleged infringer's litigation costs, should the court ultimately find that the adverse party's patent is invalid or not infringed. 

As Representative Chaffetz explained in introducing the bill, "Patent trolls contribute nothing to the economy. No industry is immune to these attacks. Instead of creating jobs and growing the economy, businesses are wasting resources to fight off frivolous lawsuits. This bipartisan legislation will curb future abuse by requiring trolls to bear the financial responsibility for failed claims."

Some have criticized the SHIELD Act for not providing additional explanation about the phrase "substantial investment ... in the exploitation of the patent"; they have also pointed out that a PAE could try to meet that particular condition in order to avoid paying the litigation costs:

[W]hat does "substantial" mean? Presumably it is intended to ensnare NPEs that decide to make things, but not make enough (or good enough) things. But why should a court get to decide what is enough? And what do we do about start-ups who have patents but have not yet commercialized their invention? Are they trolls, too?

And what is to stop NPEs from becoming distributors? They could buy competing products wholesale (perhaps products where they have secured licenses) and sell them. This only makes sense; by being resellers, they can claim that the competition of the infringing product is harming their sales business.

Other commentators have questioned how the SHIELD ACT's bond requirement would work in practice:

How would the "full costs" amount of the required bonds be determined at the beginning of each, separate suit, when different defendants will employ different defense strategies, and incur different "full costs"? Will the bond amount be the subject of legal opinions of counsel, or of expert opinions? What banks, sureties, or insurance companies would offer to provide SHIELD Act bonds to NPEs? Assuming that some financial institutions would, in fact, offer to provide SHIELD Act bonds, what amount and type of collateral would be required and, more importantly, how would typically asset-free, judgment-proof NPEs provide that collateral?

section_title: Other Legislative Options
paragraphs: Commentators have suggested a number of legislative avenues to address PAE activity.
subsections: section_title: IT-Specific Reform
paragraphs: It bears emphasis that PAE activity has been concentrated in the realm of IT, primarily on patents related to software, the Internet, and electronics. Due to the component-driven and intangible nature of IT, as well as indications that patents are less essential to promoting innovation in IT than in other industries, such as pharmaceuticals, some observers urge Congress to undertake targeted reforms and leave the other realms of the patent system as they are. This could entail distinctions based on type of patent or the industry area, an approach already taken by the SHIELD Act.

However, such precision may be precluded, or at least constrained, by an international agreement. Article 27.1 of the Agreement on Trade-Related Aspects of Intellectual Property Rights ("TRIPS"), administered by the World Trade Organization (WTO), requires that patents "be available and patent rights enjoyable without discrimination as to ... the field of technology." But some observers have argued that this provision "does not strictly require a 'single level of IP protection for all technologies or industries.'" In fact, a WTO panel "rejected a strict interpretation of Article 27.1 prohibiting any differentiation between fields of technology," and the "accepted view is that 'the pejorative concept of discrimination must be distinguished from differentiation for legitimate reasons .'" Nevertheless, Congress may need to carefully examine whether any changes it desires to make to the patent system would be inconsistent with its international obligations.

section_title: Improving Notice
paragraphs: Improving notice where it currently fails is a relatively uncontroversial and high-priority goal of some patent reform advocates. The "fuzzy boundaries" of IT patents and the sheer number of them that are granted and incorporated in any given product make it difficult for firms to avoid infringement and, once faced with a PAE assertion, to know whether it is valid without going to court. There are also a number of disincentives and obstacles for product firms to find and clear patents ahead of time. Many scholars believe solving this notice failure would go far towards reducing the negative effects of PAEs while keeping the benefits and making the entire patent system work better.

Among the most popular ideas is more robust use of §112's definiteness and disclosure rules to deny (at the PTO) or invalidate (in court) abstract or ambiguous IT patents, which may entail legislatively overruling Federal Circuit standards that permit "substantial ambiguity" in IT patent claims. Of course it is also an option to let the Federal Circuit sort these matters out itself.

For definiteness, Congress might consider amendments that point the Federal Circuit to a test that "weeds out claims reasonably susceptible to multiple interpretations," which the FTC says "could reduce ambiguity and improve notice in a broad range of settings." Many observers want a test that weeds out more claims than the "insolubly ambiguous" standard adopted by the Federal Circuit in 2001. Others believe current doctrine is adequate but underenforced. 

Several reform proposals address the issue of patent applicants keeping claims hidden at the PTO by filing continuations. The most common among them involve reforms of continuation practice, which currently "allows patent owners to hide the true nature of their invention until late in the process" and extend the time during which other companies might unknowingly begin using the patented technology. There have also been many calls for the PTO to make pending applications more open to the outside world so that there are no surprises and more assurance for diligent companies that do search for existing patents. 

Finally, some scholars propose eliminating what they view as a disincentive for firms to search existing patents in advance. The "willfulness doctrine" is said to boost PAE bargaining power and has the "perverse effect of causing people to try to avoid learning of patents." Congress might consider legislation that would delay the ability to even plead willfulness until there has been a finding of infringement. Proponents argue this would preserve the doctrine's deterrent and punitive functions while improving notice and removing a tool PAEs use to raise defendants' costs and risk, as well as their own bargaining power. 

section_title: Reducing Leverage, Hold-Up, and Settlement Pressure
paragraphs: The leverage PAEs can exert by threatening an injunction from a federal court has diminished since the Supreme Court decided eBay in 2006, but commentators now indicate that PAEs have replaced it with the "Damocles sword" derived from credibly threatening to get an ITC exclusion order on the import of defendants' products. Congress recently heard testimony urging it to prevent the ITC from issuing exclusion orders for PAEs and is currently considering action to that effect. As noted above, PAEs play a smaller role in the growth of ITC complaints than reformers seem to believe, but it is possible that PAEs have extracted royalties by threatening ITC import bans and rarely needed to actually file.

Other procedural changes that shift more of the burdens and costs of litigation onto PAEs could also reduce their bargaining leverage over defendant product companies. Some scholars have called upon Congress to eliminate the presumption of validity, now given to patents out of deference to the PTO. Currently rebuttable only by "clear and convincing evidence," the presumption increases costs for defendants and leverage for PAEs. It might also extend the use of an invalid patent and the number of defendants a PAE can assert it against.

Another common suggestion is to change royalty calculation rules, which often provide damages "disproportionate" to the contribution of the infringed patent as a portion or component of the overall product. Critics posit that in the IT sector, "if every patented portion of an invention was licensed at the same rate as the infringed patent, the inventor would face a net loss." The 110 th and 111 th Congresses considered legislation to address this issue, but nothing was passed. Observers indicate that IT interests support such changes due to the many components in each of their products while pharmaceutical, biotechnology, and NPE or PAE interests have opposed it. Congress could consider IT-specific royalty reforms.

section_title: Escalating Costs or Diminishing Rights Over Time
paragraphs: Many changes proposed by scholars target the practice of sitting on a patent until infringement and/or lock-in to a plausibly infringing technology have occurred and only then notifying targets of the patent and offering them licenses. One idea that has been floated is to decrease the patent period for IT patents, which are quickly outdated yet litigated aggressively through the end of their 20-year terms. A forthcoming study by Brian J. Love shows that it may be that a shorter term would primarily harm PAEs:

Product companies predominately enforce their patents soon after they issue and complete their enforcement activities well before their patents expire. NPEs, on the other hand, begin asserting their patents relatively late in the patent term and frequently continue to litigate their patents to the verge of expiration. Indeed, I find that the average product-company patent has been shelved by its owner before the average NPE patent has even been asserted. 

NPEs account for the majority of suits brought in the final three years of the patent term, and the product firms that litigate late in the term are "a unique group of companies that . . . blur the line between practicing entities and trolls." Love's study also finds that high-tech patents represent an outsized portion of patents litigated in the last three years of their terms, comprising 86% for NPEs and 72% for product firms, even though most 18- or 20-year-old software patents are likely outdated.

An alternative to shortening the patent term would involve changes to the maintenance fees that patent holders pay at certain points in the patent term to keep their rights in force. Fees could escalate over the life of the patent or increase with each renewal and apply across the board or just for inactive patents, entities with big portfolios, or IT-related patents. Another possibility is cost- and burden-shifting in the latter half of the patent term. 

section_title: Consequences for Dormancy
paragraphs: Under other variations, patent owners could face repercussions if they neglect to engage in bona fide use, development, or licensing of their patents for a set number of years. The conditions triggering such effects might be modeled after that for trademark "abandonment" under the Lanham Act: non-use with the intent not to use in the reasonably foreseeable future. 

Not practicing a patent for a number of years could be prima facie evidence of abandonment that patent owners would have to rebut before any infringement suit could proceed. Evidence of efforts to develop, commercialize, or license the patent would rebut the prima facie assumption as long as they are both bona fide—not taken "merely to reserve a right"—and done in good faith. Ex post licensing would not qualify as a use, and availability through a designated clearinghouse of some kind might be required. 

As for the effect triggered by the period of non-use, options range from cancellation to the shifting of costs and burdens onto PAEs, diminishing their leverage and increasing their costs. Other ideas include removing the presumption of validity, subjecting plaintiffs to heightened pleading and production requirements, or freezing the patent until the patent owner begins to use it.

section_title: Patent Market
paragraphs: A leading scholar and a leading PAE have partnered to advocate consideration of another reform: requiring publication of patent assignment and license terms. Mark Lemley of Stanford Law School and Nathan Myhrvold of Intellectual Ventures point out that patents currently exist in an inefficient blind market. The publication requirement would not solve the uncertainty and notice issues, but:

[I]t will permit the aggregate record of what companies pay for rights to signal what particular patents are worth and how strong they are, just as derivative financial instruments allow market to evaluate and price other forms of risk. It will help rationalize patent transactions, turning them from secret, one-off negotiations into a real, working market for patents. And by making it clear to courts and the world at large what the normal price is for patent rights, it will make it that much harder for a few unscrupulous patent owners to hold up legitimate innovators, and for established companies to systematically infringe the rights of others.

Lemley and Myhrvold anticipate concerns that patent holders would not license their patents if they had to disclose the licenses but suggest that this is a less a problem than people might think, concluding that "[t]he only people who stand to lose from mandatory disclosure of licenses are those who are taking advantage of the current state of ignorance."


Question-summary annotations: questions: question: What has Congress recently demonstrated interest in?
answer: Congress has recently demonstrated significant ongoing interest in litigation by "patent assertion entities" (PAEs), which are colloquially known as "patent trolls" and sometimes referred to as "non-practicing entities" (NPEs).
child_questions: question: What does the PAE business model focus on?
answer: The PAE business model focuses not on developing or commercializing patented inventions but on buying and asserting patents, often against firms that have already begun using the claimed technology after developing it independently, unaware of the PAE patent.

question: What is classified as a PAE?
answer: PAEs include not only freestanding businesses but patent holding subsidiaries, affiliates, and shells of operating companies that want to participate in the PAE industry and/or a new means of countering competitors.

question: What was the proliferation of PAEs a central factor in support of?
answer: The proliferation of PAEs was among the central factors raised in support of the most recent patent reform legislation, the Leahy-Smith America Invents Act of 2011 (AIA).
child_questions: question: Why does the AIA contain few provisions on PAEs?
answer: However, the AIA contains relatively few provisions that arguably might impact PAEs, apparently because of lively debate over what, if anything, should be done about them.
child_questions: question: What did the 113th Congress introduce to combat this?
answer: In the 113th Congress, the Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act of 2013 (H.R. 845) has been introduced in an effort to affect the number of lawsuits filed by PAEs.

questions: question: How did PAEs gain notoriety at the turn of the 21st century?
answer: PAEs emerged alongside the burgeoning tech industry around the turn of the 21st century and gained notoriety with lawsuits claiming exclusive ownership of such ubiquitous technologies as wireless email, digital video streaming, and the interactive web.
child_questions: question: How did they catch the attention of Congress, the press, and the public?
answer: They have had the attention of Congress, the press, and the public since at least 2006, when a successful PAE suit almost caused the shutdown of BlackBerry wireless service.
child_questions: question: How is this PAE suit unusual?
answer: Such victories in court are rare for PAEs; they lose 92% of merits judgments.

question: How do most PAE suits end?
answer: The vast majority of defendants settle because patent litigation is risky, disruptive, and expensive, regardless of the merits; and many PAEs set royalty demands strategically well below litigation costs to make the business decision to settle an obvious one.
child_questions: question: How is this profitable for PAEs?
answer: For most PAEs, the costs of litigating and losing are more than offset by the licensing fees they can gain by demonstrating their tenacity to future defendants.

questions: question: What are PAE generated cash flows distributed towards?
answer: According to one estimate, PAEs generated $29 billion in direct costs from defendants and licensees in 2011, a 400% increase over $7 billion in 2005, and some researchers suggest these costs are primarily deadweight, with less than 25% flowing to support innovation and at least that much going towards legal fees.

question: What are PAEs criticized for?
answer: Critics assert that PAEs undermine the purposes of patent law—promoting innovation by providing incentives to invest in development and commercialization of inventions—and injure companies that play a vital role in the American economy.
child_questions: question: How do defenders of PAEs refute this?
answer: However, defenders of PAEs argue that they actually promote invention by adding liquidity options, managing risk, and compensating small inventors.
child_questions: question: How does the FTC view such benefits?
answer: The Federal Trade Commission and several leading scholars suggest that these benefits exist but are significantly less than the costs they impose.

question: What imbalance remains unclear?
answer: What remains unclear is the extent of imbalance between costs and benefits and whether Congress could recalibrate it to advance the goals of patent law while avoiding unintended consequences.