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Patent assertion entity

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Definitions[]

A patent assertion entity (PAE) is

“ a firm that owns patents but does not make products with them, instead it focuses on aggressive litigation, using such tactics as: threatening to sue thousands of companies at once, without specific evidence of patent infringement against any of them; creating shell companies that make it difficult for defendants to know who is suing them; and asserting that their patents cover inventions not imagined at the time the patents were granted.[1] ”
“ [a] firm[] with a business model based primarily on purchasing patents and then attempting to generate revenue by asserting the intellectual property against persons who are already practicing the patented technologies.[2] ”

Overview[]

Suits brought by PAEs have tripled between 2011 and 2012, rising from 29% of all infringement suits to 62% of all patent infringement suits. Estimates suggest that PAEs may have threatened over 100,000 companies with patent infringement in 2012 alone.

PAE activities hurt firms of all sizes. Although many significant settlements are from large companies, the majority of PAE suits target small and inventor-driven companies. In addition, PAEs are increasingly targeting end users of products, including many small businesses.

PAEs take advantage of uncertainty about the scope or validity of patent claims, especially in software-related patents because of the relative novelty of the technology and because it has been difficult to separate the "function" of the software (e.g., to produce a medical image) from the "means" by which that function is accomplished.

The PAE business model is generally seen as combining characteristics such as the following:

  1. They do not "practice" their patents; that is, they do not do research or develop any technology or products related to their patents;
  2. They do not help with "technology transfer" (the process of translating the patent language into a usable product or process);
  3. They often wait until after industry participants have made irreversible investments before asserting their claims,
  4. They acquire patents solely for the purpose of extracting payments from alleged infringers;
  5. Their strategies for litigation take advantage of their non-practicing status, which makes them invulnerable to counterclaims of patent infringement.
  6. They acquire patents whose claim boundaries are unclear, and then (with little specific evidence of infringement) ask many companies at once for moderate license fees, assuming that some will settle instead of risking a costly and uncertain trial.
  7. They may hide their identity by creating numerous shell companies and requiring those who settle to sign non-disclosure agreements, making it difficult for defendants to form common defensive strategies (for example, by sharing legal fees rather than settling individually).

PAE strategy[]

In a sense, a PAE reflects the legal environment created by the U.S. patent system. Indeed, four provisions of the federal Patent Act of 1952, Title 35, United States Code, undergird PAE business models. First, Section 261 declares that patents "shall have the attributes of personal property," meaning that they can be owned by one or more persons and transferred to others.[3] A PAE can acquire a patent from another firm or individual because patent law allows it to do so.

Second, Section 154 establishes a patent holder's core right to exclude others from making, using, offering for sale, or selling the patented invention in the United States.[4] When a PAE acquires a patent, what it seeks to leverage is this statutory right to exclude. It exercises this right when it asserts a patent against another firm and demands payment in exchange for a license.

Third, Section 271 defines patent infringement as any act of making, using, offering for sale, or selling the patented invention without authorization from the patent holder.[5] When a PAE asserts a patent against a customer or other accused infringer who did not manufacture the claimed technology, it relies on this provision.

Last, but not least, Section 281 creates a basic remedy for patent infringement, which is to sue an accused infringer for relief in a federal district court.[6] When a PAE files a lawsuit as part of its assertion activity, it does so under the color of federal patent law.

At the core of PAE activity is a claim of patent infringement. A PAE — no differently than any other patent holder — has the "'right to try to exclude' by asserting its patent in court" and laying odds on a favorable outcome. "Nothing in the patent grant guarantees that the patent will be declared valid, or that the defendant in the patent suit will be found to have infringed." The likelihood that a PAE can successfully prove infringement will influence the amount that the PAE can recover from that firm. The PAE's expected revenue will also depend on the likelihood that the accused firm will assert and successfully prove one or more affirmative defenses to infringement, such as invalidity and unenforceability.[7] Importantly, if a patent is held invalid or unenforceable, that ruling would affect a PAE's enforcement of that patent against other firms as well. This evaluation may affect the PAE's selection of which patents or patent claims to assert (e.g., stronger versus weaker patents).

An accused firm likewise must evaluate the likelihood of these potential outcomes, as well as the expected litigation costs, and decide how best to respond. For example, it may decide to seek the advice of patent counsel in assessing the strength of a PAE's infringement claim.[8] Advice of counsel is not required, however, to protect against a claim of willful infringement and the prospect of enhanced damages. Importantly, the Leahy–Smith America Invents Act added a new provision to the Patent Act that makes clear "[t]he failure of an infringer to obtain the advice of counsel with respect to any allegedly infringed patent, . . . may not be used to prove that the accused infringer willfully infringed the patent or that the infringer intended to induce infringement of the patent."[9] The accused firm must also assess the potential impact on its business should the outcome be unfavorable from its standpoint. For example, in addition to a judgment awarding actual infringement damages, the firm may also face some risk of treble damages[10] or that an exclusion order or a permanent injunction against the sale of its products may issue.[11]

Whether an asserted patent will be held not invalid and infringed ultimately requires a judicial interpretation of the meaning and scope of the patent claims[12]. Unless and until a court has provided such an interpretation, there may be a significant difference of opinion between a PAE and an accused firm as to whether the asserted patent is not invalid and infringed, or the likelihood that a judge or jury will reach the same conclusion. A decision from a court on claim interpretation, while not a final judgment in the case, may narrow or even close that difference of opinion.

If a PAE sues an accused firm for patent infringement, then the defendant firm may also assess the "nuisance value" of the case by estimating its litigation costs in terms of external legal fees and expenses and internal business disruption. The defendant firm may rationally decide to settle even if it reasonably believes that it could prevail on the issue of patent validity or infringement if the settlement amount is less than the estimated cost of litigation. . . . [S]ome courts have been open to considering whether filing an infringement action to extract a nuisance-value settlement rises to the level of bad faith, warranting the imposition of attorneys' fees or other relief.[13]

References[]

  1. ↑ Patent Assertion and U.S. Innovation, at 1.
  2. ↑ Federal Trade Commission, "FTC Seeks to Examine Patent Assertion Entities and Their Impact on Innovation, Competition" (full-text).
  3. ↑ 35 U.S.C. §261, ¶1 ("Subject to the provisions of this title, patents shall have the attributes of personal property.”); Id., ¶ 2 ("Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing.").
  4. ↑ 35 U.S.C. §154(a)(1) ("Every patent shall contain . . . a grant to the patentee, his heirs or assigns, of the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States, … referring to the specification for the particulars thereof.").
  5. ↑ 35 U.S.C. §271(a) ("Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.").
  6. ↑ 35 U.S.C. §281 ("A patentee shall have remedy by civil action for infringement of his patent.”); 28 U.S.C. §1338(a) ("The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents, . . .”). Additionally, a patent holder may file a complaint with the U.S. International Trade Commission to block the importation of infringing articles as an unfair trade practice in violation of Section 337 of the Tariff Act of 1930. See 19 U.S.C. §1337(a)(1)(B).
  7. ↑ See 35 U.S.C. §282(b). An invalidity defense must be proven by clear and convincing evidence because a patent is presumed valid. See 35 U.S.C. §282(a); Microsoft Corp. v. i4i Ltd. P’ship, 564 U.S. 91, 95 (2011) (full-text).
  8. ↑ As Justice Breyer recently acknowledged, "consulting counsel may help draw the line between infringing and noninfringing uses." Halo Elecs., Inc. v. Pulse Elecs., Inc., 579 U.S. __, 136 S. Ct. 1923, 1937 (2016) (full-text) (Breyer, J., concurring).
  9. ↑ Leahy–Smith America Invents Act, Pub. L. No. 112-29, §17, 125 Stat. 284, 329 (2011) (codified at 35 U.S.C. §298). See Halo Elecs., 136 S. Ct. at 1937 (Breyer, J., concurring) ("[O]n the other side of the equation lie the costs and the consequent risk of discouraging lawful innovation. Congress has thus left it to the potential infringer to decide whether to consult counsel — without the threat of treble damages influencing that decision.").
  10. ↑ See 35 U.S.C. §284; Halo Elecs., 136 S. Ct. at 1937 (Breyer, J., concurring) (expressing concern that "the risk of treble damages can encourage the company to settle, or even abandon any challenged activity," which argues for careful application of Section 284, to ensure that it targets only instances of egregious misconduct). But see id. at 1935 (dismissing the concern that enhanced damages would ever be awarded in "garden-variety cases"). Additionally, both a PAE and an accused firm may face some risk that each will be required to pay the other party's attorney's fees should it lose the litigation, and the case is deemed "exceptional" by the trial court. See 35 U.S.C. §285; Octane Fitness, LLC v. Icon Health & Fitness, Inc., 572 U.S. __, 134 S. Ct. 1749, 1757 (2014) (full-text).
  11. ↑ See 35 U.S.C. §283 (2012); eBay Inc. v. MercExchange, LLC, 547 U.S. 388, 393 (2006) (full-text) ("[S]ome patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves. Such patent holders may be able to satisfy the traditional four-factor test, and we see no basis for categorically denying them the opportunity to do so."). But see id. at 396–97 (Kennedy, J., concurring) ("When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.").
  12. ↑ See Akamai Techs., Inc. v. Cable & Wireless Internet Servs., Inc., 344 F.3d 1186, 1192 (Fed. Cir. 2003) (full-text); Markman v. Westview Instruments, Inc., 517 U.S. 370, 388–89 (1996) (full-text); Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448, 1454 (Fed. Cir. 1998) (en banc).
  13. ↑ SFA Sys., LLC v. Newegg Inc., 793 F.3d 1344, 1350 (Fed. Cir. 2015) (full-text) (agreeing with Newegg "that a pattern of litigation abuses characterized by the repeated filing of patent infringement actions for the sole purpose of forcing settlements, with no intention of testing the merits of one's claims, is relevant to a district court's exceptional case determination under § 285," but concluding that the district court did not abuse its discretion in finding insufficient evidence of such litigation misconduct); Eon-Net LP v. Flagstar Bancorp, 653 F.3d 1314, 1327 (Fed. Cir. 2011) (full-text) ("The record supports the district court's finding that Eon-Net acted in bad faith by exploiting the high cost to defend complex litigation to extract a nuisance value settlement from Flagstar.”).

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