Fiona Li is a J.D. candidate at Osgoode Hall and is taking the Patent Law course.
A non-practicing entity (NPE) is a patent owner that does not manufacture or use the patented invention. NPEs are commonly referred to as patent trolls. More specifically, patent trolls buy patents cheaply from entities not actively seeking to enforce them. The trolls, in turn, make money by aggressively enforcing claims against other companies who may be infringing on the patent despite having no intention of using it themselves.
One of the more prominent patent trolls that has been making a name for itself in recent years is Intellectual Ventures (IV). Intellectual Ventures is a patent holding investment fund that buys patents in order to develop a large patent portfolio. It licences the patents to large companies, many of whom also invest in the fund such as: Sony, Nokia, Microsoft, Intel, Google and eBay. Although IV claims to have never asserted its rights to its patents through litigation, there have been claims that it has done so through its many secret shell companies.
To fight patent trolls, companies resort to a strategy known as defensive patent aggregation. ·Defensive patent aggregation companies are in the business of purchasing patents to keep them out of the hands of entities that would assert them against operating companies (trolls). They typically do not assert rights to its patents and only license them out to members. Prominent organizations that do this type of work include:
- RPX Corporation is patent holding company that protects its members against patent trolls but buying up patents on the market. Members pay an annual membership fee, based on their operating income. RPX then licenses its patents to its members.
- Allied Security Trust(AST) is another member based patent-holding company that protects its members against patent trolls. Members contribute funds to the trust, which are then used to purchase patents that members are interested in. The trust then licenses the purchased patents to members. AST has fifteen members, including: ·Ericsson, Philips, RIM, Motorola, Verizon, Cisco, HP and others.
Patent trolls and defensive patent aggregation companies, though operating on opposing sides, are both NPEs in that they collect patents, but do not use or produce the inventions they own the rights to. Taken too far, both trolls and defensive patent aggregation companies both have the effect of creating a patent ‘cartel ‘, as described in ‘The Eureka Defence’. In the blog, the author describes the effective cartel that could potentially be formed as a result of Intellectual Ventures’ operations:
With “thousands of members” [Intellectual Ventures] would have an agreement among competing firms to coordinate prices on a vast holding of intellectual property to the disadvantage of non-members. Patents are monopolies, so non-members will have no substitutes. Its alarming size would give it substantial reach in the intellectual property market and engender a network effect, which would cultivate market power and make membership more valuable on a per-patent-basis as it grows. The problem with this isn’t the idea of patents. The problem is the power that an intellectual property cartel would have.
According to the author, the effect of a cartel would be that the threat of legal action may force concessions and settlements in situations where they are not merited. While the lack of substitutes would make membership more desirable, and the network effect would make membership more costly. As a result, the price of innovation goes up and smaller firms are put at a disadvantage.
I believe that this line of reasoning can be applied to defensive patent aggregation companies as well. Such companies, if they grow to acquire enough patents, can wield the same type of power that cartel-like power that a large patent troll could have. This is because patent trolls and defensive patent aggregation companies are more similar than they are different in that their main purpose above all else is to acquire patents. The only difference is that latter do not assert their patent rights through litigation. However, that is likely to change if the interests of members are being adversely affected by non members.