Comments for Beware! Privateers patrol these patent waters.

Those type of technic are very common in a society that allow it. the way of functionment of our society has pushed us to ask question about economy and more precisly about companies. Should companies be allowed to make profit regardless to the way of reaching their goals and the impact it create?

In deed it’s a tough question to answer. On the firms sight by using patent privateers, compagny make sure they can assume what they are born for, reach economic perennity. Even if it can be considered as immoral the first objectif of firms is to make a returns on investment from investors and shareholders. patent privateers Is a way as an others to protect the compagny and profit the investment in R and D they have made even if the innovation doesn’t bring a lot of value.

In a more wide vision. The use of patent privateers don’t profit the economy. In deed the strict rules protecting the patents and their action doesn’t allow in some way the creative destruction ( Schumpeter). Consisting to “destruct” an old innovation to create a new one, the creative destruction allow to a economy to among other create growth thanks to other firms that will invest in R and D to create innovation more efficient than the old version. Increasing the royalties and the restrictive rules about patents also bring other firms to stop invest, because there is no opportunity for them to be in concurrence with the firms who detains the rights.

Agreements between sponsors and privateers can be run afoul of the antitrust on a moral way due to the non acceptance of progress, but it’s not the point here. Antitrust law should make a more precisive temporal rules and more restrictive about patent. For example give the possibilites to a second firm to buy patent from an other firms adding an restrictive rule, if the compagny want to keep his patent he must make improvment in R and D to innovate and certifie that the pattent isn’t ” a passive patent ” just to keep the concurrence far away from them. A country can’t allow to don’t have concurrency for the good of it’s economy and it’s growth. Law about patents and in more large vision property rights should be revised because in order to allow competitivity between companies, respecting as well the fact that the firm that create the first innovation should be more protected without give him the whole power and the monopole of innovation

However this is a different kind of a market, this is still a market, and like on every other market, when you’re a company, you have to take strategic decisions if you want to survive or if you just want to be better than your opponents. Even though this a very restricted market, with a lot of different laws, agreements, so with different mechanisms, your behaviour is still to try to survive or try to get an advantage.

So, some companies have found a different way to fight, they found different weapons (in every war, we saw new weapons appeared, or new ways of fighting, and in this is case, this is the same thing).
When a company get a patent for an innovation, the company can have some different ways to use it : the usual way, the company can produce whatever it wants in a “monopoly” situation (on a product, a process …). But here, companies which produce the innovation give the patent to another while using a free licence, and the other company, which is a law-specialised or infringement-specialised (about IPRs) try to weaken or even destroy their opponents.

What public entities and more precisely regulation ones should do ? In order to protect the weakest ones, public entities should regulate this because promising start-ups, which are the ones that can innovate in the most efficient way (not a big amount of costs for, sometimes, huge benefits), but are also the ones that have the less amount of money to spend in courts for “IPRs infringements”, are targeted by these companies which use privateers’ patents, because as they outsource they don’t take any risk, and as they spend a bigger amount on money and other resources in this fight, this seems, in my point of view, to be an unfair competition. In addition to that, if public entities would act in this way, it will also be profitable for the whole society, as we know the power of innovations for the economy and the society, which mostly lead to positive externalities. It was the same thing in piratery, maybe a lot of important discoveries may not be found if ships were more likely to be attacked. As the golden age of piratery was during the 17th century, and the Age of Discovery started in the 15th century and ended in the 17th, discoveries ended when it became dangerous, when the cost and the risk overtook the potential benefit (or when there was nothing left to discover, but I’m pretty sure there are still places to be discovered).

This is only true if you analyse patent privateers in a situation where they attack small businesses, start-ups, innovative companies which can’t afford to fight. But when this situation involves big companies, when it is “fair competition”, things are different. They are different because the attacked company can defend, especially in the case when they also outsource their juridical department, so they don’t take many risks and when they have the means to fight. In this case, if the company which attacked lose, they don’t lose much thanks to the outsourcing. We can also say that it’s different because it can causes positive externalities : incentives to innovate are still here (when they attacked small companies and start-ups, incentives disappear for the weak ones), R&D investments are still profitable.

We have both positive and negative aspects about it, but negative aspects overtake positives ones overall, incentives to innovate tend to disappear, and companies which still do can be sued and spend (sometimes useless) big amount of money in courts, when they could just spend it on R&D.

References :

http://www.forbes.com/forbes/welcome/?toURL=http://www.forbes.com/sites/timsparapani/2015/09/02/attack-of-the-patent-privateers/&refURL=http://www.forbes.com/&referrer=http://www.forbes.com/

https://www.wikipedia.org (Age of piratery/Age of Discovery)

In my opinion, there are pros and cons to use those “techniques” of patenting, patent troll and patent privateer. Let’s take examples to illustrate that. When you take the case of the Unwired Planet and Ericsson, it is said that “The agreement is reported to contain a payment schedule that rewards Unwired Planet for success, and even contains a commitment by Ericsson to continue developing, obtaining, and feeding more patents to Unwired Planet over the years.” (David Balto). Those entities have an engagement, I think then that the Unwired Planet can, in this way, motivate Ericsson to innovate because Ericsson should respect their commitment and develop news patents. For that, they should spend more time to research and develop good innovations.

Moreover, I assume that patent troll can be an added value for the company because the company doing the patent troll can own many patents and then centralize them which will permit to have facilities to negotiate to have license for example. It also permits to reduce the negotiating costs. Furthermore, I believe that all companies should have the choice to sell their patent for the reason that the patent is their property and then, they should have the right to sell it to who they want.

On the contrary, when you take the case of Google, which speaks about the sequential innovations, it could be seen as a discouragement to be innovative. Let me explain, as it is written on the article, sequential innovations can only be achieved by using the results of another innovation and the mean on how to allocate the IP rights among the different authors can be a problem. Indeed, I consider that inventor would have less incentive to innovate because they will not gain the IP rights for the “whole final innovation”. If the second innovator makes an innovation that would completely change the first innovator’s innovation and then this second innovator gets nothing, it could be frustrating for him. Moreover, it will take him time to find his innovation, and just give it to the first innovator because the second innovation completes the first one? I think it is not fear and that in this way, the second innovator should find a way to work-around the system by inventing the whole innovation himself. Of course, the first innovator should do the same, by looking around him and find idea to make it work. By that, I don’t say that he has to steal an idea, but to get inspired with his environment.

Now speaking about the legislation, I do not think that a special law to prohibit patents would be that efficient. Let me clarify that, I mean that if this kind of law is introduce, good lawyers would find failures in it and they will be able to get around the law. Anyway, in an opposite way, if a definite law is put in place that may discourage patents troll considering the fact that the companies will have to hire lawyers, spend money for it and they will also lose their precious time. Moreover, in an ethical point of view, patents troll are put in place more to damage a third party than they are to really protect an invention, they have a bad ethics in my opinion.

In conclusion, patent troll is a complex subject, when a company has to face a patent troll, they should take the time to build an overview of the different pros and cons to see if it is worth it to use the patent troll or not . Additionally, even if a law against those patents troll would not be that competent it may provide a good solution to reduce the number of patents troll that are currently in used.

References:
1. https://en.oxforddictionaries.com/definition/privateer
2. http://www.businessdictionary.com/definition/patent-troll.html
3. Belleflamme,P. (2011). What to think of ‘patent trolls’? The return. IPdigit
4. Belleflamme, P. (2016). A primer on intellectual properties (slides). Not published, Louvain School of Management, Louvain-la-Neuve.

I would like to add a negative opinion about patent privateers and about their impact on the economy.

In these situations, the attacked firm is sued or is threatened of being sued for patent violations. Patent privateers give their victims (often competitors of the firm that sold patents to the privateer) the “chance” to choose between 3 very bad outcomes. The “victim” company can decide to pay a significant fee to be able to use a patent they thought they already had the right to use. They can also choose to fight back patent privateering litigation, but this would cost a lot of time, money and effort. Lastly, the victims can decide to terminate their business to end impoverishing litigation and avoid bogus infringement claims.

These three outcomes are already bad for any company in the world, but they are especially fatal for start-ups. Indeed, they have less power and money to deal with this issues, so it could lead potential good companies do their death before being able to properly launch their activity and being sufficiently strong to deal with these patent privateers issues. I don’t need to point out the importance of these starting companies to the economy, so maybe policies should be created to protect them.

One other bad think about patent privateering is the fact that companies will, through this manipulation, split their patent portfolio into smaller portfolios. These sub-portfolios will be interweaving with each other and will increase the number of entities a company must negotiate and deal with. All of this would increase the licensing cost which would raise competitor’s costs, which will ultimately raise the prices for consumers. On top of the higher price, it would also reduce the available choice for consumers. So once again, patent privateering lead to a bad outcome for the economy.

Another obvious fact about patent privateering is that it reduces innovation. Indeed, the next generation of technology is often built by improving or combining existing technologies. To be able to do this, tomorrow’s innovators need access to today’s technology at affordable price. But as explained earlier, patent privateering raises patent fees in order to protect the company that sold its patent against competition. Once again, this prove that patent privateering is a bad thing for the economy.

Even if patent privateering is not legally forbidden, it is a practice which has a very bad effect on companies, on consumers and finally on the overall economy. In point of fact, patent privateering is estimated to add an annual burden of $29 billion on the back of American consumers alone (David Balto, 2013). This money could have been used for other and better purposes.

References:
The Hill. (2015). The failure of patent privateering? Retrieved November 30,2016. Online: http://thehill.com/blogs/congress-blog/technology/230444-the-failure-of-patent-privateering
Forbes. (2015). Attack of the Patent Privateers. Retrieved November 30,2016. Online: http://www.forbes.com/sites/timsparapani/2015/09/02/attack-of-the-patent-privateers/#34005d732184
CAPX. (2015). How Patent Privateering is Hurting the Patent System and the Innovation Economy. Retrieved November 30,2016. Online: https://capx.co/how-patent-privateering-is-hurting-the-patent-system-and-the-innovation-economy/
Adam Smith Institute (2014). Privateers and the sinister threat posed by “patent trolls”. Retrieved November 30,2016. Online:https://www.adamsmith.org/blog/regulation-industry/privateers-and-the-sinister-threat-posed-by-patent-trolls

According to me, patent privateers are a logical consequence of the failure of the patent system to find an optimal design of IP rights.
Indeed, firms which compete in markets with a fierce competition, justify the use of patent privateers because, as we can read in the economic theory about optimal design of IP rights, firms will only invest in knowledge if their expected revenue is bigger than their fixed costs in R&D and according to them patents fail to give them this incentive.

Again, as we know the revenue from an investment in knowledge is hard to appropriate mainly because knowledge is a public good and is only partially excludable. Accordingly, firms need, in order to appropriate this revenue, to use either IP rights or patent privateers.
Yet, as IP law fails to find the perfect balance between, on the one hand, the private profit of the innovative firm in order to encourage it to invest in R&D and on the other hand, diffusion of the results of the creation which increase the total welfare in the society.

As a consequence, powerful sponsors have to use patent privateers to maximize their legitimate return on their risky investment in IP. Indeed, arming patent privateer with patents is the best way to realize their return.
Even if those means are absolutely not moral, I honestly think that it is inevitable that big sponsors abuse from patent privateers to enable them to develop or at least enhance their competitive advantage which could lead to an unfair competition and so running afoul of the antitrust laws.

So, according to me, if they run afoul of the antitrust laws, authorities should develop two means to fight those abusive agreements between big sponsors and patent privateers.
First, on the long term, economists should continue to make researches to find a formula which would enable patent authorities to design patents which are as close as possible from the perfect balance between the private profit and the society welfare.
Furthermore, powerful institutions, like the European commission for example, should try to make those deals easier to attack on legal grounds and then pursue firms who try to abuse from their position by using patent privateers.
I think the European commission should take action more often like she did in the Samsung’s case on misuse of mobile phone standard-essential patents. I would like to insist on a declaration of Joaquín Almunia, the Commission Vice President in charge of competition policy who said:
“Intellectual property rights are an important cornerstone of the single market. However, such rights should not be misused when they are essential to implement industry standards, which bring huge benefits to businesses and consumers alike. When companies have contributed their patents to an industry standard and have made a commitment to license the patents in return for fair remuneration, then the use of injunctions against willing licensees can be anti-competitive.”

Consequently, responsible authorities generally require companies to commit to license patents that they can call FRAND which stands for “Fair, Reasonable and Non Discriminatory Licensing”.
If the potential licensee is ready to make a FRAND deal, the agreement between them ensure an effective access to the concerned knowledge for all market players and it will avoid “hold-up” by a SEP holder, since any company have to pay for this access to sell interoperable products in the market. Furthermore, those FRAND terms allow SEP holders to be fairly remunerated for their intellectual property.

To summarize, I believe that big sponsors will reduce their use of patent privateers if patent are closer to the perfect balance between the private profit and the society welfare and if the authorities take action more often to fight companies who use patent privateers.

Sources:
http://www.investopedia.com/ask/answers/09/antitrust-law.asp
http://www.huffingtonpost.com/david-balto/as-congress-contemplates-_b_3000110.html
http://europa.eu/rapid/press-release_IP-12-1448_en.htm
https://en.wikipedia.org/wiki/Reasonable_and_non-discriminatory_licensing

In his seminal paper on innovation, Arrow wrote that: “in a free enterprise economy the profitability of invention requires a nonoptimal allocation of resources”.[1] In my comment, I will argue that, in some basic sense, this is all there is to say about patent assertion entities (be they trolls, privateers, etc.). The failure to fully appreciate this tradeoff is probably the main reason why people decry the pricing of pharmaceutical products, the crackdown against online piracy, and the patent troll phenomenon.

It is useful to start by unpacking Arrow’s conclusion. His intuition is well-known to anyone familiar with the economics of innovation. Free markets may underprovide innovations because of a lack of excludability. Governments thus grant IP rights which can improve the excludability problem. This has a cost. Once an innovation has been produced, a social planner would like to see it distributed at its marginal cost, which for public goods is equal or close to zero. Therein lies the rub. Due to increasing returns to scale, marginal cost pricing does not allow firms to recoup their investments in innovation. It thus significantly reduces incentives to innovate. The tradeoff is clear. Ex ante, a social planner would like to commit to protection. Ex post, there is a temptation to renege on the commitment and encourage marginal cost distribution. This tension led to debates between Samuelson and Coase [2]; it is sometimes referred to as static versus dynamic efficiency [3]; and sometimes to copyleft versus copyright [4].

In my opinion, a large part of the patent troll debate is just another take on this tradeoff. It is a matter of balancing incentives to produce initial innovations against the exclusion of follow-on innovators and infringers. For the IP system to work, it requires the transfer and enforcement of rights. Many innovators are ill-equipped to deal with these issues. Transferring their rights to an assertion entity is beneficial for both parties. The rights are worth more to the assertion entity, who can extract their full value at a lower cost. Meanwhile, the innovator can do what it does best: innovate. In the process, the innovator earns more profits by transferring some or all of its rights than by exercising them itself (otherwise it would not trade). In short, non-practicing entities (“NPEs”) increase the incentives to produce initial innovations. But the tradeoff remains. NPEs can also increase the cost of follow-on innovations and can lead to the prosecution of infringers. This is what excludability looks like in the real world, and it can frustrate people.[5]

As far as this ex ante/expost tradeoff is concerned, the focus on non-practicing entities is purely arbitrary. NPEs do exactly what the IP system was designed for. They ensure that IP rights are enforced, and extract the maximum revenue from them. In that respect, the only difference between NPEs and other firms is the choice of outsourcing enforcement activities rather than keeping them in-house. Sanctioning NPEs will mostly harm small firms who are more likely to outsource their enforcement activities. The difficulties that these small players encounter when enforcing their IP rights are so large that, in another area of IP law, “trolls” are the paradigm. How many artists still enforce their copyrights instead of using so-called collecting societies? These societies match the definition of NPEs – and are just as reviled – but few experts question their legitimacy. Firms and consumers that rile against “patent trolls” or “patent privateers” because they increase costs are thus out of line. Instead, they should focus their criticism on the patent system as a whole and question whether it strikes the right balance between ex post and ex ante efficiency.

All this is not to say that NPEs never raise any issues. NPEs have notably been active in the SEP (Standard Essential Patent) field, and this may raise concerns.[6][7] Likewise, it has been argued that firms might outsource their enforcement activities for strategic reasons. Though these questions are not without merit, it is important to acknowledge that they are only a tiny part of NPE activity. They should thus be tackled on a case by case basis, rather than with a blank prohibition of NPEs.

To summarize, patent trolls are just the logical conclusion of the IP system. Though they may raise some specific issues, these should be addressed on an individual basis. Most of the attention aimed at “trolls” should instead be directed towards the patent system in general. As the rapper Ice T famously said: “don’t hate the playa, hate the game!” [8].

[1] See Kenneth Arrow, Economic welfare and the allocation of resources for invention, in THE RATE AND DIRECTION OF INVENTIVE ACTIVITY: ECONOMIC AND SOCIAL FACTORS 617, (1962).

[2] See Paul A Samuelson, The pure theory of public expenditure, THE REVIEW OF ECONOMICS AND STATISTICS (1954). See Paul A Samuelson, Aspects of public expenditure theories, THE REVIEW OF ECONOMICS AND STATISTICS (1958). See Ronald H Coase, Lighthouse in Economics, The, 17 JL & ECON. (1974).

[3] See Melissa A Schilling, Towards Dynamic Efficiency Innovation and its Implications for Antitrust, 60 THE ANTITRUST BULLETIN (2015); See David S Evans & Richard Schmalensee, Some economic aspects of antitrust analysis in dynamically competitive industries, in INNOVATION POLICY AND THE ECONOMY, VOLUME 2 (2002).

[4] See Paul B De Laat, Copyright or copyleft?: An analysis of property regimes for software development, 34 RESEARCH POLICY (2005).

[5] Though unrelated to NPEs, this is particularly salient in the area of pharmaceutical products. Once a drug has been created, it exists. For that particular drug, incentives no longer matter. People can be mortified to see it sold for a price that is orders of magnitude above its unit cost. Test Achat’s latest campaign offers a case in point. See http://www.lalibre.be/debats/opinions/les-medicaments-des-prix-a-vous-rendre-malade-57e4ffa1cd706759d532ee47?utm_source=twitterfeed&utm_medium=twitter. Of course, the real issue – and the reason why rights are enforced – is about maintaining incentives for future innovations.

[6] That being said, the same can be said about many firms in this area. The problem might however be more acute if SEPs don’t risk retaliation from rivals.

[7] There is some debate concerning the extent of hold-up in the SEP context. See notably, Alexander Galetovic, Stephen Haber & Ross Levine, An Empirical Examination of Patent Holdup, 11 JOURNAL OF COMPETITION LAW AND ECONOMICS (2015).

[8] See https://www.youtube.com/watch?v=fcIH5DQY6U8

As a non-practicing entity, patent privateers come into being when innovators encounter certain patent protection problems: companies come up with good ideas and create innovations, but if they are not really good at putting an innovation into market and benefit from this idea, they choose to transfer their innovations to one entity that can monetize their innovation and maximize profit. From this point of view, innovators are simply trying to outsource the work of realizing monetary returns from their innovations to another party. And by doing so, they get rid of the potential risk of patent infringement to their rivals. For patent sellers, they are doing a business with patent privateers that can help them utilize their patents and lessen the risk of being accused by their rivals.
To think about the economy-wise, privateers come up as a proper entity to deal with sequential innovation. Otherwise, the initial innovator would not be able to achieve its value as it blocks sequential innovators who can create real extra value to his innovation. At the same time, privateers save the cost of sequential innovators to research and develop the initial innovation or some cost to use initial innovation. Total social cost of innovation decreases with the presence of patent privateers.
The agreement and cooperation between patent sellers and patent users are supplements to the strict and absolute right of patent. It is not that serious as to go against antitrust law and it solves some of the patent problems. The value of privateers is well demonstrated in the article “Beware! Privateers patrol these patent waters”.

If privateers raise the cost of the sponsor’s rivals to a high point that it pushes the price of a certain product unreasonably high, it will result in another form of monopoly with high probability. Under high competition situation, business partnership who succeed to be both the leader of innovation and the one who can maximize the benefit from the innovation will certainly rise the cost of using patent and decrease the price to undercut their competitors first, and then set the price unreasonably high after monopoly, this kind of unfair competition will have to be regulated by antitrust authorities since it heavily decreases customer surplus and hurts social welfare.

But the question is, currently, privateers are non-practicing entities, or not legally-recorded entities, then how do antitrust authorities regulate these informal entities? Authorities can only governance legal forms, therefore, there is still time and space for privateers to mature and function in market and to get to legal grounds. If privateers function “well” to their sponsors after they become a formal legal entity but the agreement between privateers and sponsors run afoul of the antitrust law, a proper approach to solve the problem of unfair competition without slashing privateers who contribute to innovation is to introduce more than one privateers to one innovator. By doing so, privateers can still execute their value to help their sponsors to efficiently monetize patent and function in sequential innovations to reduce total cost of innovation. Since there are more than one privateers who can help innovators to realize the benefit, there will also be competition between different privateers, it is unlikely that patent sellers and privateers could form monopoly, relatively fair competition thus stands a chance.

Privateers or Patent Assertion Entities (PAEs) are an interesting concept: governments/interested agencies/sponsors get the benefits of achieving their goals without direct confrontation and the associated risks. Privateering has been used a variety of ways, but has made its successful and damaging return in the IT and software industry.
The effect is that patent privateers have created and enhanced the existing culture of litigation to a new high. The objective is to reduce competitiveness of the sponsor’s rivals and maximise monetary gain through court settlements.
Patent Privateers are different from Patent trolls, who only exist to benefit themselves.
Patent privateers do have an effect on the market, in the form of lowered industrial profits and reduced incentives to innovate. However, we must see these in the context of privateering.
In the USA, privateering is the most cmmon since there is an over-rewarding of patents. This has created an atmosphere where the multitude of patents makes it much, much more likely that there will be patent infringements. The threat of litoigation is enough to pull the other party into negotiations in order to get settlements.
Technically, there is nothing the ‘victims’ of privateers can do; they cannot litigate since they are not directly challenged nor can directly challenge the privateer.
With this in mind, we need to see the actual effects of what the actions of PAEs can have on the Patenting world.
Lemus and Temnyalov (2014) explore this area. They find that the offensive value of patnets is increased due to PAE activity, but the defensive value is descreased. The former incentivises firms to invest in R&D. however, this may be actually less than the social optimum. But it is possible to take the best from this scenario, that there is at least an increase in R&D. The latter will take place alongside a decrease in industrial profits.
However, the authors abserve that there may be positive welfare effects- though this will not always likely be the case.
Moving on, we see that there is a sort of mutually assured equilibrium of patents- from the previous point that the ‘glut’ of patents has ended up creating a litigation culture of suits and counter suits. These are very damaging and wasteful, as ultimately, the spending is not productive.
We examine now the possible solutions to this problem.
The US patent office and FTC should narrow and restrict the granting of patents. At present, there is an over-rewarding of patents based on the simple premise of achieving an goal; this is created a significant overlap that does not help companies, as there are possibly hundreds of infringements, even being intentional at times. the movie to grant less oatents through a newer and more stringent patent application process would also significantly reduce the granting of dubious patents significantly.
This new system would be in line with a system of innovation protection. This would make sure that innovation itself, along with R&D requirements, are in an environment that are not to suffer from endless litigation and below optimal investment levels. This is an extremely important part of the overhaul, as it will help maintain the social optimal innovation. Of course, this new aspect should also be implemented along with the patent office reforms mentioned earlier.
Legally, there needs to a sea change; the sponsors and their PAEs should be taken as one legal entity. This entity would be held responsible for the actions of the privateers. However, while this is indeed desirable it is very difficult to implement. We need to focus on patching up loopholes and making new laws that will protect innovation and the environment it operates in. A patent granting process that is more stringent, has a greater scrutiny and better defines what a patent is or is not is of utnmost importance.
In the end, the above changes are not about maximum change; they are about positive change while making sure that there are minimal casualties. In a field such as software and IT, this change is vital if the overall growth trajectories and the social optimum of innovation and patents is to be achieved.

As usual, I believe that the key issue in this debate is to find what the abuses of the rules have been, and trying to patch those holes, while at the same time, having some protection of innovation, by still allowing the legitimate innovators to have some sort of protection, i.e. the protection of recouping their investment in future revenue.
But with the advances of these new firms and schemes, it becomes increasingly difficult to not only separate the malpractices from a legal point of view, but to even discuss the fundamental validity of these companies’ arguments. What is in fact a legitimate use of Intellectual Property, and where do abuses come from.
Being a believer of IP as protection for the overall welfare of society, and the inventors that use research to put forward new products and services, I believe there is a fundamental distinction to be made in the use of patents. While many people shout for the end of IP, and some others want it to be as tight as possible, my focus is always to look for the most comprehensive solution. I believe a great part of this is basically pointed out in this article: “the US patent system over-rewards the work of coming up with an idea while taxing those who do the work of actually implementing it.”. I believe this is the fundamental distinction. Whether a patent is applicable and done for purposes of creating new products, or whether its conception fits simply the purpose of building a protective stance for future innovation, creating situations of hold up. I believe that we must try to reward the first scenario, and somewhat punish the second, albeit with some exceptions.
Therefore, my distinction lies with one basic question. Is the patent in case (in an hypothetical litigation) being implemented by its holder in any product? Or is it simply a legal tool to try to shut competition down? If the patent is actually being used by its holder (i.e. has practical implementation in its products), I believe that there should be a certain level of protection, akin to what exists today. Obviously, it would be better if licensing deals were plentiful, but the scenario where the holder is defending a patent currently in use in one of its products is not the situation that concerns me the most.
In fact, it is the situation, in which the patent is not being used by its holder, that I think needs to be revised. With companies finding a way to exploit these intangible assets, and keeping a product from ever reaching the public, I believe this stifles competition, and in the end decreases the social welfare. Now, it is still perfectly possible that I am an inventor that came up with a great idea, and by lack of resources, I am unable to push through with a product that makes use of that idea. So while there are positive and negative cases in “dormant” patents, it is essential to find a solution that fits both. In my opinion, this can be reached through mandatory licensing, with a limit on the percentage of royalties that can be paid. That way, if I am trying to innovate, and to do that I need to use patents that nobody else is using, I believe I should have the right to do that without asking for permission, or be at risk or having to take my product out of the market. But there should still be a (reasonable) compensation for the holder of the patent, expressed as a percentage of its retail price. That way, a possible maximum could be 5% (of revenue), and any company that would use a “dormant” patent would be able to do just so, at the risk of (if found in a court that that patent was essential to its success) pay no more than a 5% royalty to its holder. This way, a method is created in which innovation does’t have nearly as many obstacles, but there is still a compensation method for companies who invested with a possibility of future revenue. It might not seem a lot, but as a certain billionaire says, “5% of something is better that 100% of nothing”.
This way, there is a system to “protect innovation”, while at the same time (and coupled with the high litigation costs) make frivolous litigation and patent trolls (in whatever way or shape they might appear as) less likely to exist.

privateers can be viewed as important agents in the market for technologies because they develop easy access to new technologies among companies.However this technologies or patented innovations are accessed at an increased costs (sometimes at exaggerated costs due to increased demand of the technology on the market) and can thus lead to failure of social welfare as a result of high costs of the final products.
Privateers are more preferred by small companies than larger companies, because most of small firms lack the funds of implementation of their inventions. other facts are that they also lack the voice to raise court claims against established large companies who might illegally use the patented inventions.
Working with privateers is a way to make easy money/ increase profits from returns handed in by contracted companies who got interested in the patent.
Privateers should however be monitored closely by antitrust authorities incases such as prizing of patents (prizes on the patents should not be of exaggeration/or taken advantage off). Discrimination in the sale of patents can also arise if privateers get in closed agreements with some companies in order to acquire high competitive advantages. This type of discrimination on sale of patents by privateers might modify market structures and lead to creation of dominant firms who might abuse the status.
It is of more pros than cons in the existence of privateers in the market as they will likely transfer technologies to companies who have more capacity to exploit it.They also give incentives to SMEs to continues with R&D which are beneficial to these markets.

Even if it’s a good opportunity for companies to deal with privateers in order to outsource the legal part related to their patents. Even if it gives even more incentives to innovate, their are some legal abuses of the system which leads to a lower welfare for the economy. Competition authorities should make firms paying significantly more for the detention of patents they don’t use for their operating business than regular patents well used by a company and not outsourced to another one. Therefore there would be less incentives to deal with privateers since they would have to pay more for the patents rights and to make R&D for technologies you won’t use either. Since the pressure of the privateers would diminish, the competition between firms would be reenforced what would be good for the society as a whole. Moreover as companies would have to pay more for having patents they don’t use for themselves, “patent trolls” would be disadvantages.

Nevertheless, the existence of privateers are sometimes good for the society, particularly for SME’s. Indeed, for those firms it’s sometimes difficult to defend their own patent versus giant companies threatening them of lawsuits even if they know they won’t win. So for those enterprises it’s easier to outsource that aspect of their business to someone more competent. It’s so a kind of barrier to the domination of the market by big firms which is not efficient regarding the total welfare of society.
In conclusion, from a certain point of view, the existence of privateers as a negative impact for the society in general but we saw there are some cases where they play an important role and where they are needed.

Patents are a means of protecting R&D investment by firms and serve the purpose of providing incentives for innovation and development. They do this through rights of excluding other companies from using the same development or technology or making it expensive to do so. It would be in the firm’s best interests to keep a lookout for other firms which might be infringing on their patent in order to safeguard themselves in the market. However, a firm would have more essential core activities to take care of and thus, might look to outsource litigation to 3rd party privateers. It seems to be efficient and makes sense from the firm perspective.

I think the problem arises because these 3rd party privateers would naturally seek to maximize profits for themselves, which results in them accumulating patents and seeking litigation which proves expensive for the sponsor’s competitors. This has the unhealthy result of discouraging subsequent innovation by other firms and competitors in light of potential and probable litigation and goes against the premise of patents in the first place.

In today’s fast changing world, innovations become outdated very quickly. New innovations borrow from older ones and there is consistent change and development. Anything that threatens this process would be counterproductive to society overall. Agreements between sponsors and privateers seem to fall into this category and hence go against anti-trust laws inspite of appearing legitimate.

Even through SEPs, there is the difficultly that privateers would raise competitor costs through excessive royalties or injunctions for non-SEPs. The attempt to excessively protect patents poses additional complexity that counter-effects its purpose. Hence, though privateers seem legal, they practically are causing more damage.

Hence, it seems to be better to limit agreements between sponsors and privateers. Also, regulatory authorities should be careful about granting patents to those developments that truly add value. They should be mindful of the life granted to patents and perhaps, make them shorter to avoid stifling innovation.

Different with patent trolls, Patent Privateer is another form of outsourcing patent litigation to another entity. Patent trolls is the company that does not market a product or service but sues other companies by using patenting litigation. Patent privateer is the entity which provide patent litigation to firms and organizations. These firms and organizations could be called Sponsors. Sponsor’s basic aim is to provide privateers with the monetary aid and target their competitors for patent infringements. Privateer’s object is to gain money out of litigation and provide to sponsors. In general, sponsor sell their own intellectual poverty rights to third party in order to let these privateers against the competitor. Privateers do not like patent troll spread their profits as wide as possible, they always have a white list of companies including their sponsors and their partners. Privateers always have their own brand and business which could be regards as wholly owned entities.

The goal of sponsors and privateers is to protect sponsors’ intellectual property by preventing their competitors with patent litigation. However, this kind of protection could be lead to monopoly especially for technical intellectual property. Even privateers do not like patent trolls who simply accumulate patents in order to sue and get profits, they are aiming to protect companies’ IP, however, the result of them is similar that using patent litigation to gain financial penalty from their competitor in order to limit their process enter the market or increase their innovation cost. The effort of sponsors and privateers seems against antitrust laws and disturb the market rules.

The European Commission set standard-essential patents for some industries. Standards organizations often require members disclose and grant licenses to their patents and pending patent applications that cover a standard that the organization is developing. If the market players fails to get licenses complying with a standards, owners of the unlicensed patents may sued from the companies adopt standard. This gives companies the potential to behave in anti-competitive ways. Therefore, standard holder could also be abuse the market power by “holding up” willing licensees with injunction.

In general, protecting intellectual poverty and antitrust law should be complementary and promote mutual. From this situation, overprotect intellectual poverty or even say pay special attention on patent litigation becomes the barrier of antitrust law, even setting the standard of patents for some areas, abuse of dominant position could also be find on the market. Competition on the market could be stimulate innovation which should also be protected.

Reference:
1, Competition Occasional discussion papers by the Competition policy brief Directorate–General of the European Commission Standard-essential patents
2, Patent Privateers: a new strategic approach
3, Patent Trolls and Privateers: What’s the difference?
4, Guest Post on Using the Antitrust Laws to Police Patent Privateering
5, Google’s privateer anti-trust attack on Microsoft and Nokia is smart, even if it does not work

By enforcing the patents, privateers affect competition. As Colleen Chien notices, when a patent is not enforced, everybody can sell the patented product and this is pro-competitive. (1) Furthermore, they impose high transaction costs on the companies they are suing. (2) Nevertheless, privateers can also be good for competition. They help smaller companies to survive by enforcing their patent and make them stay in the market. (1)

Regarding innovation, privateers seem to be helping inventors. If the inventor owing the patent must deal himself with patent infringements by other companies, it would be hard for him to support these heavy costs. Indeed, for most of litigations, the payments gained after a settlement are often smaller than the legal costs. These payments must then been split between the lawyer and the inventor, therefore there is no much left for the latter. Transferring his patents to a privateer allows him to focus more on his operating activities than on legal aspects. (1) Carl Shapiro has also argued that privateers could benefit to innovation, especially the small inventors. “The small inventor who’s otherwise going to be completely ignored by a big company stealing their ideas and infringing, they turn to a specialist to assert those patents […] PAE enables small inventor to get reasonable royalties from large infringing firms” (3)

From another point of view, privateers can be seen as taxing innovation. Their core business is not manufacturing products, they actually get money because they exact some from the those who are innovating and producing. And this money extracted from these firms are not fully given back to the patentees. Privateers keep a huge proportion of the patent revenue. (4) In the long run, privateers affect negatively innovation because firms have lower incentives to patent. (3)

The antitrust authorities could react to this rising cost inflicted to the firms by privateers. First, they could hire more witnesses to conclude on the excessiveness of a cost. Is it legitimate? Or is it far from the genuine value of the patent? Secondly, they could try to bring down the cost inflicted to the defendant. Collen Chien also proposes a way to reduce the costs. But this way should be thought before being sued. She thinks that authorities should foster operating firms to gather. The idea is that they have together a common defense, each one pays annual fees and, most of all, they don’t settle. Instead of getting rid of it as soon as possible in order to focus on business, they would fight. And authorities should help this kind of group defense. (1)

Regarding the law, privateering per se is not prohibited. (5) But transferring patents to a PAE and to make it deal with the enforcement of them can be linked to a willing to hinder a rival and therefore to “maintain or [to] obtain a monopoly power”. This constitutes a violation of ” Section 2 of the Sherman Act which prohibits monopolization” The agreement between the privateer and the sponsor can also be seen as illegal if we refer to Section 7 of the Clayton Act. This section doesn’t allow “mergers and acquisitions” which are close to a monopoly and when they lower competition. (6)

Sources:
(1) Colleen Chien, Patent Assertion Entities, Presentation at the DOJ/FTC Patent Assertion Entity Activities Workshop 15–17 (Dec. 10, 2012)
(2)Neal Rubin, Patent Assertion Entities, Presentation at the DOJ/FTC Patent Assertion Entity Activities Workshop 15–17 (Dec. 10, 2012)
(3)Carl Shapiro, Patent Assertion Entities, Presentation at the DOJ/FTC Patent Assertion Entity Activities Workshop 15–17 (Dec. 10, 2012)
(4) SEIDENBERG S., Should your company enlist patent privateers?, Inside Counsel, 2013
(5) EWING T., Indirect Exploitation of Intellectual Property Rights By Corporations and Investors, 2011
(6) BALTO D., Using the Antitrust Laws to Police Patent Privateering, Patentlyo, 2013

Under current laws, a patent holder has complete rights to file a case against a company that it believes infringes on its patent, patent troll/privateer or not. Regardless of the merits of the patent system itself, there is a large acceptance that such actions impose higher costs on the economy compared to the benefits gained, and as such, any solution that alleviates this problem is better than no solution.

With specific reference to SEPs, one solution is to impose the same conditions on the privateers that “legitimate” patent holders are bound to. Currently, members of standards organizations are required to disclose and grant licenses to their patents and pending patent applications relevant to a standard that the organization is currently developing. Any transfer of patents to a privateer should also transfer this condition to the privateer. Therefore, the privateer will also be compelled to license the patent rather than engage in expensive litigation.

More generally, there are a few options that can reduce the negative impact of privateers. The most obvious one is to reduce the term of patents. While this may raise objections of stifling innovation, the fact is that there is no clear evidence of whether patents indeed have net benefits. Further, it may also be that the reduction in costs by reducing the patent term is larger than the benefit loss, and hence is perhaps desirable.

A second option is to create compulsory licensing. While companies will probably still have to pay for the license, the costs of litigation are saved.

A third option is to provide for a compulsary advisory option. Most companies do check whether their products infringe on existing patents, but it is ambiguous in many cases whether a patent infringement may occur or not, given that the scope of patents (especially in USA) is sometimes ambiguous. If at all a company suspects that its product might infringe on another company’s patent, a provision should be available for the company to write to the holder for its opinion, and the company can act according to the response received. (Note that this means a larger level of transparency on patents than is currently available).

The question on whether the actions of privateers fall afoul of anti-trust laws is more complicated. The privateers are certainly not abusing a dominant position in the market. Yet, they do end up stifling innovation and competition. However, terming such actions as being in violation of anti-trust laws is also not straight-forward, because there is sometimes a very thin line between a privateer and a company that has not yet acted on its patent. I do not think that these actions are in violation of current laws. Perhaps, along with the recommendations given above, the anti-trust laws could also be amended to include such actions. The scope of these laws, however, is a much larger exercise to be undertaken.

If injunctions on the basis of SEPs do not get overruled in the court, then they would be rendered useless against companies willing to take license under FRAND terms.

Firstly, what is FRAND? – “Fair, reasonable and non-discriminatory terms”. Reasonable term itself refers to the rates charged as part of the licensing agreement. Under FRAND terms, there is very little chance of privateers demanding very high royalties for SEPs especially since reasonable licensing rate is a rate charged on licenses which would not result in an unreasonable aggregate rate if all licensees were charged a similar rate. And if the sponsor company of the privateer enjoys free perpetual royalty-free license then all the more reason for companies to demand liberal royalty terms under FRAND terms for licensing of SEPs.

It’s true that privateers may seek injunctions on basis of non-SEPs and demand higher royalties but at least this might not ignite the ‘holdup’ debate since the patents involved are comparatively non- essential for further innovation. Taking a broad view, the employment of privateers by sponsor firms is a tactic to keep out competition and might be viewed as anti competitive. As mentioned in the article though, at the core of intellectual property lies the right to exclude other. It’s an ongoing debate and might tilt either way.

Regarding the relationship between privateer and sponsors, it could seem at first that it is acceptable for a company to outsource activities that are not at the core of its business. Typically such externalised activities: increase efficiency in the supply chain by reducing the upstream firm production costs; or they improve the offer to final customers by a better-valued product/service delivered on the market.

As these cases of outsourcing are mainly beneficial for the overall society, the externalization of patent infringement litigations raise critical issues on a moral and economical point of view even if it is still legal.

Indeed, from an economical point of view, patents are justified by the fact that they provide incentives to innovate: operating companies should be granted the right to exclude competitors in order to recover from their investments. Patents are necessary even though the patent system is not efficient in a static-economical point of view. One cause of its inefficiency is the enforcement costs which are increasing with the number of litigations. The existence of a third-party having the only goal of carrying theses litigations – considerably increases these costs and thereby reducing the benefits of the patent system.
This situation is even more harmful if we consider sequential innovations: the virtuous cycle of innovation could be seriously damaged. The probability of being assaulted is much higher for subsequent innovators when the patents are detained by privateers or patent trolls. This is against the – economical – essence of patents because instead of spurring innovation, it discourages potential later innovators who anticipate hold-ups.

Patent privateers and patent trolls are therefore not acceptable.

From my perspective, the courts and law-makers should:
1.Recognize this abuse/misuse of rights
2.Restrict the seeking of injunctions: allow the litigations only if they are carried by companies using in its operations the – knowledge / technology (embedded in the patent) –
3.Allow the trade of a patent only between companies able to use the knowledge / technology – thereby excluding non-practicing companies.

Economists “have committed a fundamental semantic error” by focusing on the term competition and ignoring the cooperative nature of markets, explained Paul Rubin (1) in his Presidential Address (2) this past weekend. By correctly emphasizing cooperation, economists could help combat the fear of markets that is prevalent in the general public and current political discourse. He blamed this fear on economists’ focus on competition, which he described as “odd” because cooperation, not competition is the goal of a market economy. “Cooperation is at the heart of economics and competition is a means to obtain better cooperation.” He continued with the statement that “every transaction is cooperative because both the buyer and seller expect to achieve some gain or benefit …The purpose of competition is not to harm competitors…Rather, the successful competitor is the agent who can cooperate with more other agents….this (capitalistic) system is moral because it maximizes human welfare. It provides the most goods and services feasible, and provides them in the least cost way.”

Privateers are the new economic pirates. They do not adhere to the concept of Paul Rubins’ definition of a capitalistic economy that tries to maximize human welfare. They try to harm and block competitors in sometimes unfair ways. These practices are possible because patent systems have an inherent flaw: the value of a patent is determined in a long court case. This opens the door for blackmailing: the competing company that is “entered” by the privateer has the choice to become paralyzed until the court has made a decision, often loosing expensive years or accept the conditions of the privateer and pay the ransom. Furthermore it will also demotivate companies to invest in research, the engine of economic advantage since several centuries, because litigation costs can undo the returns of investments made in research. The government has the right and the duty to fight this market behaviour that is detrimental to the goal of maximizing human welfare. In addition, litigation can also be reduced if the patent screening process at patent registration would contain a thorough analysis. This however will increase the cost of the registration process and this cost has to be carried by the government. The same holds if the capacity of the patent litigation courts is increased to reduce the time of the litigation process. However, it is not so easy to identify privateers as such. Companies can have good arguments to transfer patents to trolls that have demonstrated talents for “monetizing patents”(3). The transferring company maintains a perpetual royalty-free license and gets a percentage of the revenue made by the privateer in litigating competitors. These sponsors of privateers see nothing wrong in such deals; they are simply looking for the most efficient way to realize a legitimate return on their risky research investments. The legal analysis made by Paul Belleflamme (4) finds that it is much harder to attack such practices on legal grounds. Patent law has the objective to protect the intellectual property rights of owners by excluding others. This contradiction has already resulted in cumbersome actions by governments such as the definition of standard-essential patents (SEP’s). The governments can do this on the moral grounds as expressed by Paul H. Rubin in his presidential address. Many issues around privateers however remain unresolved today. It is my personal opinion that the presidential address of Prof. Rubin contains valuable hints. If a privateer and his sponsor(s) clearly violate the moral grounds of our society by using litigation and blackmailing to hamper fair competition it should be made unlawful with penalties in line with the caused damages. This would not eliminate privateers completely but reduce unfair litigation cases to a large extend. A privateer and his sponsor would think twice before engaging in such actions.

1 Paul H. Rubin, Dobbs Professor of Economics at Emory University, Presidential Address, Southern Economic Association, Tampa, FL, November 23, 2013

2 http://techpolicyinstitute.org/files/rubin_emporiophobia_1113.pdf

3 David Balto, antitrust attorney and former policy director of the U.S. Federal Trade Commission.

4 Paul Belleflamme, professor at Université catholique de Louvain.

The strategic use of intellectual property rights is not a new phenomenon. Already in the past, operating companies have acquired large portfolios of patents that went beyond the results of their own R&D. So have done a broad variety of NPEs.

The “privateering” approach seems to be a rational profit-maximising business strategy for operating companies to generate additional value out of their R&D investments, patents, and other IP rights.

Privateering lowers companies risks and puts the burden of enforcement on others, while monetizing (unused) patents cost- and risk-efficiently. Although they may generate some efficiencies on the technology market (e.g. reduced search costs, aggregation of complementary – but problematic: substitute – patents,…) they are by some considered as opportunistic arbitrageurs on risk and and information asymmetries, a basic feature of the market for patents.

The technological and commercial value of a patent is hard to determine. Portfolio-aggregation, but also disaggregation, permit extracting excessive rents. A portfolio may have more value than the sum of the individual patents or vice versa, depending on the quality or essentiality of a patent, thus giving room for significant leverage.

Traditionally, major players in the same sector have built up large portfolios for strategic use as ‘mutual assured destruction’ (MAD) leverage, mosttimes resulting in patent peace and cross-licencing. Defensive cross- licencing provides access at lower cost to patents and seems beneficial to innovation and competition, but also has some hidden long term cost (losses of forgone royalties) that companies may now want to materialize, as economics increasingly drive IPR.

Privateers often combine portfolio aggregation and acquisition of more essential patents, mixing the MAD and classic “troll” model. This combination with the absence of repeat game constraints, retaliation threats and reputational issues to customers that operating companies face, makes them powerful monetizers.

The trend is exacerbated by the exponential increase in patents on the technology market. The large number of patents is not only due to ingeniousity, but partly caused by a permissive approach and restrained control by the granting authorities that is lean to the tax payer (an approach that, in ultima ratio, lets the court litigation decide on the validity of a patent) and the patentability of software in the US. The current system was indirectly based on the non-assertion of the quasi-totality of all patents (>90%), although infringement claims have traditionally been more frequent in the US than in Europe. Non-assertion is good for competition (Carl Shapiro, FTC PAE workshop).

The increasing market for IP-rights is about to change this pattern. Privateering may only presents an additional layer of ‘taxation’ in the value chain that is socially wasteful and detrimental to innovation, competition and consumer welfare. However, the privateering practice currently florishs within whole industries and could establish as a ‘must do’ once certain points of no return are taken.

The behaviour of the major technology companies (the most concerned sector) is ambigous, as most players seem somehow involved or considering the option. This pressure is due to significant first mover advantages and economies of scale.

The negative impact of privateering on innovation and competition, at the bottom line, seems to be more or less consensus among non-NPEs. Competition authorities, in combination with other agencies and the courts, can help providing broader information on the privateering business model, promote transparency of patent ownership and “the real party in interest”, assure the transferability of SEP-promises, encourage better quality of patents, gather information to vigorously apply antitrust law and finally encourage the creation of ‘patent books’ and large SEP pools.

For a succesful relationship between the sponsor and the privateer from the operating company’s point of view, it is essential to achieve an alignment of incentives between the two. Otherwise it may be in the best commercial interest of the privateer to assert the intellectual property rights (IPR) on the customers of the of the operating company instead towards competitors or firms on non-related product markets. Even without the risk of retaliation this can harm the sponsor’s core business.

If possible, the sponsor may provide the privateer with precisely circumscribed patents that inherently direct the latter one’s activities in the ‘right’ direction. In any other case, the sponsor must control the PAE through some form of agreement. These contractual provisons may be subject to antitrust scrutiny.

In a first scenario, the PAE may helps the sponsor, a dominant undertaking in a given product market, to unduly impede a competitor active on the same product market. This could qualify as an exclusionary abuse under article 102 TFEU.

Secondly, with regard to FRAND-encumbered SEP that are included in a standard, the sponsor may use the PAE as a mechanism to avoid its engagements to the Standard Setting Organisation (SSO) and the licencees. After the transfer or the disaggregation of the SEP portfolio, each entity may seeks royalties as high as the initial percentage promised by the operating company. So the licencees having implemented the standard in good faith have to confront an ex post patent hold up situation. Furthermore, the splitting of the SEP portfolio creates the tragedy of the anticommons problem (Cournot complements) that lead to an inefficient outcome with regard to the prior situation of an unified portfolio. This potential exploitative and/or exclusionary conduct may also be in breach of article 102 TFEU, as the privateer is provided with monopoly power in the technology market. Its abuse could be imputed to the sponsor if the SSO proved that it would have adopted a different technology in the counterfactual situation and, in addition, the SEP transfer facilitates the non-respect of the sponsor’s initial commitment.

Thirdly, if several competing operating companies transfer SEP or de facto essential patents to a privateer in view of enforcement of those IPR against other rivals or entrants, a collusive outcome may be challenged under article 101 (1) TFEU.

So far, the sole combination of intellectual property does not seem to be treated as a joint venture or vertical merger by the ECMR. However, if the law may evolves, potential anticompetitive effects may be caught under the significant impediment of effective competition (SIEC) test.

In sum, such agreements, especially with “hybrid” privateers that de facto stay under control of the sponsor after the patent transfer, could run afoul of the antitrust/competition laws, but to establish causal links and a coherent theory of harm may be difficult. A case-by-case analysis is needed.

1. Impact of non-practicing entities on innovation and competition

Despite alleged efficiencies of PAE activities (better equipped to evaluate patents, negotiate licensing agreements or manage litigation; possibility to constitute bundles of complementary patents; making sure inventors are remunerated for their efforts; …), such activities may impact innovation in detrimental ways :

– Transferring patents to multiple PAEs may help evading FRAND commitments, reinforcing hold-up possibilities;
– Large resources are wasted in litigation and not allocated to innovation activities anymore, affecting also the pace of innovation;
– Companies prefer to pay for a license on weak patents rather than starting with litigation;
– The overcompensation resulting from high royalty rates give wrong prices signals what results in a misallocation of R&D;
– Privateering modifies the habits between players in the market that used cross-licensing to maintain “peaceful” relations ;
– Potential victims of PAEs prefer to buy portfolios of patents ex ante so that PAEs cannot buy and monetize them afterwards;
– …

From a competition perspective, privateering is used by certain operating companies as a weapon to raise rivals’ costs and dampening competition. The companies sued by privateers face a threat of business interruption (injunction) and are forced to bargain at disadvantageous terms and conditions. Privateering impacts consumers who bear the costs of PAEs’ activities through higher prices (“welfare loss”). A collusion risk also exists between the sponsors and/or the privateers.

2. Possible reaction from competition authorities?

Competition authorities have a role to play but the problem being complex, a global approach (competition, IP, judicial) and a responsible industry behaviour is necessary.

Competition lawyers in the US (where PAEs appeared) suggest that :

– outsourcing patent litigation may help to obtain monopoly power in breach of section 2 of the Sherman Act;
– the transfer of patents from sponsors to privateers may be reportable under the Hart Scott Rodino Act and reviewed under section 7 of the Clayton Act governing concentrations likely to substantially lessen competition;
– the relationship between sponsor(s) and privateers may restraint trade contrary to section 1 of the Sherman Act ;
– privateering may constitute unfair methods of competition affecting commerce that may be prohibited by the FTC.

Even if these US legal provisions differ from their EU “equivalent”, the underlying reasoning is useful to determine whether articles 101 and 102 of the TFEU and the EU merger regulation (1) may apply to privateering that may extend to the EU(2) (cfr. points 3 and 4 below).

PAEs are prosperous in the US due to certain features of the US judicial system (no loser pays rule, treble damages, jury ruling, high litigation costs, forum shopping possibilities). Should US authorities wish to tackle the privateers problem, changes to their judicial system may be necessary. Major changes are not expected at short-term as modifying in-depth the judicial culture of a country is difficult. However, smaller but useful changes have already occured, such as the review of the conditions to grant injunctions (cfr. the Supreme Court ruling in eBay vs MercExchange) or the dis-joinder of parties (America Invests Act) so that privateers may not sue all allegedly infringing companies in one and the same proceedings (increasing privateers’ own costs and the risk of invalidation of their patents).

Concerning the US patent system, certain improvements were suggested (improving the efficiency of understaffed patent offices; facilitating patents researches and improving their intelligibility; making easier to invalidate weak patents; …). A radical suggestion has also been formulated: prohibiting the patentability of softwares(3) . This would resolve the privateering issue but there is no strong political or industrial (at least amongst big players) will in this respect. Another solution may be to limit the patent protection duration.

3. Raising rivals’ costs (SEPs and non-SEPs)

a) Any initiative taken by an undertaking raising its rivals’ costs should not be prohibited. Nobody contests the right of a company to enforce its patent in case of infringement by a competitor even if the latter bears legal costs but raising rivals’ costs is perceived as problematic when it is excessive and is part of a plan focusing exclusively on this aspect.

Article 102 of the TFEU offers a solution in certain circumstances. It has been invoked successfully in the Rambus (abuse standards process) and AstraZeneca (abuse patents process) cases. It is also invoked by the Commission in the Statement of Objection recently sent to Samsung (alleged misuse of mobile phone SEPs).

b) Should a dominant player (sponsor or privateer) try to escape a FRAND commitment and demand high royalties for SEPs, it could be reproached an abuse of dominant position.

As a preventive measure, SSOs should contractually (i) individualize the amount of fees an undertaking may request for the use of each of its patents in the standard or impose a global cap and (ii) provide that this undertaking procures the transferees of said patents will be bound by the same.

Another tool useful in the assessment of the privateers royalty demands, would be to consider the price of transfer (often at a low price) of such patents by the sponsor to the privateer as a benchmark.

c) Concerning the risk of injunction in case of non-SEPs, possibilities exist to reduce PAEs’ detrimental initiatives in this respect:

(i) The ECJ case law on refusal to license (art.102 of the TFEU):

In the Magill case, criteria were determined to condemn a refusal to license (downstream monopolization, prevention of a new product, consumer demand). These criteria have been watered down in subsequent ECJ decisions (IMS Health and Microsoft). Depending on the circumstances, an undertaking willing to negotiate a license on reasonable terms could invoke such case law against a privateer requiring an injunction against it. Going a step further, the ECJ may consider that excessive licensing prices required by a privateer constitute a refusal to deal which may be abusive under article 102 of the TFEU.

(ii) The discrimination between the sponsor which benefits from a license at a low price and other undertakings which are charged higher license fees is another ground for action under article 102.

(iii) Another option would be, as in the US, not to allow non operating entities (as PAEs) to seek for an injunction. Contrary to operating entities trying to assert a patent, PAEs would only be entitled to get damages and could not use the threat of injunction as a bargaining tool anymore.

4. Agreement between privateers and sponsors

a) The relationship between sponsors and privateers may take various forms :

– a sponsor sells a portfolio of patents to an independent privateer that may assert it freely;
– the privateer acquires small portfolios of patents and then become a large IT patent holder;
– sponsor(s) and privateers enter into a complex agreement where the sponsor(s) transfer patents to the privateer which in turn grant a license to the sponsor(s) at good terms and they agree to share the revenue from the future licensing activity of the privateer ;
– sponsors and privateers (which may already hold patents) create a joint-venture which acquire the sponsor’s patents and they share the control of the joint-venture;
– …

To the exception maybe of the first example in the list above, the European (or national) Competition Authorities might review such “concentration” operations under the EU Merger Regulation (or its equivalent at national level) to prevent the creation or strengthening of dominant positions. The difficulty will be to define the relevant market (product market, technologies or patent licensing market, IT patents assertion market?). The theory of harm could be based, depending on the circumstances, on horizontal and/or vertical (foreclosure) effects.

b) The agreement between the sponsor(s) and the privateer could also fall under the scope of article 101 of the TFEU which prohibits agreements that distort competition notably by (i) limiting or controlling output and technical development (innovation) or (ii) applying dissimilar conditions to equivalent transactions with other trading parties thereby placing them at a competitive disadvantage.

The agreements between sponsors and privateers are criticized especially in the US as they raise rivals’ costs. Such concept is not unknown in EU competition :

– Paragraph 41 of the guidelines on horizontal cooperation agreements stipulates “the creation, maintenance or strengthening of market power can result from superior skill, foresight or innovation. It can also result from reduced competition between the parties to the agreement or between any one of the parties and third parties, for example, because the agreement leads to anti-competitive foreclosure of competitors by raising competitors’ costs and limiting their capacity to compete effectively with the contracting parties”.
– Paragraph 141 (2) of the guidelines on application of article 81 (now 101 of the TFEU) on technology transfer agreements states that restrictive license agreements may foreclose competitors “by raising their costs restricting access to essential inputs or otherwise raising barriers to entry”.
– In another context, the idea underlying the prohibition of margin squeeze (under article 102) is also to prevent actions that could “artificially” increase the competitors’ costs and influence their retail price.

The question is whether EU Competition Authorities could consider that an agreement the main purpose or effect of which is raising rivals’ costs could infringe article 101 of the TFEU. I doubt the European Competition Authorities consider an agreement between sponsor(s) and privateer as anticompetitive by object (except of course, if the parties also collude on other aspects such as price fixing). Asserting patents as such is perfectly legal and is an essential feature of IP Law. I think European Competition Authorities are more likely to adopt an effect based approach vis-à-vis such agreements. It will be interesting to know the Commission’s position following the complaint filed by Google against Nokia, Microsoft and Mosaid.

In an effect based approach, the whole context of the agreement (wish to attack specific competitors or not, …), the parties’ commitments and the impact on the market are carefully analysed. Should it be considered that such agreement falls under article 101 (1) of the TFEU, it could still be individually exempted if the conditions under article 101 (3) are fulfilled. This could even lead, when the patents privateers phenomenon is better analysed and solid data available, to amend the TTBER to encompass certain modalities or clauses of the less problematic agreements between sponsors and privateers.

5. Conclusion

The appearance of patent privateers creates additional problems to the one caused by patent trolls (which were still unresolved). Nevertheless, it interestingly opens the possibility to apply article 101 of the TFEU in this field whereas the initial patent trolls activities were essentially assessed or studied under article 102 or under the EU Merger Regulation.

The PAEs’ issue should be addressed in a multidisciplinary approach but measures that could improve significantly the situation from a patent or judicial law perspective may not come rapidly. Operating companies confronted with PAEs in a sector characterized by patent ticketing have thus great expectations vis-à-vis competition law authorities in the short-term to set a level-playing-field.

Competition law will not solve all issues at stake but the limited measures already taken in other fields (i.e. restrictive conditions to get an injunction in the US) and the first decisions to be taken by competition authorities on privateering will procure a framework preventing the most excessive behaviours of patent privateers and their sponsors. It may however take time to have a fixed and clear stance on all competition aspects of the PAEs phenomenon. Given the complexity of the problem (relationship between IP Law and Competition Law) and the great variety of possible situations, the future case law in this field will need to be rapidly refined and probably be subject to evolution.

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(1) The unfair commercial practices argument is less suitable in an EU context as EU directives on unfair commercial practices focus mainly on B2C and not on B2B.
(2) Cfr. the recent complaint filed by Google with the Commission against Nokia, Microsoft and Mosaid.
(3) On the basis of various arguments such as “software is math”, “it hinders technological progress”, costs savings, open sources disadvantages, …

V. Leroy – June 10, 2013 (BSC)