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Patent Freedom chairman challenges claims that few NPEs will be affected by SHIELD Act

Last week I wrote a blog pointing out that according to statistics put together by PatentFreedom, as few as one in four known NPEs would be covered by the provisions of the proposed SHIELD Act. Dan McCurdy, who is chairman of the firm, has been in touch to provide his perspective on what I wrote:

I saw your post on the proposed SHIELD legislation and wanted to share with you further thoughts that you might find interesting.

As you correctly pointed out, the distribution of NPEs (60% original assignees, 15% blend) on PatentFreedom’s website refers to 680 “parent” entities.  However, if we add in the more than 2,100 subsidiaries and affiliates of these entities and treat them all as standalone entities, we find that 19% of them are originally assignees, and 69% are acquirers, and 12% are blends. 

A better way to begin to assess the impact of acquired patents is to look at the distribution of operating company counterparties in NPE litigations over time.  According to our latest numbers, in 2005-2006, 37% of defendants (and plaintiffs in DJ actions) faced acquired patents and 63% faced originally assigned patents.  By 2011-2012, however, that had changed quite substantially, so that 60% of defendants faced acquired patents and 40% faced originally assigned patents.

In other words, at least some of the entities that could be affected by the SHIELD legislation (175 parent entities as you reported, now 215 with our latest data) are, indeed, the ones that form large networks of affiliated entities to buy patent assets (sometimes of low value) and subsequently sue dozens or, in some cases, even hundreds of companies, often seeking quick settlements.  Such entities are clearly different from those that invest in the creation of new intellectual property and subsequently choose to use the courts to enforce their patent rights. 

Finally, you comment on our definition of NPEs, and seem to have the misimpression that universities, research institutions and similar entities could be swept into the definition.  This is not the case.  Universities, for example, derive the majority of their revenues not from licensing or enforcement of patents, but rather from tuition, grants, and endowments.  In fact, a minuscule amount of their revenue is typically derived from licensing of any kind.  But the roughly 2,800 parent NPEs and their affiliates detailed in PatentFreedom do in fact generate the vast majority of their revenues from the licensing or enforcement of patents.  And therefore these entities are distinguishable.  This is not to cast a view on that business model, but rather simply to say that it is a recognizable "industry" at this point, and while the participants differ with respect to where they obtain the assets they enforce, and how they engage the market, they all share this common business objective — to obtain a royalty based on sales of what they allege to be infringing products or services.

To sum up, not all NPEs are alike, and not all are predatory.  And not all operating companies are angels either.  These facts will no doubt be weighed in the debate surrounding the SHIELD legislation.

I am grateful to Dan for getting in touch and I would urge others who think we have got it wrong in our coverage to do the same.

Dan makes some fair points in what he writes. When looking at the potential impact of NPEs it is important to remember that the 700 or so known NPEs out there do own any number of subsidiaries and affiliates; and I have no argument with his claim that an increasing number of the patents being asserted by NPEs have been acquired, as opposed to created, by them – if anyone knows about these things it is PatentFreedom.

However, what I would say is that an acquired patent has to have been brought from and/or assigned by someone else, and ultimately the trail will always lead back to an inventor. SHIELD is clear that inventors are the “good guys”. But what the Act proposes will make it much harder for many of these “good guys” to get a monetary reward, however small that may be, for their work.

In that regard a point made by Representative Melvin Watt from North Carolina at a Congressional hearing about the legislation is telling. He referenced the purchase of the Kodak portfolio, which was coordinated by Intellectual Ventures and helped to secure a deal which brought the stricken company out of bankruptcy. “The purchase undoubtedly saved thousands of jobs,” Watt said. “It also enables a non-practising entity to pursue litigation against other infringers on patents duly acquired from Kodak.” With SHIELD in place IV may well not have been interested in the Kodak portfolio; at the very least the amount it would have been willing to offer for the patents would have been a lot lower. Who, except those infringing the Kodak patents perhaps, would have gained from that?

More generally, who would gain from the overall reduction in the value of patents in the US marketplace that SHIELD would cause? Has anyone bothered to look? Given the way that the Act is currently framed, SMEs, start-ups and lone inventors could end up facing a double whammy: not only will it be more expensive and risky to enforce patents against deep pocket corporations (which will be given further ways to extend a case and drive up plaintiffs’ costs), but also the market value of the patents they create will be reduced. Now, that may not bother some large corporations with big lobbying budgets; but it sure as hell might worry early-stage companies in a range of industries whose patents are their only real assets, not to mention those from whom they might seek investment.

Where I do have a big argument with Dan is over what he says characterises all those that PatentFreedom considers to be NPEs: “While the participants differ with respect to where they obtain the assets they enforce, and how they engage the market, they all share this common business objective — to obtain a royalty based on sales of what they allege to be infringing products or services. “ I am afraid I just do not agree.

When I look at PatentFreedoms’s list of the NPEs with the biggest holdings, I see names such as WARF, CSIRO, Rambus, Tessera and InterDigital. I don’t think these entities have set themselves up primarily to obtain a royalty base on infringing products. Instead, I’d argue that they see themselves as organisations which do a great deal of R&D that leads to patents and know-how which others can incorporate into their products, so saving a great deal of R&D time and spend. They monetise the R&D by licensing its results and they do not want to get to the stage of potential infringement – they want to develop meaningful relationships before that. Indeed, I’d go further and say that most of the organisations on that PatentFreedom list would describe their business models as being based on a variant of that idea; they see themselves as aggregators which identify patents that could underpin important technologies and they offer companies the opportunity to save time, effort and cash on duplicating R&D that has already been done by offering licences to those patents. They would far prefer the carrot to the stick. 

Perhaps if a lot of companies that end up being found to have infringed NPE patents approached the whole business in that way, there would be a lot less litigation. Maybe what legislators need to be doing is facilitating the creation of that kind of market – one in which inventors get rewarded for high-quality invention, patents are a fully tradable asset and companies that cannot possibly hope to do all R&D in-house are actively seeking to license rights that will help them to offer products and services that people want to buy. I’d say that despite the problems it may cause some, much more transparency around patent ownership may be part of the solution here, rather than a very partial and potentially damaging ‘loser pays’ regime. 

Finally, from the posts that we have run on SHIELD, as well as our general reporting of issues surrounding NPEs, some may have concluded that we are supporters of the NPE model.  This is not the case. The following points guide our coverage:

• First, as Dan makes clear in his note, there is no such thing as a single NPE model. Instead there are entities that we can call NPEs which pursue very different business models. We believe passionately that debate about NPEs should reflect this fact, but that all too often it fails to do so.

• Second, we are pro-IP and believe that if you start tinkering with the IP system in ways designed to stifle the activity of what you deem to be “bad” players within it, unless you are very careful you run the serious risk of doing more harm than good because the measures you introduce will adversely affect many more entities than those “bad” players.

• Third, we are extremely uncomfortable about making moral judgements when it comes to what are perfectly legal business activities, especially when arguments about morality can often hide self-interested business agendas.

• Fourth, we believe that the debate about NPEs is characterised by a lot of anecdote and theory, as well as some very questionable research, and that this is no basis from which to legislate.

• Fifth, we believe that SHIELD itself is not only very poorly drafted, but that it also displays very little understanding of the way the patent markets work in the US. It is deeply flawed and will end up making life a lot easier for many deep pocket defendants in patent cases at the expense of many plaintiffs, whether NPEs or not.

• Sixth, we believe that there are two sides to every story, but that you would not be able to tell that from most coverage of NPEs you see. Given that we report on the IP marketplace, it would be a dereliction of duty not to ensure that we reflect that.


Joff Wild
IAM Magazine
18 March 2013

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Licensing, IP politics, IP litigation, Patents, IP business, IP valuation

Comments

RE: Patent Freedom chairman challenges claims that few NPEs will be affected by SHIELD Act

Points two and three - unintended consequences and hidden agendas - resonate strongly. If those who push SHIELD will concurrently aggressively promote ideas to help individual inventors and SMEs find practical ways to be rewarded for their patented technology that is adopted by "deep-pocketed" high-tech firms, we might have the beginnings of a useful paradigm.

Chuck Neuenschwander

Charles R Neuenschwander, IPLC, LLC on 27 Mar 2013 @ 14:14

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