Patent trolls – or to use their more formal name, non-practising entities (NPEs) – are often accused of being parasites, sucking money out of the industry.
Not so, says Daniel Papst, managing director of German company Papst Licensing – a broker of patent licence agreements. NPEs, he told NewLegal Review, play an important role: ‘supporting patent owners in reaping benefits from their IP’.
In Papst’s view, patent aggregators – companies that harvest patents purely for their economic potential – are not doing anything significantly different to what occurs in other fields of innovation. ‘The single inventor who received a patent on his invention and is trying to make some money with his patent by either selling it or licensing it is effectively an NPE,’ he said, adding that the same applies to academic or research institutions with large patent portfolios, but no manufacturing systems. Aggregators, said Papst, have merely placed patent value centre stage in their sector.
Taking the high ground?
Papst said that the backers of patent aggregators have begun to view NPEs as ‘safe alternative asset investments, free from the vagaries of established capital markets’. It is not uncommon, he added, ‘for some of those investors to expect a return on investment of ten times the capital – and some estimates put the amount of capital flowing into NPEs over the past eight years at between $6bn and $8bn. Just as markets for intangibles such as debt and risk have evolved over the past 100 years, a market for patent assets has also taken shape’.
However, Papst pointed out, aggregators are fundamentally on the side of original patent holders, and typically partner with them to ensure that their assets are properly managed. ‘Infringements must be actively pursued to ensure that the patent holders can successfully reap the benefits of their rights and keep innovation at the cutting edge,’ he said. ‘Why bother to innovate if infringers can readily misappropriate an invention without penalty? The objective of sharing the fruits of their monetisation programmes with original patent holders is a motivation for most NPEs in pursuing infringement suits.’
When working with an NPE, Papst added, an original IP holder ‘has the advantage of facing no direct costs as a result of the commercialisation process. He has to deal with only a minimum tie-up of internal resources, as the NPE has access to an extensive professional network of litigation and patent attorneys – plus technical experts and market analysts’. In this way, he said, the original holder ‘avoids direct conflicts with customers, suppliers and competitors and – most importantly – improves his prospects for success and earnings as a result of having a competent, experienced and independent partner’.
Checks and balances
Key recent lawsuit decisions in the US, said Papst, have ensured that aggregators are unlikely to become a rogue element. ‘The US Supreme Court has issued a number of rulings that have weakened some of the leverage that NPEs can wield. For example, by establishing a four-part test to determine whether an injunction is warranted in a patent case, the 2006 decision in eBay v MercExchange made it much more difficult for NPE patent holders to obtain injunctions.’
Papst outlined the effects of three later Supreme Court cases:
• MedImmune v Genentech (2007): ‘The court ruled that a licensee is not required to terminate its licence agreement before seeking a declaratory judgment to determine whether the patent at hand is invalid, unenforceable or not infringed. Hence, it is now easier for alleged infringers to challenge the validity of patents while maintaining their licence rights.’
• KSR International v Teleflex (2007): ‘This went even further and raised the bar for patent holders to prove that their inventions are non-obvious. The ruling made many existing patents more vulnerable to litigation – particularly where they represent mere incremental improvements or combinations of prior elements – and may also make new patents harder to obtain.’
• Quanta Computer v LG Electronics (2008): ‘In this case, the court clarified the principle of patent exhaustion. Its ruling made it more difficult for a patent holder to claim infringement against parties that have purchased patented products from a licensee and embedded them in downstream products.’
Despite the hurdles presented by those rulings, Papst is confident about the future. ‘The emergence of patent monetisation companies is a sign that the idea of innovation as a financial asset has arrived,’ he said. ‘Independent patent owners function as market intermediaries. By doing so, they increase patent liquidity, set market clearing prices and foster efficiency in the IP economy. The use of derogatory labels and alarmist dialogue about NPEs serves to undermine an increasingly global and intangible-asset-driven, knowledge-based economy’.