At George Mason University's Center for the Protection of Intellectual Property, Wayne Sobon, Vice President and General Counsel of Inventergy, Inc. weighs in on the recent round of patent legislation and associated regulation. According to Sobon:
One genius of our patent system has been an implicit recognition that since its underlying subject matter, innovation, remains by definition in constant flux, the scaffolding of our system and the ability of all stakeholders to make reasonably consistent, prudent and socially efficient choices, should remain as stable as possible. But now these latest moves, demanding yet further significant changes to our patent laws, threaten that stability. And it is in fact systemic instability, from whatever source, that allows the very parasitic behaviors we have termed “troll”-like, to flourish.
It is silly and blindly ahistoric to lump anyone who seeks to license or enforce a patent right, but who does not themselves make a corresponding product, as a “troll.” Many arguments about Non-Practicing Entities (NPE), Patent Assertion Entities (PAE), Patent Licensing Assertion Entities (PLAE) — the various formal names and acronyms for the more commonly known epithet, “patent troll” — include an implicit and often explicit emotional condemnation of any patent holder who either did not invent or does not manufacture the patented products. The President’s statements are replete with such derision of people or firms who “don’t actually produce anything themselves.”
Yet, from the very outset, our American patent system distinguished itself from its English predecessor, by establishing the unfettered sale in the marketplace of patent rights, precisely because patents are private property rights (see here, here, and here). In England, patent monopolies were still mostly creatures of the Crown — personal privileges. See B. Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 (Cambridge University Press, 2005), pp. 36-38. The United States patent system, based upon objective criteria for inventiveness and established in freely-alienable property rights, was as significant a revolution in the commercial sphere as the federalist structure was in the political. Id., pp. 49-51, 60-62. And it’s hard to argue against the unprecedented success of the American economy based on the patented innovation protected by these laws.
And indeed, it might come as a surprise, that many of the inventor giants we hold in such high regard today in fact never manufactured the products covered by their patents. Elias Howe did not make sewing machines. Rather, having invented the hugely important lock-stitch technology, but being poor himself, he assembled financing, using then novel securitization of patents, and then licensed his patent to others (and famously, fought the equivalent of our smart phone wars, against Singer). Charles Goodyear never manufactured any rubber; he licensed his vulcanization process to others. Thomas Edison also received third-party financing to operate his famous invention factory in Menlo Park, and he licensed his patented inventions to other companies for manufacture and sale in the marketplace, such as his invention of the first electric pen. And when the unscrupulous refused to pay licenses, each of these inventors of course moved to enforce.
Sobon goes on to highlight two areas where change may be needed:
Here are two important areas that could benefit from targeted interventions: (1) the high costs of litigation for all participants, and (2) the rampant and extended uncertainty of patent disputes. Both of these interventions rest soundly in the discretion of our Federal Courts. We already have the tools to bring down discovery costs (I’d argue we need less discovery than what we spend so much time, money, energy and emotion on to yield valid, fair results). And as noted by Chief Judge Randall Rader in his many public comments, judges already have the legal and procedural tools to cull sham lawsuits from the courts. It just requires exercising judgment, as they ably can and do.
[I]t would be a terrible mistake of patent policy to insist that the only firms that should be entitled to enforce patents are those that are actually in the business of making tangible products with their patented technologies. Of course, there is nothing whatsoever wrong with savvy full-service firms taking this approach. After all, their routine business activities could easily generate new ideas for patentable inventions that the firm could then exploit synergistically through its own research arm. But by the same token, there is much to be said for an alternative business model in which specialization takes place along a different axis.
The entities qualifying as NPEs are wide-ranging and heterogeneous: they include all universities, which certainly do not manufacture or sell patented inventions, but also start-up companies, semiconductor design houses, and even some large, established commercial firms, like IBM. Thomas Edison would have been called an NPE, if that term existed 100 years ago, as he worked full time in his invention factory in Menlo Park and only licensed his inventions to the companies that manufactured and sold his patented inventions, although he loved to put his name on these companies as well. As is clear, IBM, Edison, and Harvard University have hardly invoked the ire that has been directed to PAEs. Yet all of them hold patents for the same commercial reasons: they transfer technology and its rights to other market actors, and in some cases, they also develop technology.
PAEs can generate efficiencies in two different but interrelated markets: the market for patents and the market for ideas. PAEs have contributed to a more active secondary market for patents, increasing patent liquidity, allowing patent holders to dispose of portfolios they cannot or will not maintain, and permitting companies to recoup immediately some R&D costs – often extensive. Each of these functions in turn permits practicing entities to re-focus on invention, manufacture, and further research. This liquidity-enhancing function operates along several dimensions, from funding small entrants which notoriously struggle in interacting with established incumbents to salvaging patent rights from failed start-up companies, to providing a marketplace to companies wishing to diversify or refocus their patent holdings.
We also need to consider the social costs from an erroneous condemnation of PAEs or an overbroad remedy to address any PAE activity that is shown to be harmful. As I have previously stated, it is particularly important to minimize the sum of the costs of legal errors and administrative costs in high-tech industries because innovation is critical to “the long-run health of the industry and consumer welfare.”47 In its 2011 Report, the FTC agreed, explaining that “[i]t is difficult to distinguish patent transactions that harm innovation from those that promote it, and errors that undermine beneficial transactions can harm consumers.”