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«SCHWARTZ et al_5fmt 11/30/2014 3:19 PM Article Unpacking Patent Assertion Entities (PAEs) † †† Christopher A. Cotropia, Jay P. Kesan & David ...»

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SCHWARTZ et al_5fmt 11/30/2014 3:19 PM


Unpacking Patent Assertion Entities


† ††

Christopher A. Cotropia, Jay P. Kesan & David


L. Schwartz

In the last decade, the landscape of patent litigation has

radically shifted. Entities that do not manufacture products

have become important players in the patent litigation system.

This is a change from years ago, when patent litigation was dominated by lawsuits between competitors. In this earlier period, there were complaints that the cost of patent litigation prohibited most small patent owners from enforcing their † Professor of Law and Austin Owen Research Fellow, University of Richmond School of Law. We would like to thank David Abrams, Christopher Buccafusco, Colleen Chien, Peter DiCola, Robin Feldman, Miguel de Figueiredo, Christi Guerrini, Stuart Graham, Richard Gruner, Paul Heald, Paul Janicke, Ed Lee, Matthew Levy, Laura Pedraza-Feriña, Lee Petherbridge, Michael Risch, Matthew Sag, Ted Sichelman, Greg Vetter, nd Saurabh Vishnubhakat, Corey Yung, and the participants of the 2 Annual Empirical Patent Law Conference at the University of Illinois College of Law, the Patent Reform: Theoretical Propositions and Factual Foundations Conference at the University of Pennsylvania Law School, the Work-in-Progress IP Conference at Santa Clara, and faculty workshops at Northwestern University Law School and USC Gould School of Law for their comments and suggestions on prior drafts of this paper. We would also like to thank our student research assistants Lucas Dahlin, Michelle Ingram, John Li, and Andrew Thompson for their hard work and dedication. Finally, we would like to thank Docket Navigator for providing us with its data relating to patent claim construction of all 2010 lawsuits.

†† Professor and H. Ross & Helen Workman Research Scholar, University of Illinois College of Law.

††† Professor of Law and Co-Director of the Center for Empirical Studies of Intellectual Property, Chicago-Kent College of Law.

Copyright © 2014 by Christopher A. Cotropia, Jay P. Kesan, and David L. Schwartz.

1. See generally Colleen V. Chien, Of Trolls, Davids, Goliaths, and Kings:

Narratives and Evidence in the Litigation of High-Tech Patents, 87 N.C. L.

REV. 1571 (2009) (describing various plaintiff-defendant matchups and their frequency of occurrence in patent litigation).

SCHWARTZ et al_5fmt 11/30/2014 3:19 PM 650 MINNESOTA LAW REVIEW [99:649 rights against large entities. Today, companies that manufacture products embodying their patents urge that patent plaintiffs that do not manufacture products are fundamentally different. The main argument is that there are asymmetric stakes. In a patent lawsuit when both plaintiffs and defendants are manufacturers, defendants can cross-license patents or hit back at plaintiffs with their own patent infringement lawsuit, a strategy that is unavailable with a nonmanufacturing plaintiff. As a result, non-manufacturing plaintiffs in the patent system are seen as opportunistic actors who sue manufacturing companies for money.

The recent entrants, often-called “patent assertion entities” (“PAEs”), non-practicing entities (“NPEs”), patent monetization entities (“PMEs”), or simply patent trolls, come in many shapes and sizes. They run the gamut from universities, failed start-ups, and individual inventors, to companies formed by venture capitalists seeking to exploit the inventions of others.

From the perspective of a patent as an economic instrument designed to provide rewards for inventors, it is important to carefully separate these specific categories of PAEs. There is little economic support for the proposition that individual inventors and university personnel should not benefit from the patent system. Similarly, start-up companies that subsequently fail to commercialize their patented technologies also urge that they should be allowed to monetize their patents through litigation when other companies deploy the start-up’s patented technologies in their products. Other entities in the patent system who help individuals, universities, and failed start-ups monetize their patents also urge that they are important intermediaries bringing resources to inventors to help them monSee Mark A. Lemley & A. Douglas Melamed, Missing the Forest for the Trolls, 113 COLUM. L. REV. 2117, 2162 (2013).

3. Colleen V. Chien, From Arms Race to Marketplace: The New Complex Patent Ecosystem and Its Implications for the Patent System, 62 HASTINGS L.J.

297, 300 (2010).

4. Sara Jeruss, Robin Feldman & Joshua Walker, The America Invents Act 500: Effects of Patent Monetization Entities on US Litigation, 11 DUKE L.

& TECH. REV. 357, 361 (2012).

5. Some studies have attempted to classify parties using a dozen entity status categories. See, e.g., John R. Allison, Mark A. Lemley & Joshua Walker, Extreme Value or Trolls on Top? The Characteristics of the Most-Litigated Patents, 158 U. PA. L. REV. 1, 10 (2009).



7. See id. at 3.

SCHWARTZ et al_5fmt 11/30/2014 3:19 PM 2014] PATENT ASSERTION ENTITIES 651 etize their patents. We recognize that there are various names that people use to refer to these entities. In this Article, we refer to all of these entities as PAEs, except when referring to the studies of others who call them by a different name.

Most recently, there has been a ferocious backlash in many sectors of society against PAEs. Some academics and practitioners have argued forcefully that PAEs are bad, that their conduct is costly, and that they are socially harmful to the economy. The President of the United States has even joined in the fray. In response to a question about “patent trolls,” President Obama recently stated, “They don’t actually produce anything themselves.... They are essentially trying to leverage and hijack somebody else’s idea and see if they can extort some money out of them.” To counter patent trolls, the President and his economic team issued an executive order, including some legislative recommendations, to make litigation more difficult for patent holders. Academics have contended that PAEs cost the economy tens of billions of dollars, based upon a confidential survey of defendants. The press trumpeted anSee Edith Ramirez, Chairwoman, Fed. Trade Comm’n, Opening Remarks of Chairwoman Edith Ramirez, Competition Law & Patent Assertion Entities: What Antitrust Enforcers Can Do (June 20, 2013) available at http://ftc.gov/speeches/ramirez/130620paespeech.pdf (“Rewarding genuine invention is good for competition and consumers. PAEs can serve that goal by reducing the enforcement hurdles facing small inventors and start-ups....

PAEs can make it easier for a failed start-up to monetize its patents, providing some insurance for venture capitalists.”).

9. Some refer to all or some NPEs as “trolls.” For instance, some believe troll refers to a case brought by an NPE which is meritless. Others believe troll refers to a case brought by an NPE for a nuisance value settlement. Others believe that all cases brought by an NPE are troll cases, regardless of the merits. While the terms PME and PAE are meant to exclude University patent litigation, it is less clear whether Individual Inventor lawsuits are included.

For an empirical project such as ours, the definition of an NPE is key.

10. See Sannu K. Shrestha, Trolls or Market-Makers? An Empirical Analysis of Nonpracticing Entities, 110 COLUM. L. REV. 114, 129 (2010). See generally James Bessen & Michael Meurer, The Direct Costs from NPE Disputes, 99 CORNELL L. REV. 387 (2014) (discussing the costs of patent litigation).

11. Gene Sperling, Taking on Patent Trolls To Protect American Innovation, THE WHITE HOUSE BLOG (June 4, 2013, 1:55 PM), http://www.whitehouse.gov/blog/2013/06/04/taking-patent-trolls-protect-american-innovation.

12. See Edward Wyatt, Obama Orders Regulators To Root Out “Patent Trolls,” N.Y. TIMES (June 4, 2013), http://www.nytimes.com/2013/06/05/ business/president-moves-to-curb-patent-suits.html; EXECUTIVE OFFICE REPORT, supra note 6 (discussing data findings regarding PAE litigation).

13. Bessen & Meurer, supra note 10, at 389. For a critique of the methods used in that study, see David L. Schwartz & Jay P. Kesan, Analyzing the Role SCHWARTZ et al_5fmt 11/30/2014 3:19 PM


other study that found patent trolls filed 62% of patent lawsuits in 2012, a huge increase from the 29% filed in 2010. RPX Corporation (RPX) and Patent Freedom, two companies whose business includes providing subscriptions for businesses facing PAE assertions of patent infringement, have each reported summaries of their proprietary data on PAEs.

While the rhetoric in these studies is often sharp and clear, the same cannot also be said for the disclosures of the underlying data. The studies merely provide summary data to the public and often do not differentiate between the various types of PAEs. Instead, the studies broadly classify companies as either PAEs or non-PAEs (or sometimes, trolls or non-trolls). Importantly, nearly all of the data upon which these studies are premised is confidential and thus is not available for peer review or for use in other studies. This includes the data used in the Executive Office Report. In late August 2013, the Government Accountability Office (“GAO”) released its long-awaited report on NPEs. That report, while appearing quite balanced of Non-Practicing Entities in the Patent System, 99 CORNELL L. REV. 425 (2014).

14. See Steven Musil, Patent Trolls Now Behind Most Patent Infringement Lawsuits, CNET (Dec. 10, 2012, 9:10 PM), http://news.cnet.com/8301-1023_3

-57558384-93/patent-trolls-now-behind-most-patent-infringement-lawsuits (“About 62 percent of all patent lawsuits filed this year up to December 1 were brought by patent assertion entities (PAEs), which are created to extract licensing fees from other companies rather than make products based on the patents.”); Colleen Chien, Patent Trolls by the Numbers, PATENTLY-O (Mar.

14, 2013), http://www.patentlyo.com/patent/2013/03/chien-patent-trolls.html.

15. See, e.g., RPX CORP., 2012 NPE ACTIVITY REPORT (2013), available at http://patentlyo.com/media/docs/2013/07/0BF995E82CFF591EE80EFE8AC692 59E7.pdf. Patent Freedom’s publicly available website contains summary data on NPE assertions. See, e.g., Litigations Over Time, PATENT FREEDOM, https://www.patentfreedom.com/about-npes/litigations/ (last visited Nov. 5, 2014). Moreover, Steven J. Moore, a legal practitioner at the Kelley Drye law firm, wrote a five-part series on the popular blog IPWatchdog about NPEs. In the posts, he reported summary data on a variety of NPE related issues that appear to contradict the anti-patent troll narrative. See, e.g., Steve Moore, Probing 10 Patent Troll Myths—A Fractured Fairytale Part 2, IPWATCHDOG (July 30, 2013, 11:35 AM), http://www.ipwatchdog.com/2013/07/30/probing-10


16. We understand that Stanford Law School is in the early staging of organizing a publicly available database of litigated patent owner information, including classification of entities that own the underlying patents. We have agreed to contribute our data to this worthwhile effort. We understand that some or all of the data from the Feldman et al. article will also be contributed to the public database.


SCHWARTZ et al_5fmt 11/30/2014 3:19 PM 2014] PATENT ASSERTION ENTITIES 653 and thoughtful, has several shortcomings. The GAO analyzed data from patent lawsuits initiated between 2007 and 2011, which means that it lacked meaningful data after the effective date, in late 2011, of the America Invents Act. The GAO report also did not disclose its underlying data. Because the underlying data is never released in any of the prior studies, other researchers cannot often determine which entities were classified as PAEs or NPEs, what revenue numbers were associated with these entities, and other information necessary to fully evaluate the claims. This information is critical to verify, as a policy matter, whether PAEs are engaging in strategic and opportunistic behavior that does not benefit anyone except them.

Defenders of PAEs have offered several purported benefits.

They claim that PAEs provide liquidity in the marketplace for patents. They permit inventors who are otherwise excluded from the marketplace—because, for instance, they are individuals who cannot manufacture products, or they are companies that tried yet failed to manufacture—to obtain some return on their investment. Even when these entities sell their patents to another to enforce, they are receiving something for their efforts. According to this argument, without the market for patents, these inventors would remain uncompensated for their contributions. Furthermore, PAEs are claimed to be specialists in patent enforcement who are skilled in evaluating allegations of infringement and hiring and supervising law firms to keep costs down. PAEs also have resources to cover litigation expenses. Under this theory, PAEs assert lawsuits that have a reasonable likelihood of succeeding and which are expected to yield recoveries above out-of-pocket litigation expenses.

HELP IMPROVE PATENT QUALITY (2013) [hereinafter GAO REPORT], available at http://www.gao.gov/assets/660/657103.pdf.

18. Id. at 4. The GAO Report hypothesizes without data that the increase in litigation in the end of 2011 was because patent owners anticipated the passage of the AIA, which restricted the number of accused infringers who could be joined in a single lawsuit. Id. at 15.

19. We also note that lawsuits do not represent the complete story of patent disputes. Some disputes are clearly raised and either settled or dropped without court intervention. We have no means to evaluate the quantity or effect of cease and desist letters sent by patent holders, despite their potential importance. This correspondence between private parties is confidential and not available to research in all but the rarest of circumstances.

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