Patent Privateering: Patents As Weapons

Author: Thibault Schrepel, LL.M., Antitrust Analyst

In the late 16th century, Queen Elizabeth I of England commissioned Francis Drake to sail for America. The Queen asked him to plunder Spanish vessels on his way there. Francis Drake became a pirate commissioned by the crown. This type of “legal” pirate was called a “privateer.” They allowed nations to attack one another without the risk of being counter-attacked, because the identity and the nationality of these pirates’ employers were kept secret.[1] Today, the spirit of those pirates is reborn. Known as “patent trolls,” these companies do not use patents for their technical aspects and are principally in the business of collecting money from others that use the patented designs or ideas,[2] and are now employed by high-tech companies seeking to use patents against their competitors.

The mere existence of these patent trolls cannot be legally challenged.[3] However, some “strategies” they use are prohibited under the scope of antitrust law. These strategies can take the form of “patent ambushes,” where a patent troll does not reveal the existence of its patent, waits for a standard containing it to be adopted, and then reveals its existence in order to obtain a license at exorbitant prices. These strategies can also take the form of “patent privateering.” Patent privateering is a strategy whereby a company—a patent troll[4]—acquires or buys patents from their original holder and then initiates a lawsuit against companies for infringing on the patent, in most cases the rivals of the original holder. The troll and the original holder then share the booty from the lawsuits, which might take the form of licensing royalties, litigation settlements, or damage awards. There are many variations of this scheme. On some occasions, patent trolls threaten to file a lawsuit and then simply settle the case. But in any case, the original patent holder and the patent troll maintain their relationship so the original patent holder can target its rivals.

There are some benefits to the existence of patent privateering. First, it is a way to outsource (and finance) patent litigation to those who know how to handle it. It is, however, worth noting that this is only a benefit in cases where small companies are transferring their patents to trolls, since large corporations usually dedicate a budget to litigation and do not need outside financing in order to enforce their rights. In some cases, patent privateering may also generate royalties or damages that original patent holders can then use to develop innovations. However, the drawbacks of patent trolls are very strong. Indeed, by avoiding countersuit[5] and by evading reputational constraints, original holders do not have incentives to cross-license anymore.[6] Patent privateering destroys the “state of mutually assured destruction”[7] in which big high-tech corporations usually live (for the better).

At the same time, patent privateering allows original patent holders to evade fair, reasonable, and non-discriminatory (FRAND) commitments.[8] In the case of patent privateering, the original patent holder will maintain its FRAND commitments, while at the same time have the patent troll negotiate some new license fees that it can share with the original holder. This practice is one of the most harmful side effects of patent privateering, because the goal of FRAND commitments—to give license in pro-competitive terms—is eliminated. It is also worth noting that the principal targets of patent privateers are large tech companies that spend billions of dollars on research and development. The more they spend, the more they release products, and therefore, the more likely they are to be subject to instances of patent privateering. And because litigation is expensive, they will have fewer available funds to spend on research and development. By forcing the ginal holders[9] to invest in costly litigation, patent privateering undermines the process of competition, which reduces costs and prices and stimulates innovation.

Enforcing patent rights is, as a general rule, an indirect contribution to innovation. Moreover, without the possibility to enforce patents, they would be useless. Therefore, when a company is able to enforce them in order to tackle some violations of the rights related to the patent, this encourages the company to keep innovating and patenting. But the situation is much different when a patent troll use patents in order to obtain higher license fees by feigning FRAND commitments. Also, patent privateering harms consumers by discouraging cross-licenses that allow products to become available at a lower cost on the market. Therefore, patent privateers’ practices tend to justify the criticism of patent trolls as hindrances to innovation,[10] while those that tend to justify patent trolls[11] find it hard to justify them in the specific case of patent privateering.

So, what should be done? The enforcement of antitrust laws[12] is a good way to fight patent privateering, whether through government authorities or private litigation. Patent offices also have a role to play, and need to be more vigilant before granting patents. Patent offices must implement real economic and antitrust analysis before granting patents.[13] In other words, solving the “too many patents problem”[14] will be a good way to start fighting against patent abuses like patent privateering. This will require toughening the conditions under which patents are granted.

Even if patent trolling is becoming more well-known, patent privateering is still relatively unfamiliar for many, and so far, informing consumers about the patent privateers practices remains the priority. Big companies care about their reputation, and anti-competitive practices are never viewed positively by consumers. So far, sharing information about patent privateers to shed light on their practices appears to be the best way to fight them, because informed consumers are much harder to fool than ignorant ones. Indeed patent privateering is a real harm to consumers: as more patent trolls engage in the practice, prices go up[15] and innovation goes down.

As of yet, no European body has fined a company or person for employing patent privateering. So far, this practice is the embodiment of the fact that companies are free to sell their patents to the highest bidder. Because this implicates patent-granting processes, patent offices must be more vigilant before granting patents.[16] Only real economic and antitrust analysis by those agencies will help to prevent some companies from transferring many patents, which is a vital underpinning for the existence of patent privateers. In other words, solving the “too many patents problem” will be a good way to start fighting against patent abuses like patent privateering.

[1]      John M. Golden, Patent Privateers: Private Enforcement’s Historical Survivors, 26 Harv. J.L. & Tech. 545 (2013).

[2]      Mark A. Lemley, A. Douglas Melamed, Missing the Forest for the Trolls, 113 Colum. L. Rev. 2117 (2013).

[3]      Melissa Lipman, FTC Patent Troll Study To Disappoint Some, Wright Says, Law360 (September 4, 2014).

[4]      Thibault Schrepel, France Brevets: A State-Owned Patent Troll, Harmful… And Illegal?, GenerationLibre (January 2014).

[5]      For instance, an FTC commissioner has mentioned that, “because PAEs do not manufacture products, they are not subject to countersuit, and have less incentive to cross-license patents.” See Julie Brill, Introductory Remarks of Commissioner, Patent Litigation Reform: Who Are You Calling a Troll?, 2014 International CES CEA Innovation Policy Summit, January 8, 2014.

[6]      A cross-licensing agreement is an agreement pursuant to which two or more license holders exchange licenses so that each party may benefit from the other’s patent.

[7]      Eli Dourado, How Patent Privateers Have Eroded Mutually Assured Destruction in the Computer Industry, The Umlaut (October 2, 2013). As the author describes, in a regular pattern, “if one company sues, then it is likely to face a counter-suit,” which limits the introduction of abusive lawsuits.

[8]      Jorge L. Contreras, A Market Reliance Theory For FRAND Commitments And Other Patent Pledges, __ Utah L. Rev. __ (2015, forthcoming).

[9]      Julio H. Cole, Patents And Copyrights: Do The Benefits Exceed The Costs?, 15 J. Libertarian Stud. 79-105. Here, the author shows how the existence patents is to move the capital available for R&D towards the legal costs.

[10]    Sara Jeruss, Robin Feldman, & Joshua Walker, The AIA 500 Expanded: The Effects of Patent Monetization Entities, 11 Duke L. & Tech. Rev. 357-389 (2012).

[11]    For instance, the fact that, by creating patent bundles, patent trolls can only grant one license, is seen as pro-competitive. Therefore, some can justify the existence of patent trolls that way, but this argument can be used to justify the practice of “patent privateers” that do not create such pro-competitive effect.

[12]    Mostly, Article 101 (prohibiting cartels) and 102 (prohibiting abuse of dominant position) of the TFUE in Europe, and Section 1 (prohibition cartels) and 2 (prohibiting monopolization) of the Sherman Act in the U.S.

[13]    So far, before granting a patent, US and EU patent offices only go through an analysis in term of pure intellectual property (is it a technical innovation to a technical problem, and is it new).

[14]    See Randy Picker, Apple v. Samsung: What Are Patents Good For?, The University of Chicago Law School Faculty Blog, August 26, 2012.

[15]    Mike Masnick, The $120 Smartphone Patent Tax: Patent Royalties Cost More Than The Actual Hardware in Your Phone, TechDirt (May 30, 2014).

[16]    Thibault Schrepel, Patent Trolls Through the US and EU Antitrust Law: When Co-Operation Is No Longer an Option, ECLR Vol. 34, No. 6, 318-325 (2013).

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