LegiStorm

Summary:

Congress has recently demonstrated significant ongoing interest in litigation by "patent assertion entities" (PAEs), which are colloquially known as "patent trolls" and sometimes referred to as "non-practicing entities" (NPEs). The PAE business model focuses not on developing or commercializing patented inventions but on buying and asserting patents, often against firms that have already begun using the claimed technology after developing it independently, unaware of the PAE patent. PAEs include not only freestanding businesses but patent holding subsidiaries, affiliates, and shells of operating companies that want to participate in the PAE industry and/or a new means of countering competitors. The proliferation of PAEs was among the central factors raised in support of the most recent patent reform legislation, the Leahy-Smith America Invents Act of 2011 (AIA). However, the AIA contains relatively few provisions that arguably might impact PAEs, apparently because of lively debate over what, if anything, should be done about them. In the 113th Congress, the Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act of 2013 (H.R. 845) has been introduced in an effort to affect the number of lawsuits filed by PAEs. PAEs emerged alongside the burgeoning tech industry around the turn of the 21st century and gained notoriety with lawsuits claiming exclusive ownership of such ubiquitous technologies as wireless email, digital video streaming, and the interactive web. They have had the attention of Congress, the press, and the public since at least 2006, when a successful PAE suit almost caused the shutdown of BlackBerry wireless service. Such victories in court are rare for PAEs; they lose 92% of merits judgments. But few cases make it that far. The vast majority of defendants settle because patent litigation is risky, disruptive, and expensive, regardless of the merits; and many PAEs set royalty demands strategically well below litigation costs to make the business decision to settle an obvious one. For most PAEs, the costs of litigating and losing are more than offset by the licensing fees they can gain by demonstrating their tenacity to future defendants. According to one estimate, PAEs generated $29 billion in direct costs from defendants and licensees in 2011, a 400% increase over $7 billion in 2005, and some researchers suggest these costs are primarily deadweight, with less than 25% flowing to support innovation and at least that much going towards legal fees. Another study reported that 62% of all patent suits filed in 2012 were brought by PAEs. Critics assert that PAEs undermine the purposes of patent law—promoting innovation by providing incentives to invest in development and commercialization of inventions—and injure companies that play a vital role in the American economy. However, defenders of PAEs argue that they actually promote invention by adding liquidity options, managing risk, and compensating small inventors. The Federal Trade Commission and several leading scholars suggest that these benefits exist but are significantly less than the costs they impose. What remains unclear is the extent of imbalance between costs and benefits and whether Congress could recalibrate it to advance the goals of patent law while avoiding unintended consequences. This report reviews the current debate and controversy surrounding PAEs and their effect on innovation, examines the reasons for the rise in PAE litigation, and explores the legislative options available to Congress if it decides that these are issues that should be addressed.