Patent Basics

Anti-Competitive Effects: Litigation & Extortion

The patent system’s friendliness toward patent applicants and owners necessarily favors patent assertion and litigation over market competition.  Particular factors include:

Two broad developments stand out: “thermonuclear war” and the emergence of trolls.  A third, privateering, is emerging as large companies use trolls to earn revenue and attack rivals.

The Thermonuclear Patent War

While there has been large-stakes patent litigation in the past, the global scale and scope of the smartphone patent wars is unprecedented.  The current litigation battles fulfill Steve Jobs’s promise of thermonuclear war against the competing Android operating system.  As in nuclear warfare, defendants have retaliated by asserting their own patents.  The high tech and consumer electronics sectors previously had little experience with litigation on this scale because cross-licensing and the prospect of mutually assured destruction deterred patent aggression.  However, if a single patent is found infringed and the assembled product or a component thereof is imported the patent owner is entitled to an exclusionary order from the International Trade Commission (ITC) that will bar the entire product from the market.

Patent Trolls

Trolls, or “patent assertion entities” (PAEs), acquire patents to assert against companies that have inadvertently incorporated patented technology into their products.  Trolls want to get paid (they have no competitors to exclude from the market) and they benefit from the leverage that patents provide against fully developed products and services.  Since they do not produce or sell anything, they are not at risk of infringing other patents, allowing them to assert patents aggressively without fear of retaliation.

Trolls extract money from producers and users by threatening injunctions, exclusionary orders or disproportionate damages.  Some defend trolls as market specialists who arbitrage differences in patent value under different circumstances.  However, these are not markets in the usual sense, where willing buyers find willing sellers.  Instead, trolls seek opportunities to derive profit from information failure, such as the cost and uncertainty of finding patents that infringe products. Trolls take advantage of legal arbitrage — their lack of exposure to counter-assertions allows them to assert patents without fear of retribution.  Additionally, the low-quality patents trolls often assert may be more valuable against small companies that cannot afford to mount a defense.

Privateering

Privateering is a recent development in which large companies work with trolls, explicitly or implicitly, to attack their rivals.  In one common form, companies license patents to allies, retain a license for themselves and then sell the patents to trolls who can use them to attack unlicensed third-parties.  Unlike the company that originally owned the patents, the troll can go after that company’s rivals full force without fear of retaliation or reputational damage.  A variation on privateering includes spinning patents off into shell companies that become patent assertion entities.

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