29 September 2011

Patent Monetisation

Reading 'The Giants Among Us', a paper by Robin Cooper Feldman & Thomas Ewing regarding 'patent monetisation'.

The authors argue that -
The patent world is undergoing a change of seismic proportions. A small number of entities have been quietly amassing vast treasuries of patents. These are not the typical patent trolls that we have come to expect. Rather, these entities have investors such Apple, Google, Microsoft, Sony, the World Bank, and non-profit institutions. The largest and most secretive of these has accumulated a staggering 30,000-60,000 patents.

Investing thousands of hours of research and using publicly available sources, we have pieced together a detailed picture of these giants and their activities. We consider first the potential positive effects, including facilitating appropriate rewards for forgotten inventors, creating a market to connect innovators with those who can manufacture their inventions, and most important, operating as a form of insurance – something akin to an Anti-Troll defense fund.

We turn next to the potential harmful economic effects, including operating as a tax on current production and facilitating horizontal collusion as well as single firm anticompetitive gamesmanship that can raise a rival’s costs. Most important, we note that mass aggregation may not be an activity that society wants to encourage, given that the successful aggregator is likely to be the one that frightens the greatest number of companies in the most terrifying way.

We argue that mass aggregators have created a new market for monetization of patents. It is vast, rapidly growing, and largely unregulated. We conclude with some normative recommendations, including that proper monitoring and regulation will require a shift in the definition of markets as well as a different view of corporations and their agents.
They argue that -
The market for monetized patents, which has been created through patent aggregators, should be understood as a massive, rapidly growing, and essentially unregulated market. It has grown up quietly, remaining under the radar as early entrants have garnered power and strength. Like any market, however, it should be monitored and regulated, with sovereign entities giving some thought to whether aspects of the market should be encouraged, tolerated, deterred, or outright forbidden.

Competition authorities, such as the Federal Trade Commission and the Department of Justice, are in the best position to address the activities of mass aggregators and the market for patent monetization. Establishing the rules for this market, however, will require a certain amount of reorientation in the conceptualization of innovation markets.

The most natural FTC/DOJ regulatory structures for analyzing the activities of mass aggregators are those in the context of licensing and acquisition activity. In licensing, the Agencies follow a set of basic principles that are applies to intellectual property licensing in general. These principles are that intellectual property is comparable to any other form of property and standard antitrust analysis applies, that intellectual property is not presumed to create market power, and that intellectual property licensing is generally procompetitive. The Agencies believe that problems arise, however, when a licensing arrangement harms competition among entities that would have been actual or likely competitors in the absence of the arrangement.

In analyzing intellectual property licensing agreements, the Agencies consider three basic markets that can be affected by anticompetitive licensing restrictions: goods markets, technology markets, and innovation markets. Goods markets, of course, are those related to final or intermediate goods and their close substitutes. When rights to intellectual property rights are marketed separately from the products in which they are used, the Agencies use technology markets to analyze competitive effects. Technology markets consist of the Intellectual Property that is licensed and its close substitutes.

Finally, licensing arrangements may have competitive effects on innovation that cannot be adequately addressed through goods or technology markets. Thus, the Agencies have identified a third type of market, innovation markets, which is defined as the research and development directed to particular new or improved goods or processes.

The Agencies do have particular guidelines for certain types of arrangements that may be relevant to the activities of mass aggregators, including guidelines on crosslicensing, pooling arrangements, and grant backs. Grant backs are licensing arrangements in which the license holder agrees to give the patent holder rights to any improvements on the invention.

In the case of pooling, for example, the guidelines note that exclusion from pooling arrangements can be anticompetitive if a) excluded firms can’t effectively compete in the relevant market and b) pool participants collectively poses market power in the relevant market. Similarly, grant backs may be found anticompetitive if they substantially reduce the licensee’s incentives to engage in research and development.

One should note, however, that these concerns are analyzed against a backdrop of the Agencies’ perspective that licensing is generally precompetitive.

In a 2011 report on The Evolving Intellectual Property Marketplace, the Federal Trade Commission took notice of increasing activity by what it called, 'patent assertion entities' or 'PAEs' in the information technology industry. In particular, the Agency noted the following:
Some argue that PAEs encourage innovation by compensating inventors, but this argument ignores the fact that invention is only the first step in a long process of innovation. Even if PAEs arguably encourage invention, they can deter innovation by raising costs and risks without making a technological contribution.
The report, however, notes the difficulty in distinguishing patent transactions that harm innovation from those that promote it, and rather than recommending antitrust action proposes various improvements in patent notice and remedies.

Although these are important considerations, a full analysis of the impact of mass aggregators requires identification of a different market. Even when Agencies think about separately marketed intellectual property rights or innovation markets, those categories are grounded in their relationship to a particular product market. Moreover, market power is measured in relationship to that product market.

When patent rights float unmoored from any underlying products on a large-scale, widespread manner such that they are traded and arbitraged, that activity begins to resemble a market of its own. This is the market we have been describing as the market for patent monetization. Viewed from this perspective, an entity could acquire market power in the market for patent monetization without necessarily holding a monopoly in any individual product markets. Considering only product, technology, and innovation markets could miss a fair amount of worrisome activity.

Another way to think about floating patent rights and anticompetitive effects is the following: One may not need a monopoly on patents in a particular product market to create negative effects in that market. Perhaps one simply needs a large enough group of all kinds of patents in combination with tough tactics or even just a reputation for tough tactics.

Moreover, the Agencies may need to reconsider the general principle that licensing is pro-competitive. In the context of a market for intellectual property rights floating separately from invention or production, that general principle may be less applicable. One has to take a much harder look at licensing when it has become such an expansive activity that is separated so far from the activity of introducing new technologies.

The same types of considerations should be used for reorienting the Agencies’ approach to acquisition of intellectual property rights. Section 7 of the Clayton Act requires that certain proposed acquisitions of assets be reported, which is interpreted as including patents. The FTC and DOJ may conduct a preliminary antitrust evaluation and decide whether to take enforcement action. Certain transfers of intellectual property rights and transaction that grant an exclusive license are analyzed by applying the principles and standards used to analyze mergers. Such transactions may have the effect of removing a participant from the market, in the same manner as a traditional merger would.

In any merger enforcement action, the Agencies will normally identify one or more relevant markets in which the merger may substantially lessen competition. Such market definitions focus solely on demand substitution factors, which are customers’
ability and willingness to substitute away from one product to another. Again, the traditional Agency focus in this inquiry would be on the market for the products that can be made by the patents that are being purchased, but not on the market for patent monetization itself. Such an inquiry would miss a wealth of potential anticompetitive conduct and consequences.

In short, competition agencies should think about a market composed of floating intellectual property rights as its own market, in order to capture the potential for harm and mischief. Courts also must be willing to understand and approach patent markets in this manner. Although the focus initially may be on patents in this market, it is possible over time it will become clear that the market for all intellectual property rights, including trade secrets and know-how as well as patents, should be considered.

Courts, agencies and government entities must also engage in doctrinal changes that will allow for the curative power of sunshine. As we encountered in trying to track the acquisition and litigation activity of the mass aggregators, many of the current doctrines in corporation and agency law allow aggregators to shield their identities from government view. The targets themselves may be unable to determine who the aggregator is, sometimes even when the parties are in litigation. The less appealing behavior described above is much easier to carry out in secrecy than in the light of day. We should consider changes that will bring such activities to light, making them easier to monitor and evaluate their individual and cumulative effects.
They conclude that -
The patent world is poised to undergo a change of astounding proportions. A system that has operated such that the vast majority of patents bring little or no return is shifting to a system in which a substantial number of patents will become traded and monetized, largely through a system of mass aggregators. The giants among us are undoubtedly changing the patent world. The question that remains is how.

One could argue that mass aggregators could potentially have positive effects. Mass aggregators might potentially ensure that the forgotten inventor receives the compensation due or could serve as a middleman to connect inventors with capital and expertise. Mass aggregators could also serve as litigation defense funds, providing Just-in-Time patenting and creating a powerful weapon stream that will deter troublesome infringement suits. Mass aggregators may also reduce troll activity by soaking up the supply of monetizable patents. The question, however, is whether the cure is worse than the disease.

In particular, the same market characteristics that have made let to the rise of troll activity are likely to plaque the activities of mass aggregators as well. Without changing the basic incentive structures of the patent system, mass aggregation will be no better than the current patent system at rewarding the deserving inventor and greasing the wheels of innovation while protecting diligent producing companies. Moreover, the activity of mass aggregation brings its own potential harms. Rather than contributing technological innovations, mass aggregators operate as a tax on current production, burdening existing products and potentially reducing future innovation and productivity.

In addition, characteristics of the market for patent monetization make it an excellent vehicle for anticompetitive behavior, including horizontal collusion and single firm or multi firm behavior that raises rivals’ costs. Most important, the basic business model of mass aggregation is troubling. The successful aggregator is likely to be the one that frightens the greatest number of companies in the most terrifying way. This may not be an activity that society wants to encourage.

These and other concerns suggest that mass aggregators and the market for patent monetization should not be allowed to flourish unchecked. The burgeoning market must
be properly monitored, regulated, and restricted so that the considerable risks associated with this activity may be fully contemplated and cabined.
The paper subsequently appeared [PDF] in Stanford Technology Law Review (2012) 1.