Patent trolls are bad enough on their own. But increasingly, companies that otherwise develop technology and sell products have begun outsourcing their patent portfolios to patent trolls as a strategic weapon against their competitors, and that can be even worse.
So say Google, BlackBerry, EarthLink, and Red Hat in comments filed jointly with the US Federal Trade Commission (FTC) and the Department of Justice (DoJ) on Friday.
Dubbing the practice "privateering", the companies claim it not only distorts competition in markets, impedes innovation, and imposes unnecessary and burdensome costs, but it may also violate US antitrust law.
Here's how it works. A company develops some product, such as a mobile phone. Along the way, it acquires a portfolio of patents on technologies used in the device.
Then, once it has brought the product to market, it transfers a portion of that portfolio to one or more patent trolls (the filing with the FTC calls them Patent Assertion Entities, or PAEs, but we needn't stand on ceremony), effectively outsourcing enforcement of those patents to the trolls. That's bad for a number of reasons, say Google & Co.
First off, when one technology company asserts a patent against another, it's often the case that each company holds patents on technologies used by the other. What usually happens next is that both companies will agree to license each other's patents for some agreed-upon fee. It's all very civilized, and nobody has to sue.
But a patent troll, by definition, doesn't make anything. It therefore has no need to license anyone else's patents and nothing to fear from patent counter-suits, so it has much more incentive to litigate its patent claims aggressively.
For technology companies, those claims can be shockingly costly to defend against. According to Google and its cosigners, the median cost of defending even a relatively small infringement suit will likely run into the millions, and that's just the legal fees.
Little wonder, then, that companies often settle – but the settlements aren't cheap, either. Google's filing claims that the average total cost of a patent settlement is $8.1m for a small or midsized company and $42.4 for a large one, when you include both direct and indirect costs.
Obviously, those kinds of costs can be particularly painful for smaller companies. And according to the filing, 66 per cent of patent suits are filed against companies with less than $100m in annual revenue.
That's worrying when it's just your typical patent trolls filing the suits. But it's especially concerning when the trolls are being enlisted by technology companies specifically to target their rivals, to raise their costs and make it harder for them to build competitive products.
Another reason companies sometimes enlist patent trolls, the filing says, is to avoid prior commitments the companies might have made around their patents – such as a pledge to offer Fair, Reasonable, and Non-Discriminatory (FRAND) licensing terms, for example, or to cap the total amount of royalties it would seek from a single company.
For example, suppose a company pledges to a royalty cap of no more than 2 per cent for its entire patent portfolio. It later transfers portions of its patent portfolio to two patent trolls. Legally, the 2 per cent pledge might still be binding. But it now applies to each of three different companies, so the effective royalty a licensee will have to pay is 6 per cent – triple what was originally pledged.
Again, companies employ these tactics as a way to raise rivals' costs. But they can also make a company's products more attractive to customers, if the customers are aware that the company's rivals are vulnerable to a patent troll, while it is not.
For these reasons, Google and its cosigners have requested that US regulators launch a wide-ranging probe of the practice of patent privateering under 15 U.S.C. § 46(b), a statute that allows the FTC to compel companies to file "special reports or answers in writing to specific questions."
Among the questions the companies would like the government to ask are: How prevalent is privateering, really? What types of arrangements have technologies struck with patent trolls? What are the real motives of these arrangements? And, what are the competitive implications?
In a blog post on Friday, Google senior competition counsel Matthew Bye made it plain that the Chocolate Factory thinks it already knows the answers.
"Trolls use the patents they receive to sue with impunity – since they don't make anything, they can't be countersued," Bye wrote. "The transferring company hides behind the troll to shield itself from litigation, and sometimes even arranges to get a cut of the money extracted by troll lawsuits and licenses."
Bye added that it would take the combined efforts of both the public and private sectors to address the issue.
"We're asking other companies to work with us to develop cooperative licensing agreements that can help curb privateering," he wrote. "We're also encouraged that the FTC and DOJ are paying attention to this critical issue, and we hope they will continue to study how abusive troll litigation and patent privateering are harming innovative industries." ®