Professor Robin Feldman appeared before the House Committee on Energy & Commerce's Subcommittee on Oversight & Investigations Nov. 14 to offer testimony about the dangers facing our patent system from patent monetization entities, more commonly known as patent trolls.
Mr. Chairman and esteemed members of the Committee, I am honored to be here today. I am Robin Feldman, Professor of Law and Director of the Institute for Innovation Law at the University of California, Hastings. As an academic, I have studied patent assertion behavior both in the litigation context, and in the pre-litigation context.
In recent years, a new business model of patent demands has exploded onto the scene. It preys on people’s fears of the costs and risks of litigation, and it takes place largely outside the courthouse — with no judge, jury, or regulator in sight. Much of the time, it is shrouded in nondisclosure agreements, so no one is allowed to talk afterwards.
The behavior is based on the following: There are millions of patents outstanding, and it is very difficult to know what a patent covers. It will cost you between $1 million and $6 million dollars in litigation expenses to find out. And there is a risk. If you lose, you could end up paying a massive damage award or you could have your business shut down. With that leverage, here is a sample of some of the modern techniques that have appeared.
The first is what one could call the peddler’s bag. Suppose you are a computer manufacturer, and I claim that your manufacturing infringes my patent on gumballs. That may seem pretty far-fetched to you. However, suppose, I threaten to throw 50 more patents at you as well. While you may be tempted to fight the first, you may not have the stomach or the litigation budget to fight all fifty patents. The process of analyzing those 50 patents is costly, let alone the risks of litigating the entire lot. If not the gumball patent, maybe something in there will stick, and it is probably just better if you take a license.
Another behavior is what I call the assault rifle approach. With this approach, patent assertion entities target a vast number of people, hoping to obtain moderate settlement amounts from as many of them as possible. For example, patent assertion entities have launched campaigns against thousands of small businesses for using scanner equipment they have purchased and against coffee shops for using Wi-Fi equipment. Those who receive the letters know nothing about the patents involved or about how to respond to the demands.
Still another behavior is known as privateering. Suppose I am a company that makes products. If I launch my patents against a competitor, my competitor will just launch its patents back at me, putting my business at risk. Thus, I may not bother. In the modern world of entities that do not make products, however, I have many options. I can transfer my patents to an assertion entity that can target my competitors. I could even structure the transfer so that I share in the returns. That way, I damage my rivals, get a return from my patents, and my hands are clean.
These three are samples of the techniques that are being utilized. As with many pressure sales tactics, the demand letters may say that the cost will go up if you consult a lawyer, if you ask for more information, if you wait until a lawsuit is filed, or if you wait until others take the offer. Some demands require that the company sign a broad nondisclosure agreement, even to get basic information.
Which leads me to one of the many troubling aspects of this behavior. Much of the behavior is shrouded in nondisclosure agreements and hidden behind layers of shell companies. This makes it difficult for regulators to see when bad behavior is occurring. It is also difficult to hold anyone accountable, because the shells may have no meaningful assets.
The impact of these patent demands against companies large and small is troubling. A recent study of mine showed that one in three startup companies has faced patent demands and that most of these demands are coming from assertion entities. Other scholars have estimated that very little of the vast amount of money changing hands ever gets back to the inventors who filed the patents. It does not take fancy economics to know that time spent analyzing patent demands is time away from innovating, and money spent on patent demands is money not spent on jobs.
In closing, I do want to stress one important issue. Patents are essential for innovation in this country, and patent rights are useless if one cannot enforce them. I am not talking here about the legitimate protection of an invention. I am talking about shadow games that exploit the system and prey on people’s fears.
I have submitted several pieces of my research as my full testimony for the record, and I look forward to answering any questions.