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Patent Privateers

Friday May 3, 2013 at 9:13am

Last week, we reported on the increasing problems associated with patent trolls and their use of the excessive litigation as a way to benefit financially from weaknesses in the United States patent system. This week, we bring attention to the even more harmful and rising threat of a troll-related practice known as patent privateering.

Patent privateering in its most basic form, is a system by which a company equips trolls, or Patent Assertion Entities (PAEs), with their patents to assert rights over competitors. Many organisations justify the use of PAEs as an effective way to realise returns on their research and development investments. Others reason it as efficient outsourcing. Regardless of how companies rationalise their use of PAEs, it is clear that most prefer to keep details of such arrangements out of the public eye.

Perhaps companies keep PAE deals quiet because the actual consequence of their litigious behaviour is the increasingly damaging effects they have on the economy, consumers, competitors, industries and the like. For the operating company, the transfer of patents to a separate entity for the purpose of asserting patent rights is beneficial on many levels. Privateering enables companies to split their patent portfolios across numerous PAEs who in turn plague competitors with multiple lawsuits. Rival businesses become burdened with excessive legal costs and distraction from their business activities with damaging consequences. In addition, companies can earn much more in royalties on intellectual property they had not previously pursued. Finally, the fear of countersuit is eradicated when trolls are involved – an almost-certainty if the company had asserted patents on its own.

One well-known example of privateering is the acquisition of 2000 Microsoft and Nokia patents by Mosaid, a recognised patent troll, in 2011. In details filed with the Canadian Securities Administrators, the contract confirms the use of royalty milestones as an incentive to monetise from the patents. Mosaid commented on the attainment of the patents, explaining it "will drive revenue growth, profits, and shareholder value over the next decade."

Telecoms business Ericsson is a company that recently engaged in privateering. It handed over 2,185 patents to Unwired Planet for enforcement. It is reported that the contract incentivises Unwired Planet aggressively to assert the patents through payment schedules and the promise of more patents to enforce for the future.

Overall, no matter how much companies try to legitimise their reasons for privateering, the practice of such behaviour has serious, far-reaching consequences. Aggressive patent enforcement will raise costs for competitors and consumers and deter effective cross licensing. Regulators would be wise to keep their attention on patent trolls.

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