In the media across Europe, one story continues to dominate the news agenda: the recovery of European countries from the deep recession of recent years. Some choose to focus on employment figures as proof of a recovery (or lack thereof); others look at the strength of the Euro; others still choose to look at GDP growth, or productivity.
Most would agree that fostering innovation is fundamental to any recovery, but a little-known but growing practice – known as ‘patent privateering’ – has intellectual property experts worried, as it has the potential to undermine and choke off the innovation that Europe needs.
Before examining patent privateers in detail, it’s important to look at the role of IP in the modern world. The main purpose of intellectual property, in a free-market legal system, is to provide individuals and corporations with the protection and incentives they need to keep on creating the new ideas, the new forms of expression and the new technologies that will drive growth and progress not only to the economy but also, eventually, to society as a whole.
With the patent system in particular, inventors are offered a simple yet attractive deal: if they agree to publicly disclose the details and mechanisms of their invention, the state will grant them, for a limited period of time, a legal monopoly on its use, complete with the rights to designate any licensees and to prosecute unwanted copycats. The bargain is clear and mutually beneficial: the inventor, on the one hand, is allowed to develop and invest in his work under the full protection of the law; the state—and therefore the public—, on the other, gets the benefit of the public disclosure and study of new technologies.
Unfortunately, like all institutions, the patent system has a few loopholes. What happens, for instance, when someone decides to use inventors’ right to license their patent to offer them to outsource of not just its commercialisation or its international development, but rather the enforcement of the state-granted monopoly? What are the risks, in other words, of having a full class of companies whose sole business is to allow inventors to outsource the prosecution of patent infringers?
Presumably, isolating the prosecution of patent infringement from the research and development activities that drive innovation would result in limiting the incentives of inventors to work out their differences amicably and to collaborate on joint projects. By removing what justifies the existence of the patent system, it would also artificially raise the costs of patent litigation by creating moral hazard for companies who will benefit from the innovation of others without engaging in innovation themselves and without, as a result, running the risk of being sued in return.
Such practices exist; the companies behind them are called patent privateers. While they are licensed by inventors in whose eyes they offer an efficient way to outsource litigation, more and more analysts and industry leaders claim the difference with patent trolls (technically called “patent assertion entities”, i.e. companies who use obscure and outdated patent portfolios to bully bona fide inventors into juicy litigation settlements) is thinning out.
Last year, in the United States, a collective composed of Google, BlackBerry, Earthlink and RedHat shed light on the issues posed by patent privateering in official “comments” submitted to the Federal Trade Commission and Department of Justice. According to Matthew Bye, Google’s Senior Competition Counsel, “Privateering lets a company split its patent portfolio into smaller sub-portfolios ‘stacked’ on each other, increasing the number of entities a firm must negotiate with and multiplying licensing costs. This behavior unfairly raises competitors’ costs, ultimately driving up prices for consumers.”
A few months ago, Google, Canon and Newegg formed a “cooperative patent licensing agreement” called the License on Transfer (LOT) Network. The LOT Network, which essentially acts as a royalty-free cross license, empowers its members to fight patent privateering by automatically granting them a license on each other’s patents as soon as they are sold. Its popularity speaks to the growing understanding within the tech industry that its best interest lies not in the defensive practice of patent privateering but in the fruitful cooperation brought by good-faith negotiations.
This isn’t a merely technical or pint-sized problem: according to the LOT Network, patent privateers and patent trolls cost the global economy more than $29 billion a year, and more than 10,000 companies have been sued at least once by one of them.
Given its impact, it is difficult to imagine how patent privateering —and patent trolling, for that matter— can be durably curbed without injecting a dose of transparency into the patent system. Namely, it seems only fair that defendants be allowed to know who exactly is suing them, under which pretenses and to what end.
Why does this matter? Because it goes to the heart of Europe’s need to engender growth, innovation, and economic recovery. If and when new practices emerge that harm this recovery – such as privateering, which can slow down innovation and disincentivise entrepreneurs – then swift corrective action surely needs to be taken. Patent privateers have found some receptive audiences in the USA, and are now ‘forum-shopping’ in Europe, to find the best jurisdictions in which to wield their patent lawsuits. European regulators need to be aware of the coming danger.
Many in the industries affected continue to push back against such practices, but promoting cross-licensing of patents instead. However, the question still stands: will European governments do their part in the fight against patent privateering?