NPEs: Cartoon villains or merely licensing agents?

Once described as “technology’s most fearsome patent troll” by Business Insider, Intellectual Ventures (IV) takes controversy wherever it goes. Depending  who you ask, IV either hounds patent owners for undeserved royalties or fairly monetises its intellectual property.

Since 2000, when it was formed in the US, IV has made more than $3 billion from buying and licensing patents. Today, it exploits 40,000 patents from its 70,000-strong portfolio, one of the world’s largest. It has inventors too, who have helped the company to file 3,000 applications in total.

However, IV’s business model is coming under increasing threat in the US. Political scrutiny of non-practising entities (NPEs), some of which are labelled patent trolls, hit like an avalanche in 2013. Since then, President Barack Obama has announced no fewer than eight executive actions designed to combat them. Several bills seeking to restrict them are working their way through Congress, while at least two states—Vermont (2013) and Oregon (2014)—have passed anti-troll legislation.

If one thing is clear about IV, it does not see itself as a troll. “We’re a licensing and invention company,” says Russ Merbeth, chief policy counsel. “We’re not mass mailing demand letters seeking nuisance-value settlements—we’re in the business of licensing our patents and the patents we acquire. Occasionally you have to enforce your rights via litigation, but that’s not where we want to be.”

When the company does resort to litigation, “it’s someone big, like Motorola Mobility, not a small business or ‘mom and pop’ coffee shop,” he says. Until 2014, when IV’s suit against Motorola—a case that later ended in a mistrial—reached a full trial, IV had never had a case reach that far.

“When we wind up in litigation, we typically end up in a settlement. Litigation is an inefficient mechanism for arriving at pricing on what would otherwise be a licensing deal,” he says.

According to Merbeth, a patent troll is an entity that has acquired “some possibly weak patents” and is asserting them broadly against end users and small businesses “that have probably taken the technology off the shelf and are using it for its intended purposes”.

“It’s the breadth of the assertion that people perceive as a problem,” he continues. “Such as sending out 1,000 or even 15,000 demand letters on a patent that the holder is likely never going to take anyone to trial over. At its worst, it appears to be a somewhat fraudulent practice.”

Merbeth admits that there are “complaints about certain patent practices” in the US, but that’s not how US lawmakers see it. The number of political moves there against NPEs suggests they believe there is a grave problem—one which requires coordinated action from both sides of Capitol Hill.

An innovative act?

Of the bills working their way through Congress, the Innovation Act is one of the most prominent. In December 2013 it eased through the House of Representatives by 325 votes to 91, and is awaiting its fate in the Senate. The bill’s measures include making it easier for losers to bear the costs of litigation (fee-shifting) and forcing complainants to disclose more information about their patents.

The bill, which is “sweeping and flawed”, claims Merbeth, is, he says, not the right solution to combating frivolous litigation.

“It is a cleverly titled piece of legislation that is anything but an ‘innovation’ act. It’s an anti-patent act, an anti-patent enforcement act, a litigation reform bill that happens to take as its subject matter the enforceability of IP (patents).

“The problem is that it would make it harder, more expensive and more time-consuming to enforce patent rights. We fear over time that it is intended to diminish the value of those patent rights, making it easier and less costly for big technology companies not to acquire the patent rights that they should and take the licences they should.”

The bill’s fee-shifting measures are particularly concerning for IV as “one of the largest patent holders in the country”, says Merbeth.

“While in theory it might be a good measure, in practice it and other measures would fall on all patent holders equally, not just the 0.01 percent of patent holders who might be causing problems. We’re not part of that 0.01 percent, and we don’t think that any of the 99.99 percent of patent holders should be subject to provisions like that.”

Taking the bill’s provisions together, he adds, “you have a regime that falls heaviest on small, independent inventors who already have a hard enough time enforcing their rights against big companies.”

Paradoxically, the bill might encourage small businesses to seek out companies such as IV which, some would argue, it is trying to restrict.

“There are some people in the licensing community who think that because of the potential fallout on independent inventors, they will be forced into a position where a company such as IV (in the licensing business) may be their best fallback for finding value for their IP,” Merbeth says.

He believes one of the problems in the debates over NPEs, and the legislative efforts to tackle frivolous litigation, is a lack of credible information. For example, a 2011 study by Michael Meurer and James Bessen from Boston University said that NPE assertions cost the US economy $29 billion in 2011. But Merbeth says that the findings have been widely refuted, including by David Schwartz of the Illinois Institute of Technology and Jay Kesan of the University of Illinois.

“The problem with the study is that it’s not random and it comes from biased sources,” Merbeth claims. “In the aggregate, it includes a $29 billion figure, but that includes the cost of licensing as well as litigation; there is a great deal of licensing activity every year.”

A second ‘myth’ Merbeth has tried to dispel is that trolls bring more than half of patent lawsuits. He cites a “rigorous” 2013 report by a US government agency, the Government Accountability Office, which found that between 2007 and 2011 NPEs accounted for one in five patent lawsuits.

Class war

Above all, IV wants a more balanced conversation about frivolous litigation, especially in light of a “large media campaign in Washington, DC that has drawn cartoon villains of trolls”.

“There is a deliberate attempt by the pro-patent reform community to create classes of patent holders in an attempt to make it easier to diminish the rights of one category of patent holder versus those of another,” Merbeth says.

“The easiest way to get something done in Congress is to paint a villain, and that means you have to simplify things. But when you look at NPEs at large, or the licensing business at large, you have everyone from small inventors to a big company like us, to universities, to big product companies such as General Electric and others that have a unit that buys and licenses patents that have absolutely nothing to do with their own products on the market.

“It’s actually a fairly complex and dynamic market, but the complexity of the market doesn’t serve the purposes of the pro-patent reform community, so they dumb it down to a point where people say ‘oh, there are these different classes, and one class is good and one is bad’,” he says.

“I hope there is a more reasoned conversation, so that the comic strip image of a patent troll fades away and ceases to dominate the debate.”

As a wealthy company, IV is well positioned to lead this conversation and rebalance what it sees as a lopsided debate. In February, it registered the Political Action Committee (PAC), a group that lobbies for or against political candidates or legislation. While Merbeth is listed as the PAC’s treasurer, he says he cannot disclose any information about the group’s activities.

The PAC shows that IV is ready to flex its political muscles as anti-troll bills stack up. We don’t know, however, whether the group’s formation shows that IV is worried about those bills or is simply taking a pragmatic approach and voicing its side of the story. Either way, IV believes publicly that there is a long way to go before we see any legislation set in stone.

“The House, where the Innovation Act was passed within five weeks, is very much a top-down organisation—if the leadership says something should be done, often it will be. The Senate, where other bills are being heard, is more deliberative and often they don’t just fall into line because leadership says they should.

“We are seeing a more deliberate process in the Senate: the bills are being thoughtfully debated and considered, so it’s a better process. What comes out of the Senate at this point and how it overlaps with the Innovation Act is still an open question; we don’t know the extent to which Senate bills might be incorporated into others,” he says.

As Congress turns up the heat on NPEs, the debate may be about to ignite.