November 27, 2020

Patent Holding Companies

Lately we’ve seen many complaints about the proliferation of patent holding companies, which buy patents, usually from small inventors, and then try to extract royalties, by negotiation or lawsuit, from companies that (allegedly) use the patented inventions. Often this is depicted as some kind of outrage. But from a policy standpoint I don’t see a problem.

Now perhaps you believe that the patent system is irretrievably broken and ought to be scrapped or severely reformed. Perhaps you think it should be harder to bring patent lawsuits. If that’s your position, then your policy effort should be spent on reforms that apply to all patent owners and all lawsuits, and not just on holding companies. Why focus specially on patent activity by holding companies, unless your goal is to disadvantage small inventors?

If, on the other hand, you buy into the goals of the patent system, and you think that the system, though imperfect, generally works, then it’s hard to see the problem with holding companies. It seems sensible that the financial return for an invention ought to be the same, whether the inventor works for a big company or freelances in his garage. If the invention really is novel, non-obvious, and useful, then the inventor is entitled to reasonable royalties from people who use the patented technology. Why should small inventors face barriers that large inventors don’t?

An inventor’s ability to negotiate royalties depends, ultimately, on the threat that he will bring a lawsuit if the company using the invention doesn’t agree to pay. Patent litigation is costly and time-consuming, especially if the defendant is using delay tactics. A freelance inventor can’t credibly threaten to bring a suit without financial backing from somebody else. Litigation is risky, too, and the inventor may be risk-averse. The company using an invention knows these things, so a freelance inventor’s lawsuit threat won’t have much credibility, even if the suit would have merit. And so the freelance inventor won’t be able to extract the royalties that a deeper-pocketed inventor could. It’s often argued that the patent system unfairly favors large companies, for precisely this reason.

Why not allow an outside firm to invest in small inventors’ patents, so as to provide the financial resources to support a potential suit and to absorb the risk? Coming from such a firm, a lawsuit threat would have suitable deterrent value. And so, most importantly, suchs will bid against each other for small inventors’ patents. Holding companies can level the playing field by helping small inventors extract the true value of their inventions.

Beyond this, holding companies may develop expertise in patent valuation or negotiating royalties. Holding companies that specialize in valuation and revenue-extraction allow small inventors to specialize in what they do best, which is inventing. This would mirror the structure in large companies, where one subgroup of people handles invention and another handles revenue-extraction. Why treat the small inventor differently from the large one?

Though there is no good policy argument for disadvantaging small inventors, we may see such changes anyway, due to rent-seeking by large companies. Those who support rational patent policy should focus on setting up the right patent rules (whatever they are), and applying those rules to whoever happens to own each patent.

Comments

  1. Grant Gould says:

    The focus on these companies is not because they are evil, but because they are the most dramatic demonstration that the whole system is broken. Indeed, I suspect that a lot of the outrage at patent holding companies is being bootstrapped other large patent holders who oppose systemic reform and see a chance to kill a scapegoat and hence avoid serious change.

    What is needed to make the patent system economically efficient — strong prior-art investigations, a more objective obviousness criterion tied to the likelihood of reinvention during the patent term, an independent reinvention defense to infringement claims, increasing renewal fees tied to the price of a license — is well-understood and relatively easy. Patent holding companies and their frequently outrageous actions draw attention to the need for these reforms, but aiming reforms at those companies alone would be a mistake.
    –G

  2. I think, professor Felten, that you miss the point. Most people will probebly agree with what are you sayig, but the outrage is in my opinion not because of the fact that there is a holding company with no other business than extracting patent licensing fees, but because some of the patents being enforced are overbroad. As G points out, the focus should not be on who holds the patents, but on how are patents granted. Moreover, you also omit the point that it is small companies that cannot afford patent layers that are frequently target of such lawsuits. These companies have little choice but to pay up.

  3. Eric Johnson says:

    If nothing else, a patent company changes the dynamics of the marketplace from one in which a player is defending their ability to compete into one in which the defender is maximizing the value of their IP.

    A company that is competing with their IP, and clearly charging excessive rents against their competitors is at risk of either annoying their customers or or violating anti-trust laws. A patent holding company isn’t subject to the same contrary market and legal forces.

  4. Darren Coolidge says:

    First of all, patents are a good idea because they protect the inventor. They only become bad when companies or individuals abuse the system, as in any system, with lawsuits to ubiquitously implemented inventions. Hyperlinks is a good example of a ubiquitous invention some company tried to cash in on.

    Second of all, I hate to bring this up because I hate the mandatory part of this business but, perhaps a way for patents to work would be to buy into some kind of patent protection insurance.

  5. I think most of the outrage about these companies is because they have no intention of actually commercialising the invention themselves, only of either preventing others from doing so or of charging them for doing so.
    Of course, this is precisely what the patent system is all about, it’s just that other patent holders use their patents to prevent others from competing with themselves.

    Some people feel that using patents to prevent others from competing with you is ok but using patents to prevent products coming to market is not a good use of a system supposed to “promote science and the useful arts”.

  6. fourleggedant says:

    non-existent entities selling non-existent things. oh, the ontology of it all!

    . -ant

  7. Our current one-size-fits-all patent system does not work equally well in different industries.

    For instance, allowing pharmaceutical patents is probably a net benefit, since the entire drug research industry is built around patents. But in the software industry, patents are a net loss. (i.e. more product development is inhibited by software patents than encouraged).

    I would propose a solution where different types of patents receive different levels of protection. E.g. it might make sense to offer special patents with longer-than-usual duration for drugs to fight certain rare diseases, where the one-size-fits-all term does not promise enough revenue to make developing such drugs worthwhile. And for software developments, limit the duration of patents to a very short term, or disallow software patents entirely.

    I fear however that market and legislative forces have no reason to favor an optimal level of patent protection; powerful industry groups through legislative influence will always be able to achieve stronger protection than is strictly optimal.

    In regards to these patent holding companies – the problem is the obviousness of the patents they are granted. In the cases I have heard about, like the ones against Microsoft for ActiveX and web sites for streaming video, the companies would clearly have developed the patented technology in the normal course of their business. The low standard of non-obviousness leads to great losses as companies waste time and money patenting trivial developments and fighting off lawsuits.

  8. Yes, the patent system is broken, at least for pharmaceutical patents, with which I have had some personal experience. There is no feasible way for the examiner to do an adequate prior art search and the desion often turns on an inconsequential issue. Whether one is granted a patent or not is largely a random phenomenon. I favor a system whereby inventors file notices of their inventions with the patent office. Then, if infringment becomes an issue, the inventor would have an opportunity to argue the point in front of an expert panel.

  9. Interesting posts. I am currently asserting a patent and do not manufacture any product so I guess I qualify as a “Patent Holding Company”. What I don’t quite understand is how companies have objections to my assertion but then turn around and assert against other parties (in some cases solely to gain a competitive advantage) for infringing their patents. Unless I am mistaken, the US Patent granted me (or the company I purchased the patent from and which has a continuing interest in any royalties I recieve) does not contain any condition that says I need to be manufacturing the invention to get the benefits afforded me under the law. Don’t get sucked into the corporate PR machinery. I can tell you stories you wouldn’t believe.

  10. Interesting posts. I am currently asserting a patent and do not manufacture any product so I guess I qualify as a “Patent Holding Company”. What I don’t quite understand is how companies have objections to my assertion but then turn around and assert against other parties (in some cases solely to gain a competitive advantage) for infringing their patents. Unless I am mistaken, the US Patent granted me (or the company I purchased the patent from and which has a continuing interest in any royalties I recieve) does not contain any condition that says I need to be manufacturing the invention to get the benefits afforded me under the law. Don’t get sucked into the corporate PR machinery. I can tell you stories you wouldn’t believe.

  11. Rent-seeking.

    That’s the word I was looking for. That the USPTO grants patents for obvious developments leads to rent-seeking. i.e. more than the optimal level of resources are spent trying to receive a greater “dividend” from the patent system (by filing trivial patents and extracting cash settlements from infringers).

  12. The entire patent system is flawed. Perhaps the worst aspect, which no-one has mentioned here, is the comparision to copyright.

    Both of these were initially the same, a bargain struck between the government(s) and the creator, such that others would get to see and use the ideas and technologies after the creator had been rewarded for the creative moment.

    Weird how that has changed now! Copyright extends for so long, for free, and with massive penalties for infringement, that it has become a nightmare. Bands that dare to use a few seconds of a sample in a re-mix or new tune are often forced to not release at all, or to pay a large percentage to the copyright holder (which is generally a company, rather than the creator) who grow fat from the easy to enforce criminal side of the copyright laws keeping most in line. They then use these huge sums to further extend copyright so the cash cow is never returned to the people (which was the original deal).
    Mickey Mouse is a good term for this!

    DRM now means that, even if you wait for some 80 years after the death of the author/actor/ship cat, you still cannot get a copy to do with as you please, since the machines will be obsolete, as will the software, and the media will have died of old age, and I can bet the keys will long since have been lost.

    The creators side of the bargain will never, ever be called in, and the works will never reach the public domain.

    Patents, on the other hand, are anything but automatic. They are complex and difficult to write in the first place, and cost a lot in lawyer time. One minor typo means that they can be invalid. Prior art means they can be overturned with ease in many cases. They cost millions to enforce and maintain world-wide, and it is rare that it is worth the hassle. Only around 3% of patents ever even recoup the costs of fileing. A patent has to be a really detailed process, generally, so by applying, you are gambling that your competitors don’t pay £20 for a copy of your patent, then start making them in the Far East for less than you can, and use the money they saved by stealing your idea to fight your infringement case!

    Both these systems need urgent reform. Copyright should *not* be an automatic right. It should be a proper contract with the state. Unless a dated copy has been delivered to the central register (or whatever) there shouldn’t be a right to sue. Then, after a realistic time, such as 10 years, the rights should start to decay unless the owner pays to maintain them. It need only be a nominal fee, so that those works that are not making money, and are not really cared about anymore, can be returned to the public domain over a few years- say 5 or ten- as the amount of the work allowed to be copied before it is an infringement which could be pursued. Current fair use allows up to 10% or one chapter, so increasing it upwards to 50% over a number of years would be easy to do, though tricky to enforce. The owner could still, then, sell the complete work, but anyone selling three copies of it to sell the whole book/song/whatever would be infringing. The owner would then have a chance at getting more money, because people who heard or read the “free” part could only (legally) get the whole work from the copyright owner. If this made the owner enough money to make it worthwhile, they could then pay the fee and maintain the level of that copyright for another (say) ten years, before it decays away again.

    But then copyright now is tricky enough to enforce, since “Fair Use” is being taken away as fast as possible, and everyone claims an infringement in ten seconds. This would be like the patent system, where a license to copy must be granted after a certain time.

    Thoughts?

  13. Darren Coolidge says:

    Yes the patent system is broken! I just figured out how. Maybe I am slow and others have thought of this before. Here goes…

    Once upon a time patents were used to communicate inventions to others. The patents had to be detailed enough so that another person can get the patent and create one for himself but he couldn’t sell it. Thus, we had free inventions for people to try.

    Currently, the patent system is flawed in that the patents are too fluffy. Software patents only have to describe a process to obtain a patent.

    Maybe a way to fix patents is to require source code before anyone can obtain a software patent?

  14. Ed Felten defends patent holding companies, which exist solely to own patents and sue the pants off anyone who infringes on a patent.

    They’ve gotten kind of a bad name among innovators, because litigation is a primary business strategy for these kinds of companies, and nobody loves a plaintiff. But patents are only honored when there’s a credible threat of litigation, and small…

  15. Ed Felten defends patent holding companies, which exist solely to own patents and sue the pants off anyone who infringes on a patent.

    They’ve gotten kind of a bad name among innovators, because litigation is a primary business strategy for these kinds of companies, and nobody loves a plaintiff. But patents are only honored when there’s a credible threat of litigation, and small inven…