The Rise of State-Sponsored Patent Trolls

By Alan Daley

Patent trolls are a hazard in the U.S. marketplace, much like the privateers of an earlier era. These companies buy up patents -- many of which should not have been issued to begin with -- and aggressively accuse others of infringing them. Litigation is the cudgel of choice in the trolls' "negotiations," as it provides an asymmetrical advantage and quickly beats defendants into a settlement.

It's no surprise that patent trolls prefer to be called "patent-assertion entities," a euphemism that masks their sometimes seamy behavior. And now, some national governments are choosing to sponsor their own patent trolls.

Patent trolls typically produce nothing themselves -- they are "non-practicing entities" (NPEs), which comes with advantages in court. Companies sued by NPEs can't allege that the trolls are actually infringing their patents, because NPEs make nothing and thus use no one's patents. Furthermore, an NPE's cost of discovery is minimal, because there is little it can disclose.

Producer litigants, by contrast, incur preparation and court costs of about $650,000 for each of these patent lawsuits when less than $1 million is at risk, and about $5 million for suits where $25 million or more is at risk. About half those costs are incurred by the end of discovery -- the stage by which many defendants decide to throw in the towel. And the actual settlement rides on top of those costs.

Recently, foreign governments have begun founding their own patent trolls. France Brevets, Intellectual Discovery in Korea, and Innovation Network Corp of Japan are examples of these troubling entities. China is headed toward similar "investment service platforms."

France Brevets says it will give favored treatment to French firms. Intellectual Discovery says a Korean firm targeted in a lawsuit can use Intellectual Discovery's patents to fight back -- i.e., the targeted firm can substitute an Intellectual Discovery patent that achieves the same result as the patent under dispute. These strategies to help domestic firms are essentially government subsidies.

Foreign NPEs undermine U.S. competitiveness and erect roadblocks to American companies' participation in an ever more globalized marketplace. When governments launch protectionist litigation based on frivolous allegations of infringement, they are in essence imposing a tariff on foreign goods. When they support their companies with subsidized patent licenses, they are placing foreign products at a disadvantage. Unfortunately consumers will be left with the bill.

While not government-owned, U.S.-based patent trolls also work against the consumer's interests. Some trolls have even started litigating against users of products that are the subject of current patent infringement suits. Regardless of how mundane or novel, patent lawsuit costs are ultimately borne by consumers. They create delays in product delivery and prevent small firms from moving beyond the concept phase when they lack enough capital to fight off these nuisances.

As our lawmakers consider how to deal with the domestic patent-troll issue, they should be mindful of the emerging threat from many of our closest trading allies. State-sponsored trolls are fixing the patent litigation game and using baseless protectionist infringement claims in lieu of fair competition. Free markets keep pricing down and innovation up, but foreign governments in the patent trolling business will surely harm both.

Alan Daley is writes for the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization. For more information, visit www.theamericanconsumer.org.

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