this paper – which can be found here – deals with the relationship between patent assertion entities (a.k.a. patent trolls) and antitrust. This relates to privateering, a practice through which a firm sponsors the assertion of IP claims by third parties (so-called patent assertion entities (“PAEs”)) with the ultimate objective of raising competitors’ costs without disclosing who is ultimately behind this practice. However, PAEs act for themselvesin most cases, and their actions are not necessarily anti-competitive. PAEs are merely entities that acquire and enforce patents without actually practicing them – their business model is predicated on acquiring licensing fees from entities that actually provide goods and services (so-called “operating entities”).
PAEs have been severely criticised, and it has been suggested that antitrust be deployed against them. At first glance, the nexus between antitrust law and PAEs seems clear: if litigious patent trolls are unfairly deteriorating the markets for various patented goods, antitrust law can step in and reassert the proper rules for efficient competition.
This piece is meant as an attempt to identify the limits of this argument, particularly as regards privateering. From the author’s perspective, the argument suffers from two main defects: (i) antitrust scholars have largely failed to distinguish between different types of PAEs and their activities; (ii) where the literature has distinguished between different types of PAEs, it has still failed to account for the costs of expanding or reshaping antitrust law to cover their activity, as opposed to leveraging existing legal solutions. The article thus: “seeks to improve both the specificity and cross-doctrinality of patent troll analysis in the existing antitrust literature by (1) analyzing the shortcomings of antitrust law in policing privateering activity specifically, and (2) considering alternative legal regimes that would require little or no alteration to provide a solution.”
It does this by examining the shortcomings in applying antitrust law to each perceived problem with privateering, and offering an alternative solution or perspective. The perceived problems are:
- Evasion of litigation constraints (Section I) – operating entities typically face retributive and reputational constraints on their ability to litigate their patent rights. One of the primary arguments for using antitrust law against patent privateering is that patent privateering enables operating entities to avoid these litigation constraints that they would otherwise face: a “privateer, it is argued, faces no threat of patent counter-suit or reputational damage since they produce nothing themselves. As a result, with sufficient opacity separating them from the privateer, an operating entity that exercises control over a privateer is able to leverage their patents to a much greater extent than their competitors, raising their competitors’ costs in an anticompetitive fashion, and necessitating antitrust.”
The author’s argument against this is three-fold: (a) it assumes that the status quo, and existing litigation constraints, are efficient. However, privateers may not be increasing costs relative to the status quo – instead, they may be disrupting the status quo, and such disruption may in fact be procompetitive. In particular, litigation costs allow bogus patents to remain in place, and foment the under-monetisation of patents, which patent trolls challenge in a potentially pro-competitive fashion; (b) using third parties as privateers to avoid retributive or reputational litigation constraints – which is likelier to be anticompetitive – may be immunized from antitrust scrutiny under existing doctrines regarding the immunity of sponsors of litigation under the First Amendment [Not: This does indeed seem to be a live issue, but most authors seem not to think that it should be an absolute bar obstacle to antitrust enforcement. After all, even the FTC has identified this type of activity as “nuisance litigation”]; (c) rather than distort antitrust law to proscribe privateering activity, transparency-based solutions would likely address any remaining concerns more easily.
- Evasion of licensing obligations (Section II) – Another of the primary arguments for using antitrust law to diminish patent privateering is that privateering allows operating entities to circumvent licensing commitments they have made. In the context of FRAND, the alleged antitrust issue arises when operating entities sell their patents to privateers who do not themselves abide by the licensing commitments, either refusing to license to certain businesses or demanding a higher royalty.
The author’s arguments against this use of antitrust are that: (i) it is pre-empted by existing US antitrust law. As noted by Joshua Wright, “there does not appear to be a single case that finds breach of an SSO agreement—without proof that deception resulted in acquisition of market power—a violation of the Sherman Act.” (ii) much simpler solutions can be found in existing private law. In the FRAND context, for example, a patent holder makes an explicit promise to an SSO that it will grant licenses to anyone wishing to implement the new standard, and in exchange the SSO adopts the patented technology as part of the standard. These types of commitments have been increasingly described as “contractual” by litigants and courts. If contract law is seen as insufficient or inapplicable, then in the context of FRAND another clean solution lies in promissory estoppel. (i.e. generally speaking, an informal promise—that is, one otherwise failing to satisfy the conditions of a contract— may be enforceable by reason of action in reliance upon it).
- Increased cost and frequency of patent litigation (Section III) – “ Another primary argument for using antitrust law to curtail patent privateering is that privateering increases the frequency of patent infringement or exclusion litigation, as well as the cost per suit relative to suits brought by operating entities. It is argued that the costs of these suits and licenses are distortionary and act as a “startup tax across the tech sector”—essentially an anticompetitive barrier to market entry.” Against this, the author points out that the underlying assumptions as to the effects of patent trolls on cost and frequency of litigation are themselves largely incorrect with respect to privateers. Since privateers favour fast settlement over prolonged litigation, privateers are not likely responsible for the increased amount of patent assertions overall. Instead, the author notes that patent assertions have increased at a rate roughly proportional to the rate of patents being issued.
- In Section IV, the Article concludes by examining collusion via privateers – e.g. two or more operating entities could hypothetically use a privateer to pool their patents and wield them collectively against competitors not in the pool – as an example of the type of activity which falls properly and squarely within antitrust’s purview. Such collusive activity would be functionally identical to cross-licensing between patent holders followed by an agreement to sue all other competitors out of the market. Hence, antitrust has a clear role to play in policing privateers as agents of collusion, but the arguments for the role of antitrust law in regulating collusion are not arguments for policing privateering activity in and of itself.
The author makes an interestingly argued case as to why not all privateering activities should be seen to pose antitrust. However, I’m not really convinced by the alternatives offered by the author on how best to deal with problems raised by privateering. This is not to say that I think that antitrust should apply to privateering tout court – not at all. Instead, my problem with the author’s approach is that no benchmark is provided that allows for the determination of whether certain regulatory approaches are preferable to antitrust – i.e. there is no normative benchmark that allows one to identify which is the better approach (assuming there is a problem with privateering). In any event, this piece provides an interesting analysis of IP privateering, of the ways in which it is regulated in the USA, and of the arguments for and against applying antitrust law to IP privateering.