Defensive Aggregation Complements Coming Patent Reform

Robert C. Pozen recently assessed Congressional patent reform efforts in a New York Times op-ed piece. Mr. Pozen is a professor at Harvard as well as the chairman of MFS Investment Management, and in his piece he suggests some excellent changes in how patents are evaluated, issued and protected. His proposed reforms would indeed help “weed out low quality patent claims … and reward our best innovators”, but they would not address the most serious problem faced by both owners and users of intellectual property, which is the increasing number of lawsuits filed by non-practicing entities, or NPEs.

As Mr. Pozen notes, patent law needs to be reformed. Patents are the legal catalyst for technology innovation, and thus largely responsible the tremendous social and economic value created by that innovation. It is precisely this value that has created a thriving secondary market for patents.

NPEs have invested billions of dollars to purchase patents. Their business model is to solicit royalty payments from companies that make or use products or services incorporating technologies covered by the patents in question. By thus seeking to ‘monetize’, or extract the financial value embodied by their intangible assets, NPEs are doing what literally thousands of companies have done since the formation of this country. However, the fact that NPEs often use litigation as a tool in their monetization efforts has not endeared them to the many technology-driven companies that have been their targets, as patent litigation is costly and time-consuming for all involved.

Mr. Pozen does not suggest legislating away the ability to assert for NPEs or any third party to assert patent rights. Nor should he. Patents are legitimate property, and in America, property rights are legal bedrock.

The NPE approach to monetizing the value of intellectual property is nonetheless inefficient due to the excessively high transaction costs; and for many companies, it is a very expensive problem. The optimal remedy, however, is not a legal solution; it is a market solution. And efficient, market-based solutions are historically how industries have responded when companies collectively face operating risk.

For example, the merchant banks and insurance underwriters that emerged in the 17^th and 18^th century allowed brokers, land owners, manufacturers, traders and shippers to offset the significant financial risks – shared by all participants – of changing market conditions or catastrophic weather. Today, similar market-based approaches to addressing the NPE problem are taking shape, lead by RPX’s Defensive Patent Aggregation service. By combining our expertise in patent assessment with the economic resources of our fee-paying members to buy patents strategically and defensively, our service is able to keep patents out of the hands of NPEs who might otherwise assert them.

This approach enables a free and open market for intellectual property and ensures that patent owners can extract fair value for their asset without resorting to legal methods. And it provides an efficient, cost-effective way for companies to share the risks inherent in using technologies that are based on high-value intellectual property. It is a market solution to a legal problem, and one that – like Mr. Pozen’s suggested reforms – goes a long way toward protecting and nurturing the innovation that is the driving force of the American economy.