Patent Trolls and Defensive Patent Aggregation: Two sides of the same coin?

Fiona Li is a J.D. candidate at Osgoode Hall and is taking the Patent Law course.

A non-practicing entity (NPE) is a patent owner that does not manufacture or use the patented invention. NPEs are commonly referred to as patent trolls. More specifically, patent trolls buy patents cheaply from entities not actively seeking to enforce them. The trolls, in turn, make money by aggressively enforcing claims against other companies who may be infringing on the patent despite having no intention of using it themselves.

One of the more prominent patent trolls that has been making a name for itself in recent years is Intellectual Ventures (IV). Intellectual Ventures is a patent holding investment fund that buys patents in order to develop a large patent portfolio. It licences the patents to large companies, many of whom also invest in the fund such as: Sony, Nokia, Microsoft, Intel, Google and eBay. Although IV claims to have never asserted its rights to its patents through litigation, there have been claims that it has done so through its many secret shell companies.

 To fight patent trolls, companies resort to a strategy known as defensive patent aggregation. ·Defensive patent aggregation companies are in the business of purchasing patents to keep them out of the hands of entities that would assert them against operating companies (trolls). They typically do not assert rights to its patents and only license them out to members. Prominent organizations that do this type of work include:



  • RPX Corporation is patent holding company that protects its members against patent trolls but buying up patents on the market. Members pay an annual membership fee, based on their operating income. RPX then licenses its patents to its members.
  • Allied Security Trust(AST) is another member based patent-holding company that protects its members against patent trolls. Members contribute funds to the trust, which are then used to purchase patents that members are interested in. The trust then licenses the purchased patents to members. AST has fifteen members, including: ·Ericsson, Philips, RIM, Motorola, Verizon, Cisco, HP and others.

 Patent trolls and defensive patent aggregation companies, though operating on opposing sides, are both NPEs in that they collect patents, but do not use or produce the inventions they own the rights to. Taken too far, both trolls and defensive patent aggregation companies both have the effect of creating a patent ‘cartel ‘, as described in ‘The Eureka Defence’. In the blog, the author describes the effective cartel that could potentially be formed as a result of Intellectual Ventures’ operations:

With “thousands of members” [Intellectual Ventures] would have an agreement among competing firms to coordinate prices on a vast holding of intellectual property to the disadvantage of non-members. Patents are monopolies, so non-members will have no substitutes. Its alarming size would give it substantial reach in the intellectual property market and engender a network effect, which would cultivate market power and make membership more valuable on a per-patent-basis as it grows. The problem with this isn’t the idea of patents. The problem is the power that an intellectual property cartel would have.

According to the author, the effect of a cartel would be that the threat of legal action may force concessions and settlements in situations where they are not merited. While the lack of substitutes would make membership more desirable, and the network effect would make membership more costly. As a result, the price of innovation goes up and smaller firms are put at a disadvantage.


I believe that this line of reasoning can be applied to defensive patent aggregation companies as well. Such companies, if they grow to acquire enough patents, can wield the same type of power that cartel-like power that a large patent troll could have. This is because patent trolls and defensive patent aggregation companies are more similar than they are different in that their main purpose above all else is to acquire patents. The only difference is that latter do not assert their patent rights through litigation. However, that is likely to change if the interests of members are being adversely affected by non members.

While at first glance, defensive patent aggregation companies may be a useful tool in battling patent trolls, they can potentially grow to have the same adverse influences as the very thing they were designed to protect against. 
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  1. There are a couple of errors in this post that need to be corrected. You state that “Patents are monopolies, so non-members will have no substitutes.” First patents are not monopolies, as I explain below. Second is the statement that there are no substitutes. Ask any practicing patent attorney and they will tell you that there is always a design around for any patent.

    Monopoly: According to Wikipedia “in economics, a government-granted monopoly (also called a “de jure monopoly”) is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement.” Alternatively, Wikipedia defines “a legal monopoly, statutory monopoly, or de jure monopoly is a monopoly that is protected by law from competition. A statutory monopoly may take the form of a government monopoly where the state owns the particular means of production or government-granted monopoly where a private interest is protected from competition such as being granted exclusive rights to offer a particular service in a specific region while agreeing to have their policies and prices regulated.” Patents are government granted (legal, statutory) so this is appropriate definition. However a patent does not provide a “private individual or firm” the exclusive right to offer a good or service. Patent are not monopolies, they are property rights.

    There are some economists that argue that all property rights provides some monopoly power. This definition of a monopoly is inconsistent with the historical definition of a monopoly and becomes a circular argument that and provides no useful insights. Economists who adhere to the point of view that property rights confer monopoly power are pushing a socialist political agenda instead of acting like a scientist trying to understand the economy.

    The post seems to imply that these companies that aggregate patents are a bad thing for our economy.

    From an economic point of view NPEs are the beginning of a secondary market in patents. Most of these companies got their start in the failed companies of the bust. These patent investing companies bought the patents of failed companies. This reduces the cost and the risk associated with R&D. The VC’s I knew were going to let these patents expire, resulting in zero return to the investors. Patent investing companies should not be vilified, but appreciated for the valuable secondary market they are creating. Like all new markets, the pioneers took enormous risks but also paid very little for the assets they acquired. Their success will encourage other entrepreneurs driving up the prices for patents (excess R&D). This will reduce the cost and risk associated with R&D, which will result in more investment in high technology start-up companies.

    Vilifying patent investment companies is like vilifying investors in the physical assets of failed enterprises. These investors recycle assets and make them part of the productive economy again. While it is sad to see a business fail, failure is part of the innovation process. Putting the assets of a failed enterprise back to work as soon as possible would be considered a humanitarian effort if performed by a non-profit. However it is just as valuable or more valuable to the economy when done by a for-profit enterprise.

    Dale B. Halling, Author of the “Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation.”

  2. There is sound rationale for allowing patents to be bought and sold. It is not surprising that a lucrative industry has developed that is exclusively dedicated to buying patent rights and asserting claims. The problems caused by patent trolling is arguably simply the by-product of a free market economy rather than an imperfect patent system. Patents operate on proprietary concepts, and as a result, buying and selling rights to an invention is rational and logical. This concept is what the whole patent system is based on; without the right to exclude others, there would be no patents. Patent trolling, therefore, may be a nuisance, but it is a viable industry. The market to buy and sell patents exists, and patent trolls take advantage of it. It is a smart business.

    Excessive litigation is the primary weapon for NPEs, where many utilize a tactic of suing as many defendants as possible, as settlement from only a few claims will exact a profit. This is where the problem lies. When a company, as a part of its business model, relies on litigation as a method of earning profits, the courts should react with a heavy hand. Not only does it rely on the fact that the high costs associated with litigation will be enough to strong-arm an early settlement, this type of business model is a strain on the court systems. Arguably, this is not what Patent Legislation is meant to protect. To take a rather romanticized view, patent laws exist to protect and reward the inventor for her inventiveness, not to effectively allow companies that take no part in innovation to pursue litigation for profit. Steps need to be taken to ensure that there is no abuse of the courts taking place.

    Courts are recognizing the abuse of litigation by NPEs. In eBay Inc. v MercExchange, the US Supreme Court rejected the general rule of issuing injunctions against those accused of patent infringement without first meeting a threshold test. Patent trolling was a primary concern when reaching this decision. The Court unanimously held that several factors must be weighed before a patent infringer is barred from using a technology. Although this is one step in favour of alleged patent infringers, there is still the need for patent law reform to ensure NPEs do not overstep the appropriate use of the courts.

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