US antitrust regulators have recently developed great interest in patent trolls, which they have taken to calling "patent assertion entities" or PAEs. But it seems like they still haven't decided what to do about trolls. At recent hearings, critics lamented extortion-like demands, while supporters proclaimed trolls’ benefits to "invention markets."
While they haven't yet settled on a plan of action, the regulators are certainly thinking the issue over. Just last week, dozens of comments were submitted to the antitrust agencies (US Department of Justice and Federal Trade Commission) suggesting what they should do—or not do—about the troll issue.
Trolls are causing great harm. They are filing more lawsuits with no fear of countersuit. They are seeking exclusion orders in the ITC. They are suing as patents are about to expire. They are pushing startups out of the market. They are targeting technology users. They are helping established companies harm rivals. They are avoiding promises made by predecessors. Despite claims that trolls help inventors and that the empirical evidence is not yet complete (when is it ever?), the antitrust agencies can act right now to address the troll problem.
To start, they can challenge concerning aggregations of patents. In the past two decades, the agencies have been transfixed on the positive effects of patents and licensing. But massive patent portfolios can be used offensively and can be valuable because of their size rather than the validity of each patent. These portfolios can have anticompetitive effects, including holdup, raised rivals' costs, increased price, and reduced innovation.
The agencies could also promote transparency. Much troll activity today is hidden beneath a labyrinth of shell companies. Acacia's subsidiaries control 250 patent portfolios. Intellectual Ventures has used at least 1276 shell companies to purchase and hold patents. Given this, how could potential targets engage in licensing negotiations or evaluate patent portfolios? The agencies must be able to shine sunlight on this subterranean network, obtaining complete information from patent acquisitions, among other conduct, to determine competitive effects.
It seems particularly slippery for trolls to avoid promises made by their predecessors. The agencies could prohibit transfers to trolls that refuse to adhere to promises to keep licensing costs reasonable. Such obligations are crucial when industries adopt standards, and evasion through transfer could create a fatal loophole since the industry would be locked into a technology that could face skyrocketing royalties. To pick one example, after the agencies approved the acquisition of the Nortel patent portfolio by the Rockstar consortium based on Apple and Microsoft promising to agree to reasonable licensing, the Rockstar CEO publicly stated that the consortium "isn't bound by the promises that its member companies made" since "[w]e are separate" and the promises "do not apply to us."
The agencies could challenge acquisitions involving trolls based on their distinct incentives. Trolls face fewer constraints in filing suit: they are immune from countersuit (since they don’t manufacture anything), do not face disruption to their business, and do not confront reputational harms, customers exerting pressure to settle, or shareholders skeptical of enforcement. Challenge is even more appropriate when trolls have enhanced incentives to sue to cover anticipated venture-capital-like returns or when they combine with companies having both an incentive and ability to harm rivals.
Related is the potential unholy alliance between operating companies and trolls. Look at the recent $527 million sale of bankrupt Kodak's digital imaging patents to Apple, Google, Microsoft, Intellectual Ventures, RPX, and others. What would Intellectual Ventures and RPX do with these patents? Do any companies outside this large alliance stand a chance?
Finally, the FTC could consider the use of Section 5, the tool that reaches beyond antitrust and has been criticized for not offering a precise set of standards. One framework could find that certain trolls have market power in technology (licensing) markets, do not offer non-trivial efficiencies, and cause competitive harm that results in higher prices or reduced innovation for consumers.
Antitrust enforcement is crucial to the protection of consumers and a competitive marketplace. Even if certain trolls can justify some of their conduct, that does not mean that all troll activity is immune from antitrust scrutiny. If it was so protected, then the most aggressive and unjustified behavior, undertaken by trolls with the greatest market power and largest portfolios, and inflicting the greatest harm on rivals and consumers, would fall through the antitrust cracks.
The novelty of troll behavior ensures that the framework must be applied flexibly. But antitrust enforcement cannot automatically be shunned in a context that presents new and powerful opportunities to inflict anticompetitive harm.
Listing image by Flickr user: Cali4Beach
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