New Papers on PAEs

1.  Gaia Bernstein has posted her paper The Rise of the End User in Patent Litigation on ssrn, link here.  Here's the abstract:

The patent system focuses on the actions of two players: the patentee and its competitor. It assumes that the competitor will represent the interests of the end user. But increasingly, end users are becoming significant players in the patent system, their interests sometimes diverging from those of competitors. Attention has recently turned to Patent Assertion Entities (“PAEs”) – also known as patent trolls – who are suing vast numbers of customers using patented technologies in their everyday businesses. Yet, end users were also principal players in some of the main recent patent cases before the Supreme Court. In Bowman v. Monsanto, Monsanto sued farmers for re-using its patented self-replicating seeds. In Association for Molecular Pathology v. Myriad Genetics, patients and physicians sued to invalidate breast cancer gene patents. And, patients and drug stores repeatedly challenge pay-for-delay agreements between patentees and competitors, claiming they undermine patients’ interests in access to generic drugs.

The drafters of the America Invents Act (the “AIA”) intended the legislation to catch up with the changing patent landscape. Yet, the AIA did not predict and is largely ill-equipped to address the growing role of end users. The AIA addresses the needs of small entities, mainly, by adding procedures to challenge patents in the United States Patent and Trademark Office (“PTO”), providing a cheaper and faster forum for challenging validity. However, end users are different from small technological competitors. End users lack technological sophistication, they are often one-time players and tend to become involved in the patent dispute relatively late in the life of the patent. The AIA’s novel PTO procedures are largely unsuitable for end users because they permit expansive challenges mostly early in the life of the patent before end users are likely to be implicated.

Paradoxically, as end users play an increasingly larger role in patent law disputes, they have few legal tools to assert their interests. This Article argues for the need to equip end users with tools to defend their interests in this new litigation landscape. Specifically, since end users, who lack internal resources of technological sophistication, are especially ill suited to fund the expense of patent litigation, fee shifting is particularly warranted when the prevailing party is an end user. In 2014, the Supreme Court decided two fee shifting cases: Highmark v. Allcare and Icon Health v. Octane Fitness, in which it lowered the standard courts need apply to award fee shifting in patent cases. And, at the same time, a flurry of Congressional bills proposes different versions of fee shifting. Yet, while these bills and cases address the general fee shifting standard and the issue of PAE lawsuits, they do not consider the unique status of the end user. This Article argues for the need to consider the special status of end users in any fee shifting reform.

2.  Daniel Harris Brean has posted a paper on ssrn titled Ending Unreasonable Royalties: Why Nominal Damages are Adequate to Compensate Patent Assertion Entities for Infringement.  Here is a link to the paper, and here is the abstract:

According to Section 284 of the Patent Act, damages for patent infringement are supposed to be compensatory. The statute only allows for recovery of "damages adequate to compensate for the infringement." Even though it qualifies that such damages must be "in no event less than a reasonable royalty," this language cannot be read to avoid the fundamental requirement that, as compensatory damages, any recovery must stem from actual harm suffered by the patent owner. Absent proof of actual harm, only nominal damages should be recoverable. Yet patentees who suffer no actual harm are regularly obtaining considerable amounts of money from alleged infringers as purported reasonable royalty damages. This state of affairs reveals a need to correct the course that damages law has taken.

The most prominent group of patent owners receiving windfalls instead of compensatory damages are patent assertion entities ("PAEs"), also known as "patent trolls." While there are other situations where patentees are not actually harmed by instances of infringement, PAEs’ business models and damages theories best highlight how existing damages law is being misread and exploited to support widespread overcompensation for infringement.

PAEs are exclusively in the business of patent assertion, seeking to license their patents via actual or threatened litigation. They make and sell no products or services themselves, having no capacity or infrastructure to do so, nor do they partner with technology companies to develop and bring their patented products or services to market. Having no actual or prospective direct or indirect market participation relating to the technology, PAEs suffer no pecuniary loss from infringement — they are no worse off than they would be if the infringement had never occurred. PAEs are only legally harmed, not actually harmed, by infringement.

The business model of PAEs is lucrative because of the erroneous assumption that substantial reasonable royalty damages must be awarded for any infringement. The statutory language allowing for damages "in no event less than a reasonable royalty" has been twisted and expanded, especially by PAEs in recent years, far beyond its strictly compensatory origin. PAEs emphasize improper restitutional facts instead of compensatory ones to unduly inflate their supposed damages — i.e., they focus on the benefits to the infringer instead of the harm to themselves. They also draw analogies to common law trespass principles to suggest that, just as a trespass interferes with a landowner’s use of real property, substantial damages are owed to patentees merely because they own the patent and the patent was infringed. When properly examined, however, these common law principles reveal that the analogy would support only nominal damages for such legally harmful but actually harmless trespasses.

Nothing in the legislative history of the reasonable royalty statute suggests that a reasonable royalty was required to be a substantial sum. With no evidence that Congress intended a reasonable royalty to be substantial or have a special meaning, under the plain meaning of the statutory text a royalty should be deemed reasonable simply when it constitutes sensible and fair compensatory relief. This allows for case-by-case findings of actual damages without artificial legal constructs that distort the meaning of Section 284. Under this fresh reading of the statute, patent owners who suffer no actual harm from infringement would be entitled to recover nominal damages only. In some cases, such as those brought by PAEs, a nominal royalty is reasonable.

I should state that, although I am skeptical of Mr. Brean's thesis as elaborated in his abstract, I haven't yet read the paper.

3.  Hana Oh Chen has published a paper titled Combating Baseless Patent Suits:  Rule 11 Sanctions with Technology Specific Application, 54 Jurimetrics 135 (2014).  Here is the abstract:

Nuisance-value patent suits impose significant costs on a wide range of industries. Patent assertion entities (PAEs), or “patent trolls,” receive particular attention, although individual inventors and practicing corporations also contribute. Yet effective solutions in the political arena remain elusive. The situation calls for a practical approach that can be quickly implemented, is useful throughout various stages of litigation, and adaptable to meet the different needs of various industries. Sanctions under Rule 11 can be such a tool in curbing frivolous infringement suits. Rule 11 is particularly useful in the patent litigation context because it applies throughout the stages of litigation, including the initial stages, and its provisions help prevent the overdeterrence of claims with merit. A technology-specific application of the prefiling investigation requirement under Rule 11 can be an effective weapon in deterring plaintiffs from bringing meritless claims. Existing factors of the Rule should be considered within the context of the specific technology at issue.

A version of the paper is available on ssrn, here.

4.  Issue 2 of volume 79 of the Antitrust Law Journal features papers from a symposium on patent assertion entities.  Here is the list of articles and authors:

Thomas P. Brown, PAEs and Antitrust--A Brief Introduction.

Tom Nicholas, Are Patents Creative or Destructive?

Erica S. Mintzer & Suzanne Munck, The Joint U.S. Department of Justice and Federal Trade Commission Workshop on Patent Assertion Entity Activities--"Follow the Money"

Mark S. Popofsky & Michael D. Laufert, Antitrust Attacks on Patent Assertion Entities

Fiona M. Scott Morton & Carl Shapiro, Strategic Patent Acquisitions

Joshua D. Wright & Douglas H. Ginsburg, Patent Assertion Entities and Antitrust:  A Competition Cure for a Litigation Disease?

J. Robert Robertson & Logan M. Breed, United States v. Widget Co., Newco, and Patent Aggregator Plus LLC:  A Hypothetical Closing Argument