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Patent Privateering – Patents as Weapons

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By Thibault Schrepel, LL.M.

In the late 16th century, Queen Elizabeth I of England commissioned Francis Drake to sail for America. The Queen asked him to plunder Spanish vessels on its way there. Francis Drake became a pirate commissioned by the crown. This type of “legal” pirate was called a “privateer.” They allowed nations to attack one another without the risk to be counter-attacked, because the identity and the nationality of these pirates’ employer were kept secret. Today, the spirit of those pirates is reborn. Called “patent troll” – a company that does not practice patents and is principally in the business of collecting money from others that practice them – they now act for high-tech companies by “patent privateering” others.

The legal legitimacy of these patent trolls cannot be discussed in its principle. However, some “strategies” they use are prohibited under the scope of antitrust law. It can be some “patent ambushes,” where a patent troll does not reveal the existence of its patent, waits for a standard containing it to be adopted, and then reveals its existence in order to obtain a license at exorbitant prices. It can also be “patent privateering.”

Patent privateering is a strategy where a company –  a patent troll –  acquires/buys patents to its original holder and then engage a lawsuit against companies, in most cases the rivals of the original holder. The troll and the original holder then share the booty. It could be either licensing royalties, litigation settlements or damage awards. There are many variations of this scheme. Sometimes, patent trolls only finance the trial without buying any patent (parties transfer them under many forms). In some other occasions, patent trolls just threat to introduce a lawsuit and then settle the case. But in any cases, the original patent holder and the patent troll maintain relationships so the original patent holder can target its rivals.

True, there are some benefits to the existence of patent privateering. Mostly, it is a way to outsource (and finance) patent litigation to those who know how to handle it. It may also, in some cases, generate royalties or damages that original patent holders can then use to develop innovations.

However, drawbacks are very strong. Indeed, by avoiding countersuit and by evading reputational constraints, original holders do not have incentives to cross-license anymore. At the same time, patent privateering allows to evade Fair, reasonable, and non-discriminatory (“FRAND”) and other licensing commitment. In the case of patent privateering, the original patent holder will maintain its FRAND commitments, while, at the same time, having the patent troll litigate some new license fees that it can share with the original holder. It is one of the most harmful side effects of patent privateering. It is also worth noting that the principal targets of patent privateers are big tech companies which spend billions on R&D. The more they spend, the more they release products, and, therefore, the more patent privateering will be active against them. And because litigation is expensive, they will have fewer available funds to spend in R&D. By raising the costs of the original holders’ rivals with costly litigation, patent privateering is contrary to the process of competition which aims at reducing costs, prices, and stimulate innovation in order to win market shares.

Enforcing patent rights is, as a general rule, an indirect contribution to innovation. But the situation is much different when some patent troll use patents in order to get higher license fees by fooling FRAND commitments. Therefore, if most arguments against patent trolls can stand, most of those pro-patent trolls, like the fact they can be used to grant only one license over patents bundle, don’t stand in the specific case of patent privateering.

So, what should we do? Enforcement is a good way to fight against privateering. Articles 101 and 102 of the TFEU, for instance, might be some useful tools. We argue that patent offices need to be more vigilant before delivering them. Only real economic and antitrust analysis in those agencies will help to prevent some companies from sending or transferring many patents. In other words, solving the “too many patents problem” will be a good way to start fighting against patent abuses, like patent privateering.

If patent trolling is a popular topic, patent privateering is still very unknown, and so far, informing consumers remains the priority. So far, sharing information about patent privateering, to reveal their practices, appears to be the best way to fight against it. And don’t be fooled, patent privateering is a real harm to consumers: prices go up, and innovation go down.

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