Who stands to win and lose when a patent system created to foster innovation is being utilized to hide and distort patent ownership?
As Congress prepares to take up the heated issue of patent reform again early in 2015, a new paper published today by UC Hastings Professor of Law Robin Feldman, Director of the Institute for Innovation Law, provides a framework for fixing a key problem. In October 2014, the U.S. Patent and Trade Office announced that it was giving up on rules requiring greater transparency about patent ownership and punting to Congress.
Feldman’s “Transparency” focuses on one important aspect of the evolving patent marketplace in which new issues have emerged in just the past five years—information related to who has financial interests in a patent.
The full text of “Transparency” is available online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2402389
Scholars have described an optimal patent system as one in which “the world is on notice of the existence, scope and ownership of a patent.” Feldman writes, “Shell games and hide-and-seek rarely make for an efficiently functioning market.” She suggests borrowing from the substantial body of well-developed doctrine and literature associated with section 16 of the Securities Exchange Act, which is used for disclosure of interests in corporate securities, rather than starting with a blank slate.
In “Transparency,” Feldman proposes that two key concepts from existing securities law can be readily adapted to patents. The first concerns the potential to benefit from assertion of patent rights, while the second addresses business structures designed to evade established regulatory definitions. Applying the stock ownership approach to patent ownership has the additional benefit of providing a robust body of interpretive case law.
“As the market for patent monetization develops and expands,” Feldman writes, “scholars and lawmakers must think of it in classic market terms. This includes, of course, ensuring the flow of information necessary to establish an efficiently functioning market.”
“Transparency” examines how and why the current system fails to meet this challenge in an era when a single smartphone may involve an estimated 300,000 relevant patents. Securing ownership of valuable patent assets and their associated licensing fees is a lucrative enterprise, not only for the creators of inventions but also for others whose core business involves licensing or litigating patents.
Known as non-practicing entities or “patent trolls,” these new players in the game of patent rights want to preserve a system that currently works in their favor. Feldman writes, “Processes that take advantage of and dupe the small inventor are hardly consistent with the goals of the patent system. In short, from a societal perspective, stealth is not valuable to the patent system.”
Although Congress passed the America Invents Act in 2011, the most significant changes in 60 years, that legislation did not address the issues that are the focus of “Transparency.” More recent court decisions have reduced the number of new cases, but the train is still barreling down the tracks. For example, although the number of new patent cases dropped in recent months, the pace is still 60% higher than it was in the same months of 2007-2008, before modern patent trolling took off.
Who really owns a patent requires following the money trail, but often that information is obscured. Patent trolls may create layer upon layer of entities to hide owner relationships from those they target.
Feldman notes, “Patent assertion entities have proven as creative as the inventors whose patents they purchase, at least from the standpoint of legal structuring.”
While filing patent infringement lawsuits costs little and can be highly profitable for patent trolls and their attorneys, such lawsuits can cost defendants from $600,000 in attorney’s fees for smaller defendants to $6 million or more for larger ones. This is in addition to the burdens of time wasted in the legal process, rather than in creating new products.
Small companies also have much to lose, writes Feldman, yet they lack representation in the current debate. “Suppose ownership is recorded at the Patent and Trademark Office in the name of a parent company; the parent company has a number of subsidiaries, each of which holds a license to the patent.” she writes. “If a small business has paid for a license from the first subsidiary and is approached by the second subsidiary, it may be difficult for the small business to know that the subsidiaries are related, and it may already hold a sufficient license.” With the complex web of ownership, a small business cannot even begin to know whether a claim is legitimate.
“Transparency” proposes new solutions to the complex issue of patent ownership that impacts all stakeholders in the U.S. innovation economy. By creating a definition of who benefits from asserting patent rights and applying the well-established framework of securities law to the disclosure needs of an information age patent system, it provides an adaptive framework for reform at a critical time in the debate.
The Institute for Innovation Law is a public interest academic center at the University of California Hastings College of the Law. The Institute engages in academic research and education to encourage innovation through the practice and development of law and policy. The Institute’s mission is to identify and promote the tools, knowledge, and skills needed to encourage innovation through the practice and development of law and policy.
Alex A.G. Shapiro
Director, Communications & Public Affairs
UC Hastings College of the Law
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