Patent Privateering: Everything You Need To Know

Patent privateering describes the activity of a patent holding company that buys valuable patents for the purpose of suing for infringement of those patents.3 min read

Patent privateering describes the activity of a small patent holding company that buys valuable patents from large companies for the purpose of suing for infringement of those patents. Examples in recent years include the purchase of Microsoft and Nokia patents by a company called MOSAID and Ericsson patents by holding company Unwired Planet. Each of these deals includes the transfer of more than 2,000 assets.

Companies sell their patents to privateers in exchange for a share of enforcement and/or a promise not to sue for infringement on other patents owned by the holding company.

Controversies About Patent Privateering

Although some compare privateers to patent trolls, who drag down companies with expensive and ongoing litigation, others note that, unlike the so-called trolls, privateers share their revenue with the company that invented the patented product. The sales agreements in these cases indicate that any settlements, royalties, or awards will be shared with the patent's prior owner. Supporters of the practice liken it to affordable outsourcing of patent litigation services.

Critics of these patent holding companies accuse privateers of abusing the system to limit growth and profit from competitors, negatively impacting innovation in the U.S. In addition, they note that many of the lawsuits filed by privateers are frivolous, thus tying up the court system and extending the resolution of legitimate infringement claims.

Another common criticism is that because these companies do not manufacture or practice the patents they own, they can charge exorbitant prices for licensing to those whom they claim are infringing without concern that they will be the subject of a retaliatory lawsuit.

The original patent owners are able to share in the profits derived from infringement litigation without the bad press associated with filing these suits themselves. They may also benefit from devaluation or closure of competing firms.

Many compare these privateers to pirates who damage small enterprises by threatening them with or suing them for patent violations that are either invented or unintentional. These small businesses are forced to either pay a substantial license fee to avoid litigation costs or bite the bullet and defend themselves in court. Some companies stop doing business altogether to avoid these two miserable outcomes.

While many are turned off by the opportunistic behavior of patent holding companies, these practices are currently on the right side of the law. And not only is the practice legal, but it's also a billion-dollar industry.

Examples of Patent Privateering

  • Kodak's entire suite of digital imaging patents was purchased by Intellectual Ventures, a patent holding company that was in possession of approximately 40,000 patents at the time of this transaction in 2014.
  • Acacia Research Group, a holding company based in Newport Beach, CA, has purchased patents from both AT&T and Apple.

The Future of Patent Privateering

In the absence of legislative changes that make privateering illegal, the practice is expected to increase throughout the U.S. in years to come. Failed startups will seek to regain their investments and compete in the marketplace by initiating frivolous legislation against similar businesses.

While it's natural for a business to sell patents just as they do other assets, they should ideally be used by the purchasing firm to defend the company frivolous claims by other patent trolls and expand on and improve the product or service in question.

Many companies have significant value in their patent portfolios that has not been monetized because they have chosen not to enforce their patents against infringing parties. Slowly, these companies are cashing in by transferring rights to privateers who can enforce the patents on their behalf.

Sequential Innovation

This term refers to inventions that can only exist because of the existence of another invention. When a sequential innovation exists, so too does the question of how to divide intellectual property rights among several different inventors. This is complex because the more rights granted to one inventor, the fewer rights the others will receive.

This becomes even more complicated when the original invention has little value beyond its role in the later innovation. Thus, the first inventor would be unlikely to invest in R&D if he or she was granted only narrow patent rights. Yet giving broader rights would risk the second patent.

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