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    US Perspectives
    Patent Outsourcing May Harm US Economy

    Published on 18 February 2013 @ 5:43 pm

    By for Intellectual Property Watch

    It has become routine for companies to outsource many business functions. Human resources, customer service, accounting, manufacturing of components – all have been outsourced. Now, however, a growing number of US businesses are outsourcing something new: patent licensing. And this outsourcing may hurt both the US economy and its patent system.

    Businesses in the US have plenty of reasons to outsource their patent licensing programs. They know that patent licensing can bring in big bucks, but they are also know that running a successful licensing program is far from simple. A company must identify which of its patents are worth licensing, find potential licensees, negotiate suitable terms, and sue recalcitrant entities that infringe its patents. In short, the company must run a type of business that is very different from its usual activity of making and selling products/services.

    Learning to operate this new line of business is no mean feat. It requires a major commitment of time and money. “[E]xperience, expertise and developing a core competency in that [patent assertion] business are critical to success,” said Ron Epstein, CEO of Epicenter IP, a consultancy that helps businesses monetise their patents.

    Moreover, patent assertion programs often require deep pockets, because patent enforcement doesn’t come cheap. Infringement litigation in the US can drag on for years and cost a plaintiff millions in legal fees. And while the litigation grinds on, it eats up significant amounts of time from the plaintiff’s executives and researchers – time that could otherwise be spent on pursuing the company’s core goals of making and selling goods/services.

    Finally, there’s a significant risk of blowback. When a company seeks to licence its patents, its most likely targets are its “suppliers, customers and competitors,” Epstein said. Suing one’s suppliers and customers, however, is not good for one’s business. Suing customers, moreover, risks an explosion of negative PR that shreds a company’s image and sales.

    Suing one’s competitors is more tempting, since it offers the opportunity to distract rivals’ executives, force these competitors to incur costs for litigation and design-around, and possibly require these rivals to take some of their products off the market. But if these rivals have patents of their own, they are likely to countersue, asserting their own claims of infringement. The result could be an expensive, time-consuming battle that leaves all participants poorer – as demonstrated by Apple’s litigation campaign against its smartphone rivals. Suing rivals also can have a PR cost, if customers view the plaintiff as trying to bully competing products off the market.

    That’s why, over the last five years, a growing number of patent owners have begun outsourcing their patent licensing and enforcement to specialists, which are sometimes referred to as “patent privateers.” A privateer typically purchases selected patents from an operating company (Opco), works to licence the patents, and shares the resulting revenue with the Opco. If the privateer fails to produce sufficient revenue from the patent at the conclusion of specified time periods – often two and four years – the Opco has the option to repurchase its patents at a nominal fee.

    This is an attractive deal for many Opcos. The privateer bear the risks and financial burden of patent litigation and licensing. Meanwhile, the Opco is insulated (at least somewhat) from the negative repercussions of the licensing campaign. If the privateer sues an Opco’s suppliers and customers, the Opco is not responsible. If the privateer sues the Opco’s rivals, these rivals cannot seek to force a settlement by countersuing for infringement, because the privateer is just a patent assertion entity that does not provide goods or services covered by the defendants’ patents. (The rivals could file a separate infringement suit against the Opco, but that wouldn’t stop the privateer’s suit, which the Opco does not control.)

    In short, by using privateers, Opcos benefit from the upside of patent licensing while suffering little of the downside. So it’s little wonder that more and more Opcos are turning to privateers. “The outsourcing of patent litigation is a growth industry,” said Thomas Ewing, principal consultant at Avancept LLC, an IP consultancy.

    The Effects of Patent Privateers

    The growing use of privateers, however, is likely to be a drag on the US patent system. The number of patent infringement lawsuits is likely to rise, taking up scarce judicial resources. These lawsuits could take longer to be resolved, because they cannot be settled by patent cross-licensing deals. (A privateer, unlike an Opco, faces no risk of being countersued for infringement, and thus has no interest in obtaining a licence for a defendant’s patents.)

    Yet it is unclear how much privateers will increase the amount or duration of patent litigation. “I guess there will be a little bit more litigation … maybe a bit less cross-licensing,” said Michael Risch, associate professor at Villanova Law School.

    It is also unclear whether privateers will ultimately help or harm the Opcos that are their clients. “Privateers both help and hurt large companies,” said David Schwartz, associate professor at Chicago-Kent College of Law. “Privateers allow [Opcos] to sell their patents and make more money, but these companies also are likely to be hit with more [infringement] lawsuits so they may have to pay out more money.”

    Some argue that the expected increase in patent litigation and licensing will help promote innovation. By squeezing more revenue from patents, privateers will encourage Opcos to spend on R&D.

    However, a paper recently written by two economists at the Federal Reserve Bank of St. Louis casts doubt on the notion that patent assertion promotes innovation. After reviewing “sector-level, national, and cross-national” studies on the effects of patents, the authors write that these studies “fail to provide any clear empirical link from patents to innovation or to productivity.” In another section of their paper, the authors are more direct: “there is no empirical evidence that they [patents] serve to increase innovation and productivity.”

    It is thus unclear whether the growing use of patent privateers will benefit anyone other than the privateers (and legal counsel for alleged infringers). The privateers will boost patent litigation to some degree and wring more licensing fees out of companies, but that may simply slow down the courts and increase the financial burdens of firms doing business in the US – without any offsetting benefits to the economy, innovation or the companies that created the patented inventions.

    If that is the case, if the growing use of patent privateers does harm the US economy and its patent system, the privateers should not be blamed, according to Risch. The privateers and their client Opcos are just taking advantage of the US patent law, and it’s the law which needs to be reformed. “If privateers thrive because patents are bad [e.g., overbroad or weak], we should look at bad patents. If privateers thrive because litigation is expensive, we should do something about litigation costs,” Risch said. “This latest form of litigation isn’t the problem.”

    Steven Seidenberg is a freelance reporter and attorney who has been covering intellectual property developments in the US for more than 15 years. He is based in the greater New York City area and may be reached at info@ip-watch.ch.

     

    Comments

    1. ron marchant says:

      The paper at the root of this posting is very valid. Patents are a tool, not an end in themselvers. The objective is the commercialisdation of innovation – and hence availablity to the public. However, outsourcing does not mean “privateers”. Companies can outsource the licensing process without giving up control. It’s like any conbtractual situation. Perhaps we like labes such as “privateers” and “trolls” when we criticise the system. It’s like the “pirates” used by the IP interests. Perhaps it’s time to leave middle earth and return to planet earth.

    2. Patent Outsourcing May Harm US Economy – Intellectual Property Watch | Savvy Consultancy says:

      [...] Patent Outsourcing May Harm US EconomyIntellectual Property WatchIt has become routine for companies to outsource many business functions. Human resources, customer service, accounting, manufacturing of components – all have been outsourced. Now, however, a growing number of US businesses are outsourcing … [...]


    Leave a Reply

    We welcome your participation in article and blog comment threads, and other discussion forums, where we encourage you to analyse and react to the content available on the Intellectual Property Watch website. By participating in discussions or reader forums, or by submitting opinion pieces or comments to articles, blogs, reviews or multimedia features, you are consenting to these rules.

    We welcome your participation in article and blog comment threads, and other discussion forums, where we encourage you to analyse and react to the content available on the Intellectual Property Watch website.

    By participating in discussions or reader forums, or by submitting opinion pieces or comments to articles, blogs, reviews or multimedia features, you are consenting to these rules.

    1. You agree that you are fully responsible for the content that you post. You will not knowingly post content that violates the copyright, trademark, patent or other intellectual property right of any third party or which you know is under a confidentiality obligation preventing its publication and that you will request removal of the same should you discover that you have violated this provision. Likewise, you may not post content that is libelous, defamatory, obscene, abusive, that violates a third party's right to privacy, that otherwise violates any applicable local, state, national or international law, that amounts to spamming or that is otherwise inappropriate. You may not post content that degrades others on the basis of gender, race, class, ethnicity, national origin, religion, sexual preference, disability or other classification. Epithets and other language intended to intimidate or to incite violence are also prohibited. Furthermore, you may not impersonate others.

    2. You understand and agree that Intellectual Property Watch is not responsible for any content posted by you or third parties. You further understand that IP Watch does not monitor the content posted. Nevertheless, IP Watch may monitor the any user-generated content as it chooses and reserves the right to remove, edit or otherwise alter content that it deems inappropriate for any reason whatever without consent nor notice. We further reserve the right, in our sole discretion, to remove a user's privilege to post content on our site. IP Watch is not in any manner endorsing the content of the discussion forums and cannot and will not vouch for its reliability or otherwise accept liability for it.

    3. By submitting any contribution to IP Watch, you warrant that your contribution is your own original work and that you have the right to make it available to IP Watch for all purposes and you agree to indemnify IP Watch, its directors, employees and agents against all damages, legal fees and others expenses that may be incurred by IP Watch as a result of your breach of warranty or of these terms.

    4. You further agree not to publish any personal information about yourself or anyone else (for example telephone number or home address). If you add a comment to a blog, be aware that your email address will be apparent.

    5. IP Watch will not be liable for any loss including but not limited to the following (whether such losses are foreseen, known or otherwise): loss of data, loss of revenue or anticipated profit, loss of business, loss of opportunity, loss of goodwill or injury to reputation, losses suffered by third parties, any indirect, consequential or exemplary damages.

    6. You understand and agree that the discussion forums are to be used only for non-commercial purposes. You may not solicit funds, promote commercial entities or otherwise engage in commercial activity in our discussion forums.

    7. You acknowledge and agree that you use and/or rely on any information obtained through the discussion forums at your own risk.

    8. For any content that you post, you hereby grant to IP Watch the royalty-free, irrevocable, perpetual, exclusive and fully sub-licensable license to use, reproduce, modify, adapt, publish, translate, create derivative works from, distribute, perform and display such content in whole or in part, world-wide and to incorporate it in other works, in any form, media or technology now known or later developed.

    9. These terms and your posts and contributions shall be governed and interpreted in accordance with the laws of Switzerland (without giving effect to conflict of laws principles thereof) and any dispute exclusively settled by the Courts of the Canton of Geneva.

     

     
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