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Technology companies traditionally have preferred to maintain large patent folios for defensive purposes. Filing a patent lawsuit against another technology company armored with patents was believed to be a risky proposition because the litigation would be expensive and the defendant could counter-sue, potentially winning an injunction against the plaintiff's products.
But recently PAEs, also known as non-practicing entities or as patent trolls, have proven that the investment required to obtain a patent and then file lawsuits asserting infringement is worth the risk when weighed against the potential financial reward. And companies with many patents have realized that they can cross-license their patents to PAEs, thereby allowing them potentially to share in licensing fees or legal judgments without risk of a counter-suit. This practice is sometimes known as privateering, in reference to the former maritime practice by which governments authorized privately operated ships to conduct attacks on their behalf.
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The problem with this practice is that it promotes litigation and harms companies producing goods or offering services.
"Outsourcing to PAEs alters these incentives in ways that raise costs and harm competition," the companies said in remarks submitted to the U.S. government. "Unlike an operating company, most PAEs are immune to patent countersuits because they offer no products or services. Transferring patents to a PAE can shift symmetric patent peace into asymmetric patent aggression."
According to BlackBerry, Google, EarthLink and Red Hat, PAEs are filing four times as many lawsuits today as they were in 2005 and their cases now account for 62% of all patent litigation. The four companies refer to such litigation as an innovation tax and claim that PAE actions cost U.S. companies $29 billion in 2011, or $80 billion when direct and indirect costs are considered together.
As if to demonstrate the burgeoning appeal of this business model, Lodsys, a patent holding company known for demanding licensing fees from app developers, last week sued 10 additional mobile game developers, including the Walt Disney Company, for allegedly infringing its in-app purchase and chat patents. Lodsys has filed over 60 patent infringement lawsuits since it began its litigation spree in early 2011, and has obtained licensing deals with over 200 companies.
Lodsys has been alleged to have ties to Intellectual Ventures, a well-known PAE. Intellectual Ventures has said it does not control Lodsys, but it has not disavowed the possibility that it might benefit financially from the patent fees and penalties collected by Lodsys. Intellectual Ventures did not immediately respond to a request for comment.
Apple has tried to intervene in the case, but its claim -- that its developers inherit its license to Lodsys's patents -- won't be heard until later this year. Google is challenging the validity of Lodsys's patents but that claim also awaits resolution.
The proliferation of PAE infringement claims might be addressed through proposed legislation such as the Shield Act, which would make PAEs pay defendants' legal costs upon defeat in court. But further patent reforms might be necessary to curb abusive litigation.