Patent-assertion entities (PAEs) are non-technology-practicing companies that aggregate and license patents under threat of suit. Their activities have drawn fire, including presidential condemnation, and spurred proposed legislation to protect operating firms against them. PAEs leverage flaws in the patent system to extort firms that independently invent and sell technological goods to consumers. Since PAEs tax innovators and appear to restrict rather than facilitate wealth transfer to original patentees, their worst rent-seeking practices almost certainly reduce net incentives to innovate and harm consumers. This result is more likely if the principal desirable incentive that PAEs create is to file patents rather than to commercialize technology.
The idiosyncratic nature of today’s patent system facilitates PAE activity. Patents’ numerosity, vague scope, widespread invalidity, and sometimes-functional claiming prevent even the most assiduous technology companies from securing guaranteed clearing positions before building products. These conditions ensure that a universe of potentially infringed patents of dubious validity exists in many industries ex post, especially in information technology. Fortunately, atomized ownership of intellectual property limits enforcement ex post because the unlikelihood of success in asserting few patents, the risk of countersuit, and high litigation costs make suing a negative value proposition. The result is a public-goods benefit in constrained enforcement that ameliorates hold-up potential. Even ex post, owners of disaggregated patents typically lack market power unless their intellectual property rights are both likely valid and infringed.
PAE accumulation changes all of that. By amassing hundreds or even thousands of patents, never building or selling goods, using shell companies to conceal the contents of their portfolios, and asserting patents in waves ex post, PAEs can realize immense hold-up power that atomized owners lack. This conclusion holds true even if the great majority of their patents are invalid or not infringed. Thus, many operating victims are vulnerable to threats of incessant litigation and are forced to pay tens or even hundreds of millions of dollars for licenses that are unnecessary to engineer successful products. Commentators increasingly—though not universally—accept that PAEs harm the economy. The solution, however, is less clear. Many propose reforming the patent system, such as by requiring losing patentees to pay the other side’s costs and forcing PAEs to disclose their portfolios. Some legislative reforms appear likely, and in 2014 the Supreme Court considered whether to invalidate certain computer-implemented inventions. Nevertheless, modest changes are unlikely to provide a significant remedy for PAE hold-up.
Lacking other means, some policy makers now look to antitrust law for solutions. Not everyone believes that competition rules proscribe PAE conduct or otherwise suitably constrain patent hold-up. Indeed, antitrust rules are not a cure-all. This Article argues, however, that antitrust law can viably limit certain abuses of the patent system by PAEs. Section 2 of the Sherman Act proscribes monopolization and Section 7 of the Clayton Act prohibits asset acquisitions that may substantially lessen competition or tend to create a monopoly. These provisions have sufficient teeth theoretically to catch the most egregious forms of hold-up founded on ex post patent aggregation and assertion. This Article explains how PAE activity can reduce social welfare and how PAEs’ targeted patent aggregation and assertion may violate competition rules.