Academic spotlight (I): Sterzi, Rameshkoumar and Van der Pol on NPE activity

In between chasing birds and lounging on her editors' desks, Merpel occasionally reads some of the materials that pass over them. Recently, she came across two academics publications that may be of particular interest to patent-oriented readers of IPKat.

This post, therefore, kicks off a two-part miniseries, which will summarize both papers and offer a reflection. Merpel has selected these two papers because each was picked up by industry groups that (very) actively participate in the debate on the contours of contemporary patent law.

Such strong interest in academic studies shows that a lot is at stake. The IPKat wrote earlier about how different industry interests clashed over the proposed German patent reform [here]; it is therefore understandable that each side in this debate seeks to provide evidence for the positions it takes. The stalemate gives academics a great opportunity to demonstrate the practical relevance of their work and forms an impetus to perform (empirical) research that will foster a better understanding the real-world effects of the patent system.

First up for discussion is a study by Valerio Sterzi, Jean-Paul Rameshkoumar and Johannes van der Pol of the University of Bordeaux, entitled 'Non-practicing entities and transparency in patent ownership in Europe' [here]. This paper was publicly presented in a webinar hosted by IP2Innovate called Ensuring Europe's patent system is fit for purpose in the digital age [recording here].

Sterzi, Rameshkhoumar & Van der Pol

Background: mounting concerns over Non-Practicing Entities

Most readers will be aware of the rise to prominence – at least in academic and policy debates on patent law – of Non-Practicing Entities [NPE’s], also known as Patent Assertion Entities or simply trolls. These monikers refer to patent owners who do not manufacture any goods themselves, but generate income through purchasing and then licensing patents. Some worry that NPEs do not contribute to European innovation and seek to abuse the patent system [see, for instance, a 2017 open letter that IP2Innovate sent to the European Commission].

In 2018, the IP case law search engine Darts-IP released a report suggesting that NPE activity is on the rise in Europe [report here, Katpost here]. The report found a 19% year-on-year rise in NPE activity in Europe, an effect often attributed to patent reforms in the U.S. and favourable conditions for patent enforcement in European jurisdictions, above all Germany. The findings of the report, however, are not undisputed: a guest author for this blog expressed doubts that the report shows a pattern of abusive patent litigation in the EU [here].

In sum, much remains unknown about the extent of NPE activity in Europe, and better data would surely help inform the debate.

The main findings of the paper

That is where the paper by Sterzi et al comes in: it presents original empirical research which helps us better understand the nature of NPE activity. According to the authors, the data "give unique insight into how NPE's game Europe's patent system for profit" [Abstract, p. 2].

Using data provided by Darts-IP, the authors first concur with the findings in its 2018 report: the number of NPE litigation cases in Europe has risen over the years [at 14]. They then provide some further characteristics of NPE activity in Europe, such as the proportion of total enforcement cases that were initiated by NPE’s [at 16, risen from 5% in 2010 to 13% in 2017].

The real concern of the paper, however, is the way in which NPE’s are structured to obscure the ultimate beneficial owners of a patent.

Chapter 3 is devoted to a discussion of the importance of the notice function in patent law. The authors claim that “implicit to the structure of the patent system is the concept that someone willing to license a patent can identify those who hold the necessary rights” [at 23]. If market operators interested in developing a technology cannot identify the owner of the relevant patents, they are exposed to the risk of patent holdup. Patent holdup refers to a situation where an implementer invests in production, unaware of some or all relevant patents. In case of later enforcement of such patents, the patentee has a strong bargaining position due to the implementers’ sunk costs [for general papers, see here and here].

The main claim made by Sterzi et al is that the current patent system suffers from a "serious lack of transparency in patent and corporate ownership" [Abstract, p. 2]. According to the authors, lax requirements to record patent transfers and stipulate the ultimate beneficial owner of a patent make it possible to strategically hide patents in hard-to-find shell companies. Such practices affect the notice function of patents, i.e. the presumption that granted patents signal accurate information on ownership of relevant technologies to market participants, which allows them to effectively perform pre-clearance before investing in follow-up innovations.

To investigate whether patents are indeed strategically hidden in this way, the authors researched how many "dormant" UK companies hold patents, and what kinds. They found that there are 224 UK firms that are small, with no employees and no reported income or activity, that nonetheless hold 14 158 patents. The ultimate ownership of these companies could not be traced back to practicing entities. The authors observed that these patents receive relatively few citations from the EPO, whereas they have relatively many IPC classes. They believe this to be indicators of relatively low patent quality and a relatively broad scope of protection, i.e. having a strong offensive potential [page 59].

These findings are further illustrated through a case-study investigating a specific company, Dragon Green Development Balboa SA, "a [NPE] with a substantial litigation record against various companies in Germany" [page 61]. According to the authors, this company uses shell companies to deliberately obfuscate the ultimate ownership of its patents. Table 5 on page 78 shows this company's litigation activities: it appears that in most proceedings, it was defending the validity of its patent, but there is one case where it was successful in an infringement action.

Source: Sterzi et al, p. 78.

Based on these findings, the authors make a number of policy recommendations [pages 39-45], the majority of which can be summarized as strengthening disclosure requirements on patent owners, penalizing strategic obfuscation of patent owners and denying injunctive relief to patent owners that fail to timely notify the infringer of their rights.

Comment

The report is a laudable effort to help prove that at least some NPE's make conscious efforts to exploit the patent system. Many authors have expressed concerns about these efforts, but evidence of abuse being widespread is hard to find, in particular because most of the action takes place outside of courts [for a study to measure out-of-court patent enforcement numbers, see here].

Merpel's feeling is that, although Sterzi and his colleagues have thus shown the way towards potentially fruitful research, their actual data falls short of showing "how NPE's game Europe's patent system for profit", as they claim in the abstract.

True, there is no doubt that corporate structuring can be organized in a manner that obscures ultimate beneficial ownership. If that is done to obscure the identity of the patent owner and to make pre-clearance of technology more difficult, with the purpose of extracting higher royalty sums from implementers in a hold-up situation, that is certainly alarming.

Some patent courts seem to share those concerns. Very recently, the U.S. Court of Appeals for the Federal Circuit upheld a denial to treat as confidential a large swathe of documents that would make public the owner of patents asserted against Apple [here]. The first instance court emphasized "the public’s right to learn of the ownership of the patents-in-suit—which grant said owner the right to publicly exclude others" [at 4]. This captures the public interest at stake perfectly: if patent owners may exclude all others from using their invention, then the public must reasonably be able to find them before making substantial investments in technology that potentially infringes their rights.

However, that observation alone doesn't mean the European patent system is being "gamed" on a large scale, or even on a scale that is sufficiently significant to implement the more far-reaching policy recommendations of the authors [such as an explicit recognition of sectoral differences in patent law, p. 40].

One would need to know more about actual enforcement strategies employed by the dormant companies to draw this conclusion. Arguably, the fact that the NPE selected for the second case study – Dragon Green Development Balboa – managed to obtain only a single offensive win in Germany suggests that the scale of the problem is manageable.

Merpel also wonders how many patentees, if approached by prospective users of the patented technology with a request for a license, would refuse to enter into negotiations with them, let alone deliberately make it more difficult for prospective users to find them. Most patentees complain about the reverse happening, i.e. users of their technology failing to engage in serious licensing discussions because they hope they won't be sued for infringement [see here].

This is not to say that the study raises no cause for concern. In Merpel's opinion, its main strength lies in demonstrating which tricks can be exploited by bad faith actors to abuse the patent system. In specific circumstances, the use of such tricks can – and should – be penalized. One way to do this is at the remedies stage, where injunctive relief may be denied to patentees that employ abusive tactics.