SHIELD Act will help address patent system abuses

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The technology, pharmaceutical, entertainment, and fashion industries financially suffer from illegally pirated software, movies, and music, and counterfeit inferior goods flooding the market. While companies battle intellectual property wars with infringers here and overseas, the latest threat comes from people who never create a thing. Non practicing entities (“NPEs”), less kindly referred to as “patent trolls,” learned to profit off of the patent system without ever developing or manufacturing a product. Through the acquisition of patents, usually inexpensively, the person or entity then enforces these patents against alleged infringers. Due to the high cost of litigation, which can be in the millions of dollars, companies will often settle or agree to take a license resulting in income to the NPE. Enforcement of patents by NPEs is on the rise. One study asserts that in 2012, more than half of U.S. patent lawsuits were filed by NPEs.

Another phenomenon gaining attention is the creation of patent pools. Less nefariously, patent pools are designed to more efficiently manage groups of patents deemed essential for a particular technology. Two or more companies join together and agree to cross-license patents to each other, streamlining the licensing process, reducing risk, and lowering fees. Pools are particularly important in the high tech industry, where inventors frequently develop products based off of or incorporating existing technologies. Patent pools are allowed to exist without Department of Justice intervention due to antitrust concerns only when they abide by their founding principles of cost-effectiveness, risk aversion, and efficiency.

MPEG 2, one of the larger and more well-known patent pools, is managed by MPEG LA, a private patent licensing organization. The pool is comprised of patents deemed essential to the MPEG 2 video format used in many consumer technology products such as cell phones and tablets. When operating as designed, licensees can incorporate the MPEG 2 video format into their inventions, lowering development costs, which trickle down to a lower price for consumers. This, however, is not happening.

Rather, MPEG LA violates the spirit in which it was created. Through unfair business practices, MPEG LA is increasing costs and creating barriers to entry. Specifically, MPEG LA charges high licensing fees for patents that either have already expired, or will soon expire. Licensees are locked in to terms that extend beyond the life of some patents.

Patents are only valuable when they are enforceable. Once a patent expires, it is no longer enforceable. As patents approach expiration, the fees collected through licensing should decrease and once a patent expires, collection of fees for that patent should cease. MPEG LA’s fees remain the same for the enforceable licensed patents, as well as those that have expired. This is the opposite of cost-effectiveness.  By 2014, more than half of the MPEG-2 patents will expire. More than 90% of the patents will expire by 2015. Businesses — those that can afford it--end up wasting crucial dollars that could be spent on development on worthless patents. Start-up companies and entrepreneurs that can’t cough up the resources, never enter the market. At the end of the day, the consumer pays the price while the economy continues to stall.

If MPEG LA’s MPEG 2 licensing practices were not concerning enough, the President of MPEG LA, Larry Horn, is also President of MobileMedia Ideas, a known NPE. MobileMedia Ideas is owned by Sony, Nokia, and MPEG LA. Mobile Media Ideas is frequently categorized in the media as an aforementioned NPE or ‘patent troll.’ MobileMedia Ideas owns hundreds of patents covering technologies incorporated in cell phones, computers, tablets, cameras and videogame players and it isn’t afraid to enforce them. Horn and MPEG LA not only profit from their unreasonable licensing fees, they also profit from their trolling lawsuits filed by MobileMedia Ideas.

Recently, regulators have begun to pay more attention to the practices of patent pools and NPEs. Congress is even taking notice. Congressman Peter DeFazio (D-Ore.) introduced HR 6245 (co-sponsored by Congressman Jason Chaffetz (R-Utah)), the Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act. The bipartisan Act is designed to protect companies from frivolous patent lawsuits initiated by NPEs. The SHIELD Act will put the financial burden on the NPE rather than the innovator by allowing defendants to recoup money spent to successfully defend themselves.

It is imperative that the patent system is used as Congress intended to spur innovation. Patent pools and NPEs must be further scrutinized to prevent harm that is wide reaching, affecting the economy and ultimately felt by consumers. We can hope that group patent licensing accountability works its way into an eventual legislative solution.

Hopkins is a partner at Palmer|Cooper|Hopkins, LLC where she specializes in intellectual property law.

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