The House of Representatives has delayed voting on the Innovation Act, a bill designed to curb patent trolling, until after the August recess. But patent abuse still finds itself part of the legislative discussion, in this case with the Trans-Pacific Partnership (TPP).
The pact itself is a great step toward freer global trade and more open markets for American products. But lawmakers should ensure that intellectual property commitments within the accord do not overlook new weapons of protectionism.
The concern centers on sovereign patent funds (SPFs), government-funded organizations that acquire and leverage patents in pursuit of national economic objectives. Ideally, they should act as one-stop clearinghouses where a person or entity can acquire a bundle of interrelated patent licenses instead of negotiating with every individual patent holder. Given that the average smartphone incorporates as many as 250,000 patents, patent pools provide a function in streamlining access to IP rights.
While they can increase efficiency into the licensing process if the pools are private, as state entities, SPFs frequently operate discriminately on behalf of their host nation’s commercial interests. This harms free trade and promotes an uneven playing field for private companies that conduct business abroad.
In a few notable cases, SPFs, sometimes called Government-Sponsored Patent Trolls (GSPTs), operate similarly to domestic private patent trolls. Despite the pending Innovation Act, 1,656 patent-infringement suits — a record number — were filed in the second quarter of 2015, according to Lex Machina, a legal analysis firm. The patent law firm Unified Patents estimates that 68 percent of these suits are initiated by trolls.
All countries within the TPP, except for the U.S., sponsor SPFs, said Hosuk Lee-Makiyama, director of the European Centre for International Political Economy (ECIPE), in a forum on SPFs hosted by the Cato Institute July 9 in Washington.
Even some prospective TPP members sponsor these entities. Although they are not yet parties to TPP, South Korea and China have expressed interest in joining. They would bring their own large SPFs with them. Intellectual Discovery, the South Korean SPF, owns more than 4,000 patents related to telecommunications and computing, Lee-Makiyama said. Ruichuan IPR, China’s SPF, holds 23,000 high-tech patents, he added.
Free market proponents should be weary of SPFs controlled by our trading partners — questioning why governments, which are tasked with regulating enterprise, are also participating as a player in the same market. A sound TPP agreement must include safeguards that police three specific abuses.
Litigation aimed at erecting barriers to market entry or investment. A common indicator is when a SPF sues a foreign company for alleged infringement in a foreign court selected for reasons other than the jurisdiction of the alleged violation. Generally, it is favorable to recover an award or settlement when patent registration — the simple fact of owning the patent — is considered ahead of the patent’s validity.
Unfortunately, this may be the toughest to fix for the same reason the Innovation Act has brought so much debate. At heart, the current process for evaluating and granting new quality patents, especially in high-tech areas, is flawed. Still, the TPP can allow room for appropriate penalties if an SPF patent suit is found to be baseless or malicious.
Discriminatory licensing. This occurs when an SPF discriminately demands an inflated patent license fee from a foreign company. That frequently arises when foreign market entrants pose a competitive threat to native enterprise. SPF’s often expansive patent catalogs amplify the threats and impact posed by abusive licensing. Unlike trolling, discriminatory licensing is easier to spot and should be addressed in the agreement.
Retaliation. SPFs should not be used as a means for retribution by lawsuit. For example, when one of its domestic companies is confronted with a patent suit, legitimate or not, from a TPP partner, there should be checks that halt an SPF from filing multiple retaliatory claims against companies native to that same TPP partner. Analogous to the “dumping” problems that plagued international trade in the past, retaliatory suits only escalate confrontation and cost economies, businesses and consumers in both countries exorbitant resources.
SPFs that are focused on research and pooling knowledge rather than on lobbing lawsuits can serve to improve access and spurn innovation. They can be an asset for small companies and start-ups, monetize quality patents and guide them through Byzantine aspects of international patent law. But the cocktail of economic nationalism, deep pockets and regulatory clout seems too tempting for many U.S. trading partners to abstain. A comprehensive TPP provides an opportunity to correct the problem, rather than further open the door to government-funded patent war.