Patent Troll? Or Formerly Manufacturing Entity?

Some time ago, I had a lively conversation with Kristen Osenga, a professor of law at the University of Richmond School of Law, Virginia. As part of Prof. Osenga’s research for a forthcoming paper, we discussed Conversant’s business model and where we fit within the broad landscape of companies who engage in patent licensing. Prof. Osenga was interested in breaking down the “patent troll” category to better understand the actual numbers of companies willfully engaged in abusive or predatory behavior verses those whose behavior is perfectly reasonable.

As a lead-in to her upcoming paper, Prof. Osgenga wrote an opinion piece in the current issue of IAM Magazine. She strongly challenges mainstream research into the scope of the patent troll problem:

If you accept the mainstream story, this bad behaviour by patent trolls is a serious problem. Academic work by Professor Colleen Chien estimates that over 60% of lawsuits in 2012 were brought by patent trolls; Professors Jim Bessen and Mike Meurer have claimed that defending against patent troll lawsuits cost companies over $29 billion in 2011. However, there is a serious problem with these accounts and one that is not being reported in the media. The patent trolls that Chien, Bessen and Meurer and other scholars include in their research are not based on a company’s behaviour. Rather, the research takes a very broad definition of ‘patent troll’ which includes any entity that can be considered non-practicing, such as a university, an individual inventor who does not manufacture a patented innovation, a start-up forced to sue a larger company which stole its patented innovation before it had a chance to get it off the ground, large licensing companies such as IBM and even manufacturing companies that license patented innovation outside their primary areas of business.

 Prof. Osenga argues that it is more accurate to define patent trolls by specific problematic behavior and not just apply this derogatory label to anyone with a licensing-based business model. She says trolls are easily identified because their actions “amount to a shakedown or a tax on doing business.” Prof. Osenga also states that when looking at the IP industry overall, it’s vital to clearly understand the various business models, because they are quite varied, and intrinsic to how companies operate.

As an example, Prof. Osenga explores a fresh category that she calls Formerly Manufacturing Entity or FME. This is a grouping of businesses that were not formed as licensing firms. These FMEs (Conversant is one) began as technology development companies. (We note that technology innovation has continued to be important to Conversant. In fact, since 2008 our engineers have filed more than 900 patents related to our inventions in flash memory technology.) FMEs, she says, are far less likely to engage in patent troll behaviors for a variety of reasons:

Formerly manufacturing entities tend to share three common characteristics that distinguish them from the rhetorical trolls that have captured the attention of media, Congress and the courts. First, they had or still have a product that is available on the market – Conversant invented, made and sold actual chips… Second, these companies operated in the business world and were subject to the business ethos that goes with being part of an industry – Conversant was, and still is, part of the chip industry as it is still developing technology in the space… Third, these companies continue to develop and/or support their technology.

Prof. Osenga goes on to say that FMEs actually benefit the innovation ecosystem:

In addition to not engaging in abusive behaviour, formerly manufacturing entities provide unique benefits in the match-making and market-making areas. In particular, because they either did or attempted to commercialize the technology themselves, they are in a better position to know its true value. Patent trolls are often condemned for seeking a quick settlement of cases by seeking low-ball royalties or damages that are not worth the trouble of fighting in court. However, a knowledgeable formerly manufacturing entity could be seeking a low figure precisely because it knows that that is what the technology is worth.

Prof. Osenga’s observations come as a breath of fresh air in a debate marred with rhetoric and inexact “research”. Her astute observations about the ever-shifting and often unfair definition of “patent troll” is one of the reasons that we think it important for licensing companies to publicly articulate their business models and practices.

Unfortunately, the patent licensing industry has contributed to its own poor reputation. Until very recently, most legitimate patent licensing firms remained silent about the abuses committed by the relatively small handful of true patent trolls. Many feared getting embroiled in public controversy, or sought to avoid tarnishing the industry’s reputation even further by a public airing of its dirty laundry.

Whatever the intent behind this silence, its result has been to merely reinforce the perception that a small number of trolls in our business represent the mainstream of our industry. This in turn has further eroded public support for the patent system itself — and for the demonstrable value of patents as stimulants to American innovation and economic growth.

Recognizing that our silence was only compounding the problem, Conversant released a set of guidelines for ethical patent licensing practices — including explicit promises not to sue small businesses or hide behind shell companies. Since then, a number of other patent licensing firms such as Finjan Holdings and Dominion Harbor Group also committed themselves to ethical licensing practices.

Now, the industry’s main professional organization, the Licensing Executive Society of the U.S. and Canada (LES), has taken strong steps toward creating an industry-wide code of conduct for patent licensing transactions. An initial workshop was held in Chicago two months ago to discuss ways to rein in abuses within the industry and codify ethical business practices.

If we want policy makers and the public to recognize the difference between a patent troll and a legitimate NPE (or FME) It’s time for patent licensors to step up to the plate and do our part to help curb abuses in our own industry, just as responsible members of other industries do. Only then will we be able to begin to restore faith in the patent system.