Fiona Scott Morton & Carl Shapiro on the Alignment of Patent Rewards and Contributions

Fiona Scott Morton (Yale School of Management) and Carl Shapiro (Berkeley School of Business) have posted Patent Assertions: Are We Any Closer to Aligning Reward to Contribution?, which has a nice summary of some recent developments related to patent assertion entities (PAEs) and standard-essential patents (SEPs), even for readers who will disagree with their ultimate conclusions.

Scott Morton and Shapiro argue that there is often a "divergence between the reward that a patent holder can obtain by asserting its patent and the social contribution" of the patent. They do not attempt to measure the social value from patents; rather, their argument is based on economic theory. PAEs can impose high litigation costs with little downside risk, especially when they assert low-quality patents for their nuisance value. And royalty stacking and patent hold-up (backed up by the threat of an injunction) can increase the reward to patentees beyond the patent's value, especially for products that comply with standards for which there are many SEPs.

The authors argue that there has been "significantly improved alignment between rewards and contributions" for PAEs. "Whether one applauds or bemoans the activities of PAEs," it seems clear that they have experienced numerous recent setbacks, and the value of patent portfolios has been declining. A series of Supreme Court patent decisions—including Alice, Octane Fitness, Medtronic, and Nautilus—have lowered the returns to patent assertion. The White House has announced executive actions related to patent quality (which are being implemented by the PTO) and has called for "bold legislative action." And patent reform legislation is making its way through Congress with fee-shifting, ownership transparency, limitations on discovery, etc.

The authors' "conclusions regarding SEPs are more mixed." In February 2015, the IEEE became the first major standard-setting organization to reform its IP policy, requiring that FRAND commitments travel with the patent, clarifying what a "reasonable" royalty is, and limiting the use of injunctions (see DOJ review for details). The FTC has also taken two recent enforcement actions against SEP hold-up. However, SEPs still fare well before the ITC. And the authors "are concerned that progress toward eliminating patent hold-up by SEP owners has stalled out, especially as regards reform of the IPR rules at SSOs other than the IEEE."

I'm not sure that the paper lives up to its promise of providing an "economic analysis" of these changes related to PAEs and SEPs—it is more a review of these developments and of other scholarship (including by these authors) in these areas. But those looking for an overview of some recent news and analysis on PAEs and SEPs might find it worth a read.