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IP, IP Asset, Patent

Concerned About Competition, Feds Should Prefer Nortel Portfolio In The Hands Of ‘NPE’

The Federal Trade Commission, tasked with monitoring “anti-competitive” business practices has been taking a look at Intellectual Property lately, culminating in a 300 page report issued several months ago (see the report at Peter Zura’s 271 Patent Blog) with over 50 recommendations on how it would “improve” the patent system. The FTC’s involvement in IP, and patents specifically, is ironic since the purpose of the patent is to separate technology from the right to exclude others from using technology in specific ways.

While the spin machines went into full effect, describing the FTC’s report as an attack on NPEs (or Patent Assertion Entities, as described in the report), the truth is the study was far broader than any one class of patent owner.  Just last week, the FTC stuck its nose in the pending Nortel patent portfolio auction, which is an area in which, given its charter, it should be far more concerned.  The IAM blog, commenting on a Wall Street Journal report, explained that Apple’s apparently “offensive” interest in Nortel is concerning the FTC since the deal could significantly alter the competitive balance in the smartphone market.  (See Nortel patent auction – now the Feds get involved!)

Of course, the FTC’s primary concern is maintaining competition for the benefit of consumers.  There are several reasons why the FTC should prefer patents to be in the hands of NPEs rather than operating companies.

NPEs Promote Competition And Deployment

When operating companies fight asymmetric patent wars, their goal (and a likely end result) is to obtain an injunction preventing their opponent from making and selling the patented product.  Excluding competition allows the incumbent firm to maintain monopoly pricing.  NPEs, on the other hand, are investors interested in profiting as much as possible from the very valuable rights to use patented technologies.  As a result, every NPE has an incentive to see those technologies deployed as widely as possible, ensuring a broad universe of licensing partners.  The NPE is better off with each additional firm that wants to take a license.  Consumers are similarly better off (in theory) because more operating firms taking licenses means more consumer choices and (again, in theory) lower prices.

Some might complaint that the license fee paid to the NPE will raise consumer prices.  However, if the technology is licensed broadly to an entire industry, then the license fee is factored in to each firm’s pricing structure, driving everyone back down toward competitive equilibrium.

NPEs Don’t Practice Discriminatory Pricing

When operating companies fight imperfect patent wars (where the patent owner has a stronger case than its competitor, but not strong enough to entirely dominate), licensing structures can be created allowing the incumbent to effectively engage in discriminatory pricing.  By maintaining a sufficiently high royalty rate, an operating patent owner can impose additional costs on its competitors that it doesn’t face itself, effectively setting a pricing floor below which the competitor can’t profitably deliver the product.  As a result, the competitor would either stop producing (resulting in the scenario above), or would sell at or above the artificial floor.  Even though consumers would theoretically have a choice, they wouldn’t enjoy truly competitive pricing.

NPEs, on the other hand, survive and thrive through volume. It must negotiate as many deals as it can as quickly as it can in order to generate the desired returns.  The easiest way to do this is to first establish a market price for the technology, and then charge that price against the entire market.  The result? Every operating firm that licenses from an NPE then pays roughly the same amount relative to market share, thereby having a negligible impact on consumer pricing.

NPEs Don’t Form Exclusionary Cartels

When operating companies fight balanced patent wars (recognizable because they end in broad, cross-license agreements), licensing structures allow large firms to “pool” their assets into a sort of patent Country Club.  Small and medium-sized firms may not have a large enough patent portfolio to afford admission to the club.  Large firms save money by not pursuing each other for patent infringement, but firms on the outside looking in are not so lucky.  The end result is that large operating companies conspire to use their patents to maintain oligopoly pricing.

Again, NPEs have no such interest.  They want to license all players, regardless of size, to any business practicing their claimed technology on comparable economic terms.  Don’t believe me? As we speak, a patent owner called Lodsys is busy attempting to license its patents to some of the smallest companies in the world, publicly asking for a 0.575% royalty.  For the average company that Lodsys is pursuing, this amounts to less than $600 per year.

What would be really interesting for the FTC to consider whether the agency should ask Congress to ban the practice of “selling” rights to an invention before the invention exists.  If employers could no longer freely harvest employee inventions, and instead had to negotiate each patent ex post with each inventor, more patents would undoubtedly end up in the hands of inventors, small businesses and NPEs, which, in my opinion, would result in more competition, more innovation, and more entrepreneurship.

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