Key Takeaways

  • Patent privateering occurs when large companies transfer patents to smaller holding entities that enforce them through litigation, often while sharing profits with the original patent owners.
  • The practice is controversial because it can stifle innovation, burden small businesses, and clog the legal system, though supporters argue it is a strategic outsourcing of patent enforcement.
  • Academic research shows that patent privateering can influence R&D investment, settlement dynamics, and competitive strategies, particularly in industries with sequential innovations.
  • Case studies reveal how privateering has been used to target competitors indirectly, avoid reputational risks, and maintain influence over markets without directly initiating lawsuits.
  • In the telecom and tech sectors, standard-essential patents (SEPs) are a common focus of privateering, raising concerns over licensing costs, competition, and global litigation strategies.
  • The future of patent privateering will depend on legislative reforms, judicial attitudes, and global coordination in addressing the balance between legitimate patent enforcement and anti-competitive misuse.

Patent privateering describes the activity of a small patent holding company that buys valuable patents from large companies for the purpose of suing for infringement of those patents. Examples in recent years include the purchase of Microsoft and Nokia patents by a company called MOSAID and Ericsson patents by holding company Unwired Planet. Each of these deals includes the transfer of more than 2,000 assets.

Companies sell their patents to privateers in exchange for a share of enforcement and/or a promise not to sue for infringement on other patents owned by the holding company.

Controversies About Patent Privateering

Although some compare privateers to patent trolls, who drag down companies with expensive and ongoing litigation, others note that, unlike the so-called trolls, privateers share their revenue with the company that invented the patented product. The sales agreements in these cases indicate that any settlements, royalties, or awards will be shared with the patent's prior owner. Supporters of the practice liken it to affordable outsourcing of patent litigation services.

Critics of these patent holding companies accuse privateers of abusing the system to limit growth and profit from competitors, negatively impacting innovation in the U.S. In addition, they note that many of the lawsuits filed by privateers are frivolous, thus tying up the court system and extending the resolution of legitimate infringement claims.

Another common criticism is that because these companies do not manufacture or practice the patents they own, they can charge exorbitant prices for licensing to those whom they claim are infringing without concern that they will be the subject of a retaliatory lawsuit.

The original patent owners are able to share in the profits derived from infringement litigation without the bad press associated with filing these suits themselves. They may also benefit from devaluation or closure of competing firms.

Many compare these privateers to pirates who damage small enterprises by threatening them with or suing them for patent violations that are either invented or unintentional. These small businesses are forced to either pay a substantial license fee to avoid litigation costs or bite the bullet and defend themselves in court. Some companies stop doing business altogether to avoid these two miserable outcomes.

While many are turned off by the opportunistic behavior of patent holding companies, these practices are currently on the right side of the law. And not only is the practice legal, but it's also a billion-dollar industry.

Legal and Economic Implications

Patent privateering is not merely a legal loophole—it also has significant economic implications. By outsourcing litigation to privateers, original patent holders reduce their direct exposure to countersuits and reputational damage while still profiting from settlements or licensing fees. Economically, however, this strategy may discourage new entrants, particularly in high-tech industries, where litigation threats reduce incentives for R&D investment. Studies suggest that privateering increases uncertainty for firms considering market entry, which may shift resources away from innovation and toward defensive legal strategies.

On the legal side, courts currently recognize the validity of such transfers, but antitrust regulators have started examining whether privateering arrangements distort competition. In industries with heavy reliance on standard-essential patents (SEPs), these practices can drive up licensing costs and complicate negotiations, raising concerns about market fairness.

Examples of Patent Privateering

  • Kodak's entire suite of digital imaging patents was purchased by Intellectual Ventures, a patent holding company that was in possession of approximately 40,000 patents at the time of this transaction in 2014.
  • Acacia Research Group, a holding company based in Newport Beach, CA, has purchased patents from both AT&T and Apple.

Case Studies in High-Tech Industries

Several well-documented examples highlight how patent privateering operates in practice:

  • Nokia and MOSAID: Nokia transferred thousands of patents to MOSAID, which subsequently enforced them against competitors, while Nokia retained a share of litigation proceeds. This arrangement allowed Nokia to weaken rivals without directly suing them.
  • Microsoft and Intellectual Ventures: Microsoft has been linked to transfers of patents to Intellectual Ventures, a well-known patent assertion entity, which pursued enforcement campaigns in software and telecom markets.
  • Ericsson and Unwired Planet: Ericsson assigned over 2,000 patents to Unwired Planet, enabling aggressive litigation strategies against global mobile device manufacturers.

These cases illustrate how patent privateering serves as a strategic weapon, enabling major corporations to exert pressure on competitors indirectly while maintaining plausible deniability.

The Future of Patent Privateering

In the absence of legislative changes that make privateering illegal, the practice is expected to increase throughout the U.S. in years to come. Failed startups will seek to regain their investments and compete in the marketplace by initiating frivolous legislation against similar businesses.

While it's natural for a business to sell patents just as they do other assets, they should ideally be used by the purchasing firm to defend the company frivolous claims by other patent trolls and expand on and improve the product or service in question.

Many companies have significant value in their patent portfolios that has not been monetized because they have chosen not to enforce their patents against infringing parties. Slowly, these companies are cashing in by transferring rights to privateers who can enforce the patents on their behalf.

Policy and Regulatory Outlook

The debate over patent privateering has reached policymakers. Antitrust agencies in the U.S. and EU have expressed concern that privateering may enable collusive behavior by allowing firms to suppress competitors under the guise of third-party enforcement.

Possible regulatory responses include:

  • Greater disclosure requirements for patent transfers to ensure transparency.
  • Antitrust scrutiny of privateering arrangements that appear to target rivals unfairly.
  • International coordination, particularly for disputes involving SEPs in global technology markets.

Whether privateering remains a profitable legal strategy or faces stricter regulation will likely depend on judicial interpretations and the political climate surrounding intellectual property reform.

Sequential Innovation

This term refers to inventions that can only exist because of the existence of another invention. When a sequential innovation exists, so too does the question of how to divide intellectual property rights among several different inventors. This is complex because the more rights granted to one inventor, the fewer rights the others will receive.

This becomes even more complicated when the original invention has little value beyond its role in the later innovation. Thus, the first inventor would be unlikely to invest in R&D if he or she was granted only narrow patent rights. Yet giving broader rights would risk the second patent.

Effects on Settlements and R&D

Recent research has modeled how patent privateering influences settlement behavior and R&D incentives in markets with sequential innovation. Findings suggest:

  • Privateering can make settlements more likely, since defendants face greater risk from aggressive third-party enforcers.
  • The presence of privateers may shift R&D incentives, as firms weigh the costs of potential litigation against the benefits of innovation. In some cases, this leads to underinvestment in R&D by smaller firms due to fear of enforcement.
  • Conversely, large firms that benefit from privateering arrangements may continue to innovate, knowing they can monetize unused patents through third parties.

This dynamic highlights the trade-off between patent monetization and innovation incentives, particularly in industries where follow-on inventions depend on prior technologies.

Frequently Asked Questions

  1. How is patent privateering different from patent trolling?
    Patent privateering involves original patent owners outsourcing enforcement to private entities, often with revenue-sharing, while trolls acquire patents solely for litigation.
  2. Why do companies use patent privateering instead of direct enforcement?
    It helps them avoid reputational risks, reduce countersuit exposure, and indirectly pressure competitors while still profiting from litigation outcomes.
  3. What industries are most affected by patent privateering?
    Telecommunications, software, and high-tech industries with standard-essential patents are particularly affected due to complex licensing and cross-licensing needs.
  4. Does patent privateering harm innovation?
    Yes, research shows it may discourage smaller firms from investing in R&D due to litigation risks, though larger firms may benefit from monetizing unused patents.
  5. Could patent privateering be banned in the future?
    While currently legal, regulators are exploring stricter disclosure rules and antitrust scrutiny to curb anti-competitive effects, especially in global markets.

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