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Think carefully before getting in bed with a PAE

Working with ‘patent trolls’ could bring income, but at what cost?

This article appeared in the January 2014 issue of Technology Transfer Tactics. Click here for a free sample issue or click here to subscribe.

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Patent assertion entities (PAEs) can be seductive to tech transfer programs that are looking for some yield out of patents that otherwise don’t have much prospect for commercialization. It sounds like a no-brainer — the PAE will work on your behalf to enforce patent rights against infringers and collect licensing fees, so you might reap some benefit from a real dud of a project. What could go wrong?

Plenty, according to the experts consulted by Tech Transfer Tactics. While there is no hard consensus about whether monetizing patents through PAEs is a good move for universities, everyone involved says the decision should be made carefully and with an eye toward unintended consequences that could negate any financial gain. It’s a gamble at best, they say, and you may end up sullying the reputation of your tech transfer program for what in all likelihood would be a small, short-term gain.

Known derisively as “patent trolls,” PAEs are under fire from legislators and the business community. Some university TTOs do work with PAEs but are not eager to talk about it, while others have decided that PAEs pose too much risk and do not fit with their missions. Typical of the latter is the University of California, Berkley, which has looked at the issue and decided not to ally with any PAE, says Carol Mimura, PhD, RTTP, assistant vice chancellor with the Office of Intellectual Property Industry Research Alliances.

‘We require that our licensees diligently commercialize a product, so if they are only going to take the licenses to bundle them and assert them in a lawsuit, that does not satisfy our requirements for diligence, which include meeting commercial milestones, reporting to us, and generally fulfilling a public commitment,” Mimura says. “Anyone requesting an assignment of title also is suspicious because we don’t know why anyone couldn’t do what they want to do under an exclusive license [without title]. We are very worried about what it would mean to us to relinquish title.”

UC-Berkeley would consider working with a PAE that made a convincing case for commercialization through a methodology that involved bundling licenses, but so far no suitors have shown that intention, Mimura says. The university wants to stay away from the widely vilified patent trolls whose sole purpose is to extract payments by making dubious infringement claims. According Mimura, three red flags make her extra wary: when a group wants exclusivity without all the usual checks and balances; it will only settle for assignment; and it fails to make a convincing case with respect to a positive use of the license.

Still, in an era of tight research budgets, isn’t it tempting to make some money off of idle patents? “We want to consider all options, but if we are looking at it solely from the financial aspect, we would also have to consider the potential downside — how much harm would be caused if we were joined in a suit against a licensee for the wrong reasons,” Mimura says. “Any such analysis would have to take into account the opportunity cost of withholding the opportunity from a credible licensee, and the downside of what they can do to your technology and possibly your name.”

Simply staying out of the fray has its own value while the subject of patent trolls is debated, Mimura notes. “It has been worth its weight in gold to be able to answer questions of legislative analysts and other key stakeholders by saying that to date we have not licensed a troll,” she says.

PAE option considered more now

PAEs have made inroads with universities in recent years, says Robin C. Feldman, JD, director of the Institute for Innovation Law at the University of California in San Francisco. Feldman has closely studied the question of universities working with PAEs, and she advises caution. Her research has shown that one in three start-up companies has faced patent demands, and that most of these demands are coming from PAEs. Very little of the money changing hands ever gets back to the inventors who filed the patents, she says. (See the story on p. 5 for more on Feldman’s research.)

Feldman recently testified before the House Committee on Energy & Commerce Subcommittee on Oversight & Investigations and painted a grim picture of the PAE business. “In recent years, a new business model of patent demands has exploded onto the scene,” she told the subcommittee. “It preys on people’s fears of the costs and risks of litigation, and it takes place largely outside the courthouse — with no judge, jury, or regulator in sight. Much of the time, it is shrouded in nondisclosure agreements, so no one is allowed to talk afterwards.”

The negative image in the business community, among legislators, and increasingly among the public is good reason for universities to be wary of working with PAEs, Feldman says. She also says monetization through PAEs runs counter to the mission of a university and a tech transfer program because it tends to stifle commercialization of academic research.

“The concern with many PAEs is that they are a dead end for invention,” she says. “There are very few new products that come out of the economic activity associated with a PAE. Technology transfer offices should consider whether this transfer is likely to lead to the creation of new products. It’s not clear to me that the question of translation into products is one that technology transfer offices are concerned with when they work with a PAE. I worry that the concern at that point is simply dollars in the door.”

One of the biggest players in the field is Intellectual Ventures, which reports having relationships with more than 400 universities around the world and enforcement deals with 50. The company declined a request for comment. Universities are increasingly working with PAEs or at least exploring the idea, Feldman says.

“I find that troubling,” she says. “If you saw the creation of new products coming out of this, I might think differently. For a tech transfer program considering this course, I would advise caution. One has to consider the costs and risks for society and for the academic mission, not just dollars.”

Reputation may be at risk

There are over 2,000 cases pending in U.S. District Courts in which a PAE has asserted infringement of a patent, notes Gerard Norton, JD, chair of the Intellectual Property Department at the law firm of Fox Rothschild in Princeton, NJ.

Norton understands that universities are faced with strapped budgets, and a PAE offering a deal for a group of patents could be hard to turn down. The trend is for universities to work with PAEs more than in the past, Norton confirms, but not without some negative consequences.

“It’s a double-edged sword. Working with PAEs can have a chilling effect on future development and on a university’s efforts to establish relationships in the business community,” he says. “Are large pharmaceutical companies going to want to work with a school known for using PAEs?”

Large and powerful companies will fight patent infringement lawsuits — for example, Microsoft recently won a high-profile case filed by a PAE. But mid-size and smaller companies are more likely to settle just to avoid litigation costs, and that is why some critics say PAE lawsuits amount to extortion by entities that really have no product-based infringement concern.

Universities that participate in that litigation can benefit financially, but it may bring on a PR nightmare, Norton says. “If the CEO is a graduate of the university, that’s going to be an embarrassment,” he says. “The university can protect itself by exercising some control over which entities [can] be sued. At least have a right of first refusal.”

But getting that kind of power in a PAE contract may be difficult, says the former associate general counsel to the University of Pennsylvania and first director of legal affairs for Penn’s Center for Technology Transfer. Christopher F. Wright, JD, now a shareholder at the Pennsylvania-based law firm of McCausland Keen & Buckman, says the potential for antagonizing the business community and university donors must be weighed against what might be a comparably small revenue stream from the PAE.

“At a university you are probably not going to know, at the time you license to the PAE, who the defendant is going to be,” Wright says. “That raises the question about whether down the road they start going after the companies that are your potential research sponsors at the university. You might have a long-term research relationship with a company, and all of a sudden there’s a lawsuit against that company with your name attached. That’s a problem, because just about any negative press for the university is going to hurt way more than whatever the income can be from a small deal for patents lying fallow.”

The university’s reputation is quite a big asset to risk on a PAE deal, echoes Kenneth Horton, JD, a patent attorney with Kirton McConkie in Salt Lake City, UT.

“If your whole purpose for the university is to commercialize intellectual property with the business community, you have to have a good reputation. You have to be someone that the people want to work with,” Horton says. “So you have to consider whether someone who wants to commercialize your intellectual property is going to walk away from it because of your reputation problem. It has to be a pretty high reward-to-risk ratio to justify that.”

There is a danger of focusing too much on the potential benefit and the rosy promises of PAEs, adds Ronald P. Abrams, JD, an attorney with the law firm of Ezra Brutzkus Gubner in Los Angeles. The PAE will provide plenty of encouragement to take some easy money for non-performing patents, he says — but remember how disastrous a money grab can be.

“The downside is that it’s going to ruin your reputation and you’re going to be known as just a patent troll university,” he says. “They shoot themselves in the foot and don’t make any money either. It’s bad enough when you sell your reputation for a lot of cash, but in this case you ruin your reputation, lose donors and contributions, and you did it for very little money.”

Consider legal complications

Another issue not often considered by tech transfer leaders is potential conflicts with the Bayh-Dole Act. The Act has a general policy in favor of the commercialization and public availability of inventions, and that could be problematic if a court determines that the actions of the PAE run counter to that policy.

“You need to at least think about the goal of the PAE,” Wright says. “Is it really about a litigation strategy purely, or is it a licensing strategy supported by litigation? A licensing strategy that gets those inventions in the community may satisfy Bayh-Dole, but if all they want to do is bring lawsuits, that issue is going to be tougher for you.”

Wright notes a question of legal exposure stemming from the fact that Bay-Dole Act prohibits assigning patents, which means that in any PAE arrangement the university remains the patent owner. When it comes time to litigate, the university is likely to be a necessary plaintiff in the lawsuit, Wright says, and that raises the question of exposure. Any involvement will be a financial drain, he explains, beginning with the personnel costs of staff and faculty being deposed.

From what he is seeing, universities are talking about working with PAEs much more than they are actually licensing patents to them, Wright says. He encourages tech transfer leaders to be skeptical and consider the terms of a PAE agreement closely.

“This decision requires a lot of different shareholders in the university to be comfortable with it,” Wright says. “General counsel has to consider the legal issues, and the public relations question has to satisfy everyone on the endowment side of the house, the folks trying to get checks from alumni, and maybe all the way up to the president. This is not like finalizing a normal tech transfer license, where the tech transfer office is pretty much on its own. These are slow deals, not quickies.”

Create a separate company?

One strategy when working with a PAE is to create a shell company that licenses the patents to the PAE and creates a layer of separation from the university, Horton says. A defendant can always dig back and find out that the university is attached, but the shell company at least provides some buffer from the negative publicity of having the university’s name mentioned in the first description of a patent infringement lawsuit, he says.

“This is a strategy used in the business community, where they park all of their intellectual property in a company and that company litigates any infringement,” Horton explains. “It probably would be difficult for a university to set up this arrangement because of the bureaucracy in how most universities operate, but it is something to consider.”

Loss of control is another issue to consider, Abrams says. Once the patent is licensed to the PAE, the university loses most control over what happens to it, he says. “They may find out too late that they licensed it to the wrong people for some quick money and now they’ve lost their right to it,” he cautions. “One university had a problem where they developed an AIDS drug, and there was a lot of criticism over the pharmaceutical company charging too much for it. The university got the bad press as well but they had no power to do anything about it, and I think you will see more of that with licensing to PAEs.”

Another view of PAEs

A more neutral view of PAEs comes from David Vance Lucas, JD, an attorney with Bradley Arant Boult Cummings, Huntsville, AL. Universities have been in the IP licensing business for a long time, either via royalties from direct patent licensing, copyrights for publications, or trademarks for school logo merchandise, and Lucas says using PAEs for patent licensing and litigation is no different than using Intercollegiate Brands to license school logo merchandise.

Universities are in the business to educate not litigate, he says, so the use of third parties — whether traditional law firms or PAEs — makes sense. There are risks and potential downsides to consider, he says, but it is more effective and palatable to invest in PAEs to pursue infringement than to fund and pursue multiple suits yourself.

“When someone has put a lot of money into research and development, often the sale of the patents is the last means for investors to recover their investment dollars,” he says. “Without PAE funds to buy those patents, I’m concerned that you may see less willingness to invest in innovation and start-ups.”

Contact Mimura at 510-642-4548 or carolm@berkeley.edu; Feldman 415-565-4758 or feldmanr@uchastings.edu; Norton at 609-844-3020 or gnorton@foxrothschild.com; Wright at 610-341-1026 or cwright@mkbattorneys.com; Horton at 801-321-4897 or khorton@kmclaw.com; Abrams at 818-827-9250 or rabrams@ebg-law.com; and Lucas 256-517-5131 or dlucas@babc.com.


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