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market forces may be suggesting that a standard is not needed or may be best
determined over time and in the marketplace directly (Farrell et al. 2007).
When voluntary agreement does produce a standard, there are
instances when parties to the agreement do not feel that others are living up
to the agreement. In such instances, when patent holders have committed
to license on RAND terms, judicial and enforcement procedures should aim
to reproduce the intent of the agreement; that is, to ensure that the patent
holder receives a RAND royalty. Otherwise, judicial and enforcement procedures
can tip the balance of power in favor of one party or the other, leading
either to excessive market power in the hands of the patent holder or to nonpayment
of reasonable royalties by implementers, and to greater incentives
against establishing a standard in the first place (Lemley and Shapiro 2005).
Patent Assertion Entities
In recent years, organizations known as Patent Assertion Entities
(PAEs) have become common. PAEs brought 24 percent of all patent lawsuits
in 2011, and over the 2007-11 period they brought approximately onefifth
of all patent lawsuits, covering about one-third of all defendants (GAO
2013). These PAEs purchase rights to patents belonging to other firms, and
then assert them against firms or individuals who are using the patented
technology. Some of this activity is valuable: incentives to invent are stronger
if inventors know they can later sell their patent to, or merely engage the
services of, a PAE that can assert it more effectively than they could do themselves.
Also, in some cases, it may be efficient for PAEs to act as intermediaries
by obtaining the rights to patents held by disparate inventors in order to
decrease the transaction cost of negotiating licenses. However, many industry
observers believe that PAEs often do not assert patents in good faith, but
rather assert them simply in order to extract nuisance payments from firms
looking to avoid costly and risky litigation. In some cases, these patents are
valid but of low value, meaning that absent the high cost of litigation they
would only command very low licensing fees. In other cases, the patents are
invalid (or not infringed), and absent the high litigation costs they would not
command any license fees at all (Scott Morton & Shapiro 2013).
This issue is particularly pronounced in smartphones and other
consumer electronics devices (Chien 2012). Many of these products contain
technology based on thousands of patents, and as shown in Figure 5-10
above, the number of patents issued in the “Electrical and Electronics” category
has been increasing over the past decade. The large number of patents
embodied in these products, and their complexity, often makes manufacturers
subject to patent-infringement claims, with the associated threat of costly
and risky litigation, from owners of low-value valid patents or even from
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