Patent Assertion Entity Activity

guaranteed revenue and zero risk. The investors, who may have greater risk tolerance, then stand to
enjoy the financial upside of successful assertion activities. In addition, manufacturing firms may
transfer patents to Portfolio PAEs for assertion because Portfolio PAEs may enjoy lower costs, lack of
reputational concerns, or licensing experience owing to their specialization in patent assertion.
Additionally, for manufacturing firms that are potential investors, the Portfolio PAE model also offers
an extra upside benefit, a chance not only to be an investor but also to avoid becoming a target of
assertion activity. Several PAEs adopted a practice whereby investors acquired a license to the patents in
which they invested, in addition to an interest in revenue generated by future assertion against third
parties. In such cases, investors obtained assurances that the patents would not be asserted against them,
as well as the opportunity for potential financial gain.
Litigation PAEs
The Litigation PAE business model frequently employed one or more affiliate entities, usually set up as
limited liability companies (LLCs), each created to acquire and assert a small portfolio of patents,
without bundling or aggregating acquired patents into larger portfolios. 170 Some, but not all, Litigation
PAEs sent demand letters. Regardless of whether they sent demand letters, Litigation PAEs almost
always sued potential licensees in district court before beginning license negotiations. 171 These patent
infringement suits usually settled quickly, typically with a lump-sum payment of less than $300,000.
Litigation PAEs tended to be thinly capitalized. Many had between one and three individual owners,
often with no other employees and no offices outside of their owners’ homes. In fact, several Litigation
PAEs were simply individual entrepreneurs who relied entirely on outside attorneys and professionals to
maintain records regarding their assertion activity. Many firms did not have sophisticated recordkeeping.
Figure 2.3 shows the acquisition and assertion model for Litigation PAEs from the perspective of a
single portfolio acquisition.
170
See supra note 168 (discussing Portfolio PAEs and Affiliates). While Portfolio PAEs and Litigation PAEs both created
and used Affiliates, Portfolio PAEs assigned aggregated portfolios to Affiliates, while as described here Litigation PAEs and
their Affiliates acquired and asserted small portfolios without aggregation. In all, 297 Affiliates were related to Litigation
PAEs.
171
Under the category of Litigation PAEs, more than 40% of Responding PAEs reported that they, or their Affiliates, never
sent demand letters.
47