Patent Assertion Entity Activity

Larger Litigation PAEs also used the Affiliate model, scaling up by creating more Affiliates to hold
portfolios as they were acquired, instead of aggregating patents into larger portfolios. This structure may
reflect how Litigation PAEs paid for the patents they acquired. As noted already, Litigation PAEs
frequently entered into revenue sharing agreements with patent sellers, agreeing to pay the sellers a
percentage of the revenues that the PAE would obtain through licensing as consideration for the patents.
The use of separate LLCs to own and assert patents acquired from separate sellers would make it easier
for PAEs to segregate revenue for sharing with each patent seller. Several Responding PAEs reported
tracking their revenue sharing at the level of the Affiliate for this reason.
For Litigation PAEs, the controlling entity in Figure 2.4 was most frequently itself an LLC. In some
cases, however, there was no single controlling entity, and the LLCs were instead a loose affiliation of
firms that did not operate in a parent/subsidiary relationship with each other. They operated
independently but shared common owners or investors. Controlling entities, if present, sometimes
performed centralized business functions, including: (1) scouting for new patents to acquire; (2) vetting
patents to select for acquisition; (3) providing technical assistance during assertion; (4) financing
acquisition and assertion expenses; and (5) maintaining a public-facing website offering the firm’s
services to inventors and patent holders. 176
The identity of the controlling entity identified in Figure 2.4, and its relationship to other entities, further
defined the Litigation PAE business model. In one sub-model, the controlling entity directed the patent
acquisition and assertion, often operating as a repeat player, finding and contracting with different patent
owners and asserting patents on their behalf. When an Affiliate was successful in its assertion behavior,
the Affiliate’s legal owners and shareholders retained significant revenue. Controlling entities using
this model frequently operated websites advertising their services as patent brokers and intermediaries
to small companies and lone inventors. In a second sub-model, a patent seller transferred its patents to
the controlling entity while retaining significant control over how—and against whom—the PAE
asserted and licensed patents. 177 PAEs using this model tended to transfer the majority of their
176
Some firms noted that patent screening was an important aspect of their business model, and that they declined to acquire
a majority of the patents that they reviewed.
177
In this model, the patent seller retained control over assertion behavior through clauses in the patent acquisition or revenue
sharing agreement.
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