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The America Invents Act and the rise of NPEs


On September 16th, the America Invents Act (AIA) was signed into law to reform the patent process with the aim of decreasing the time it takes to apply for a patent. The AIA effectively ensures that a patent, from the point of its filing to its certification, will be subjected to less scrutiny and be protected to an increased extent against potential challenges of competitors with the goal of accelerate the process by which ideas could be applied, produced as products, increase production of goods and stimulate the economy. While the new patent reform will certainly speed up the patent process, whether it will actually prove to be beneficial to accelerating product development is dubious. By applying the concepts of game theory, we can see how the American Invents Act shifts the equilibrium in the choices of companies that results in not the increase of products introduced into a growing market, but the increase of non-practicing entities.

Earlier this year several iOS application developers were sued by a non-practicing entity (NPE) over the alleged infringement of its patents. The patents allegedly infringed include the use of buttons for in-apps purchasing and upgrades, features that are included in Apple’s patents and licensed to the app developers. This particular case showed how a NPE could generate profit from enforcing patents it crafted from vague ideas that it has no intentions of making into concrete products and were issued only through loopholes in the patent system. The AIA, instead of repairing those loopholes, has effectively increased them. Its signing into law would mean that more of the patents such as used by the NPE to threaten iOS developers will be granted and that they will be harder to challenge and defend against. If we were to consider the choices and payoffs of companies’ choices in their functions between producing and non-producing, the AIA has increased the payoff for the development of vague patents and NPEs that profit from the use of legal loopholes and decreased the payoff of companies working to develop useful products. If the choices of starting a company include the use of its resources in the establishment of a company that produces some product or the use of the same resources to produce patents and lawsuits as a NPE, we can see the choices of any given company A, relative to any other existing company B as expressed in the following payoff matrix to either produce or become a NPE. What the AIA has effectively done is increase the payoff of being a NPE by relaxing the criteria for patents and the right to challenge them and decreased the payoff of being a producing company by the increased threat of patent infringement suits from NPEs who now wields more power with increased availability of patents. From that we can see how the AIA, instead of encouraging the growth of entrepreneurs as it was intended, will instead only encourage the growth of NPEs.


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October 2011