- Despite their extensive experience in patent litigation, the most litigious patent assertion entities (PAEs) fair relatively poorly in court. These firms commonly file dubious infringement claims on which they are ostensibly very likely to lose money if litigated to judgment. It is therefore tempting to conjecture that these PAEs are mistaken to pursue such litigation. However, we argue that this is in fact part of a calculated strategy of predatory patent litigation used to monetize low quality, excessively broad patents. In effect, the PAE aggressively litigates when its licensing demands are rejected -- despite expecting to lose money on the suit -- in order to injure the defendant and develop a litigious reputation that intimidates future defendants into more lucrative settlements. Like predatory pricing, this involves a short run loss that is recouped in the long run through supra-competitive pricing.
The welfare impact of predatory patent litigation is unambiguously negative: it creates a market for low quality patents, exacerbates the patent thicket problem and inflates social costs -- and it does so without improving on the ability of non-predatory PAEs to encourage innovation. The welfare impact of non-predatory PAE activity, by contrast, is prima facie ambiguous. Rather than fee shifting remedies like the SHIELD Act, we propose that potential defendants form a litigation cost-sharing agreement: a contractual agreement that divides a member's defense costs among the group when the plaintiff is a PAE, and which requires members to litigate predatory claims to judgment. This deters predatory litigation without deterring meritorious infringement claims.