Tax Policy for NPE ('Patent Trolls") [Wonky]

'In this world nothing can be said to be certain, except death and taxes." - Benjamin Franklin (noted scientist, inventor, philanderer  founding father, and fit model for currency).

The current debate around NPE (non-practicing entities, i.e. Patent Trolls) had me thinking about the law of unintended consequences and taxes. (Yes, I know, boring).  

I think everyone can agree that the ultimate goal of the AIA changes to the patent law were driven, in no small measure, by companies wishing to eliminate the threat of Patent Troll suits. For a general counsel with the ear of the legislature, this sounds like a perfectly reasonable use of power and influence. For the solo inventor who honestly believes that MegaCorp has ripped him off, it looks like corruption of the highest order. 

Resolving these two conflicting visions is nearly impossible. For MegaCorp, it honestly believes that Solo inventor is just a crook who is hassling their highly successful venture. For Solo inventor, he has invested time, but more importantly, money in acquiring a patent and MegaCorp is reaping all the benefit.  Furthermore, to Solo, it looks like the law has been changed to favor one party over the other. 

While the AIA might cut down on NPE suits, it will likely have inadvertent effects that we are barely aware. As such, I tend to not agree with wholesale legal changes as a way to eliminate 'bad' actors. When profit is the motive, very bright people will expend effort to find the loophole.  The problem with the AIA is that it targets the result of NPE actions (suits directed against major tech companies) instead of the goal of NPEs (Profit!). 

I would have advocated using tax policy to target the goal, not the result. 

On MegaCorp's side, Tax policy could be changed to make a new taxable income category for reasonable royalties as assessed by a court for infringement of a non-practiced patent.   Currently the tax rate for recovery in settlement and and reasonable royalty recovery by judgement are the same (~35% and taxed as income).  However, a change is the way that the IRS treats recovery from settlement vs recovery from litigation would lead NPE's to maximize their profit through the most efficient way possible.  If the tax rate for reasonable royalty (of a Non-practiced patent were sufficiently high, it would alter the calculus of going after MegaCorp, especially given that attorney fees are not tax deductible. Likewise, tax policy could be used to reduce the windfall that a true NPE could recover based on a past damages.

While this might drive NPE's into settlements instead of broadside litigations (which is what most GC's are really worried about), it would still leave Solo inventor holding the bag on his out of pocket patent fees.  

One way to lesson the impact to Solo is to use tax policy to unburden him of some of the cost in acquiring the patent.  This system would work as thus: The IRS would allow, given the size, income and subject matter, a tax credit for money spent acquiring a patent. This could be as simple as acquiring a tax credit for application fees, or it could be as complex as some formula for a tax credit that takes into account the amount of money that was spent in prosecution. 

These are obviously rough sketches of a goal oriented solution to the NPE problem, while trying to make sure that honest small inventors are not thrown out with the NPE bathwater. 


Jordan Garner