Does Patent Trolling Actually Put Innovation at Risk?

By Haneen Daham

Many practitioners are vaguely acquainted with the concept of patent trolls, but are unfamiliar with its nuances. On a superficial level, one might recognize that the term “patent troll” is a pejorative moniker used to refer to a patentee that does not manufacture a consumer product.[1] This name is typically traded for a more neutral alternative: non-practicing entities (NPEs). Rather than make, use, or sell new products and technologies, trolls obtain essentially defunct patents to force third parties to purchase licenses.[2] They accomplish this by waiting for an industry to utilize a patented technology and then force the alleged infringers to either pay up or litigate.[3] Patent trolls can be divided into three categories: (1) those that purchase other companies’ controversial patents to assert them against an industry; (2) those that originally sold products but have either completely or largely closed their operations to focus on patent licensing; and (3) those that act as agents to help assert patents on behalf of patent owners for a fee.[4] Despite these variations, the business model of the average “troll” is largely uniform: (a) accuse a company of infringing a patent and offer a license for a royalty on sales; and (b) sue the target company if it does not agree to a license.[5]

According to critics, “trolls” do not contribute to innovation because they have no interest in finding business solutions or encouraging technology development, partnerships, or cross-licensing opportunities.[6] Their goal is simply to maximize profit margins from litigation, which is possible given the current patent climate. For one, the understaffed and underfunded United States Patent and Trademark Office (“USPTO”) is inundated with hundreds of thousands of ambiguous and dubious patent applications, some of which slip under the proverbial radar and get approved.[7] These “bad” patents are ultimately seized by patent trolls who then exact a toll on companies that commercialize certain technologies.[8] For companies that become targets of trolls, the high cost of litigation resulting from judicial uncertainty leaves them with no choice but to settle. If the high cost of litigation fails to deter a company from pursuing litigation, the severely constrained avenues of defense might do it. Ordinarily, a company’s patent portfolio would bolster its case against an infringement charge; however, it holds little value when dealing with a patent troll because trolls do not make or sell products, thus, the “target company has no basis for filing a countersuit, and [] no leverage to create an incentive for a . . . business resolution.”[9]

As patent trolls expanded their victim pool, Congress responded by proposing the Patent Reform Act of 2005[10] (“PRA”)—the most comprehensive change to patent law since the passage of the Patent Act of 1952. As it relates to patent trolling, the PRA proposed to give trolls a harder time in court by lowering the threshold for invalidating patents, thereby giving the target company a fighting chance to challenge dubious patents seized by trolls. Although the PRA was eventually passed as the Patent Reform Act of 2007, many inventors voiced dissatisfaction with the Act’s effect on the patent industry, arguing that the new rules failed to fix the underlying problems that lead to patent troll lawsuits. Thus, they’ve called on Congress and the White House to, once again, reform the patent system. However, critics contend that the patent system does not need fixing because there is no evidence that trolls hinder innovation.[11] This camp argues that calls for reformation are driven by a few large companies that do not want to pay inventors. They maintain that patent trolls strategically file suits in lucrative industries, but are not responsible for the recent surge in patent-related dockets. However, recent research suggests otherwise.

Three empirical studies—cited by the White House and the Congressional Research Service—provide “strong confirmation that patent litigation is reducing venture capital investment in startups and is reducing R&D spending, especially in small firms.”[12] Research reveals that patent trolls cost defendant firms $29 billion per year in out-of-pocket fees and destroy over $60 billion in firm wealth per year.[13]

In light of this evidence, what should an attorney do when representing new inventors and startups facing an infringement allegation from an NPE?

  • Be sure to comply with all notice requirements—failure to do so will allow the NPE to assert an easy willfulness claim.
  • Submit a list of clarifying questions to the complaining NPE to understand how the troll’s patent applies to the allegedly infringing technology. This will help the alleged infringer look for contradictions in the patent, which might reveal inequitable conduct, in order to devise a defense strategy for a possible pre-trial settlement. Note that trolls sometimes hope to scare new companies into paying for a license without a reasonable basis for alleging infringement. Thus, this step proves incredibly important in identifying whether there is a reasonable basis for the claim.

[1] Robert P. Merges, The Trouble with Trolls: Innovation, Rent-Seeking, and Patent Law Reform, 24 Berkeley Tech. L. J. 1583, 1587 (2009).

[2] Jeremiah Chan and Matthew Fawcett, Footsteps of the Patent Troll, 10 Intell. Prop. L. Bull. 1 (2005).

[3] See Chan and Fawcett, supra note 2 at 1.

[4] See Chan and Fawcett, supra note 2 at 1-2.

[5] See Chan and Fawcett, supra note 2 at 3.

[6] See Chan and Fawcett, supra note 2 at 3.

[7] See Chan and Fawcett, supra note 2 at 4.

[8] Michael Risch, Patent Troll Myths, 42 Seton Hall L. Rev. 457, 459 (2012).

[9] See Chan and Fawcett, supra note 2 at 4.

[10] H.R. 2795, 109th Cong. (2005). Later enacted as H.R. 1908, 110th Cong. (2007).

[11] See, e.g., Stephen Haber and Ross Levine, The Myth of the Wicked Patent Troll, The Wall Street Journal, June 29, 2014, available at https://www.wsj.com/articles/stephen-haber-and-ross-levine-the-myth-of-the-wicked-patent-troll-1404085391.

[12] James Bessen, The Evidence Is In: Patent Trolls Do Hurt Innovation, Harvard Business Review, Nov. 2014, available at https://hbr.org/2014/07/the-evidence-is-in-patent-trolls-do-hurt-innovation.

[13] James Bessen & Michael J. Meurer, The Direct Costs from NPE Disputes, 99 Cornell L. Rev. 387, 408 (2014).