Patent Troll

troll patent

Patent troll is a pejorative term used for a person or company who enforces patents against one or more alleged infringers in a manner considered aggressive or opportunistic with no intention to manufacture or market the patented invention.

The Patent Troll was originally depicted in ‘The Patents Video,’ which was released in 1994 and sold to corporations, universities, and governmental entities. The metaphor was popularized in 2001 by Peter Detkin, former assistant general counsel of Intel, who chose the term from among a number of suggestions during a discussion with Anne Gundelfinger, Vice President and Associate General Counsel at Intel.

Detkin first used it to describe TechSearch, its CEO, Anthony O. Brown, and their lawyer, Raymond Niro, while Intel was defending a patent suit against them. Detkin had previously used the term ‘patent extortionist’ to refer to a number of companies who were suing Intel for patent infringement and who were trying to ‘make a lot of money off a patent that they are not practicing and have no intention of practising and in most cases never practiced.’ After Intel was sued for libel, he began using the term ‘patent troll’ instead. Those accused of being patent trolls typically viewed Intel as being a large and manipulative company who had stolen their ideas.

‘Patent troll’ is currently a controversial term, susceptible to numerous definitions, none of which are considered satisfactory from the perspective of understanding how patent trolls should be treated in law. Definitions include a party that does one or more of the following: Purchases a patent, often from a bankrupt firm, and then sues another company by claiming that one of its products infringes on the purchased patent; Enforces patents against purported infringers without itself intending to manufacture the patented product or supply the patented service; Enforces patents but has no manufacturing or research base; Focuses its efforts solely on enforcing patent rights; or Asserts patent infringement claims against non-copiers or against a large industry that is composed of non-copiers.

The term ‘patent pirate’ has been used to describe both patent trolling and acts of patent infringement. Related expressions are ‘non-practicing entity’ (NPE, defined as ‘a patent owner who does not manufacture or use the patented invention, but rather than abandoning the right to exclude, an NPE seeks to enforce its right through the negotiation of licenses and litigation’), ‘non-manufacturing patentee,’ ‘patent shark,’ ‘patent marketer,’ ‘patent assertion company,”patent licensing company,’ and ‘patent dealer.’ The cost of defending against a patent infringement suit, as of 2004, is typically $1 million or more before trial, and $2.5 million for a complete defense, even if successful. Because the costs and risks are high, defendants may settle even non-meritorious suits they consider frivolous for several hundred thousand dollars. The uncertainty and unpredictability of the outcome of jury trials also encourages settlement.

It has also been suggested that distortions in the patent market, such as those caused by long patent application pendency, promote patent trolling. If the patent office accepts claims that have been invented, published, or even patented before, ignoring prior art, then even existing technologies in use are subject to patent trolling. Reexamination to invalidate the patent based on prior art can be requested, but these occur rarely and often in conjunction with infringement lawsuit. Only the patent holder will participate in this process, and the party requesting the reexamination has no right of appeal and is estopped from using the same evidence in any subsequent civil action; this risk keeps the popularity of reexamination low despite its lower cost. Furthermore, the most common outcome is not the validation or invalidation of the patent, but narrowing the scope of the claims.

There is also no obligation to defend an unused patent immediately, thus manufacturing companies may produce the patented product for years until the patent troll sues them. For example, the JPEG format, intended to be free of license fees, was subject to two patent attacks, one by Forgent Networks during 2002–2006 and another by Global Patent Holdings during 2007–2009. Both patents were eventually invalidated based on prior art, but before this, Forgent collected more than $100 million in license fees from 30 companies and sued 31 other companies. In 2011 patent trolls cost US bodies direct costs totaling 29 billion dollars in the United States alone. A core criticism of patent trolls is that ‘they are in a position to negotiate licensing fees that are grossly out of alignment with their contribution to the alleged infringer’s product or service,’ notwithstanding their non-practicing status or the possible weakness of their patent claims. The risk of paying high prices for after-the-fact licensing of patents they were not aware of, and the costs for extra vigilance for competing patents that might have been issued, in turn increases the costs and risks of manufacturing.

On the other hand, the ability to buy, sell and license patents is seen by some as generally productive. ‘The Wall Street Journal’ argued that by creating a secondary market for patents, these activities make the ownership of patents more liquid, thereby creating incentives to innovate and patent. Patent Licencing Entities also argue that aggregating patents in the hands of specialized licensing companies facilitates access to technology by more efficiently organizing ownership of patent rights. In an interview conducted in 2011, former U.S. federal judge Paul R. Michel regarded ‘the ‘problem’ [of non-practicing entities, the so-called ‘patent trolls’] to be greatly exaggerated.’ Although there are a number of problems with the U.S. patent system, i.e. ‘most NPE infringement suits are frivolous because the defendant plainly does not infringe or the patent is invalid,’ inventors may have benefited from the developing market in patent acquisition.’

Patent trolls operate much like any other company that is protecting and aggressively exploiting a patent portfolio. However, their focus is on obtaining additional money from existing uses, not from seeking out new applications for the technology. They monitor the market for possibly infringing technologies by watching popular products, news coverage and analysis. They also review published patent applications for signs that another company is developing infringing technology, possibly unaware of their own patents. They may start by suing a particularly vulnerable company that has much to lose, or little money to defend itself, hoping that an early victory or settlement will establish a precedent to encourage other peer companies to acquiesce to licenses. Alternately they may attack an entire industry at once, hoping to overwhelm it.

Patent trolls are at a disadvantage in at least two ways. First, patent owners who make and sell their invention are entitled to awards of lost profits. However, patent trolls, being non-manufacturers, typically do not qualify. Further, patent owners’ rights to bar infringers from manufacture, use, or sale of technologies that infringe their patents has recently been curtailed in the 2006 court decision ‘eBay v. MercExchange.’ Rather than automatically granting an injunction, the US Supreme Court stated that Courts must apply a standard reasonableness test to determine if an injunction is warranted. Writing in ‘Forbes’ about the impact of this case on patent trolls, writer Jessica Holzer concludes: ‘The high court’s decision deals a blow to patent trolls, which are notorious for using the threat of permanent injunction to extort hefty fees in licensing negotiations as well as huge settlements from companies they have accused of infringing. Often, those settlements can be far greater than the value of the infringing technology: Recall the $612.5 million that Canada’s Research in Motion forked over to patent-holding company NTP, Inc., to avoid the shutting down of its popular BlackBerry service.’

The non-manufacturing status of a patent troll has a strategic advantage, in that the target infringer cannot counter-sue for infringement. In litigation between businesses who make, use or sell patented technology, the defendant will often use its own patent portfolio as a basis to file a counterclaim for infringement. The counterclaim becomes an incentive for settlement, and in many industries, discourages patent infringement suits. Additionally, a patent suit carries with it the threat of an injunction or mutual injunction, which could shut down manufacturing or other business operations. If a patent owner does not make, use or sell technology, the possibility of a counter-suit for infringement would not exist. For this reason a patent troll is able to enforce patents against large companies which have substantial patent portfolios of their own. Furthermore, patent trolls may use shell companies.

Patent troll ‘companies have no interest in using the patents… but instead hope to reap large sums of money from the lawsuits themselves.’ This gives them an advantage over manufacturers since they are relatively immune to the typical defensive tactic large entities use against small patent plaintiffs, because the cost of litigation tends to fall more heavily on an accused infringer than on a plaintiff with a contingency-fee lawyer, and because trolls have an almost-unrestricted ability to choose their preferred plaintiff-friendly forums, most prominently the Eastern District of Texas.

Many common techniques used by companies to protect themselves from producing competitors are rendered ineffective against patent trolls. These techniques include monitoring patent activities of competitors to avoid infringing patents (since patent trolls are not competitors, productive companies usually have no way to find out about the troll or its patents until after significant investments have been made to produce and market a product); going on the offensive with counterclaims that accuse the patent plaintiff of infringing patents owned by the defendant (the mutual threat often leads the parties to arrive at a mutually beneficial cross-licensing arrangement); or a ‘scorched earth’ defense designed to drive up litigation costs (which is equally ineffective because patent trolls plan for and have the finances to fully litigate a case; in fact, some are able to draw on hedge funds and institutional investors to finance their patent cases). Patent ‘pooling’ arrangements where many companies collaborate to bring their patented knowledge together to create new products are also inapplicable to patent trolls because they don’t produce products.

Substantial companies that attempt over-reaching patent litigation are subject to losing their patent rights to a defensive claim of patent misuse. However, defendants find it difficult to charge patent trolls with misuse because the antitrust violations typically involved require significant market power on the part of the patent holder. Nevertheless, manufacturers do use various tactics to limit their exposure to patent trolls. Most have broader uses as well for defending their technologies against competitors. These include: Design arounds, Patent watch, Clearance search (Thomas Edison uncovered a prior patent by two Canadian inventors, Henry Woodward and Mathew Evans for carbon filament in a non-oxidizing environment, the type of light bulb Edison wanted to develop, so he bought the patent for US$5,000 to eliminate the possibility of a later challenge by Woodward and Evans); litigation; Patent infringement insurance; and Defensive patent aggregation (the practice of purchasing patents or patent rights from patent holders so they don’t end up in the hands of an individual or enterprise that can assert them). The aggregator then provides members a broad license to everything it owns in exchange for an annual fixed-fee.

Under US law patent owners need not commercialize the invention to enforce their patents. Patent owners may negotiate any royalty others can be convinced to pay in exchange for a license to not be prohibited from making, using, or selling the patented invention, but the only right conferred by holding a US patent is the right to sue to prevent others from making, using, or selling the invention or to collect damages for the breach of that right (UK and European patent law, by contrast, contains provisions for compulsory licenses). Moreover, the owner of a patent need not be the inventor. Patents are legally transferable in the sense that they can be bought, sold, and licensed to entities other than the inventor(s).

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