Northwestern Journal of Technology and Intellectual Property

By: Caitlin Olwell

This article is based largely on research conducted for a student presentation given in  Professor Clint Francis’s Intellectual Property course during the Fall Semester of 2012

Patent as a Property Right 

A patent is a set of exclusive rights granted by the government to an inventor or applicant for a limited amount of time. The Federal Circuit characterizes a patent as a real property right:

Intellectual property is the most intangible form of property . . . Like real property, it may be disposed of, territorially, by metes or bounds; it has its system of conveyancing by deed and registration; estates may be created in it, such as for years and in remainder; and the statutory action for infringement bears a much closer relation to an action of trespass than to an action in trover and replevin. It has, too, what the law of real property has, a system of user by license.

With a property-like right to exclude, patent law creates a short-term monopoly preventing all others from making, using, or selling an invented product or inventive process. Exclusive rights from patents are predicated on the belief that inventors will be incentivized to invent and disclose new inventions to the public only if they can be rewarded with a limited period of exclusivity for those inventions and disclosures.

However, a monopoly over useful inventions may also hinder competition and intellectual progress because it has the potential to block the development of other useful inventions. Thus, patent law can be described as a “double-edged sword,” with monopolies creating a reward for innovators at the potential cost of future development. 

Introduction to Patent Trolls 

A troll is a supernatural being in Norse Mythology and Scandinavian folklore. It typically has a negative connation, which extends into the patent law context. In regards to patents, non-practicing entities (NPE’s) have been dubbed “patent trolls” because they aggressively file patent infringement lawsuits in the hope of collecting revenue in settlement or licensing arrangements. Specifically, patent trolls buy rights to patents and sue companies for infringement of those patents. Patent trolls have no intention to manufacture or market the patented invention and they profit from innovations they did not create.

Further, patent trolls can effectively sue other patent holders because patent trolls do not make their own products. Typically, 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.  If a patent owner does not make, use or sell technology, the possibility of a counter-suit for infringement does not exist. Given that patent trolls do not make their own products, they do not risk having countersuits against them claiming that their products infringe the target company’s patent.  Therefore, unlike practicing patent entities, patent trolls are not discouraged from suing.  Litigation from patent trolls is increasing in the United States. Recent studies report that suits filed from NPE’s affected 5,842 defendants with $29 billion accrued cost in 2011.

The Operation Model & Strategy of a Patent Troll

A patent troll’s strategy is to amass patents related to a target company. By purchasing many patents focused on a specific area, trolls are able to cite so many instances of possible infringement that it makes it harder and more expensive for the target company to defend the suit. Further, trolls wait until the related product achieves success in its intended market before filing suit and they choose courts that try patent suits efficiently to file the lawsuit.

In their lawsuits, trolls claim a percent of the total revenue from the infringing product.  Though the patent may cover only a small aspect of the technology, the award can amount to millions of dollars for a successful product. Patent trolls also sue multiple defendants in order to increase their legal costs per defendant and increase the potential for a large payout.  Finally, to reduce legal fees, patent trolls pay attorneys with contingent fees while the target companies are caught paying high hourly rates to defend the infringement suit.

Costs of Trial and Settlement 

As stated earlier, the relative number of lawsuits filed by troll-like entities has grown significantly – from 22 percent of patent-related lawsuits in 2007 to 40 percent in 2011. Additionally the cost of defending against a patent infringement suit is overwhelmingly expensive (typically more than $1 million).  However, the uncertainty and unpredictability of the outcome of jury trials makes it difficult to ensure successful litigation. Even worse, the sheer number of overlapping patents in the software and technology industries makes it harder for technology companies to be sure they aren’t infringing on an existing or pending patent. Given this uncertainty, about 97 percent of infringement suits are settled before trial. This suggests that companies would rather pay off patent trolls than take the risk and incur massive costs of litigating in court.

Rewarding Innovators or Stifling Competition? 

Patent law’s aim is “to promote the Progress of Science and useful Arts.” Supporters of patent trolls argue that the companies actually encourage innovation by helping inventors profit from their ideas.  For example, 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. Further, former U.S. federal judge Paul R. Michel argued that patent trolls may add value to the patents by buying patents when manufacturers decline to do so.

Nonetheless, in a study conducted by the Boston University School of Law in 2011, researchers found that companies targeted in patent suits lost a total of more than $500 billion in market value. The losses, which were corrected for stock market trends and random events, represented “a significant fraction of U.S. R&D spending.”  This indicates that the impact of patent trolls falls most heavily on companies that invest in exploring and creating new products and technology. Finally, patent trolls also soak up money that could be used on research and development and pass on very little of it to inventors.

Case Law and Defense Strategies 

With hundreds of litigious patent trolls aggressively seeking to reap substantial value from filing infringement suits, there are many cases currently being litigated in federal court with patent troll plaintiffs.  For example, last year, the patent troll Mobile Commerce Framework (MCF) filed suit against Yelp, Groupon and Foursquare alleging patent infringement. It is unclear if these target companies will choose to go to trial to defend the lawsuit or will settle out of court with MCF. Regardless, the capital that the target companies devote to litigating the MCF suit or settling out of court is likely to reduce resources for R&D and marketing of new technology in this rapidly growing industry. Based on such consequences, some critics argue that the only entities who benefit from patent trolls are the trolls themselves, their financial backers and the lawyers who handle the suits.

However, not all is lost for businesses practicing their patents. First, it is now harder for patent trolls to get relief in court. Patent owners who make and sell their invention are entitled to awards of lost profits. Patent trolls do not qualify for this relief because they are not marketing or selling the patent. Therefore, patent trolls seek the remedy of injunctions in order to force settlements and receive large payments from target companies. In eBay v. MercExchange, the US Supreme Court made it difficult for patent trolls to request injunctive relief. In eBay, the Court held that that the traditional four-factor test in equity law should be applied to disputes arising under the Patent Act when considering whether to award permanent injunctive relief. That test requires a plaintiff to demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.” This test makes it more difficult for patent trolls to request injunctive reliefs.

Second, patent defense companies are being formed in order to counteract problems caused by patent trolls in the high technology industries. In response to the patent troll threat, large companies have purchased their own patent portfolios. For example, Apple, Microsoft, Nokia and others paid $4.5 billion for the patents of the bankrupt company Nortel. The patents help them to fight suits and can be used to threaten other companies to ward off litigation.

Conclusion 

Recently, during a virtual Google+ fireside “hangout”, President Obama responded to a question from an entrepreneur about patent trolls saying, “They don’t actually produce anything themselves. They are essentially trying to leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

Although patent trolls may make the ownership of patents more liquid, creating incentives to innovate, the litigation arising from patent trolls is making it expensive to enforce and defend patents. Companies are facing the possibility of having to defend infringement suits and invalidity claims filed by patent trolls. Considering the expense of patents, too many overlapping patents in the industry, and hundreds of litigious patent trolls aggressively seeking to reap substantial value from filing infringement suits, short-term monopolies from patents may actually be translating into a lower reward value and creating a disincentive for individuals to start up new ventures for fear of being sued.

Sources

• Patent Troll Presentation by Jamie Liebert, Xiaohui Zhang, Shih-I Liao & Chulgun Lim
• Greg Meditz, Groupon, Yelp Sued by Patent Troll, IPBrief.net, http://www.ipbrief.net/2011 /11/15/groupon-yelp-sued-by-patent-troll/
• James E. Bessen and Michael J. Meurer, The Direct Costs from NPE Disputes 2,24 (Boston Univ. School of Law, Law and Economics Research, Working Paper No. 12-34, 2012), available at http://papers.ssrn.com/sol3/papers. cfm?abstract_id=2091210
• Patlex Corp. v. Mossinghoff, 758 F.2d 594, 599 on reh’g, 771 F.2d 480 (Fed. Cir. 1985).
• Filmtec Corp. v. Allied-Signal Inc., 939 F.2d 1568, 1572 n.5 (Fed. Cir. 1991); see also Kaiser Aetna v. United States, 444 U.S. 164, 176, (1979) (recognizing the right to exclude others is “one of the most essential sticks in the bundle of rights that are commonly characterized as property”).
• Edison Elec. Light Co. v. Sawyer-Man Elec. Co., 53 Fed. 592, 598 (2d Cir. 1892) (“[t]he right to this monopoly is the very foundation of the patent system.”).
• Smith Int’l, Inc. v. Hughes Tool Co., 718 F.2d 1573, 1577-78 (Fed. Cir. 1983) (recognizing that without the right to exclude, “the express purpose of the Constitution and Congress, to promote the progress of the useful arts, would be seriously undermined”).
• Michele Boldrin & David K. Levine, Against Intellectual Monopoly, Syracuse Sci. & Tech. L. Rep., 130, 132 (2009).
• Kelly Burke. Obama Takes Swipe At Patent Trolls In Call For Further Reform. Intellectual Property Watch, http://www.ip-watch.org/2013/02/15/obama-takes-swipe-at-patent-trolls-in-call-for-further-reform/