June 9, 2015

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Beyond Tech


A Tale of Two Patent Trolls

Why Targeting Trolls may Cause more Harm than Good

By Kory Christensen

June 9, 2015

In 2014, patent infringement lawsuits brought by entities that did not make or use the patented technology accounted for nearly 61 percent of all patent cases filed, prompting renewed calls for legislation to address the growing “patent troll” threat.

Citing an annual economic cost of $29 billion, proponents of reform seem to have an airtight case—at least until one looks below the surface at what precisely is meant by a patent troll. Unfortunately, there is no agreed upon definition, and defendants, watchdog groups and internet fear mongers have a vested interest in defining the term as broadly as possible.

Wikipedia, for example, conflates patent trolls, non-practicing entities (NPEs) and patent assertion entities (PAEs), defining them collectively as “person or company who enforces patent rights against accused infringers in an attempt to collect licensing fees, but does not manufacture products or supply services based upon the patents in question, thus engaging in economic rent-seeking.”

Extortionist or Guardian?

If companies are acting like the bridge troll in the Three Billy Goats Gruff, why can’t some of the most brilliant minds agree on ways to curtail these modern-day trolls? The answer is that most NPEs and PAEs do not engage in troll-like behavior that should be curtailed. To illustrate this, here are the stories of two patent “trolls.”

Troll No. 1 is a shell company with no more than a post office box in the Eastern District of Texas (a plaintiff-friendly jurisdiction); it has no assets other than one or two patents it bought in a bankruptcy sale; and it does nothing except sue companies for patent infringement. Troll No. 1 identifies a number of small startups that generally work in the same technical field as its patents. Colluding with contingency lawyers, and without spending any resources to determine whether the startups actually infringe, Troll No. 1 sends demand letters requiring the payment of $40,000 each in exchange for a covenant not to sue. Recognizing that $40,000 is hardly enough money to pay a law firm to investigate the allegations, most of the startups reluctantly pay, adding legitimacy to Troll No. 1’s claims in subsequent cases.

Troll No. 2 is a university that spent years developing a revolutionary technology, but does not, itself, “manufacture products or supply services based on the patent in question.” Rather, it licenses its technology to companies, and the royalties it receives are used to fund additional research and educate students. Troll No. 2 learns that Company A is ripping off its patented technology and sends a letter inviting Company A to take a license. When negotiations
are unsuccessful, Troll No. 2 reluctantly files suit.

Most people would likely agree that the extortionist tactics of Troll No. 1 should be curtailed, whereas the activities of Troll No. 2 are perfectly acceptable and may foster innovation. Unfortunately, the solution is not as simple as determining whether a plaintiff is a private company or a university. Many research labs engage in precisely the same activities as Troll No. 2. Indeed, many of the largest technology companies, from Apple to IBM, acquire and license patents on technologies that they do not manufacture. Likewise, it is easy for a company like Troll No. 1 to acquire token manufacturing and R&D interests. Accordingly, much of the proposed legislation to stop Troll No. 1 would negatively impact Troll No. 2.

Harmful Legislation

What kinds of legislative reforms might work? Some are already being tested, such as provisions in the America Invents Act (AIA), which provides for two less expensive methods for challenging bogus patents: post-grant review and inter partes review. Other proposals include making the loser pay, as is currently the case in many foreign countries. However, this could have a chilling effect on individual inventors and universities, who may have legitimate claims but lack the resources to pay both sides’ costs.

Another proposal includes heightened pleading requirements and sanctions in the case of plaintiffs, like Troll No. 1, that don’t fully investigate before filing suit, but rather hope to rely on discovery to substantiate their claims. Again, this proposal could chill legitimate claims where a plaintiff lacks the ability (due to resources or the nature of the technology) to definitively prove infringement at the outset of litigation.

Short of championing legislation that could harm the patent system, what can a company do to protect itself against Troll No. 1? Patent infringement insurance is one option, as well as patent pools (Intellectual Ventures and RPX). If sued, a company is also free to join with other defendants in a joint defense group to share costs and intelligence.

No perfect solution exists to the problem. In the real world, there are many bridges (patents), and not everyone guarding them is a troll. However, using emotionally baited names, such as patent troll, does little to move the debate forward and may result in changes to the patent system that are neither warranted nor desirable. What is needed is an understanding of the role of patents in innovation and an awareness of the necessity to tread lightly on one of the mainsprings of technological progress.

Kory Christensen is a partner in Stoel Rives’ Intellectual Property group. He has a global practice that emphasizes domestic and international patent procurement.

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