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The Troll's Toll: The Impact of Patent Trolling

Updated on June 6, 2017

In November of 1999, Giuseppe Cuozzo found inspiration in a speeding ticket for a new invention that would have used GPS tracking and a colored speedometer to inform drivers when they were driving above the speed limit. However, after receiving a patent for his invention, Cuozzo never produced a product using it and eventually sold it to Empire IP who then created a shell company, Cuozzo Speed Technologies LLC. The shell company then proceeded also not to produce any products and instead used the patent to launch infringement law suits against a plethora of companies claiming that modern GPS technology infringed upon Cuozzo’s speedometer patent(Mullin.) Companies following this model of business are referred to as patent assertion entities (PAEs) but are more well known by their pet name “Patent Trolls.” Patent trolls are a type of non-practicing entity (NPE), which means that they do not produce a product; however, not all NPEs are patent trolls. NPEs serve an economically positive need for acting as a middleman between inventors and manufacturers, allowing inventors to liquidize their patents quickly and get back to what they do best. What marks the difference between a NPE and a patent troll is aggressive, and often baseless, patent assertion. According to RTX patent trolls account for around 62% of all patent litigation filed in 2012 and another study also from 2012 “found that 92 percent of lawsuits from NPEs (in 2012) were defeated” (Pouge). Theoretically this means that the system works and all is good in the world of patents, yet unfortunately reality is much more messy as it is easier for many companies to settle before a trial rather than fight the empty threats of a patent troll. This results in a loss of resources, time, and money for those responsible for pushing innovation forward. Because of an abusable patent system and a lack of reform in patent law, patent assertion entities, inhibit innovation by attacking those who drive it forward.

The business model of patent assertion entities mimics that of a troll at a bridge crossing. The troll plays no part in the design or building of the bridge but still collects on it by forcing those who wish to use the bridge to pay a steep price or have their way forward blocked. This relation has led to the nicknaming of PAEs as patent trolls. However instead of a club or some other brute physical threat the PAE wields patents as legal weapons (Electronic Frontier). A patent is a type of agreement between the Federal government and an inventor “which conveys to the owner exclusive rights to the claimed invention”(Quinn). Most patents last for 20 years and function as a type of asset as they can be transferred through various means. Patent infringement lawsuits allow patent holders to enforce their exclusive rights when a company or individual uses the claimed invention without licensing it or paying royalties. Infringement suits or the threat of them is the main way through which PAEs generate revenue. In 2012 overall there were 4,701 patent litigations, and 2,921 or 62% of them were initiated by PAEs (Crouch). The patents that PAEs assert and use as a source of revenue are often bought by the PAE specifically for their vague nature. This allows the PAE to use the patent to sue or threaten to sue a broad list of potential infringers. For example the patent troll Soverain used three patents, purchased from a failing software company, to claim ownership of the shopping cart feature found on many online stores. Armed with these patents Soverain launched dozens of lawsuits against big name companies and had large success with large settlements from Amazon and GAP until the validity of their patents were successfully challenged in 2010 (Mullin). This kind of aggressive and often baseless patent assertion over a broad variety of defendants is the cornerstone of PAE revenue generation and is the center of the PAE business model.

“Imagine getting a letter from a company you've never heard of demanding $25,000 in royalties because they hold a patent on a design, process or component used in or by your product. What if that letter went on to say you had only a few months to pay or the fee would double to $50,000?”(Morrow). Vague and demanding threats like the one above are often used by PAEs to collect on businesses or inventors who they can scare into a settlement or royalty deal. Upon receiving a demand for royalties or a threat of law most companies large or small will choose to settle regardless of whether the product they make actually infringes on the patent in question. This is because for a defendant to fight a patent infringement suit to final deposition the average cost is around 2.8 million if the defendant wins and significantly more if the defendant is found to have infringed (Neumeyer). To avoid the expensive and risky court process many companies choose to give in to the PAE and settle out of court. This method of intimidating companies into a settlement is a free source of easy revenue for PAEs and as such will grow in its use until some action is taken to either make initiating lawsuits more expensive for PAEs or defending patent lawsuits less expensive for defendants.

The true essence of why patent trolls are a problem comes in the area of the business world they tend to target and the way in which it effects them. While PAEs find their main media attention in cases filed for hundreds of millions of dollars against big name companies like Apple, the level of business most affected by the patent troll problem consists of smaller businesses that make less annually. A study on this effect found that “55% of unique PAE defendants make $10M or less in revenue, and 66% make less than $100M a year”(Crouch). It would make sense for a PAE to target companies with more resources to draw on in order to get more money in a settlement or lawsuit; however, a larger company also has more legal resources and as such more ability to better fight an infringement claim. Because of this many PAEs choose instead to target small companies who have less ability to fight back. The other defining factor seen in companies that are targeted is that the more research, development, and innovation a company completes the more likely it is for a PAE to sue for infringement(Bessen). A company that innovates new ideas and products is an easier target for patent trolls as there is a greater chance that there is a patent that can be manipulated in meaning to apply to the ideas being developed by said company. According the the White House Patent Report, in 2011 defendants and licensee paid PAEs 29 billion dollars and less than 25% of this money flowed back into innovation. Despite only including the direct loss of resources, this figure represents the incredible loss of resources PAEs inflict on innovation. Instead of going towards funding research and development those resources went to lining pockets of patent owners who do not produce or contribute any product or service to society. The significance of this effect becomes even larger when one considers the indirect effect of the money taken out of innovation. A company forced to settle for millions of dollars after being sued for infringement will have less money to invest in innovation in the future and will be less willing to do so as they have been punished for it in the past. A study into the effect of an infringement lawsuit against small research and development firms found that the percent of operation spending that went to research and development dropped by around 19% after the lawsuit(Bessen). This reduction of resources dedicated to innovation logically will have a lasting overall effect on innovation, and while there is no concrete number or scale on which to measure this effect the connection can be made. Patent assertion entities target and punish those who drive forward innovation.

A major contributor to the increase in patent troll activity and its subsequent impact on innovation is the failings of the patent system in consistent patent quality. The patent system often has difficulty adapting to new fields of technology and invention which results in an increase in patents that are overbroad or contain functional claiming. Function claiming is when a patent application attempts to patent an overall effect rather than a mechanism used to produce this effect (White House Patent Report). This type of patent application is usually denied as it does not qualify as an invention, but in new and developing fields patents utilizing functional claiming can often slip through the cracks. The result of this is an overbroad patent that can be enforced on a myriad of infringers. PAEs thrive off of patents like this as it gives them the ability to go after many targets with one patent. In this way patent trolls and the effect they have is a symptom of the much larger problem of the failure of the patent system to maintain consistent patent quality (Downes). Several different solutions have been proposed to remedy this problem within the system, one of which is for examiners of the patent office to become more knowledgeable in developing patent fields. Theoretically this would reduce the amount of functional claiming and over broadness that would be allowed through because examiners would be able to identify when a patent's claims exhibit these problems. However this solution is a bit near sighted and lazy as it requires no real reform and shifts unrealistic responsibility to the examiners. Even if patent examiners are able to make this change they would be forced to do it again and again every time a new field develops. Another possible solution that has been proposed is to reform the patent system to be more open and flexible and institute an open review procedure (Levin). The idea of this solution is to allow the patent system to vary its rules and procedures between different fields of patents. This would allow the system to adapt to new fields better as well as increase patent quality in said fields. An open review process would also benefit the system as it would allow a third party to challenge the validity of an issued patent before a judge. Open review would work to catch overbroad patents that do end up slipping through the system, and it would reduce the ammount of ammo given to PAEs. There is no logistical way to reduce the number of overbroad patents that are issued to zero, but the creation of a more adaptable patent system and provisions for the challenging of overbroad patents would have make significant progress towards reducing the amount of overbroad patents available to patent trolls.

Congressional action regarding PAEs has been largely ineffective in terms of legislation passed that affects patent trolls in any significant way. Several bills such as the Innovation Act have been proposed in the past few years in both the house and senate, but none have made any progress towards enactment despite the marketing of them as “bipartisan overhauls of a system that is already in crisis due to a decade of instability”(Neily). This lack of legislative action addressing patent trolls and their effect on innovation is part of what allows this problem to continue and in all likelihood PAE activity will continue to rise until some change at the congressional level is made. There are hundreds of plans floating around for revisions that could be made to the patent system at the congressional level, but what the best ideas for reform boil down to is reducing cost for companies defending from a patent troll and increasing the operating cost of patents trolls. One example of a potential reform that meets these parameters is fee shifting. Fee shifting was included in the proposed Innovation act and would have forced PAEs to cover the legal costs of defendants in cases where the defendant was found not to have infringed(Patent Progress). Fee shifting would allow defendants to fight PAE lawsuits in court as it would reduce the cost of doing so if the defendant wins the lawsuit. It would also make lawsuits more risky for PAEs as there would be increased consequences for a lost case. Without intervention by congress it is unlikely that any major strides towards reducing PAE activity can be taken, and a lack of legislative action will allow the problem to continue to grow and have a further effect on innovation.

When asked for his thoughts on PAEs, President Obama said that“The folks that you’re talking about are a classic example; they don’t actually produce anything themselves. They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.” This is a good summary of the patent troll problem and points out the easily solved source of the patent troll problem, money. The only reason patent trolls target innovators is that in most cases it makes for a quick and easy profit. The solution to reducing the amount of PAEs breathing down the necks of inventors is to turn that quick and easy profit into a long, arduous, and often fruitless process. This can be done through two major approaches. First, increasing the adaptability of the patent system to reduce patents that are overbroad and flawed will make it harder for PAEs to find patents that can be used to attack many different inventors and companies and second, reforming patent law through legislation to make the process of an infringement suit more difficult and costly for PAEs. Both tasks are momentous undertakings, but reducing patent troll activity frees up resources for innovators, which means that for every inch we move toward ending patent trolling innovators are able to advance a mile into the future of technology.

Works Cited

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

Crouch, Dennis. “Patent Trolls by the Numbers.” Patently0, patentlyo.com/patent/2013/03/chien-patent-trolls.html.

Downes, Larry. “Innovations Everyone hates patent trolls, but here’s the root problem with our broken system.” Washington Post, www.washingtonpost.com/news/innovations/wp/2015/05/04/everyone-hates-patent-trolls-but-heres-the-root-problem-with-our-broken-system/?utm_term=.b16af976d521.

Levin, Richard. “A Patent System for the 21st Century.” Issue, issues.org/20-4/levin/.

Morrow, Stephanie. “Patent Trolls and Their Impact.” Legalzoom, www.legalzoom.com/articles/patent-trolls-and-their-impact.

Mullin, Joe. “Supreme Court sends off patent troll that challenged review rules with an 8-0 slapdown.” Arstechnica, arstechnica.com/tech-policy/2016/06/how-a-patent-troll-brought-its-color-shifting-speedometer-to-the-supreme-court/.

Neily, Nicole. “Bills to combat ‘patent trolls’ are actually counterproductive.” The Hill, 14 Sept. 2016, thehill.com/blogs/pundits-blog/technology/295924-bills-to-combat-patent-trolls-are-actually-counterproductive.

Neumeyer, Chris. “Managing Costs of Patent Litigation.” IP Watch Dog, 13 Feb. 2013, www.ipwatchdog.com/2013/02/05/managing-costs-of-patent-litigation/id=34808/.

“Patent Assertion and U.S. Innovation.” White House, Executive Office of the President, obamawhitehouse.archives.gov/sites/default/files/docs/patent_report.pdf.

“Patent Progress’s Guide to Federal Patent Reform Legislation.” Patent Progress, www.patentprogress.org/patent-progress-legislation-guides/patent-progresss-guide-patent-reform-legislation/#SHIELD.

“Patent Troll.” Electronic Frontier, www.eff.org/issues/resources-patent-troll-victims.

Pouge, Melissa. “Under the Bridge: Patent Trolls and the Toll on Innovation.” Martin Prosperity, martinprosperity.org/content/under-the-bridge-patent-trolls-and-th e-toll-on-innovation/.

Quinn, Gene. “What is a patent and where do patent rights come from?” IPWatchdog, www.ipwatchdog.com/2016/02/20/what-is-a-patent-where-do-patent-rights-come-from/id=66345/.

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