All About Patent Trolls
Patent trolls are dreaded in the patent world. They are designated as frivolous and opportunistic entities that create a nuisance for companies through hardball legal tactics. While there is an opposing view of patent trolls as benefiting the landscape by promoting innovation and playing an intermediary role between individual inventors and large manufacturers. The jury is still out on the question of patent trolls as an irritant or benevolent institution, but read on to learn more about patent trolls, how they operate, and measures for safeguarding against them.
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What is a Patent Troll?
A patent troll can be an individual or a company that buys patents from a company and uses patent infringement claims to threaten litigation against another business. They earn profit through settlements or winning lawsuits and are not involved in manufacturing their own goods or offering services.
How Do They Operate?
The main modus operandi of patent trolls is to first buy patents from bankrupt or financially unstable companies, and then use them to threaten businesses with infringement litigation. The pattern followed by trolls is:
- Buy: Approach financially distressed companies with relevant patents and offer to purchase their patents.
- Target: Identify businesses that are using a similar process or design to the purchased patents.
- Sue: Shoot off legal threats to these businesses threatening patent infringement.
Patent troll companies are referred to by many names such as nonpracticing entities (NPEs), patent assertion entities (PAEs), patent sharks, patent dealers, patent marketers, etc. It is important to note that patent trolls do not manufacture any products or use their owned patents for commercial purposes. The sole intent of patent trolling is to threaten someone using a similar design with infringement and earn through licensing or settlement fees.
Patent trolls usually buy from:
- Bankrupt businesses that need to sell off assets
- Small businesses that do not have the finances to protect themselves from trolls.
- Companies that have a large patent portfolio that has not been commercially utilized.
How Patent Trolls Affect Businesses
Patent trolls have a devastating effect on businesses, especially SMEs, who do not have the resources to defend themselves. A few ways in which trolls affect businesses are:
- Most patent trolls use low-quality patents to force small companies into settlement and bigger companies into paying a licensing fee for using the technology. Since patent infringement cases are prohibitively expensive and can drag on for years, most companies give in to the demands of the trolls.
- Many businesses are forced into arrangements that restrict their innovation and severely inhibit their ability to grow. This has a negative impact on the economy and also serves as a deterrent to other entrepreneurs.
- Credible businesses that can make a positive impact with their research and innovation seldom enter areas where patent trolls are most active. This leads to stagnation, and new products and tech are never developed despite huge potential.
- The inability of companies to grow due to extortion of huge sums of money, which in turn directly affects the creation of jobs, which impacts the economy.
Defending Against Patent Trolls
Despite many states having passed anti-patent troll legislation, trolling continues to take a toll on business across the United States.
Below are some measures that may be adopted to defend against patent trolls:
- Upon receiving a demand letter from an NPE, immediately refer to a lawyer. Never engage with patent trolls without consulting a lawyer first. Also, never ignore such letters as frivolous, because this can prove to be a costly mistake in the future.
- Never sign any licensing agreements until you have discussed them with your lawyer.
- Taking an aggressive posture is an option too. Get professional services to look into the infringement case and weigh its credibility. A lot of times NPEs do not have any strong arguments.
- Opt for intellectual property insurance for your novel designs and processes as a precautionary measure.
- State your case before a Patent Trial and Appeal Board of the United States (U.S.) Patent and Trademark Office (USPTO). If the board clears your product, then the case filed by the trolls weakens.
How Patent Trolls Make Money
There are several ways in which patent trolls monetize their patents, such as:
- Licensing of patent technology to companies.
- Encouraging their targets to agree to a settlement.
- Suing companies for patent infringement and earning from the lawsuit.
- Hurting the brand image of the business in media to force them into a settlement or licensing agreement.
Court Cases Involving Patent Trolls
Patent troll cases often make headlines, especially when they involve big firms. There is no saying which way the judgment might go, as there have been wins and losses for and against the trolls.
If you give in to the NPEs, then licensing or settlement is the only way out. In 2016, Apple settled an infringement case against Network-1 Technologies for $25 million.
If, however, you choose to fight, then things might turn in your favor, as they did for Newegg, an e-commerce electronics store. Newegg received demand letters from PAE Soverain and decided to select the litigation route. Newegg won the case, which resulted in the reversal of other judgments too that Soverain had won.
- Ignoring the demand letter sent by NPEs. These demand letters are often vague and without any substantial information. This fools companies into believing that they can be overlooked. But since these letters are legal and form part of public records, do not make the mistake of ignoring them. Instead, consult with a lawyer and send an appropriate reply.
- Small companies often sell to patent trolls without realizing the consequences. It is best to research the company to ensure it is not an NPE before selling.
- What is the reason behind patent trolls’ success in court?
Patent trolls continue to win in courts as they mostly target small and medium businesses that do not have the means to put up a defense. Also, they usually buy simple technology patents that have broad usage, so they can target multiple companies at one time. And since they target more than one business at a time, they are likely to win against a few. The examination backlog between patent filing and approval also gives patent trolls adequate time to research potential targets.
- Does the patent system prevent trolling?
The USPTO has come up with a few ways to indirectly deter patent trolls. It has cut back on the number of business practice patents issued, which might prevent junk lawsuits over broad patents. Internal methods have been created for patent disputes. Besides, the success rate of patent troll cases in the Supreme Court is very low. This discourages many NPEs from pursuing their cases in the Supreme Court.
- Can patent troll victims retrieve their legal fees?
The decision by the Supreme Court in two infringement cases filed by NPEs directed that the victims be reimbursed their legal fees. This has set a precedent in favor of the victims of frivolous cases. In another case, the Supreme Court made it easier for companies to challenge vague and broad patents by ruling that “indefiniteness” in the patent description could make infringement lawsuits invalid.
- How much does a patent infringement lawsuit cost?
While the exact cost varies per case, be prepared to shell out about $650,000 for a $1 million lawsuit, per CNET reporter Jim Kerstetter. For cases worth more than $25 million, expect a fee of $5 million to defend.
Patent trolls pose significant dangers not just to a business but to innovation and the economy as a whole. A long-term solution is required to manage their adverse effects. This could be done by introducing comprehensive patent reform legislation that necessitates patent trolls to issue demand letters with complete information rather than unclear statements. Patent trolls should also be required to submit records of the number of letters they have sent and their follow-up practices for a case. This system of swift extortion that is weakening the IP landscape needs quick redressal to remain efficient.
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