Patent Trolls: Friend or Foe?

By Robert L. Stoll, Partner, Drinker Biddle & Reath LLP, Washington, US and former USPTO Commissioner for Patents

Trolls of lore were ugly creatures who lived under bridges, charged travelers to safely cross raging waters and threatened harm to those who refused to pay. Trolls and their kindred spirits have haunted the nightmares of our children for generations. But in 1999, a lawyer at Intel Corporation, Peter Detkin, began using the term to describe companies with no products that brought what he believed were meritless patent suits.

The term has since gained currency and is now widely used to characterize the activities of non-practicing entities (NPEs) or patent assertion entities (PAEs). The fact that Mr. Detkin went on to co-found Intellectual Ventures - widely perceived as an archetypal modern day patent troll - has caused many a wry smile within the IP community. Perhaps our collective subconscious childhood fear of the original troll is one of the reasons why it is easy for the media, our elected leaders and even some savvy CEOs to vilify modern trolls for everything they do. I guess Mr. Detkin rues the day he began using the term.

Although this article focuses on the experiences of the US, patent litigation issues attributed to NPEs already exist in other jurisdictions. Germany, for example, is a venue of preference in Europe for NPEs. Earlier this year, the Republic of Korea modified its laws to protect local technology companies from NPEs who had sued a major technology firm there multiple times. As the monetization of patents continues to grow around the world it will not be long before these issues gain traction in many other jurisdictions.

What defines a troll? Most would agree that companies that don’t make products and whose function is to buy up patents to assert against others would be in that category. But there seems to be as many permutations to this basic formulation as there are companies. What about large manufacturing companies that have divisions that purchase patent portfolios for the purpose of assertion? What about companies that spin off their unused patent portfolio to a wholly or partially owned subsidiary that asserts those patents? What about companies that buy up portfolios for defensive purposes, compelling membership by companies to join for protection? What about universities? They don’t make products. Most would say that universities don’t fit into the category because they license to companies that make the products covered by their patents. But what if the university sells its patents to an NPE with an agreement to share in the profits?

As the foregoing suggests, defining a troll is very difficult. Some would even claim that Thomas Edison, one of the most prolific inventors in the US, was an early troll, seeking licenses for patents that he did not plan to manufacture.

The monetization of patents in the marketplace can spur innovation and drive economic growth and job creation. Many inventors just like to invent. Some have no interest in manufacturing anything, but would prefer to go back to the lab and hunt for the next new breakthrough. In trolls, inventors and others in the secondary market have a purchaser willing to pay for valuable patents: an entity that will help them reap the benefits of their efforts. It is widely recognized that patents are property and, like any other property, can be freely bought and sold, as long as there are no antitrust issues.

Until the onset of the troll era, small inventors, creditors in bankrupt companies with large patent portfolios and companies with many patents in technologies that they no longer planned to use, had few options to monetize them. In some instances, large companies refused to purchase or license these assets, taking a gamble that they could continue infringing because the costs of asserting patents preempted the owners’ ability to enforce their rights. Faced with expensive enforcement and limited secondary markets, some in the financial services industries and in the emerging technologies sector who were unfamiliar with the patent world chose not to play in the patent sandbox.

The evolving use of patents by trolls required new strategies and new business plans for many powerful companies. The disruption caused by abusive litigation behavior in the corporate world has generated uncertainty and fear. Where we usually applaud innovation both in the scientific arena and in the creation of wealth in the challenging world of the money markets, the rise of the troll has many crying foul!

What is the problem? There are many!

The quality of the patents being asserted has become a frequent lament. All too often, plaintiffs use low quality patents to extort settlements from small companies that cannot afford to defend themselves at trial, or they seek licensing fees from large companies who simply want to make the costly and time-consuming case go away.

The costs of litigating invalidity and/or non-infringement of a patent claim asserted against a small company in the US can bankrupt it, striking fear in the heart of a CEO who is just embarking on a business venture. Panic stricken, many small businesses, the majority of which have no in-house patent counsel, are forced into arrangements that significantly weaken their ability to grow. The legal fees to defend against such actions can be devastating.

Unsophisticated owners of mom-and-pop shops across the US are receiving vague legalistic demand letters alleging infringing uses of common office equipment such as copying machines, scanners, shipment tracking technology or basic WiFi. These are end-users who have legitimately purchased equipment from well-known manufacturers. Thousands of them, however, are being sued by NPEs for small amounts – demand letters for license fees as low as US$1,000 are common - as part of a strategy to build up the means to attack the more well-heeled manufacturer at a later date.

It is good for innovative companies to know who they are dealing with and to have a thorough understanding of the environment in which they operate, but plaintiffs frequently transfer patent interests to shell companies. In effect, this masks ownership of a particular right and prevents potential licensees from knowing whether they have rights to all of the commonly owned patents covering the product they wish to produce. Without knowing the real-party-in-interest, a licensee is vulnerable to repeated attacks from the same parent entity.

Solutions

The types of problems outlined above that exist in the current patent system are real. They are barriers to further innovation and job creation. Fixing them, however, does not require a comprehensive definition of a troll. Lady Justice is blindfolded for a purpose. Justice in the US should be meted out objectively regardless of who appears in court. So too when dealing with troll-like behavior. It is not the identity of the actor that needs to be evaluated, but the character of the action. We need to assure that frivolous, predatory actions are penalized and we need to prevent the types of abusive tactics witnessed of late which harm our innovative culture.

The America Invents Act of 2011 took a significant step forward in providing several more rapid and less expensive procedures for removing improvidently granted patents from the system. These include:

• Inter Partes review which allows a third party to challenge a granted patent on the basis of earlier prior art;
• Post grant review which allows any first-to-file patent to be challenged on any statutory grounds within the first nine months of issuing the patent; and
• The recently enacted Transitional Covered Business Methods procedure which permits a challenge on any grounds for a non-technical financial service or product patent.

While these procedures are new and it will take some time to evaluate their full impact on the patent system, they are a relatively inexpensive way to challenge patents that should never have issued from the USPTO and thereby to limit their use in a frivolous lawsuit.

The most effective way to remove overly broad and poor quality patents and to reduce predatory activity is to ensure that bad patents don’t issue in the first place. Trolls don’t issue their own patents! The USPTO is an agency that is funded by the fees applicants pay for the examination of their applications and yet for years, Congress has diverted these funds away from the agency. Without these funds, the USPTO is hamstrung. It is unable to acquire all of the available databases of prior art needed to accurately search public domain material and it is unable to provide its patent examiners with the time they need to properly examine the applications they receive. On top of this, the first victim of inadequate funding is training. As a consequence, examiners are not trained to focus on assuring enabling disclosures and well bounded claims. This, in turn, leads to greater uncertainty and more unnecessary litigation.

Driven by the misplaced focus on trolls, the US Congress and the US Administration are again focusing on patent reform that they hope will further curb abusive practices regardless of the definition of the actor. The US House of Representatives, in arguably the most polarized of times, has passed patent reform legislation and now awaits action by the US Senate. A number of the current discussions are addressing the issue of real-party-in-interest and legislators are trying to find ways to identify patent owners without making the requirements overly burdensome. Other proposals relate to a form of “loser pays” provision where frivolous suits are discouraged by requiring the loser to pay the attorneys’ fees of both parties. Ideally, the provisions will ease current standards for the award of attorney’s fees, but will give the courts, which are closest to the proceedings, some discretion in evaluating the situation and will allow the Judicial Conference to develop regulations.

Still other portions of the bill under consideration would increase the required specificity of pleadings and curb the abusive use of demand letters. If properly crafted, both measures could improve the transparency of the system and help reduce predatory activities.

One provision rightfully dropped from consideration in the bill passed by the US House of Representatives relates to making the recently enacted Transitional Covered Business Method (CBM) procedure permanent and expanding it to include any computer-implemented (software) invention. As the original CBM procedure is only around a year old, expanding it now, with all the other significant changes recently enacted and with more likely to be enacted, could have serious deleterious consequences. In addition, providing more uncertainty in the emerging technologies of computer-implemented inventions will make it harder for small businesses in this competitive environment to secure funding.

While the fear of trolls has pushed legislators to address some of the problems of the US patent system as it currently exists, at the end of the day, legislators must judiciously focus their attention on the potential for abuse not only by so-called trolls, but by anyone. Making the US patent system fairer and more transparent will benefit the US economy, boost job creation and spur innovation to create new inventions that improve the human condition.