Patent Trolls and Their Impact

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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?

If you’ve ever known anyone who’s lived that nightmare most likely they were the unfortunate victim of a patent troll, sometimes called a “non-practicing entity” or NPE. The Ninth Circuit provides a more detailed explanation of the practice as “a small 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.” Many victims, unable to afford the cost of defending themselves and panicking at the short deadline, pay the demanded sum just to put the ordeal behind them. Here’s how to make sure it doesn’t happen to you.

What is a Patent Troll?

A Patent Assertion Entity (PAE), also known as a “patent troll,” is an individual or company that acquires patent rights for innovations developed by others—either by purchasing questionable business method patents or other active patents, sometimes from companies in bankruptcy—solely for the purpose of filing claims against unwitting infringers. In some estimates, more than 60 percent of patent lawsuits are brought by NPEs today, while in 2006 the rate was about 19 percent. These estimates don’t include those who were threatened with a lawsuit but never sued. For most victims, the only two choices are to pay the claim or fight it in court, a daunting prospect most can’t afford. The threat of lawsuit alone leads many to settle rather than risk a costly court battle.

How Do Patent Trolls Get Away With It?

A patent for an invention is a property right granted to the inventor by the United States Patent and Trademark Office (USPTO). Generally, U.S. patents are granted for a term of 20 years from the date the application was filed, which gives patent trolls a fairly long effective timeframe in which to pursue claims based on their portfolio of patents. Patent laws are poorly understood by most businesses, and patent litigation is complex, lengthy and expensive. Patent trolls exploit this confusion and complexity for financial gain.

For example, say your company develops an iPhone app that becomes wildly successful. You sell a million copies from the “Buy” button on your website. Unbeknownst to you, a patent troll holds the patent for the button’s design or functionality. The troll can take you to court, insisting you pay a licensing fee on every sale you’ve made to date (up to six years of past revenues)—and will make in the future, called a reasonable royalty—using their button. Their claim might seem reasonable if the patent holder were the inventor or manufacturer, but patent trolls own patents for products they generally did not invent and do not presently make.  

Cost to U.S. Businesses in 2011: $29 Billion

According to a Boston University School of Law study, “The Direct Costs for Non-Practicing Entity Disputes,” patent trolls cost United States businesses more than $29 billion in 2011. In one case, the online backup company Carbonite was sued for patent infringement by Oasis Research for $20 million. Carbonite and EMS, another company being sued by Oasis Research, fought the patent claims and won, while many smaller companies paid Oasis more than $100 million rather than fight them in court. Atlanta-based BlueWave Computing also fought a patent troll and won, but the battle cost the company tens of thousands of dollars in legal fees.

Larger companies that have been targeted, including BlackBerry, Olympus, Cisco, and AT&T, have fought back. In a recent suit CLS Bank v. Alice Corp., tech giants Google, Facebook, Dell, and Zynga successfully argued as “friends of the court” against Alice Corp.’s patent claim for a system, method and media for financial intermediation. The court ruled the patents were invalid because they were abstract ideas, not the actual processes. However, the average company targeted by patent trolls has annual revenues of less than $10.8 million. They simply can’t afford long, costly legal battles so they tend to pay the demanded amounts, even when the claims are weak or absurd.

What’s Being Done to Fight Patent Trolls

State and federal government leaders are beginning to take a stand against patent trolls. In June, the White House joined Congress in proposing new legislation aimed at stopping patent trolls from preying on well-intentioned companies. The legislation would require patent applicants and owners to regularly update their patent information. It would also include methods to determine the original owner of these patents used by patent trolls. U.S. Sen. Charles Schumer (D-NY) has also introduced a bill that would allow the USPTO, which oversees all patent applications, to establish a formal review process for infringement disputes. This bill would also allow patent holders and businesses to have the agency itself review their cases and issue a decision, eliminating a costly court battle.

States are also fighting to curb the business of patent trolls. On May 22, 2013, Vermont passed a law stating that patent trolls can be sued by victimized businesses, their customers, or even the state attorney general. Under the new law, patent trolls could be forced to pay the victims’ legal fees and damages of up to $150,000.

According to an October 18, 2013 New York Times article, the Supreme Court will be hearing two appeals decisions by the federal appeals court that oversees patent cases, in which two companies were sued for patent infringement by patent trolls. Both companies won their cases, but the Supreme Court will now decide whether the patent trolls will be forced to pay the legal fees of the companies they sued. If this decision is upheld, it could deter patent trolls from suing unsuspecting companies for patent infringement because of the added expense.

Businesses and associations are also coming together to fight patent trolls. The Internet Association, National Restaurant Association, National Retail Federation and Food Marketing Institute unveiled a national ad campaign in August 2013 that could seen and heard in 17 states to raise awareness of the patent troll problem. The print and radio ads are available at http://stopbadpatents.internetassociation.org/.

Arm Yourself With Knowledge

The surest way to protect yourself from patent trolls is to obtain patents for each aspect of your innovation. However, this peace of mind can be more expensive than risking a lawsuit and settling or defending against one in court.

If you are sued by a troll and you can afford to put up a fight, do it. Many claims made by patent trolls are spurious, and the court finds that no actual infringement to intellectual property has occurred.

A coalition of organizations and law schools, including the UC Berkeley School of Law, Consumer Electronics Association, and Electronic Frontier Foundation, recently launched Trolling Effects, an online crowdsourcing tool developed to battle patent trolls. The site offers a database of demand letters and blogs with helpful information about legislation and patent troll scams.

If you are contacted by a patent troll, or if you are interested in filing a patent application for your invention, an attorney can help. You can talk to an attorney about patent matters through LegalZoom’s Business Legal Plan or file your patent application with a USPTO-registered patent attorney or agent. For more information on patents, visit the U.S. Patent and Trademark Office website at www.uspto.gov.