The Truth Behind Patent Trolls Issue Brief

This is the issue brief based off findings in The Truth Behind Patent Trolls page.

Introduction

Patent trolls have galvanized legislators to create legal solutions to economic problems. Legislation considered in the current congressional cycle seeks to curb patent troll activity through restricting enforcement methods for patents, such as demand letters. This issue brief is designed to provide an overview of patent troll activity and provide recommendations for proponents of patents and innovation as they seek to curb patent troll activity.

What is a Patent Troll?

No agreed-upon definition of patent troll exists. The term patent troll is used interchangeably with the terms non-practicing entities (NPEs) and patent assertion entities (PAEs). Despite similar sounding names, several key differences exist between the three terms.

Non-practicing entities own patents, but do not necessarily create products out of these patents. This behavior is pretty common; 95% of patents are never used commercially [1]. Universities are examples of non-practicing entities. Faculty members may file for patents based on their work in a laboratory and receive a patent. Then, those faculty move on to a different project and do not use the patent they hold.

Patent assertion entities (PAEs) are a type of non-practicing entity that generate a majority of their revenue through licensing patents they own. For example, a large firm may buy up a thousand patents. Instead of creating products derived from those patents, they license these patents to other firms that wish to create those products. If another firm infringes on a patent, the patent-assertion entity may send a demand letter to the company with a warning. The demand letter warns the infringer that they are subject to a lawsuit if they do not acquire proper licensing of a patent. (Maybe present some story to get the point across easier.)

These demand letters serve as the tipping point between patent assertion entities and patent trolls. Whereas PAEs assert the fair value of their patent against the infringer, patent trolls inflate the amount of damages felt as a result of infringement. Patent trolls may threaten a firm with exorbitant lawsuit costs, and then provide a quick way out of a lawsuit through a license. The supposed infringer, fearful of a high lawsuit costs, may just pay the licensing fee. However, the supposed infringer may not even have infringed on any patent.

Patent trolls may also target a slew of companies that tangentially intersect the sphere of the patent. One famous example of a patent troll is MPHJ Technology Investment, which sent out demand letters to more than 16,000 small businesses. Each letter demanded license fees in the $1000 range.

• Show venn diagram on patenttrollsdata3.xlsx on sheet 1 if relationship between NPE, PAE, and PT is not clear

Why Patent Assertion Entities are Good for Innovation and Small Businesses

Patent assertion entities that do not engage in abusive litigation are often burdened by the association with the term "patent troll." [2] Proposed patent legislation in the 114th Congress fails to make a clear distinction between PAEs and patent trolls. The House Innovation Act (H.R. 9) and the Senate PATENT Act (S. 1137), two major bills proposing patent reform in the current Congress, do not differentiate between legitimate patent holders and patent trolls and threaten to make litigation even more costly and risky for all patent holders.

The current U.S. patent system restricts the market for innovation with high transaction costs and legal risks. [3] Most small and medium-sized businesses are unable to afford the costs associated with patent litigation and are prevented from commercializing or licensing over 95 percent of current active patents. [4] Therefore, many smaller-sized businesses rely on patent assertion entities to protect their patents and defend against expensive litigation. Patent assertion entities aggregate and manage patents and have the expertise to legitimately protect patents from infringement. [5]

The patent market is illiquid, meaning that assets cannot be sold or exchanged easily. In illiquid markets, specialized intermediaries, like patent assertion entities, can help match patent holders to patent buyers and transfer ideas and technology from inventors to manufacturers effectively. [6] This allows inventors to focus on innovation while benefiting from the knowledge and connections that intermediaries possess. [7] Patent assertion entities are able to incentivize innovation through the effective brokerage of patents. [8] They manage risks for small inventors and inform manufacturers or inventors of the usefulness of having another inventor's patent in their patent portfolio. [9]

PAE litigation increased with the rise of technological innovation in the twenty-first century, but this does not mean that they have stifled innovation with more litigation. Rather, patent assertion entities lose 92 percent of trial cases based on merits. [10] Some believe that this is a sign that PAEs do not have valid claims to the patents they possess; however, PAEs fail trial cases because they do not properly show infringement. Because PAEs do not manufacture or sell products, they are not liable to counterclaims. This makes them more likely to make weak infringement claims, which leads to a lower-than-average success rate in cases ruled on merit. [11]

According to the U.S. Census Bureau, small businesses (with less than 500 employees) made up 99.7 percent of employer firms in the United States in 2012. [12] Small firms produce more patents per employee than large companies and help drive innovation in the United States economy. The patents they develop have a greater impact and are often more technologically important than those of large firms. [13] The Small Business Administration reported that "although small firms account for only 8 percent of patents granted, they account for 24 percent of the patents in the top 100 emerging clusters." [14]

Are Patent Trolls Really that Big of a Problem? + Why Stricter Demand Letter Requirements Isn't the Solution

There's no doubt that patent trolls exist. eDekka, widely considered one of the top patent trolls, filed lawsuits against 101 companies for patent infringement in 2015, 55% of which are considered small businesses under SBA regulations. There may be more companies eDekka sent threatening demand letters to, companies that decided to settle instead of bringing the case to court. Compare eDekka to Intellectual Ventures, which had only filed 6 patent lawsuits in all of 2015. Intellectual Ventures is considered by the public to be a legitimate patent monetization firm [15]. It is clear that there is a distinct difference between patent assertion entities and patent trolls. As of December 2015, eDekka had sued over 200 companies for infringing upon the US Patent no. 6,266,674 "Random Access Information Retrieval Utilizing User-Defined Labels", a patent on a form of household remote controls. 168 of these cases were later thrown out by US District Judge Rodney Gilstrap, who wrote that the "strikingly similar lawsuits" demonstrate "an aggressive strategy that avoids testing its case on the merits and instead aims for early settlements falling at or below the cost of defense" [16].

Supporters of current legislation against patent trolls claim that the huge increase in patent litigation cases proves that patent trolls, just like eDekka, are increasing in number and prevalence. Many of them point to stricter demand letter requirements as the solution. The Innovation Act that is currently under consideration in the House demands that any claims of patent infringement must be accompanied by a very specific initial complaint letter, including information such as the name, exact model number, and description of each alleged infringement.

There are two problems with this. First, the increase in patent litigation cannot be attributed to an increase in patent trolls. Patent litigation is increasing, but only because of the uncertain nature of technological advancements and the application of patent claims to these new developments. Patent litigation surges are consistent with major shifts in technological developments. When patent filings and lawsuits are graphed together, both lines have an obviously positive slope, and generally move in tandem. There has been an increase in lawsuits, but it is proportional to the increased filings. (Show the graph) Thus, patent trolls exist but their prevalence has been greatly exaggerated by the media.

Second, stringent demand letter requirements are not an efficient solution to curbing patent trolls. The proposed reforms against demand letters by the Innovation act are too broad; they have the potential to stifle innovation. Patent owners acting in good faith would not be able to legitimately enforce their patent rights, creating an ineffective patent system and reducing the incentives for innovation. Qualcomm Incorporated, one of the leading companies within the telecommunications sector, manages a portfolio that contains at least 13,000 US patents. As a company that relies on the current patent system to protect its innovations, Qualcomm stated that "the appropriate goal of the legislation should be to identify, and empower the FTC to address, only those demand letters that are sent in bad faith" [17].

Do we need to empower the FTC?

Legislators propose granting the Federal Trade Commission (FTC) more power to enforce demand letters and curb patent troll activity. However, their efforts are misguided given that the Federal Trade Commission has already demonstrated willingness and ability to address patent trolls. In the 2014 investigation regarding MPHJ Technology Investments, LLC, the FTC found more than 16,000 demand letters sent to small businesses. Subsequently, the FTC prohibited MPHJ from asserting "false or unsubstantiated representations" regarding a patent's licensing activity or the potentiality and imminence of a lawsuit.[18] However, the FTC did not award any damages to small businesses that fell victim to this patent troll.

Authors of legislation such as the Targeting Rogue and Opaque Letters (TROL) Act may argue that their proposed legislation creates more power for the FTC to determine "bad faith" demand letters. Bad faith refers to "'clear and convincing evidence' that the infringement assertions are 'objectively baseless' to avoid dismissal on summary judgment or a motion to dismiss"[19] However, determining the nature of bad faith demand letters sets an unreasonably high standard for the FTC to meet. In order to meet this standard, the FTC would have to enter into the demand letter author's state of mind and determine that the author's assertions are "objectively baseless."

Recommendations on Curbing Patent Troll Activity

• have courts be more consistent on their rulings and procedures (so not everyone goes to E.D. Texas)
• more specific regulation that targets patent owners acting in bad faith