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. (Get statistics about number of patents not used) 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.

• venn diagram showing the overlap of PAEs, NPEs, and Patent Trolls?

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." [1] 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. [2] 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. [3] 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. [4]

The patent market is illiquid, which means 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. [5] This allows inventors to focus on innovation while benefiting from the knowledge and connections that intermediaries possess. [6] Patent assertion entities are able to incentivize innovation through the effective brokerage of patents. [7] They manage risks for small inventors and inform manufacturers or inventors of the usefulness of having another inventor's patent in their patent portfolio. [8]

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, sued 101 companies in 2015, 55% of which are considered small businesses under SBA regulations (Endnote: eDekka considered top patent troll by Unified, and the percentage is based on the 92 companies we could find information on and classify). There are without a doubt many more companies that eDekka sent threatening demand letters to, companies that decided to settle instead of bringing the case to court. Compare this to find data for another company that is definitely not a patent troll, perhaps Apple?. 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". 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" [9].

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.

Recommendations on Curbing Patent Troll Activity

• have courts be more consistent on their rulings and procedures (so not everyone goes to E.D. Texas)