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 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 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.

Why Patent Assertion Entities are Good for Innovation and Small Businesses

The current U.S. patent system restricts the market for innovation with high transaction costs and legal risks. [1] Most small and medium-sized businesses are unable to afford the costs associated with potential patent litigation, which prevents the commercialization or licensing of over 95 percent of current active patents. [2] Therefore, smaller-sized businesses must 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. [3]

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. [4] This allows inventors to focus on innovation and benefit from the knowledge and connections that intermediaries have. [5] Patent assertion entities have the ability to incentivize innovation through the effective brokerage of patents. [6]

Are Patent Trolls Really that Big of a Problem?

• There's no doubt they exist