This post expands on the remarks I made today at the Chicago Tech Roundtable meeting on Patent Trolls and Chicago’s Tech Community. The meeting was attended by a number of elected officials and their representatives as well as start-ups such as Jump Rope and Options Away Travel who have had direct experiences with patent trolls. This is an important issue for Chicago’s technology sector.
Trolls and Trolling – The Nature of the Problem
Patent trolls are in the news and they have been high on the agenda of intellectual property policy makers and academics for over a decade now. I started thinking about these issues when I worked as an IP lawyer in Silicon Valley in the early 2000’s. The Federal Trade Commission sounded an important call to action on patent trolls and the balance of competition and patent law and policy in 2003 [FTC, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, (2003)], and again in 2011 [FTC, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition (2011)].
I first wrote about these issues in a paper published in 2007, Patent Reform and Differential Impact (with Kurt W. Rohde who was then a student of mine and is now is a partner with McDonnell Boehnen Hulbert & Berghoff LLP), some things have changed since then, but the patent trolls problem persists, it may even be getting worse. In 2012, businesses and individuals targeted by patent aggregators and patent holding companies accounted for
58 37.8% of all patent defendants.
* An earlier version of this post contained the assertion that businesses and individuals targeted by patent aggregators and patent holding companies accounted for 58% of all patent defendants. That was a very unfortunate transcription error.
Not every non-practicing entity, patent aggregator and patent holding company is a necessarily a troll. There is obviously a role in our innovation ecosystem for people who invent but don’t have the complementary skills to commercialize. But the rough and ready correlation between patent assertion entities and trolls seems to fit. Any business that is sending out infringement notices by the hundreds or thousands can’t plausibly be doing the kind of diligence it should take to make a meritorious claim of infringement.
Debating who is and is not a troll is beside the point – it is trolling behavior that we need to address. Trolling is abusive and opportunistic behavior such as asserting bad patents or using patents to extort settlements that are only justified by the threat of legal fees. Trolling is mostly a numbers game – trolls targets hundreds or thousands of defendants, seeking quick settlements priced just low enough that it is easier for the defendant to pay the troll directly rather than pay his lawyers to defend the claim. Anyone who takes part in this kind of systematic opportunism that undermines innovation is a troll, NPE or not.
Patent trolls thrive by opportunistically taking advantage of the uncertain scope of patent claims, the poor quality of patent examination, the high cost of litigation and the asymmetry of risks and costs of litigation. There is nothing wrong with licensing your technology, or with litigating against infringers who would rather take your technology without a license. The patent system is meant to encourage investment in R&D and innovation. Businesses monetizing their technology aught to be celebrated, but using the threat of costly litigation to monetize bad or ill-fitting patent claims takes money away from R&D budgets for no social gain.
There will always be opportunists who try to exploit the system – the goal of patent reform should be to limit unproductive rent-seeking while leaving the door open to those businesses that actually contribute to the research and development that makes the U.S. a world leader in so many fields. We need reforms targeted at bad patents such as limiting continuations, rejecting highly abstract functional claims (especially in software and business method patents) and improving the quality of patent examination. But we also need reforms targeted at bad conduct. We need reforms that level the litigation playing field — it is far too easy to impose millions of dollars of defense costs based on dubious patents and tenuous theories of the scope of those patents. Some of the most useful reforms— reforms that leave the door open for well-founded claims — include: fee shifting such that the losing party pays the winning party’s fees in ordinary cases; heightened pleading standards; delaying discovery until after “claim construction,” and limiting discovery to those documents likely to be relevant to the specific litigation at hand. “Consumer stay” provisions would also do a lot to end opportunistic threats of litigation – under this proposal if, for example, a cafe was sued by offering Wi-Future interest to its customers, the manufacturer of the router could intervene and effectively consolidate the cases of all of its customers. Reforms aimed at transparency of patent ownership and taking action against misleading and deceptive language in demand letters would also be of some assistance.
House recently passed the Innovation Act to take up some of these issues and the Senate Judiciary Committee seems close to finalizing a complementary bill. Neither of these bills will put an end to opportunism, but they have the potential to make life a harder for patent trolls and a little easier for the rest of us.
Patent Troll Statistics
According to RPX Corporation PAEs initiated 62% of all patent litigation suits in 2012. [See Colleen Chien, Patent Trolls by the Numbers (http://patentlyo.com/patent/2013/03/chien-patent-trolls.html)] However, it is not exactly clear how RPX determines who is and is not a patent troll. Also RPX is in the business of providing “patent risk management services”, so it is not exactly a disinterested bystander in the patent troll debate.
The best empirical analysis of patent troll numbers so far is contained by Christopher A. Cotropia, Jay P. Kesan & David L. Schwartz, Unpacking Patent Assertion Entities (PAEs) (working paper available at http://ssrn.com/abstract=2346381). Figure 3 of that paper reports these numbers in terms of the number of individual defendants sued. On this metric:
- suits by large aggregators and patent holding companies increased from 31.6% of all patent litigation in 2010 to 37.8% in 2012;
- in contrast suits by operating companies went down from 48.9% in 2010 to 47.3% in 2012;
- if you include the IP holding companies of operating companies, suits by operating companies went down from 51.0% in 2010 to 47.8% in 2012;
Cotropia, Kesan & Schwartz round out this picture by reporting the numbers for universities & colleges, individuals & family trusts, failed operating companies & failed start-ups, and technology development companies. Some of these suits may be troll litigation, but without case specific information it is hard to tell.