IP: Trolls to freeze in their tracks? Not likely.

Vermont and federal agencies fire broadsides at NPEs with uncertain results

Last November, the Obama administration began seriously considering how to rein in the attacks of so-called patent trolls. Vermont fired the first blow this past May, and more recently both the International Trade Commission (ITC) and the Federal Trade Commission (FTC) subsequently entered the battle. Will additional sunlight on this contentious issue turn the trolls to stone, as in Tolkien's classic? Can executive actions and state legislation really stop trolls? And perhaps more importantly, can trolls’ actions be curtailed without adversely affecting the recourse that legitimate companies require to protect their IP? Only time will tell, but based on initial reviews, there is reason for concern.

A patent troll—or less pejoratively, a non-practicing entity (NPE) —has been defined as a legal entity that rather than seeking to manufacture or market a patented product instead tries to enforce its patents against one or more alleged infringers in a manner considered unduly aggressive or opportunistic. Many view trolls as a drain on the economy, forcing companies to spend more on defensive patent litigation than on research and development. Many believe patent trolls unfairly extract licensing fees from companies that are more inclined to settle than to fight. As a result, the licensing costs that litigation-averse companies pay are thought to increase the costs of products to consumers.

Patent troll activity is not just growing; it is changing. When patent trolls first started attacking, they often targeted larger software-based businesses. As their targets started to mobilize and build defenses, trolls found easier prey in filing or threatening lawsuits against end-users, i.e., hotels, coffee shops and other businesses that simply use off-the-shelf technology. For example, a hotel that uses Wi-Fi routers that are alleged to infringe patents may be more likely to try to settle a patent infringement claim outright as opposed to engaging in costly patent litigation, and the trolls and their attorneys well know it.

Trolls are also engaging in a tactic known as privateering, where an operating company transfers its patents to a troll, which then uses the patents to target the operating company's competitors anonymously. Making matters worse and drawing the ire of the FTC, some trolls send licensing demand letters that make false claims, wrongly allege infringement or assert expired patents in the hopes of extracting a quick settlement from a scared defendant.

Recently, the Obama administration proposed a number of legislative and executive steps to attempt to curb the growing onslaught of the patent trolls. These include:

  1. Passing laws requiring disclosure of the real party in interest behind efforts to enforce patents
  2. Restricting infringement actions against companies that buy off-the-shelf products and put them to their intended use
  3. Giving courts more flexibility to award attorney’s fees to prevailing parties
  4. Limiting the circumstances under which the ITC can ban imports of infringing goods

The ITC’s role in this is particularly interesting. The commission’s purview is to protect domestic industry, and it has become a desired venue because it can typically address patent infringement claims faster than federal district courts, and ban the importation of infringing products through the aid of U.S. Customs. However, under current practice, companies are not required to prove that they are well-established in the U.S. before they file patent infringement complaints at the ITC, only after. In late June, in hopes of hurting the patent trolls, the ITC announced its plans to change this rule; it will soon require companies to prove they have sufficient U.S. production, licensing and research before they can rely on the ITC as a forum to resolve their disputes. In late June as well, the FTC proposed to hold public hearings into the patent troll problem, aimed at developing additional defenses to curb their alleged abuses.

Most likely spurred by a desire to build the local economy and attract companies to the state, with an added benefit of potentially facilitating the efficient resolution of patent infringement claims, Vermont recently enacted a statute prohibiting assertion of patent infringement claims in bad faith. The statute grants the Vermont attorney general and the targets of such assertions the right to sue patent trolls in Vermont courts for such abuses. The statute also provides for the awarding of equitable relief, damages, costs, attorney’s fees and exemplary damages to the prevailing parties.

Not surprisingly, with any type of legal reform come a number of unanswered questions. In this case, the question appears simple, but its answer is anything but: How does an arbiter distinguish a troll from a company that is legitimately seeking to defend its intellectual property?

To answer that suggests revisiting the definition of a patent troll mentioned above.What can properly be defined as “unduly aggressive or opportunistic” behavior? What is so to one person is not necessarily so to another. And what general counsel does not frequently believe her company is being unduly subjected to unreasonable or opportunistic claims? Making matters more complicated is that while a troll’s litigation tactics are often characterized as abusive, many of the techniques counsel use in these cases are perfectly legitimate, applying the law as it stands to its fullest extent.

How do we draw a meaningful distinction between a “person and a company” —a distinction even the Supreme Court has balked at making, e.g., in Citizens United v. Federal Election Commission? Are big companies patent trolls and small ones not, or vice versa? Should a company’s size or pocket-book disqualify it from earning opprobrium as a patent troll?  The not-so-secret tactic of companies with huge IP portfolios is that in addition to their publicized defensive purpose, some use their patents as offensive weapons in negotiations. IBM, for example, receives more than $1 billion in revenue from licensing its patents each year. How many of those licenses are related to products that IBM actually markets or makes? In 2012, IBM secured 6,478 patents, according to IFI Claims Patent Services 2012 rankings. Considering that IBM was granted a patent on extracting value from a patent portfolio, it would seem a safe assumption that IBM is not manufacturing or marketing at least a portion of those 6,478 patents. So is IBM a patent troll? And what about Apple? In 2012, Apple was granted 1,136 patents. If Apple is not practicing each of those patents, is Apple a patent troll?

Universities present another complexity. They may own patents but typically do not manufacture or sell any patented products. Today, most large universities maintain sophisticated licensing offices that earn millions of dollars in royalties from patented technologies developed on campus each year. If Stanford University files suit to defend one or more patents it alleges that it owns, is the university a patent troll?

What about individual inventors struggling to perfect innovations of their own? Without the resources to pursue every company that uses its ideas without authorization, selling patents to a company with deeper pockets often exemplifies the best way to guarantee the income these inventors rightfully deserve. If the buyer then sues another party for infringement, is it a troll? So, was Thomas Edison a patent troll?

Lastly, if “intention to manufacture or market the product” is the benchmark, how much production is necessary to turn a troll into a member in good standing of our “innovation ecosystem”? The truth is that patent holders occupy a spectrum as expansive and varied as the nation’s economy itself. If we insist that only manufacturers and marketers are legitimate patent holders, then we risk marginalizing and weakening an indispensable aspect of American innovation, one that more often than not provides the Apples and IBMs of the world with the competitive edge they require. Some of those innovative suppliers are applied research firms developing everything from genetic sequences for super plants to complex formulas that extend the reach and productivity of mobile devices. These firms exist to develop new ways of looking at things, build a portfolio of proprietary patents, and license or sell their rights to the highest bidder. Are these innovators patent trolls?

These questions remain unanswered. As long as they are, uncertainty will prevail for trolls and legitimate businesses alike. It is possible that courts will ultimately find the Vermont statute unenforceable. It is also possible that the FTC, ITC, Department of Justice or even Congress will need to establish more rigorous standards to more accurately distinguish trolls from companies that design and manufacture intellectual property rather than just license it. That being said, just because the challenge may seem great does not mean that the battle itself should not be undertaken.

Many hope that even if these new efforts to weaken patent trolls ultimately prove fruitless, the effort itself is still worthwhile because it may make trolls think twice about what patents they seek to enforce. This introduces a measure of uncertainty for patent trolls as well, making them subject to exactly the same fears their victims have: It becomes less attractive economically to keep bringing suits if they are consistently going to fail on points of law. Investors drive the actions of publicly held NPEs, and investors hate uncertainty.

Perhaps that is the best we can hope for—to make the market volatile enough that investors will seek other havens for their money. Under the increased sunlight of continuing actions from states and the federal government, and without the spur of investors to bankroll their litigations, maybe trolls will turn to stone and ultimately be vanquished.

Contributing Author

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Scott Slavick

Scott Slavick is a shareholder at Brinks Gilson & Lione, where his practice focuses primarily on trademark prosecution and trademark litigation. Scott maintains all aspects...

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