Patent Troll Definition in the United States

Patent Trolls (PAEs)

Patent Assertion Entities (PAEs) are also called patent trolls.

In many cases, patent trolls tie up (or threaten to tie up) legitimate innovators in court by charging them with patent infringement. The patent troll business model is generally seen as combining characteristics such as the following (Chien 2012; Bessen, Meurer and Ford 2011; Hagiu and Yoffie 2013):

• They do not “practice” their patents; that is, they do not do research or develop any
  technology or products related to their patents;
• They do not help with “technology transfer” (the process of translating the patent language
  into a usable product or process);
• They often wait until after industry participants have made irreversible investments before
  asserting their claims,
• They acquire patents solely for the purpose of extracting payments from alleged infringers;
  5. Their strategies for litigation take advantage of their non-practicing status, which makes them invulnerable to counter-claims of patent infringement.
• They acquire patents whose claim boundaries are unclear, and then (with little specific
  evidence of infringement) ask many companies at once for moderate license fees, assuming
  that some will settle instead of risking a costly and uncertain trial.
• They may hide their identity by creating numerous shell companies and requiring those who settle to sign non-disclosure agreements, making it difficult for defendants to form common defensive strategies (for example, by sharing legal fees rather than settling individually).

While intermediaries in general may be non-practicing entities, and generate revenues through
licensing fees, patent trolls go further by masking their identity, and acquiring and asserting broad patents, some of questionable validity, in order to extract settlement fees.

For example, one company sued dozens of online retailers, claiming that its patents covered nearly any use of online shopping cart technology, leading several retailers to pay settlements worth millions of dollars each. Ultimately, one online technology retailer won an appeal that invalidated each of the three key patents that were the basis for the original suits. The court found that the claims of the patents were obvious in light of products that already existed at the time the patent was filed. The appeals court held that once the technology existed to do purchasing on a closed network, extending this capability to allow purchasing on the Internet, while novel, required only steps that would be obvious to anyone skilled in the relevant prior art.

The victory in this case, however, required spending millions of dollars and years in
court – a risk that other online retailers had been unwilling to take (Mullin 2013a; Mackie, Payne,
and Stewart 1994). See below for additional examples of patent troll tactics.

Patent troll activity has increased dramatically in recent years (Figure 1). Last year, PAEs brought over 2,500 lawsuits — 62% of all patent suits. That compares to 1,500 in 2011 (45% of all cases,), and 731 in 2010 (accounting for 29%) (Chien 2013). Other studies find a similar rise in patent troll activity. An updated version of a study done for the US Government Accountability Office (Jeruss, Feldman and Walker, 2012) finds that PAEs filed 59% of the patent lawsuits in the US in 2012 (Feldman, Ewing, and Jeruss (2013).

The increased prevalence of patent troll suits, and patent suits in general, in recent years stands in contrast to the 20th century, when suits for patent infringement were relatively rare. This increase is likely due to two factors. First, there are an increasing number of computer and communications patents, whose wider breadth makes them more easily abused, as we discuss below. Patent troll suits are concentrated in the IT sphere; according to one estimate, 82% of patent troll defendants were sued on the basis of a software patent (in contrast to only 30% of those sued by non-PAEs) (Chien and Karkhanis, 2013). Software patents are nearly five times as likely to be in a lawsuit as chemical patents; business method patents are nearly fourteen times as likely (Bessen 2011).

Second, during the 20th century, patents were primarily held by manufacturers (FTC 2011). Rival
makers of complex products are likely to be infringing each other’s patents, so they have an
incentive to settle competing infringement cases by cross-licensing, rather than engaging in
expensive legal battles that do not add to society’s stock of scientific knowledge. In contrast, a patent troll has no rival product, so it can’t be counter-sued. Patent trolls also have few of the reputational concerns that might deter a well-known company from appearing to victimize other innovators. Furthermore, patent trolls can develop economies of scale in suing many firms at once on a contingency-fee basis; once the initial legal preparation work has been done, a patent troll can send demands asserting infringement to numerous companies at low cost, paying legal fees only in the event that its assertion is successful.

Patent trolls often threaten to sue with the intention of extracting license fees or settlement payments. The increase in the number of suits filed for patent infringement has thus been accompanied by an increasingly large number of suits threatened. Patent trolls assert broad patent claims against an unusually large set of potential defendants; these assertions are often not based on any evidence of infringement by an individual defendant, but are instead an attempt to find companies that will seek to settle the patent troll’s claims rather than risk a trial. Conservative estimates place the number of threats in the last year alone at a minimum of 60,000 and more likely at over 100,000 (Chien 2012).

For example, one patent troll sent 8,000 notice letters to coffee chains, hotels, and retailers seeking compensation for use of Wi-Fi equipment made by several manufacturers that they allege to infringe on its patents. In February, a Federal judge dismissed a suit by one of those manufacturers to prevent the PAE from seeking royalties from Cisco customers. (See Jones (2013)).

The uncertainty and expense of litigation suggests that many patents might be best viewed as
“probabilistic property rights” or “lottery tickets” (Lemley and Shapiro 2005). Given this situation,
many patent owners and users prefer to settle out of court for amounts that have not so much to do with the economic value of their patents or the probability that they have infringed. Instead, settlements are affected more by the parties’ relative opportunity costs of going to trial and attitudes towards risk—factors that favor patent trolls, whose legal fees are low (since they do not have to provide much evidence to assert that there has been patent infringement), and who do not have to pay the fixed costs of a manufacturing operation. Therefore, patent trolls have an incentive to drag out litigation, to increase pressure on defendants to settle the case (Tucker 2012).

Examples of Abusive Practices in Litigation by Patent Assertion Entities

Above we have argued that Patent Assertion Entities (PAEs) have “over-asserted” their patents,
pursuing legal action in a way that does not increase incentives for innovation, and in fact reduces these incentives and complicates normal business operation. Below are two examples:

Large company example

SAS is the world’s largest privately held software company, providing business and organizational customers with advanced analytics. SAS has been a defendant in several suits filed by patent trolls. In Congressional testimony in March, John Boswell, SAS’s General Counsel, described the patent troll business model and its impacts on his company:

“Here are the basic parameters of what is happening with these suits. A patent troll sets up
shop in a jurisdiction known to be supportive of patent plaintiffs… It buys patents from
defunct companies or patents that companies no longer want to keep. It does not hire
employees; it does not engage in research; it does not even practice the invention—nor
does it ever intend to practice it. The patent troll then either serves a demand letter on the
victims, or effects legal service of a complaint. The troll then pursues settlement by
threatening massive and costly discovery,… of every electronic document that might touch
upon the alleged claims, by any person inside the defendant’s operations. …[In one recent
case], the number of electronic documents that we had to collect exceeded 10 million….
SAS won summary judgment in this case and it is now on appeal to the Federal Circuit. So
far this case has cost us in excess of $8 million [in legal fees alone].”

If SAS ultimately wins this case it will be a Pyrrhic victory at best. We spent $8 million and
huge amounts of developer time and executive time etc., for what? This victory does not
resolve the other patent troll cases that we face, or will face in the future. This $8 million
and the millions more we are spending on other cases is money SAS no longer has to invest
in people, facilities, research, or product development; and we are a relatively small player
in this world. .. It does not cost much to be a troll and to make broad, vague demands. On
the other hand, the risk to the company receiving a troll threat is enormous.(Boswell 2013)

Small company example

A patent troll sent letters to hundreds of small businesses alleging infringements of patents if the businesses have document scanners integrated into their computer networks, and demanding a “good faith payment” of $900-1,200 per employee for a license. The letter provides no specific evidence against the recipient; it argues instead that general research “has led us to the conclusion that an overwhelming majority of companies like yours utilize systems that are set up to practice at least one of scenarios A through C” that are covered by the patents. In May, the State of Vermont sued the patent troll for unfair and deceptive practices, alleging that the letters were targeted to businesses and non-profits unlikely to be familiar with patent law, that they “shifted the entire burden of the pre-suit investigation onto the small business that received the letters”, and that despite repeated threats to sue if the payment is not made, no such suits had been filed (see Fisher, 2013).