Transfer Pricing Associates

Are There Patent Trolls Lurking Under Your Company's Bridge?

post Friday March 2, 2012

patent trolls


The current patent law system has not yet found an adequate balance between protecting innovation while also making it harder for patent trolls to cash in on their patents held on small advances in complex technologies.  As a result, companies are finding it harder to cross the bridge to innovation without first being stopped by a troll slapping down an injunction.

So, what exactly is a patent troll?  Patent trolls are basically people or companies that buy up a large number of patents then opportunistically enforce them against alleged infringers, usually with no intent to further develop, market, or manufacture the patented invention.  These companies usually obtain patents only to license them and often use the threat of an injunction to extract a high price from infringers.

So, given the potential payouts, you can imagine that patent trolling has become pretty popular.  These companies can buy patent rights cheaply and then later have the opportunity to squeeze money out of big R&D-intensive companies that may be infringing on aspects of the acquired patent.   

Successful trolls have also learned how to play the game - they sue multiple defendants at the same time, use the same set of patents in multiple cases, and use the same team of counsel.  These patent trolls therefore can in essence capture economies of scale in litigation and lower their committed capital by using contingent fee lawyers.  Others just sit on their array of acquired patents (some bought, others acquired from bankrupt companies) and just use the threat of repeat lawsuits to get royalties out of practicing companies.  Patent trolls have essentially developed a method to yield greater profits from assets than other inventors have been able to.  So, it’s no wonder trolls have attracted private equity and venture capital. [Source: Forbes]

Although it is very expensive to go through the whole litigation process, when companies approach patent trolls head on, surprisingly, eight out of ten patents held by trolls are deemed unenforceable.  In fact, 90% of businesses who challenge patent trolls will win but the hefty costs of fighting the trolls in court could also bankrupt a business.  There may be one saving grace, however, for companies in the United States at least.  In 2011, the America Invents Act came into practice which allows patents to go to the "first to file" instead of the "first to invent." But, there is a new provision that keeps companies who are suing for patent infringement unable to sue an entire group of infringers, only individual infringers.  This will mean that patent trolls will have a higher cost to file which hopefully will mean less economies of scale litigation.  Unfortunately, the new act doesn't mean patent trolls won’t give up and go hide under their bridges of patent portfolios.  The more the digital space develops and opportunities for small tech advances patents grow, the more web innovators may be at risk.  [Econsultancy]


Image courtesy of Tom Curtis

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