Image of an early light bulb patent courtesy of Wikipedia.

Patent Trolls By The Numbers: How Litigation Is Abused To Make A Profit

Image of an early light bulb patent courtesy of Wikipedia.

In 2012 Apple was ordered by a court to pay $368 million for infringing a patent on technology used for FaceTime. But the company that owns the patent, VirnetX, has never produced a product using that technology – and probably never will.

Known as non-practicing entities – or “patent trolls” – companies like VirnetX enforce rights of patents that they hold, but do not use to produce products or supply services.

In the past, such companies have helped inventors defend their patents against infringement by large, wealthy corporations.

But the business has exploded in recent years, and has become fraught with abuse and bogus patents, according to a study by Boston University.

In 2011 alone, patent lawsuits cost companies a total of $29 billion, up from $7 billion in 2005. It’s not only big companies like Apple, either: 2,150 companies were targeted that year, 90% of which were small- or medium-sized businesses. In 2013, the number of companies totaled more than 2,600.

How the process works

Companies wishing to profit from patents that it did not research can buy them from companies that are bankrupt, companies that don’t need the patents, or license the patents from patent holders in exchange for a percentage of the profit.

They gather those in a patent portfolio, then monitor the market for anyone using or planning to use the technology in question.

Once a target is found, companies often threaten infringers with a lawsuit before going to court, in order to extract licensing fees. If that doesn’t work, however, the case is brought before a jury, in order to win a settlement and royalty payments.

While such patent suits occur across the nation, the Eastern District of Texas is considered a hotspot of patent troll litigation because of the judges’ expediency – in 2007, 88% of patent suits ended in a win for the plaintiff.

For many potential patent infringers, the odds are heavily skewed towards settling early. Depending on how large a potential settlement would be, defending against patent lawsuit could potentially cost anywhere between $350,000 and $5 million.

A net loss?

As pointed out in the study by Boston University, however, non-producing entities can often help small inventors or companies by protecting their patents for them.

It’s also argued that gathering patents in the hands of professional licensing companies organizes the ownership of patent rights in a more efficient matter.

TJ Chiang, a law professor at George Mason University, argues that it’s important to makes the proper distinction between legitimate patents and troll patents.

The latter, he says, are owned by someone who doesn’t practice the invention, infringed by non-copiers, has no licensees using it, and is asserted against a large industry of non-copiers. These patents contribute nothing to society, and only exist to make profits for the companies that filed them.

As noted by the Boston University study, the ubiquity of such patent troll suits can have a depressing effect on businesses, such as diversion of resources, delays in new products, and loss of market share.

Will patent troll suits continue to increase?

Yes, almost certainly. But there are several initiatives aimed at curbing abusive practices:

  • An anti-patent troll bill is moving through the Senate, although it’s been delayed by partisan bickering.

  • In Vermont, a recently-passed law has created a factor-based test for courts to determine when a patent lawsuit has been made “in bad faith.” Kentucky might consider passing a similar law next.

  • Federal courts are also starting to sanction patent trolls for frivolous lawsuits

  • The Electronic Frontier Foundation, which defends Internet liberties, is organizing a campaign for patent reform.

  • President Obama has already passed five executive orders calling for patent reform

Perhaps the most significant upcoming decision, however, might come from the Supreme Court in the case of Alice v. CLS Bank, a case that could decide whether software – the leading patent troll target – can be patented at all.

Ole Skaar