Policy Feature Issue: Patent Trolling and Its Many Victims

The patent system is a vital part of our national identity, stimulating American ingenuity and enhancing our global competitiveness.  Innovation is so entrenched in U.S. history that the Framers included safeguards for inventors in the Constitution.  Traditionally, patent holders have asserted their patents against those who produce infringing technologies.  But in recent years, abusive patent litigation—“patent trolling”—has ballooned, as companies have emerged solely to buy questionable and vaguely-defined patents and assert them against thousands of companies in hopes of extracting licensing fees.

How is a Patent Granted?

The U.S. Patent and Trademark Office (PTO) “is the federal agency for granting U.S. patents and registering trademarks. In doing this, the [PTO] fulfills the mandate of Article I, Section 8, Clause 8, of the Constitution that the legislative branch ‘promote the progress of science and the useful arts by securing for limited times to inventors the exclusive right to their respective discoveries.’”[1]

To acquire a patent, an inventor submits an application to PTO, where a team of patent examiners reviews the application to determine whether it meets the statutory requirements.[2]]  This process is known as “prosecution.”[3]  A patent application generally includes two parts: the specification and the claims.  “The specification is a written description of the invention that, among other things, sufficiently discloses the invention and the manner and process of making and using it”[4]  The claims “define the scope of the invention for which protection is granted and must be definite.”[5]

Once issued, a patent provides an inventor “the right to exclude others from making, using, selling, or importing claimed inventions for a limited period of time, generally 20 years,” and allows inventors to enforce this right by filing infringement suits, “regardless of whether it was copied or developed independently.”[6]  On average, the process of issuing a patent takes 30 months.[7]

What is Patent Trolling?

Patent assertion entities (PAEs) generally do not produce technology, but instead buy patents and assert them against manufacturers and end users.[8]  PAEs can protect small inventors by buying their patents and asserting them against larger companies that infringe on their technology.  However, PAEs are increasingly engaging in patent trolling, targeting not only large manufacturers, but also small businesses such as hotels, restaurants, and grocery stores.  “[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 PAE’s claims rather than risk a trial.”[9]  Demand letters sent by PAEs “can be so vague that they do not reference the patents at issue or what products the operating company sells that may be infringing these patents.”[10]  Yet, because patent litigation is so complex and costly, businesses often choose to pay licensing fees to patent trolls—even if the claims are baseless—rather than going to court.  President Obama said of these entities, “They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”[11]

Who is Targeted?

  • “…Whataburger has faced legal threats for using Ethernet networking equipment and for putting calorie information on its Web site.  And . . . Whataburger scuttled plans to offer Wi-Fi access to its customers after learning that a troll had started suing companies that offered Wi-Fi services.”
  • Supermarkets are also up in arms. . . .  ‘I would say every single supermarket chain has been targeted by patent trolls. . . .  The biggest chains are being targeted by many trolls in any given year. . . . there’s a troll that claims to own the concept of entering your zip code to find the nearest store.  Other trolls claim concepts related to clickable online menus and QR codes.’”
  • In 2011, one company “started suing chain hotels and even local coffee shops, saying they infringed 17 patents that cover the use of Wi-Fi.  [The company] sued hundreds of businesses and has reportedly sent out more than 8,000 letters demanding license fees, generally ranging from $2,300 to $5,000. Instead of going after companies that make routers like Cisco, [the company] targeted small businesses that simply use Wi-Fi, an increasingly common pattern.”
  • Another entity “claims anyone who scans documents to be e-mailed infringes its patents for the technology.  It’s sent thousands of letters nationwide to companies and non-profit organizations demanding as much as $1,200 per employee to avoid patent-infringement lawsuits.”
  • And another “has sued for license fees from podcasters through a patent originally filed in 1996, long before podcasts were conceived.”

Facts You Need to Know:

  • The number of patent suits filed by PAEs has tripled in the last two years. In 2012, “62% of all patent suits . . . were brought by PAEs.”[12]
  • In addition to the increased number of suits, “a disproportionate share of [PAEs] sued a relatively large number of defendants” per suit.[13]
  • The number of defendants sued by PAEs is estimated to have tripled from 2007-2011, while the number of defendants sued by operating companies did not significantly change.[14]
  • The increase in PAE activity extends beyond lawsuits filed, also including “an increasingly large number of suits threatened. . . .  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[15]
  • Based on one estimate, “PAE activity cost defendants and licensees $29 billion in 2011”—a 400% increase since 2005.[16]
  • Beyond direct costs, “Case study evidence suggests that there are significant indirect costs of [PAE] patent assertions. . . .  These include diversion of management or engineering resources, delays in new product introductions and improvements, loss or delay of revenue, and credit constraints.”[17]
  • When their cases are decided on the merits of their claims, PAEs lose 92% of the time.[18]
  • Small and medium businesses represented 90% of the defendants sued by PAEs in 2011.[19]
  • “Patent litigation is very expensive; the average suit in which $1 million to $25 million is at stake costs $1.6 million through discovery and $2.8 million through trial.”[20]  Thus for many, settling a claim—despite its legitimacy—is more cost-effective than going to trial.
  • PAEs increasingly assert patents without ever filing lawsuits, but “the extent of this practice is unclear” due to the lack of reliable data, as PAEs regularly require those who settle to sign non-disclosure agreements.[21]  A number of company representatives said “that for every patent infringement lawsuit filed against them, they might receive many times more letters notifying them of potential infringement and offering licenses.”[22]
  • The confidential nature of out-of-court settlements allows patent trolls to extract licensing fees both from the manufacturer of a technology and from companies that purchase and use the technology.

[1] The U.S. Patent and Trademark Office: Who We Are.

[2] GAO: Intellectual Property: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality (Aug. 2013) at 7 (“GAO Report”).  The statutory requirements are 1) novelty; 2) nonobviousness; 3) utility; and 4) patentable subject matter.

[3] Id.  In analyzing a proposed patent’s novelty and nonobviousness, examiners review “prior art,” which generally includes “other patents, publications, and publicly disclosed but unpatented inventions that pre-date the patent application’s filing date.”  Id.

[4] Id. at 8.  “The specification must be written in full, clear, concise, and exact terms so as to enable any person skilled in the art to make and use the invention.”  Id.

[5] Id.

[6] Brian T. Yeh, An Overview of the “Patent Trolls” Debate, Congressional Research Service (Apr. 16, 2013), at 3 (“CRS Report”).

[7] GAO Report at 7.

[8] CRS Report at 4.

[9] Patent Assertion and U.S. Innovation, Executive Office of the President (June 2013) at 6.

[10] GAO Report at 27.

[11] Patent Assertion and U.S. Innovation at 2.

[12] Id. at Executive Summary.

[13] GAO report at 18.  “Even with bringing about a fifth of all patent infringement lawsuits from 2007 to 2011, PMEs sued close to one-third of the overall defendants, accounting for about half of the overall increase in defendants.”  Id.

[14] Id. at 18.

[15] Patent Assertion and U.S. Innovation at 6.

[16] CRS Report at 2.

[17] James Bessen & Michael J. Meurer, The Direct Costs from NPE Disputes, Boston University School of Law (June 25, 2012) at 19-20.

[18] CRS Report at 1.

[19] Id.

[20] Id. at 3.

[21] GAO Report at 27.

[22] Id.