Distinguishing Between Legitimate Non-Practicing Entities and Patent Trolls

Patient licensing has widely been sensationalized as being a real threat to the innovation-promoting benefits of the patent system. However, as detailed in my last post, nothing could be further from the truth.

The August 2013 report from the US General Accountability Office (GAO) on US patent infringement litigation confirmed, both directly and indirectly, the view that there is no NPE patent litigation crisis and that, to the extent that there are problems with the patent system, they are linked primarily to patent quality, particularly in software-related patents, and to not the identity of the patent owner (e.g. NPE, PAE, PME, operating company).

With that in mind, the question then is how can you distinguish a legitimate NPE licensing firm from a troll? It’s simple: examine their actual behavior, not their identity as NPEs.

Legitimate NPEs employ a rigorous due diligence process to ensure that the patents they license are of good quality and highly likely to be upheld as valid by the courts and by patent office trial boards. Just as companies that manufacture products do, a legitimate licensing firm generally will resort to litigation to enforce its valid patents only after protracted good-faith negotiations with potential licensees have proven unsuccessful. They do not use the threat of litigation to seek nuisance settlements, nor do they threaten litigation against startup companies, product retailers, or retail consumers unless they directly compete with the licensor.

Patent trolls, on the other hand, often use low-quality or over broad patent claims to threaten litigation against hundreds of small businesses each year, even retail establishments such as coffee shops and hotels. They claim these businesses are infringing their patents simply by doing something as innocuous as scanning a document to email or offering WiFi access to customers. They then demand settlements of a few thousand dollars or threaten the business with an infringement suit that can cost literally millions of dollars to defend against.

These suits are known as strike suits—i.e., suits filed to extort nuisance settlements that are less than the cost of litigation—and are unfortunately nothing new in American courts. Similar suits are also filed every year in the personal injury, product liability, and shareholder rights arenas. In fact, personal injury and product liability suits outnumber patent suits by 10 to 1 every year. And given all the stories of ambulance-chasing lawyers and faked whiplash injuries, not to mention of people carrying cockroaches into fast-food joints and crying foul, it’s likely there are many times more abusive personal injury and product liability suits than abusive patent suits each year.

Abusive patent suits, however, are today generating public outrage, and it’s easy to see why. These patent trolls are corrupting a vital and venerated social compact to promote innovation by granting to inventors the exclusive right to profit from their discoveries for a limited time.

What can be done to stop them? The courts can, and increasingly do, sanction abusive litigants by making them pay the legal costs of the defendants they falsely accuse. And lately there have been calls from Congress and from the judiciary to apply these sanctions more often. But while we can certainly reduce abusive litigation, we may never do away with it completely. It’s the price we pay for ensuring free and open access to the courts by every citizen.

As for universities, R&D leaders, and legitimate patent licensing firms, these NPEs will remain a vital contributor to the U.S. economy—and as always, a fertile incubator of the next generation of startup companies that go on to change the world.

Read more about patent licensing by downloading the Patent Licensing: The Founding Fathers’ Secret for Economic Success paper. Click here to download the paper now. 

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