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Inside the patent wars that are ruining American innovation

As long as companies can file frivolous lawsuits over dubious patents, Americans will lose.


S.E. Smith


Posted on Oct 14, 2014   Updated on May 30, 2021, 10:13 am CDT

Call them trolls, aggregators, sharks, or what they actually are—nonpracticing entities (NPEs)—groups that snap up patents with the intent of leasing them to other firms are bringing big money. Groups like the Electronic Frontier Foundation have identified them as a significant threat to online speech as well as overall American innovation, and they’re also a potential hazard to consumers who bear the brunt of frivolous lawsuits that drive down the quality of goods and services while driving the costs up. Many people seem to agree the patent system is broken, but they can’t agree on the relative evil of NPEs, and the best way to reform patents.

Ostensibly, patents are a great idea. Innovators should be rewarded for developing the practices, products, and methods that stand behind a variety of creations in a broad variety of industries. Creating a robust patent and trademarking system is what promoted innovation and and ingenuity in the U.S., and the system as it stands today is designed to provide companies and inventors with protections so they can earn back their investments.

Take, for example, the thousands of patents involved in your cellphone. Each one speaks to a different component, software or app, or system for accessing the cellular network. Each one is critical, and the work of a variety of engineers went into it. Patents protect their work and encourage them to keep innovating—which is why we have 4G and not CDMA.

The practice of developing patents and licensing them to other companies, or developing a patentable invention and then selling it to an aggregator who can in turn license it, is not only common, it’s also not inherently wrong. Firms that do this, however, occupy a complex role in the American landscape.

The line between shark and genuine aggregator conducting normal business can be a thin one, and it raises complicated questions about whether it’s really fair to run a company that doesn’t actually create anything. These are pressing and troubling issues in a larger cultural landscape; the banking industry, for example, doesn’t largely “create” anything, yet it has a huge impact on the American economy. In the case of patent NPEs, many of the patents they hold are in science and technology—where the money is—and the distinction between legitimate business and chilling effect is highly blurred.

Those arguing in defense of NPEs, as in this recent article in Forbes, argue that aggregators provide protections to “the little guy,” the inventor who cannot afford to go after companies exploiting or infringing upon a patent. Being able to sell to an aggregator means that “they have deep enough pockets to do battle with the exploiters of my invention.” As Forbes piece claimed, “They pay me good money for my intellectual property. Maybe they even let me tag along with the promise of some residual participation in their winnings.

Of course, the “left,” backed by the Wall Street Journal, rises up in rage against the aggregator or patent holder, calling for judicial reform to prevent such suits from going through. This extremist view suggests that those calling for reform have no perception of the important distinctions between a NPE using licensing for legitimate business purposes and one using it specifically for outrageous profit in the form of frivolous lawsuits.

In a more thoughtful and nuanced examination of the situation, Justin Rohrlich at Vice took a look at the larger picture within the legal framework surrounding patents. He notes that one issue may be the historic approach to patenting. “An exclusive market allows a drug company to make its money back on something that might have cost hundreds of millions of dollars to develop, before the generic version eventually decimates their sales,” Rohrlich wrote. “Bringing a drug to market is also a tremendously long process, so [a 20 year patent] makes sense. Software moves much faster, and can be developed without large capital expenditures. Samuels believes five years of patent protection would be more appropriate.”

Perhaps real reform should involve a balance, establishing different terms for different kinds of patents to reflect the fact that they apply to very different industries. What is good for the goose, in this case, may not be good for the gander. Restricting tech patents to five years would turn patent trolling into an unprofitable affair, limiting NPEs to firms legitimately doing business with licensed patents.

Shockingly, in court, NPEs rule the day when it comes to patent suits. Practicing entities filing suits for patent infringement make approximately one third of the money in court judgements as patent trolls, highlighting the fact that for some aggregators, the money isn’t in the licensing. It’s in the filing suit.

Frivolous lawsuits have been part of a larger discussion on tort reform for a long time, but in this case, they have an extremely chilling effect, because they’re actively stifling innovation. Alan Schoenbaum at Rackspace notes:

Based on Chien’s research, companies with less than $10 million in revenue comprise 55 percent of unique defendants to suits by patent trolls. The companies least able to afford the enormous cost of defending patent suits are getting hit the hardest. It is well documented that defending a patent suit through trial can cost upwards of $5 million. It is a financial impossibility for a $10 million revenue company to handle that kind of financial burden. The result in virtually every case is an expensive settlement for less than expected defense costs. This is an access to justice issue if there ever was one.

This ties into a common practice. Rather than going after the big guns like Google and Microsoft, patent trolls typically start small. They aim at smaller firms that don’t have litigating power in the hopes of pressuring them into folding, building up a war chest to use against larger companies. When big firms like Amazon are hit with patent infringement suits, the amount of compensation requested is trivial, enough of a drop in the bucket that they may settle of course, swelling the bank accounts of NPEs, and the cycle begins again.

Suppressing innovation leaves consumers holding the bag. When the United States isn’t advancing technologically, it’s not advancing socially. Fewer new devices and developments equates to fewer jobs and brain drain to nations with less backwards patenting systems where creators can feel confident that their inventions will make it to market without interference.

There’s another chilling effect with patent trolls, though: The rise of the SLAPP (strategic lawsuit against public participation). SLAPP cases can be found at every level of the U.S. court system, and while many judges aren’t very impressed with them, other cases slide through. NPEs have been attempting to use SLAPPs to suppress legitimate patent owners and firms requesting thoughtful re-examinations, as for example when Landmark Technologies sued eBay for pushing the USPTO to take a closer look at three Landmark patents. Meanwhile, Lodsys filed what was effectively a naked SLAPP in retaliation against a critic who had referred to the firm as a troll in a podcast.

Public participation and commentary is key not just to upholding the First Amendment and creating a robust landscape of discussion and respect for opposing views. It’s also an important component of technological and social innovation. The combination of trolling and SLAPP cases effectively terminates important avenues of exploration within U.S. society, and many industries are taking note.

Reforming patent law is a complex challenge, but it’s imperative to address the issue sooner rather than later, as a growing number of firms grow uneasy with the safety of their products, and, by extension, the wisdom of doing business in the U.S. at all. Creating a tiered patent system more appropriately scaled to different kinds of innovations may be one way to address the issue—but are lawmakers willing to take it on in the face of considerable pressure from industries that stand to profit under the current system, including aggregators strategically applying patent suits to their business model?

Photo via Hartwig HKD/Flickr (CC BY-ND 2.0)

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*First Published: Oct 14, 2014, 11:00 am CDT