“Patent Trolls” and Their Effect on the Modern Patent System

Tuesday, October 22, 2013, by Daniel Choo

When the framers of the Constitution explicitly gave Congress the power to establish a national patent system, there is little doubt that they did so with every bit of good intention.  After all, the importance of providing inventors with temporary exclusionary rights over their inventions had been recognized long before the Constitution was even established.  But, like many things in life, good intention does not necessarily lead to positive results.  And with the recent rise in the prevalence of “non-practicing entities” (NPEs), many have begun to demand for significant overhauls to the existing patent system.

Traditionally, inventors relied on patents to protect their inventions from infringements and to promote further scientific innovations.  However, this is not so with NPEs.  Because NPEs generally do not produce or manufacture their own products, they accumulate patents by purchasing them from distressed or bankrupt companies.  Then, they use these patents to actively seek infringement suits against other practicing entities.  NPE’s primary objective is not to further scientific innovations but to generate economic revenue through patent licensing agreements and litigation.

NPEs often freely use “weak and vague patents to threaten product manufacturers . . . [with] frivolous infringement litigation.”

In theory, such an approach seems rather creative and commendable, especially in today’s stagnant economy.  But many NPEs, obviously, are not called “patent trolls” for their ingenious business strategy.  NPEs are fully aware of their advantageous position; because they do not produce products of their own, there is no risk of being countersued.  And so, NPEs often freely use “weak and vague patents to threaten product manufacturers . . . [with] frivolous infringement litigation.”  In response, these manufacturers usually have very limited options: they can invest both time and money to litigate the case with no guarantee of a victory, or they can agree to the exorbitant licensing terms.  With such limited options, there is obviously very little motivation for these companies to continue to innovate.

Many advocates of NPEs argue that all the name-calling and harsh criticisms are highly unfair.  NEPs are “simply enforcing their legal rights.”  The right to exclude others from practicing one’s patented invention is the whole basis of the patent system.  And the current system does not require that one actually manufacture or practice the patented invention before one can bring an infringement suit.

Opponents of NPEs do not necessarily object to this fact.  Where these opponents draw the line is at the sheer volume of infringement suits brought by the NPEs.  When compared to practicing entities, NPEs have filed “more than twice as many suits per patent and [have] assert[ed] each patent against more than four times as many alleged infringers.”  This discrepancy cannot be credited to mere differences in the quality of patents as “NPEs lose at a higher rate than product-producing companies when their infringement claims are [actually] adjudicated.”  Accordingly, these frivolous lawsuits not only tie up the courts unnecessarily, but legal costs resulting from such actions totaled over $29 billion in 2011 alone, highlighting an obvious need for an immediate solution to the problem of NPEs.

A potential solution, which has been lauded by many since its enactment, is Vermont’s “Bad Faith Assertion of Patent Infringement” statute.  The statute’s obvious strength is that it provides Vermont companies and businesses targeted by NPEs with the “means to sue a patent enforcer who engages in dubious patent enforcement actions or licensing activities.”  By doing so, the statute essentially levels the playing field between NPEs and the victims of their infringement suits.  Now, if the targeted company prevails in its claim against NPEs, the company is entitled to both equitable relief and monetary damages “in an amount equal to $50,000.00 or three times the total of damages, costs, and fees, whichever is greater.”  With such risks at stake, NPEs will more likely give second thought before bringing frivolous infringement suits, at least within the state of Vermont.

However, despite the acclamations, the “Bad Faith Assertion of Patent Infringement” statute is not without its share of potential issues, with the biggest relating to the issue of federal preemption.  According to the Supremacy Clause of the U.S. Constitution, any time a federal law is at issue with a state law, the federal law will prevail.  And in cases involving patents, federal courts have complete jurisdiction.  As a result, those in opposition of the law argue that it is just a matter of time before the Supreme Court overturns the statute on the grounds of federal preemption.

Proponents of the Vermont law, however, argue that the issue is not nearly as clear-cut as those opposed to the law would suggest.  First, as long as the Vermont courts apply the “objective baselessness” standard established by the Federal Circuit in its decision in Globetrotter, the issue of federal preemption is likely to have minimal relevancy.  In other words, if it can be shown that the NPEs’ assertion of patent infringement is “objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits,” then the federal patent law would not preempt any allegation of NPE’s violation of state law.  In addition, advocates of the statute are also quick to note that federal preemption only becomes an issue when the federal and state laws are in direct conflict.  However, that is not the case here.  In agreement with the federal patent law, the primary objective of the Vermont statute is to “strive[] to promote innovation and does not interfere with inventor’s decision to file for U.S. patents and disclose information about their inventions to the public.”  Under these standards, the proponents of the law argue that the “Bad Faith Assertion of Patent Infringement” statute is constitutional.

Obviously, only time will tell whether the Vermont statute has any lasting effects on the problem of NPEs.  But since its enactment, Nebraska and New Jersey have followed suit and implemented similar laws in their own respective states.  And more importantly, there has also been recent movement at the federal level in trying to curb the negative effects of NPEs on the patent system.  For instance, the Federal Trade Commission announced just a few weeks ago that it will conduct a formal inquiry into the business practices of at least “25 still-unnamed” NPEs (Politico).  In addition, House Judiciary Chairman Robert Goodlatte recently released a draft of a proposal that would significantly make it harder for NPEs to file patent litigation alleging infringement.

Regardless of the future of the Vermont statute, one thing is certain: NPEs’ days are clearly numbered.  It will be just matter of time before patents are once again utilized for their intended purpose—to promote scientific innovation and progress.