Are Pirates Preferable to Trolls?

We’ve recently posted about patent trolls (Beating the Ugly Out of Trolls, 2013), including the adverse effect that they have on patent development and consumer costs, as well as some possible solutions to the problem. But will such solutions go far enough? There’s a new monster in town – and he’s hiding under the bridge while someone else sails forth to attack.

Patent holders have begun taking the patent troll system and turning it to their advantage. Under a practice known as patent privateering, a patent holder transfers part of its portfolio to a patent assertion entity, also known as non-practicing entities or, more generically, patent holding companies. The holding company then theoretically asserts the patents in the portfolio against any legitimate infringers, although the focus is likely to be either companies with deep pockets, or companies with shallow pockets who can be scared into paying up relatively quickly.

The patentee likely takes the position that it is merely monetizing its patents, and its past research investment, which provides dollars for future research as well as ensuring that the patentee is not distracted by ongoing litigation on one or more fronts. In addition, the patentee may receive a covenant from the holding company not to sue the patentee based on any other patents in the holding company’s portfolio.

These all sound like fine, noble arguments, and are likely true as far as they go, except when the holding company is surreptitiously created by or for the patentee with the specific intent of having its patents asserted against the patentee’s competitors. The holding company ties a rival up in litigation, forcing the rival to direct its energies towards defending itself. This reduces potential innovation by that competitor, and reduces marketplace competition. The patentee does not suffer from the “loss” of the patent, as it has typically taken a royalty-free license in the subject matter of the patents, may have actually received money in exchange for the original transfer of the portfolio, and may also have negotiated a right to some of the proceeds realized from the litigation. Under these circumstances, any lawsuit can be settled without the need for the patentee to engage in cross-licensing discussions regarding the rival’s patents or some of the patentee’s other patents. The patentee is free to pursue its own activities without the risk of losing a lawsuit, or of being dragged through the mud in court or in the court of public opinion. There may also be less financial risk, as the courts, at least recently in the U.S.[1], begin to start forcing patent holders who sue and lose to pay the other side’s attorney’s fees – it could be more difficult to show that the plaintiff knew the lawsuit was frivolous if the plaintiff was not actually involved in prosecuting the patent initially.

It does appear that the U.S. is getting tired of abusive patent litigation, having recently passed the Innovation Act[2], which requires, inter alia, that the plaintiff provide extra information about the owner of a patent and the basis for the complaint. The Innovation Act also provides for attorneys’ fees to be awarded to those subject to a frivolous claim, and for future legislation to reduce the costs of discovery in patent litigation.[3] It will be interesting to see whether such legislation cools off the privateers and trolls, and whether Canada feels the need to look at enacting equivalent law.