Beating the Ugly Out of Trolls

Patent trolls have evolved from what seemed at one time almost folklore to now being the subject of statistical and scholarly analysis [fn1] [fn2]. There are now even service providers that focus on knowing the principal patent patent trolls and designing strategies for mitigating risk and dealing with the trolls, such as RPX.

The current statistics suggest that despite tentative efforts to rein them in under the America Invents Act, they remain very active. Patent Freedom and RPX each report that the number of U.S. lawsuits involving what they refer to as “Non Practicing Entities” more than doubled from 2011 to 2012. The increase may be due to the curtailing of the NPE practice of joining unrelated alleged infringements in the same lawsuit, which the America Invents Act restricted. In actual fact, although there were more lawsuits, there was a 27% drop in the number of operating companies that were sued [fn3].

New suggestions on how to curtail troll activity continue to be floated. One group proposes criminalizing willful infringement. Another author suggests applying the English rule of having the loser liable for the attorney’s fees of the winner. A judicious application of that rule, including appropriate legislated discretion for increased costs would likely have a sobering effect on at least some of the litigation that has more to do with threatening to impose a legal expense burden than on the merits of a claim.

A patent troll does not target infringers in order to protect any monopoly that it relies on to supply a market – it supplies nothing to the market. Its principal economic effect is to ultimately raise the costs of goods and services for everyone. The only industry that is invigorated by patent trolls is the patent litigation industry, but patent troll litigation is based on nothing more than a legislated patent monopoly that is not being exploited by any injection of real products or services into the economy.

The fundamental objection to the concept of a non-practicing entity asserting an entitlement to compensation for patent infringement is rooted in the intuitive feeling that a damage award should be compensatory. If the non-practicing entity has not lost business or market share because of the infringement, why should it receive any “compensation” for it? Fundamental to a non-practicing entity’s claim is that even though it is not practicing the patented invention, it is entitled to damages on the basis of a “reasonably royalty”. The problem is that U.S. jurisprudence awards such a “reasonable royalty” on the basis of legal fictional assumptions that do not apply to patent trolls.

For example, Georgia-Pacific [1] establishes 15 factors to be considered in assessing what would be a “reasonable royalty” for the purposes of calculating damages. Many of the factors explicitly refer to the actual product of the patent holder. Such an assumption simply does not apply to patent trolls.

35 USC §284 explicitly provides that damages shall not be less than a reasonable royalty. The legislative provision was adopted partly in reaction to the difficulty in accurately calculating a plaintiff’s losses in damages calculations, and to some extent what was then unsettled law in relation to the interface between law and equity and whether one is entitled to an infringer’s profits as a measure of compensation.

One option would be to eliminate the statutory reference to a “reasonable royalty” as a minimum for damages assessments. In the short term, this might take time to bring about real change. But in the longer term, the focus would return to the damage actually suffered by the patentee, providing a disincentive for gold-mining patent challenges. The actual damages suffered by a plaintiff might still take into account reasonable royalties in some cases, particularly where a court or a jury can be convinced that a real loss was suffered, albeit one that might be difficult to quantify.

A less game-changing approach might be a legislative change to 35 USC §284 requiring the court and the jury, in assessing the “reasonable royalty” minimum for damages, to consider the actual market participation of the plaintiff through the supply of goods and services other than the licensing of patents per se.

While similar changes might come about by judicial interpretation of the Georgia-Pacific factors, a legislative change is more direct and immediate.

Such changes would of course not be limited in effect to patent trolls. What is being proposed is to revamp a fundamental aspect of the calculation of damages in US patent litigation. The result may well be overall smaller damage awards in patent cases … and perhaps a saner and less “bet the farm” patent landscape, allowing companies and innovators to focus on economic value rather than dysfunctional and wasteful patent defense posturing and strategies.

[1] Georgia-Pacific Corp. v United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), mod. and aff’d, 446 F.2d 295 (2d Cir. 1971)