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A legal system already bogged down by an unmanageable number of cases is seeing a rise in the number of patent infringement suits filed nationwide.
While many are legitimate fights by patent holders to protect their rights, legal experts say they see an alarming number of filings by non-practicing entities (NPEs), or patent trolls.
Though there are a variety of strategies employed by NPEs, here’s the general idea: A business buys a bunch of patents, preferably ones with broad business use, and then sends out letters — often thousands — to companies informing them that they are infringing on the patent. There is usually an offer to settle the dispute — the cost to a company can range from $5,000 to $1 million and up — with the threat of litigation if the money isn’t paid.
Opponents of such practices say the tactics amount to little more than extortion.
Congress agrees. Last month, the House of Representatives overwhelmingly passed the Innovation Act to curb the tactics of patent trolls. And in New York, Attorney General Eric Schneiderman came down hard last week on one NPE and promised to go after others.
But defenders of the practice say it’s a matter of free enterprise. If a company has the cash and purchases a patent, it has every right to enforce it, regardless of whether it intends to ever act on the patent.
Robert Lane, a partner in Hodgson Russ LLP, specializes in intellectual property litigation. He said the firm represents small and medium-sized companies that are vulnerable to patent trolls.
“The strategy is often to threaten a large number of these smaller companies, settle with them for cost of defense to build a big war chest and then use that to finance litigation against large, national companies,” Lane said.
An issue is the cost of fighting a patent infringement case, he said — litigation expenses can top $1 million. For many, it is easier and more economical to pay the demands of the trolls and continue.
“It is the most corrosive part of the process that we see with our clients — (patent trolls) going after them because they are most disadvantaged by the cost of litigation and strong-arming them into paying for meritless cases,” Lane said.
Michael Berchou, partner in the Buffalo office of Phillips Lytle LLP, said he recently settled a troll case and is working on another. He has seen a number of clients who received demand letters from NPEs. He agreed that many clients simply settle as the course of least resistance.
“There is a company out there that has 30 or so patents that cover anyone who is using Wi-Fi in their office,” he said. “A company like that is looking for maybe five or 10 grand. Although you can initially try to dodge them, ultimately, if you are on their radar, there is simply no way you could defend that for 10 grand, so you are going to pay that.”
Berchou said people hear the phrase “patent trolls” and think of a small, back-room type of organization. Quite the opposite, he said.
“You have topnotch, nationally known attorneys on many of these cases and they do very detailed analysis in advance of pursuing these claims,” he said. “They have given a lot of thought to what defendants they are going to go after and strategically how to attack.”
Legislative protection
An anti-troll bill dubbed the Innovation Act is making its way through Congress and U.S. attorneys general are working to curb such activity, but Lane and others warn that any legislative response is likely to come with risk.
“This current legislation is aimed at sweeping in these non-practicing entities, but how will it distinguish those from, for example, a university, which is not in a commercial business and won’t be practicing their patent but will be licensing it?” he said.
“It’s the kind of thing where it is easy for us to define in an informal conversation, but when it comes to writing a law, it can be a problem.”
Berchou agreed, saying such legislation runs the risk of “punishing” not just universities but solo inventors who may hold a patent but lack funding to take it to market.
“I could see scenarios where it would dissuade them from making a legitimate claim,” he said. “The difficulty is finding a way to effectively legislate some limits on these shell companies without hurting legitimate patent holders.
From the bench
With such seemingly suspicious methods used to collect from would-be infringers, how do the courts react to patent trolls when a case makes it to litigation?
The experts say that depends on where the case is filed. Patent trolls are adept at finding the courts most likely to offer favorable conditions for a troll fight. Berchou said it varies from court to court.
“Some (courts) are more sophisticated and some less on this issue, but given that we are now at a point where more than half of the cases that are being across the country are being filed by trolls, all of the districts are taking notice,” he said.
Savvy trolls do their homework and study where to file, according to Lane.
“Some of the judges are very hostile to them, and that’s why they tend to select the venues where that is less likely to be the case,” he said.
“The Eastern District of Texas is famous for being a patent troll venue. They have rules that are fairly friendly to the patent trolls in terms of how they process the cases.”
Free enterprise?
Back to the opening question raised by defenders of NPEs: Isn’t this just free enterprise?
Someone owns the patent and they have the right to defend it regardless of why they bought it or what, if anything, they plan to do with it.
Opinions vary.
Said Lane: “I think that would be a fair argument if not for the reality that what’s really going on in many of these instances is an effort to exploit the expense of the legal system and the order of procedure in these cases to force defendants to settle.”
Rebecca Stadler, meanwhile, is managing partner of DelVecchio & Stadler LLP, a Buffalo firm that specializes in patent applications. She said there’s nothing wrong with the existence of the NPEs and their efforts to enforce the patents they hold.
“I’m not entirely certain why this is such a concern,” she said. “(NPEs) are enforcing the rights they have been granted by the patent, so I get a little troubled with all of the concern about so-called patent trolls when you are dealing with intellectual property. But when you are talking about real property, there is never that debate.”
Stadler said just because a patent holder isn’t using a patent they own shouldn’t make it fair game for others.
“I’m not using my car right now, so does that mean someone else can just go take it and drive it? I think making it harder for people to enforce their patents could hurt some of our smaller inventors, or certainly the universities,” she said.
While frivolous lawsuits are filed, there are means in place in the legal system to deal with them, she added. As for the rest of the patent suits, it’s free enterprise.
“Why is the patent troll the bad guy when the defendant is actually the one that has infringed the patent?” Stadler said. “The patent troll is made out to be the bad guy when they weren’t the one that was infringing.”
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