Patent Trolls

A 'patent troll' is a colloquial term for a patent assertion entity (PAE) — a company that holds patents primarily to extract licensing revenue rather than to make or sell products: THE PAE BUSINESS MODEL: (a) PATENT ACQUISITION: PAEs acquire patents from: failed companies (startups that folded); corporate patent portfolio sales; individual inventors; university technology transfer offices; other PAEs (secondary market); the patents are often acquired cheaply because the original owner lacked resources to monetize them; (b) DEMAND LETTERS: PAEs send demand letters to dozens or hundreds of potential licensees; letters typically assert infringement and demand a licensing fee; fees are often set below litigation cost — $50,000-$200,000 per company — to make settlement rational even when the patent is weak; (c) LITIGATION THREATS: if the target doesn't pay, the PAE files suit in a plaintiff-friendly forum (historically the Eastern District of Texas; since TC Heartland v. Kraft Foods (S.Ct. 2017) narrowed venue, now typically Waco TX Division); WHAT MAKES THE MODEL PROFITABLE: patent litigation cost asymmetry — defending a patent case costs $1M-$10M; a PAE can file suit for $200K-$500K; the target rationally settles even when they believe the patent is invalid or not infringed; THE VOLUME APPROACH: PAEs send letters to hundreds of companies simultaneously; even a 20% response rate at $50K each generates revenue; scale multiplies the return; CRITICISM AND REFORM: critics argue PAEs produce no value and impose costs on productive companies; defenders argue they help inventors who lack resources to license independently; AIA REFORMS: the AIA included § 299 (misjoinder reform) and fee-shifting improvements to constrain abusive PAE litigation; inter partes review (IPR) was specifically designed as a tool against invalid PAE patents.

A well-structured defense can defeat PAE assertions at manageable cost: STEP 1 — DON'T PANIC AND DON'T IGNORE: receiving a demand letter does not require an immediate response or settlement; but ignoring it invites a lawsuit; STEP 2 — RAPID CLAIM MAPPING: immediately map the patent claims to your product or process; determine whether infringement is a real risk or remote; often a quick review reveals no plausible infringement theory; STEP 3 — ALICE § 101 MOTION: if the patent claims software, business methods, or abstract ideas, file an early motion to dismiss (or PTAB IPR with § 101 grounds if within PGR window) under Alice Corp. v. CLS Bank (S.Ct. 2014); Alice motions typically resolve in 3-6 months at a cost of roughly $100,000; success rate on Alice motions for software patents: roughly 50-70% in some technology areas; STEP 4 — INTER PARTES REVIEW (IPR) PETITION: file an IPR petition within 1 year of being served with a complaint; ~60-70% of instituted IPRs result in cancellation of at least one challenged claim; IPR costs $200K-$500K but is far cheaper than full litigation; many PAEs will settle at a much lower number once an IPR is filed — their business model depends on avoiding serious validity challenges; STEP 5 — eBay INJUNCTION DEFENSE: if a PAE seeks an injunction, eBay v. MercExchange (S.Ct. 2006) means courts will not routinely issue injunctions for non-practicing entities; without injunction threat, the PAE's leverage is limited to damages — and damages calculations often favor defendants in PAE cases; STEP 6 — FEE-SHIFTING (§ 285): Octane Fitness v. ICON Health (S.Ct. 2014): courts can award attorney fees to the prevailing party in 'exceptional cases'; a weak or bad-faith PAE assertion may be exceptional enough for fee-shifting; threatening § 285 may deter marginal PAE cases.

TC Heartland v. Kraft Foods Group Brands (S.Ct. 2017) dramatically changed where patent cases can be filed: PRE-TC HEARTLAND: under the Federal Circuit's interpretation of the patent venue statute (28 U.S.C. § 1400(b)), venue in patent cases was proper in any district where the defendant was subject to personal jurisdiction; since most technology companies sell products nationwide, they were subject to personal jurisdiction (and thus venue) in any US district; THE PROBLEM: the Eastern District of Texas (and particularly Judge Gilstrap's court in Marshall, TX) became notorious for patent cases; local rules, local jury pools, and local practice made it extremely favorable for patent plaintiffs; EDTX handled 40%+ of all US patent cases at its peak; TC HEARTLAND HOLDING: the Supreme Court reversed the Federal Circuit, holding that the patent venue statute (§ 1400(b)) means a domestic corporation can be sued only: (a) where the defendant is incorporated; or (b) where the defendant has committed acts of infringement AND has a regular and established place of business; IMPACT: domestic corporations can no longer be sued in arbitrary plaintiff-friendly venues; a defendant incorporated in Delaware with offices in California can object to suit in Texas; PAE STRATEGY SHIFT: PAEs shifted to venues that have physical presence: Waco, TX (Western District of Texas, Judge Albright); Delaware (where many corporations are incorporated); Western District of Texas; EDTX still handles cases for foreign defendants (different rules) and for defendants with Texas operations; FOREIGN DEFENDANTS: TC Heartland applies only to domestic corporations; foreign corporations may still be sued in any district, making foreign tech companies more vulnerable to forum shopping.

Several industry organizations provide tools, collective resources, and coalition defense against PAE assertions: UNIFIED PATENTS: an industry consortium that proactively challenges PAE patents at the PTAB; member companies pay annual membership fees; Unified Patents files IPR and PGR petitions against the most frequently asserted NPE patents WITHOUT requiring each member to file individually; effectively creates a collective defense that no single company could afford alone; annual membership fees range from $10,000-$1M+ depending on company size; LOT NETWORK: the License on Transfer Network; members license each other's patents through an automatic network license; when a member company sells a patent, the buyer (including PAEs) must honor the network license; reduces the threat from companies that sell patents to PAEs; RPX CORPORATION: a defensive aggregator that acquires patents from the open market before PAEs can acquire and assert them; member companies pay annual fees; RPX licenses acquired patents to its members, preventing assertion; ARTICLE ONE PARTNERS (now part of Validity): crowdsourced prior art research platform; companies post challenges to patents; researchers worldwide search for prior art; often used to challenge PAE patents; PATENT QUALITY INITIATIVE: the USPTO's ongoing program to improve patent quality and reduce the issuance of overly broad or unclear patents; COALITION FOR PATENT FAIRNESS: lobbying organization that advocates for patent litigation reform; has supported legislation such as the PATENT Act and the Innovation Act (neither became law but both advocated for PAE reform); STATE LAWS: some states (Vermont, Nebraska, Virginia) have enacted 'bad-faith patent assertion' laws that create state-law causes of action against senders of abusive demand letters; these laws have had mixed effectiveness and face federal preemption challenges.

PAE damages claims often appear enormous but can be substantially reduced through proper litigation strategy: PAE TYPICAL DAMAGES THEORY: PAEs typically seek a reasonable royalty (not lost profits — they make no products); they often claim high royalty rates applied to large royalty bases (e.g., 5% of all smartphone revenues); APPORTIONMENT REQUIREMENT: the Federal Circuit has repeatedly required that royalties be apportioned to the contribution of the patented technology to the entire product; LaserDynamics v. Quanta Computer (Fed. Cir. 2012): the royalty base must be the smallest salable patent-practicing unit (SSPPU), not the entire product; a patent covering one feature of a smartphone cannot claim royalties based on the entire smartphone price; COMPARABLE LICENSES: the most probative evidence of a reasonable royalty is prior comparable licenses for the same or similar technology; PAE licenses are often not comparable because they are forced settlements (not arms-length transactions between willing parties); Ericsson v. D-Link: non-comparable licenses must be adjusted for technical and economic differences; EXPERT TESTIMONY EXCLUSION: under Daubert, courts can exclude PAE damages experts whose methodologies are unreliable; expert opinions based on unsupported royalty rates or non-comparable license benchmarks are vulnerable to exclusion; WILLFULNESS LIMITED: PAEs often allege willful infringement to seek enhanced damages; but willfulness requires knowledge of the specific patent — a company that first learned of the patent from the demand letter has a strong defense against pre-demand willfulness; Halo Electronics v. Pulse (S.Ct. 2016): enhanced damages require subjective bad faith; DESIGN-AROUND VALUE: in many cases, the patented technology has design-around alternatives worth far less than the asserted royalty; presenting design-around evidence reduces the hypothetical negotiation value of the patent.