Patent Trolls 101

Most people who stay informed about current legal or intellectual property issues have heard the term ‚patent troll‘ before, but they may not be sure of it’s meaning. The term can conjure a mental image of frightening plastic dolls with bright pink hair haunting patent owners. The reality, however, is more serious and consequential. Today‘s article aims to educate our readers about this current topic in intellectual property law.

Peter Detkin, an attorney at Intel Coporation who was sued for patent infringement over semiconductor chips by companies that didn’t produce them, coined the term ‚patent troll‘. He originally referred to these companies as ‚patent extortionists‘, but toned his description down to ‚patent trolls‘ after facing a libel suit.

Detkin‘s story offers a good overview of what patent trolls are and do. Trolls are companies that do not generate products or ideas. Instead, they solely buy and profit from patents. They generally own large patent portfolios, which they amass by buying bankrupt companies or patent rights from inventors who can’t afford to develop their ideas. They then make their money by demanding licensing fees or initiating infringement suits for these products. Since patent suits are expensive to defend (even if innocent), companies often fold and settle out of court. The politically correct term for such organizations is ‚non-practicing entities‘ (NPEs).

Multiple theories regarding the reason for this problem exist: The Patent Office may be too lax in granting patents; the Federal Circuit may favor patentees too consistently. According to the legal analytics company Lex Machina, the top ten patent litigators in 2013 were NPEs. PricewaterhouseCoopers reports that NPEs filed 68 percent of all new patent infringement cases in 2013.

Many worry that these entities suck money that could be invested toward research and development, stifling innovation in turn. Companies such as Google and Canon responded to this problem by launching the License on Transfer (LOT) Network, a royalty-free cross-license shared by worldwide companies that own almost 300,000 patents combined. The hope is that such a network will lessen patent litigation and allow companies to focus on innovation. Each LOT entity can license its inventions to other entities within the group. If the patent is sold to an entity outside the group, the members gain a royalty-free license to use the technology.

It seems that other companies, however, have begun mimicking troll methods. Last year, five major technology companies, including Apple, Microsoft, and Sony bought up a total 6,000 patents from bankrupt Nortel Networks Corp. 4,000 of them are now under the ownership of an NPE named Rockstar Consortium, which is involved in several licensing talks surrounding these patents.