What are patent trolls, and how do they affect innovation?

With progress in key industries such as renewable energy and biotechnology vital to our future, any roadblocks could have serious consequences for sustainability, human health and more. Thus, patent trolls are not just an IP law problem – they are a cross-industry hindrance to global development.

Characteristics of a patent troll

The exact origins of the term are hazy, with several potential assignees, but one of its earliest appearances was in an educational video from 1994. Regardless of who first coined "patent troll," its inspiration was likely the same: the Norwegian fairytale of the Three Billy Goats Gruff. When trying to cross a bridge to fresh pastures, each of the goats was challenged in turn by a rapacious troll living under it. The smaller two were able to finagle their way out of becoming his dinner by promising a bigger feast to come. In the end, the largest goat knocked the troll into the river, never to trouble them again.

The troll did not build the bridge, merely using it as an ambush point; hence, the analogy is of being stopped in one's path by an extortionist who did not create the tools of their wicked trade.

As a kind of non-practicing entity (NPE), patent trolls are not active members of the innovation community; they do not design, improve or manufacture the inventions they claim ownership of. Instead, they exploit IP rules by "hoarding" ambiguous, low-quality patents that any number of existing or forthcoming inventions could conceivably infringe. They subsist primarily on lawsuits and settlements, often benefitting from a target company's inefficient counsel, insufficient resources to tolerate extensive legal proceedings or inability to recognize the situation.

At this point, however, it is crucial not to tar all NPEs, patent-holding companies and patent assertion entities with the patent troll brush. Many of these entities are upstanding and operate legitimately, with educational institutions being a potential example.

A history of bad habits

Nevertheless, those that do engage in troll activities are relentless. For example, one study by university researchers in Canada found that NPEs exhibit repeated behaviors in the legal system, including the tendency to file an average of seven follow-up lawsuits after an initial complaint. The study also found that when an organization is challenged by a patent troll, its technology peers have a 14% greater chance of being sued the following year.

There are clear patterns in patent troll conduct, and recognizing them creates a basis for defense strategies among inventors and companies. It also highlights two important takeaways for the patent system overall:

• Where its weaknesses or "loopholes" are, and how these are most often abused
• Where lawmakers should focus improvements to prevent misapplication

Another study focused on patent troll activity in China, where laws are generally thought to be more "pro-patentee." Renjun Bian at Peking University Law School found that 44.7% of all patent infringement cases were initiated by NPEs; however, 99.6% of those were individual inventors rather than firms. Despite this highly individualistic landscape, the usual patent troll tendencies were still present: The study identified 47 repeat litigants, each of whom had filed at least 10 lawsuits. Notably, many actions targeted multiple small organizations instead of single large companies.

This only serves to emphasize that patent trolling is a global issue of IP protection and enforcement, one drawing on questions of morality, business ethics and differing perspectives on the value of shared progress. Solutions to the problem, therefore, will need to be broad enough to cover a huge range of potentialities and motivations while also establishing explicit limitations.

Effects, insights and responses

Victims of patent trolls suffer serious impacts, including significant market losses, waylaid research and legal or reputational costs. Faced with these consequences, defendants and their peers often change tack in one of two ways.

The first option is to increase innovation. A current or potential victim may boost research and development spending to work around exerted patent claims and limit future troll behavior. However, as found by the Canadian study, this activity often creates fewer or lower-value patents. It is reasonable to hypothesize that rushed or panicked developments completed under legal threat do not meaningfully benefit the state of the art.

The second approach is to reduce innovation activities in response to patent trolling. A victim may feel cornered or restricted, forced to abandon a particular product, process or line of investigation. Much like the first response, this reduces market diversity and hurts the balance of competition. In turn, this can increase prices for consumers while fostering monopolies for companies better able to resist or weather unfair practices. Naturally, the disadvantage is significantly skewed toward smaller entities, whose limited reach and resources make them softer prey.

Although many IP industry players and lawmakers have trolls in their sights, it is notoriously difficult to excise trolling without curtailing genuine enforcement actions or leaning too heavily on patent invalidation procedures. But there are ways to work toward it. In 2013, the U.S. government passed the Innovation Act, which, besides introducing tighter litigation requirements, cracked down on the use of shell companies as a way of shielding frivolous plaintiffs from paying full costs.

Staying upstream of trolls

Being confronted by a patent troll could force an agile company to "think outside the box." Even though this "box" is created by a disingenuous market participant, a more scrupulous firm may nonetheless make the best of the sudden necessity, turning challenges into opportunities. There may also be an increased focus on avoiding infringement, which could lead to growth in unexpected directions and inventions that would otherwise have had no reason or motivation to exist.

Silver linings to one side, the negative impacts are more obvious and better understood. Apart from financial hits and damage-control strategies, innovative momentum is lost when companies risk or face litigation at every step. The result is a system where progress can be punished and "cheaters" seem to come out on top.

Ultimately, every inventor and firm plays in a landscape where evolution can be arduous but is far from impossible. The key is to establish strategies and protections while monitoring your surroundings. If you are worried about defending your IP rights from patent trolls, contact us to learn how Dennemeyer's IP solutions can help.