Smith, Gambrell & Russell, LLP

Patent Trolls

Is There One Waiting for You?

According to Scandinavian folklore, a troll is a fearsome creature of mythical origin. There are many forms that the troll can take, but a common conception of the troll is a creature that is ready to pounce on unsuspecting travelers and often steals and carries away people and their possessions.

There is a modern-day version of the ancient folklore trolls. The modern-day trolls are known as "patent trolls." Patent trolls are reprehensible entities, including individuals and companies, that collect patents for the purpose of extracting high licensing fees from unsuspecting entrepreneurs and companies in the fields of technology and business. Patent trolls use the threat of forcing a company out of business to coerce the unwary business owner into paying the licensing fees demanded by the patent-holding troll because, in the past, patent holders routinely have been able to obtain court-ordered injunctions.

Patent-holding companies, which have become almost synonymous with "patent trolls," have developed over the last few years to such an extent that companies and corporations must now evaluate trolls' patent portfolios, which often include technology that the trolls use not in commerce, but instead to extort licensing fees. These patent-holding companies are able to maneuver expertly through the intellectual property-law landscape as they have become highly sophisticated and well financed. Universities and other institutions that use their patents to generate revenue may also aggressively police their patent portfolios. Thus, a company conducting business in the United States may likely run into a troll or other obstacles during its journey and be required to obtain a license in order to continue.

It is no wonder that patent trolls covet patents, as patents are one of the most effective types of intellectual property protection. Once a patent has been obtained, the owner is allowed to exclude others from making, using and selling (including offering for sale), or importing the patented invention for the life of the patent, which is 20 years from the effective filing date of the patent application. Since patents offer powerful intellectual property protection, patent application filings and issued patents have been dramatically increasing in the United States.

Patents in the United States

The increasing numbers of patent applications and issued patents in the United States add to the hurdles facing companies planning to enter the market in the United States. In 2005, over 400,000 patent applications were filed in the United States, and the United States Patent and Trademark Office (USPTO) expects about 425,000 patent applications to be filed this year. Currently, a backlog of about 600,000 patent applications awaits examination by the USPTO.

The explosion in the number of patent-application filings in the United States is, in part, due to the various types of patentable subject matter that are not patentable in many other countries. In fact, the United States Supreme Court has said that "anything under the sun that is made by man" is potentially patentable subject matter,1 which has led to other subject matter, such as business-method inventions, being applied for, patented and litigated in the United States.

As patent applications filed in the United States began to grow exponentially in the 1990s, the USPTO unfortunately was unable to hire a sufficient number of examiners to keep up with the pace of new patent application filings. As a result, the pendency time from application filing to examination has increased to the point where, in some technological areas such as business-method patents, the pendency time can be five years or more.

Because patent examiners often do not have sufficient time to study and review carefully a patent application, many applicants are able to obtain overly broad patent claims, which readily fall into the greedy hands of patent trolls. A classic "trolling" situation is one in which a troll obtains a patent covering a small improvement on an existing technology and then obtains claims that seemingly encompass more than the small improvement. The troll then investigates the relevant industry and finds companies whose activities are arguably within the scope of the patent claims and then threatens the companies either to pay licensing fees or be sued for infringement. There have been several notable instances where patent trolls have managed to obtain millions of dollars in licensing fees by scaring a company into believing that the troll's patent covers a broad application of technology rather than merely the small improvement.

Trolling is not limited to extorting licensing fees, but also threatening to obtain (or actually obtaining) an injunction whereby the alleged infringer is prohibited from conducting its activities that allegedly infringe the patented invention. The threat of an injunction is one of the major intimidating weapons that the patent holder has, and is of great concern to companies wishing to enter the U.S. market. The United States Court of Appeals for the Federal Circuit traditionally has applied a "general rule" in patent disputes: once a patent has been held to be valid and infringed, a permanent injunction will issue.2

There have been several notable instances where patent trolls have managed to obtain millions of dollars in licensing fees by scaring a company into believing that the troll's patent covers a broad application of technology rather than merely the small improvement.

The eBay Decision

Recently, however, the U.S. Supreme Court examined whether an injunction should automatically issue to stop an infringer from making or selling unlicensed products once the patent has been found valid and infringed, even in situations where the patentee is not practicing the patented invention. In eBay Inc. v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006), the Court held that the "general rule" of the Federal Circuit is not the correct standard for granting injunctions in patent disputes. Instead, the Court unanimously held that the four-factor test historically applied by courts of equity also applies to patent infringement actions, such that the plaintiff must demonstrate (1) that it has suffered irreparable damage, (2) that remedies at law are inadequate to compensate for that damage, (3) the balance of hardships favors the plaintiff, and (4) the public interest is served, in order to obtain an injunction.

In eBay, the Court noted that the district court had concluded that the patent holder would not suffer irreparable harm if an injunction did not issue in view of its willingness to license its patents and its lack of commercial activity in practicing the patents. But the Court recognized that some patentees, including university researchers and sole inventors, "might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves."3 These patents "may be able to satisfy the traditional four-factor test," and there is "no basis for categorically denying them the opportunity to do so."4 Since neither the Federal Circuit nor the district court properly applied the four-factor test, the Court vacated the decision of the Federal Circuit and remanded to the district court to decide whether an injunction should issue under the framework of the four-factor test.

In an interesting concurring opinion, Justice Kennedy inferentially touched on trolling behavior, which capitalizes on injunctions. Specifically, Justice Kennedy stated that "[a]n industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees. . . . For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent."5 Justice Kennedy's comments could be interpreted to foreshadow that equitable discretion over injunctions and the four-factor test may enable courts to deny injunctions that favor patent trolls.

Nevertheless, in the United States, a patent confers the right to exclude others for a certain period of time from practicing an invention in exchange for disclosing it to the public, and the failure to practice one's patent rights (non-use) does not result in the loss of patent rights or the inability to enforce the rights against another. There is no compulsory license available in the United States.

Consequently, many businesses, such as those in the computer and biotech industries that are bought and sold on the strength of their intellectual property rights, are particularly vulnerable to trolling. Since most cannot afford expensive intellectual property infringement lawsuits, they must understand and evaluate the intellectual property rights of others as well as their own intellectual property rights in the United States.

Freedom-to-operate or clearance opinions by intellectual property counsel examine whether a proposed activity in the United States would be free of the intellectual property rights of others. This type of opinion should be obtained before engaging in certain activities such as making products in, or importing products into, the United States.

Validity and invalidity opinions examine whether certain intellectual property rights are valid or invalid and, therefore, enforceable or unenforceable in the United States. A company should obtain a validity opinion to determine whether to acquire the patent rights of another, by becoming an assignee or a licensee of the patent owner in order to make and use the patented technology. The company should also obtain an invalidity opinion to determine whether it would still like to proceed with a proposed activity that would likely infringe the purported intellectual property rights of another.

Non-infringement and infringement opinions analyze whether a certain activity would likely infringe certain intellectual property rights, such as the claims of a given patent. To determine whether to engage in an activity, a company should obtain a non-infringement opinion that evaluates whether or not the proposed activity would infringe the intellectual property rights of another. In order to determine whether to sue another for infringement of intellectual property rights, the company should obtain an infringement opinion.

Intellectual property rights are at the heart of many companies, particularly those in the high-tech industry. As a result, before significant time and energy are invested in the development and maintenance of intellectual property rights, companies should seek the advice and counsel of experienced intellectual property practitioners. In this way, problems that are raised by the existence of patent trolls can be anticipated and either eliminated or at least minimized.

Endnotes:


  1. Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980). 

  2. MercExchange, L.L.C. v. eBay, Inc., 401 F.3d 1323, 1338 (Fed. Cir. 2005). 

  3. 126 S. Ct. at 1840. 

  4. Id

  5. Id. at 1842. 

PrintEMail