Beware the phenomenon of patent trolling

Has your business recently reported a “positive cash shock”? Do you employ only a small in-house legal department, already busy with high-profile litigation? Do your subsidiaries dabble, not necessarily profitably, in a wide range of innovative activities? Congratulations – your company could find itself on a “suckers list” of promising targets for the phenomenon of patent trolling.

That at least is the implication of a groundbreaking comprehensive study of the behaviour of “non-practising entities” engaged in patent litigation in the United States.

Non-practising entities or NPEs – businesses that acquire patent portfolios not to create products, but to pursue pay-offs by threatening litigation – are the most visible example of behaviour likely to be described as trolling. While litigants vigorously contest the label, it entered the formal lexicon of America’s highest court earlier this year when Supreme Court justice Antonin Scalia warned that a judgment might increase the power of patent trolls.

Defenders of NPEs say they oil the wheels of innovation by fighting on behalf of individual inventors who would not be able to pursue claims against big corporations. They serve a purpose by “levelling the playing field in the cost of litigation”, says Connecticut attorney Stanley Lieberstein.

Trolling on the rise

Forms of patent trolling – aggressively asserting dubious claims in hopes of a payoff – are as old as the legal protection of intellectual property (IP) itself. However, the phenomenon has been fuelled over the past decade by an explosive growth in the number of patent applications filed. In all, between 40 and 90 per cent of patents, depending on jurisdiction and industry, are never used or licensed by their owners.

A large proportion of these are “submarine patents”, vague claims left unused until a wealthy corporation seems to be making progress in a similar field, at which point the submarine surfaces in search of licensing fees.

Patent litigation in the USThis in turn has caused an explosion in patent litigation in the United States which, according to the Harvard Business School, has grown by an order of magnitude since 2000.

While trolls are not unknown in the UK, this kind of organised activity has not taken off this side of the Atlantic, says Rebecca Halford-Harrison, IP and litigation partner at specialist law firm Kemp Little. She attributes this difference to cultural and practical factors. “We don’t see what the US would call troll-like behaviour. It’s too risky for the litigant,” Ms Halford-Harrison says. “In Northern and Eastern Europe at least, there’s not the culture of paying people to go away.”

There are fears that the business of patent trolling could take hold in Europe, with speculative litigators sniffing out the market

Costly claims

An important factor is the cost in the US of defending even an apparently frivolous claim. “In the States, it’s incredibly expensive, so if you can pay someone ten or twenty thousand to go away, it’s probably worth it.” In the UK, by contrast, an unsuccessful litigant can be hit with a substantial costs bill, which makes speculative and opportunistic litigation less attractive, says Ms Halford-Harrison.

UK companies are more likely to see troll-like behaviour from people who have “a history with the company, not out of the blue”. A typical example might be an embittered former employee who feels cheated out of an innovation and secured the support of a non-specialist lawyer working on a “no win, no fee” basis.

An English court will generally strike out such ill-advised claims at an early stage, she says. But despite this, there are fears that the business of patent trolling could take hold in Europe. Ms Halford-Harrison says she has encountered speculative litigators sniffing out the market. “We’re having approaches from the US; people saying we’re interested in funding litigation, but they seem confused about the jurisdiction,” she says.

Another potential source of trouble might be Europe’s Unified Patent Court, which is due to open next year. While its costs and fees model is still being debated, its wide jurisdiction could encourage a new class of speculative claims.

Recent research from the United States suggests that governments should be worried. The first comprehensive and long-term study of non-practising entities, published by Harvard Business School this summer, seems to show that trolls are a malign influence.

Top filers of IP rights petitions


Identifying targets

The study, by Lauren Cohen and colleagues, found big differences between the behaviour of NPEs and conventional litigants. The most glaring was in the choice of target. Taking all other factors into consideration, NPEs were four times more likely to pursue companies with assets in the bank, particularly those that have had “recent, positive cash shocks”. They are vulnerable even if this cash had nothing to do with the patent in question. By contrast, lawsuits from practising entities, usually rival businesses, are much less driven by cash.

Meanwhile, NPEs are also attracted to victims already tied up with non-patent litigation, but deterred by the existence of large legal departments. Another distinct feature of NPE litigation is the tendency to “forum shop”, bringing a case in a jurisdiction with the most litigant-friendly court system. A high proportion of NPE litigation is conducted in a single district of East Texas, where juries are regarded as sympathetic.

This comes at a cost. The study finds that firms which lose actions by NPEs cut their research and development spending by an average of 20 per cent compared with those that are not targeted. Most damning, only a small fraction of payouts won by NPEs finds their way back to the original innovators. The report’s inescapable conclusion is that “NPEs appear to behave as opportunistic patent trolls” which, far from oiling the wheels of innovation, deter it.

For businesses likely to find themselves in a patent troll’s sights, the lesson seems to be to hire a good legal team, don’t boast about cash piles – and take intellectual property seriously.