The Fog of Patent War: Patent Trolls - Fact or Fantasy?

The Fog of Patent War: Patent Trolls - Fact or Fantasy?

[Originally posted 07/27/2011]

In eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 396 (U.S. 2006) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law], Justice Kennedy, in his concurrence, made the following observation:

In cases now arising trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases. An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.

Last week, NPR's This American Life broadcast a story entitled, When Patents Attack, which took a look at patent trolls and examined the workings of Intellectual Ventures, a patent holding company. The story is as informative as it is colorful, with references to:

  • the coiner of the term "patent troll," who is also the cofounder of Intellectual Ventures;
  • a patent for toast (US. Patent No. 6,080,436) (available to TotalPatent subscribers);
  • tiny Marshall, Texas (approximately 25,000 residents) and the Eastern District of Texas;
  • shell companies;
  • non-practicing entities;
  • defensive patent hoarding and weapons of mass destruction;
  • mafia-type shakedowns;
  • back-end arrangements;
  • a "Troll on Steroids;" and
  • $2 billion in revenue/royalties collected.

In the NPR story, the implication is made that Intellectual Ventures is a patent troll -- maybe the chief troll with one of the largest patent portfolios in existence. But is a patent troll merely a bad name for someone you don't like who also owns a number of patents? Intellectual Ventures argues that what it does is both productive and helpful in that it promotes innovation by supporting inventors who have neither the money nor legal savvy to stop infringement. As part of its $2 billion in revenue, Intellectual Ventures collects royalties that actually should have been paid (as opposed to collections based merely on litigation avoidance). And as Peter Detkin, Intellectual Venture's co-founder, notes in the NPR piece, litigation is just licensing by other means.

Recently, Intellectual Ventures offered their side of the story. In IV® Insights, the Intellectual Ventures corporate blog, the company posted Disruption Invites Controversy, a response to the NPR story. In the blog, Intellectual Ventures refers to itself as a "disruptive organization," which is not to be taken negatively. Instead, being similar to "disruptive innovation," Intellectual Ventures is a new product or service that has radically changed the patent market - a rapid and unexpected progress that has disrupted all reliance on the status quo. The blog states that the real, substantive issue is: "what are the best ways to ensure that ideas are given the value they are due?" The status quo is now being challenged by a business model that focuses solely on invention and patent investment, and any disruption is a necessary marketplace development. As stated in the blog:

Many of the world's leading technology companies are now beginning to recognize that patents are actually strategic assets that can be worth billions of dollars. This evolution in perspective is another crucial step toward an efficient market for inventions ....

(For an interesting narrative on Intellectual Ventures' approach towards patent reform, read the March 14th federal complaint, Choate vs. Intellectual Ventures, 11-00528 (D.D.C. 3/14/11). The case was settled and dismissed.)  

Of interest is this idea of "strategic assets," which, in the context of intellectual property, suggests something more specific -- "patent strategy." To simplify things, patent strategy can be categorized as either offensive (litigation and royalties) or defensive (patent hoarding). A recent article from the San Francisco Chronicle touches upon the latter. As author Matt Rosoff points out in his July 24th article Who Does Patent-Trading Firm Intellectual Ventures Work For, Anyway?:

What NPR does not get into, however, is the fact that Intellectual Ventures is backed by many of the biggest and most powerful companies in technology, including Amazon, Apple, Cisco, eBay, Google, Nokia, Sony, Yahoo, and -- of course -- Microsoft.

At first blush, the conspiracy theorist in all of us might see a sort of "Patent Illuminati," with some of the nation's largest corporations coming together to control a treasure-trove of patents. However, to quote Shakespeare's Richard III, "Now is the Winter of our Discontent," which might best describe the patent system's current state. Keeping this in mind, a second look at patent hoarding might offer up a preventative and protective motive, rather than one that is conspiratorial. As stated in the NPR story, existing patents probably cover every single behavior that's happening on the internet and mobile phones. This, if true, means that tech companies, when taking a step forward, will likely take that step into already patented technology. To further compound matters, as noted in NPR's interview with David Martin of MCAM, about 30% of all patents are for things already invented.

Of course, one company's patent hoard is another company's litigation risk. This brings us back to the NPR story, which touches upon the question: Do patent holding companies earn their fees less from royalties or more from litigation; particularly, the threat of litigation and fee payments to avoid that threat?

Related articles:

Eric E. Bensen on the Patent Reform Act of 2011

Like its predecessors, the Patent Reform Act of 2011, a.k.a. the "America Invents Act," promises to bring about substantial changes in patent law, but, unlike earlier Patent Reforms Acts, the PRA 2011's major provisions are relatively narrow in focus.

Change Is in the Air: Be Ready for a First-To-File Patent System

Patent law change has become likely this year. The pending legislation would grant patent rights to the inventor who is first to file a patent application for an invention. In switching, U.S. patent law would resemble that of Europe, Japan, and, indeed, most other countries of the world.

A Perspective on the Patent Wars over Mobile Technology

There has been an epidemic of patent litigation between major players in the mobile technology market. Some increase in patent litigation was to be expected as various technologies have converged in the design of smartphones and tablet computers. But the sheer multitude of patents involved in these suits has made it difficult to arrive at any firm conclusions.

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