Don’t Feed the Patent Trolls

Morgan O'Rourke


August 1, 2013


In recent years, patent lawsuits from non-practicing entities (NPEs)—companies that hold patents but do not use them to create or manufacture a product—have skyrocketed, particularly in the technology industry. More commonly known as “patent trolls,” these entities either attempt to charge licensing fees for their patents or sue companies for infringing upon them.

According to a Boston University study, in 2011, patent trolls cost the U.S. economy $29 billion—and that number only accounted for direct legal costs. Another study found that in 2012, these lawsuits represented 56% of all federal patent infringement suits, up from 24% just five years earlier.

As a result, in June, President Barack Obama proposed a series of reforms designed to curtail these frivolous patent infringement lawsuits. Along with other bills circulating through Congress, this measure indicates that the reign of the patent troll may finally be coming to an end.

The Original Patent Troll (1895)
Usually regarded as history’s first patent troll, George B. Selden filed a patent application for an early version of the automobile that he called a “road engine” in 1879. A patent attorney by trade, Selden never began production on his invention but instead spent the next 16 years purposely delaying the patent’s issuance while he waited for the fledgling automobile industry to become established. In 1895, he allowed his patent to finally issue and began collecting lucrative royalty fees and threatening lawsuits against any automobile manufacturers he felt infringed on his intellectual property. When Henry Ford refused to pay any fees, Selden took him to court. After a protracted legal battle, Ford prevailed in 1911 when the court finally ruled that Selden’s patent was invalid.

BlackBerry Battle (2000)
In 2000, patent holding company NTP sued Research in Motion (RIM), makers of the BlackBerry, over patents relating to wireless email. Faced with the prospect that an unfavorable verdict could have effectively killed the BlackBerry’s email delivery system in the United States, RIM paid NTP a reported $612.5 million to settle the case in 2006. Since then NTP has filed suit against virtually every major company in the wireless space, from smartphone manufacturers like Apple, Google, HTC and Motorola, to carriers like Verizon, AT&T and Sprint. It ultimately reached undisclosed settlements in 2012.

Twitter’s Defense (2011)
Claiming that the microblogging service infringed on its 2002 patent for a “method and system for creating an interactive virtual community of famous people,” VS Technologies sued Twitter for more than $8 million in 2011. Twitter refused to settle and at trial a federal jury ruled in its favor. In 2012, Twitter announced that it was implementing an internal policy it called the Innovator’s Patent Agreement, in which it vowed to only use its patents for defensive purposes.

Suing Small Businesses (2011)
Rather than go after larger technology providers like many other NPEs, Innovatio IP Ventures embarked on a different strategy. In 2011, the company began suing small franchise hotels, restaurants and coffee shops that it claimed infringed on patents covering WiFi use. Innovatio has demanded licensing fees ranging from $2,300 to $5,000 from hundreds of small businesses. Observers believe that the strategy is designed to encourage companies to settle for what is a relatively low amount rather than expend resources on costly litigation.

Yahoo v. Facebook (2012)
Two internet giants faced off in 2012 when Yahoo sued Facebook for violating more than 10 of its patents relating to features including messaging, social networking, advertising display and privacy controls. Yahoo was excoriated in tech circles for what some called a “desperate” and “dishonorable” act, demonstrating the rising acrimony and frustration that has developed around patent lawsuits. The companies ultimately settled the suit without any money changing hands.

No Compromise (2013)
In 2011, French telecom Alcatel-Lucent sued eight retailers for e-commerce patent infringement. Every company settled, except Overstock and Newegg, which had been sued for $6 million and $12 million, respectively. For years, Newegg’s chief legal officer had made it company policy to never settle with patent trolls—a strategy that paid off when a court ruled in 2013 that the patent in question was invalid. “There’s the classic risk management strategy, which only in my estimation engenders more litigation,” Overstock General Counsel Mark Griffin told Reuters. “The general counsels of publicly traded companies have started to wake up. We don’t feed trolls.”

Government Steps In (2013)
In May, Vermont took aggressive action against patent trolls when it passed legislation that would allow businesses to sue the patent trolls that have victimized them with “bad faith” infringement claims. Losing defendants would be forced to pay court costs and up to $150,000 in damages. Similar federal legislation has been proposed in the House, while Sen. Chuck Schumer (D-NY) has introduced a bill in the Senate that would allow the Patent and Trademark Office to review the validity of patent claims before a costly lawsuit can go to court.

Morgan O’Rourke is editor in chief of Risk Management and director of publications for the Risk & Insurance Management Society, Inc. (RIMS)