Legal Aspects in Management

Patent Trolling

Patent Trolling

Table of Contents
1. 2. 3. Introduction ............................................................................................................................. 3 Modus Operandi of Patent trolls .............................................................................................. 4 Incentives for Patent Trolls ...................................................................................................... 4 3.1 Punitive Damages ............................................................................................................... 4 3.2 Permanent Injunction ......................................................................................................... 4 4. Causes of Patent Trolling ......................................................................................................... 5 4.1. Volume of Patent Applications .......................................................................................... 5 4.2. Broad-based Patents .......................................................................................................... 5 4.3. Risky Litigation ................................................................................................................. 5 4.4. Undermining of Patent Grants .......................................................................................... 5 4.5. Lack of Alternative Technologies ...................................................................................... 5 4.6. Possibility of nationwide litigation .................................................................................... 5 5. Defenses against Patent trolling .............................................................................................. 6 5.1. Design Arounds ................................................................................................................. 6 5.2. Patent Watch...................................................................................................................... 6 5.3. Clearance Search................................................................................................................ 6 5.4. Opposition Proceedings .................................................................................................... 6 5.5. Litigation ........................................................................................................................... 6 5.6. Patent Infringement Insurance ......................................................................................... 6 5.7. Defensive Patent aggregation............................................................................................ 6 6. 7. US Context ............................................................................................................................... 7 Indian Context ......................................................................................................................... 8 7.1. Indian Patents Act ............................................................................................................. 8 7.2. Amendments ...................................................................................................................... 8 Appendix .......................................................................................................................................... 9 Bibliography ................................................................................................................................... 11

Patent Trolling

1. Introduction
A patent is a set of exclusive rights granted by the government to an inventor or applicant for a limited amount of time (usually 20 years). A patent, thus, provides the inventor the right to exclude others from making, using, selling, and offering for sale the patented invention. Patent Trolling is a term used for a person or company that enforces its patents against one or more infringers in a manner considered unduly aggressive or opportunistic, often with no intention to manufacture or market the patented invention. These entities are also described as Patent Pirates, Non-practising Entities, Non-manufacturing patentee, Patent Sharks etc. For a patent to be used as a troll by a person or an entity, it should satisfy the below conditions: Should be owned by a person or entity that does not practice the patented technology or invention Is infringed by and asserted against, non-copiers almost exclusively Has no licensees practising the particular patented invention except for defendants described above As the above description suggests, the patent trolls are not inventors who pursue their research, offer it for sale and then defend their rights against deliberate infringements. Instead, trolls seek to profit from companies that inadvertently infringe the companys patent rights mostly because they did not even know that such a license existed. The main issue with such patents is that they do not contribute anything useful to society as they lie unused in respective patent offices and, in turn, inflate the prices on the products. Patent trolls do not: Intend to actually practice a patent. Here intention is of primary importance as small inventors may have the intent to practice a patent, but do not do so due to lack of resources. Do not make use of or sell any new products and technologies but solely aim to force third parties to purchase licenses. Based on the description of what patent trolls are, it can said that patent trolls are only interested in the exclusionary right that a patent bestows on them and not in the implementation of the underlying knowledge. Thus, the patent trolls are exempt from many of the costs faced by manufacturers. The reason patent trolls are so popular is that in addition to being lucrative; the likelihood of extracting a licensing fee is considerably high. The patent trolls have nothing to lose as they hold only paper patents and thus are not vulnerable to counterclaims. It is important to distinguish between patent trolls and firms which legitimately manufacture their inventions but also take advantage of licensing laws to increase revenue. Using this broad definition of patent trolls tends to include universities and other research institutions that have no intention of making or distributing products, but file for patents that protect and give value to their research. Broadly speaking, two categories of people behave in a manner similar to that of trolls but are not trolls. These are innovators i.e. people who create or develop a new technology and producers i.e. who acquire patents as a part of their strategy related to their product line.

Patent Trolling

2. Modus Operandi of Patent trolls

With regard to Patent laws, there exists a tension between rewarding innovation and preventing noninventors from engaging in profitable activities. It is believed in some quarters that the behaviour of trolls is perfectly within the realm of patent laws around the world. The business model of the patent trolls exploits this gap in the law to provide larger monetary gains and low risk. The patent trolling business model has a defined structure i.e. it begins with the acquisition or filing of the patent that is to be enforced by a company. This is followed by a waiting period to allow the technology to develop and finally the enforcement of the patent with a view to realising monetary gains. The acquisition of the patents is usually done in one of two ways: patents are bought from failed businesses that are liquidating their assets or the company files for flimsy patents with the Patent Office that should never have been granted a patent in the first place. The patents acquired from the bankrupt companies are usually old patents which may have been forgotten or overlooked but are still being used. Another technique for acquiring the patents is to buy or file a speculative patent in the hope that a larger firm would unwittingly infringe upon the patent rights of the latter thereby resulting in monetary gains. Once the troll company has acquired the patent, it is enforced in the following ways: Licensing Fee The firm uses an aggressive licensing strategy coupled with the explicit threat of litigation if the fee is not paid. Given the high litigation fees prevalent in many of the developed countries, many of the larger firms choose to settle the disputes out-of-court. If the alleged infringer chooses to pursue litigation against the troll company, the process is costly and protracted and is just as likely to result in an injunction against the defendant.

3. Incentives for Patent Trolls

3.1 Punitive Damages In the United States, the courts award punitive damages to patent holders in case of wilful infringement of their patent rights. Companies have protested that the ability to receive treble damages provides an unbalanced incentive to bring patent lawsuits. The Federal Circuit in the US has held that the decision to increase damages is a two-step process: first, there must be wilful infringement, and second, the totality of the circumstances must allow for it. 3.2 Permanent Injunction Patent holders may also seek overcompensation by relying on permanent injunctions which prevent another party from using the patented technology once a finding of infringement has been made. With a view to gaining adequate monetary gains, the patent holder may wait for some firm in the market to develop a product based on the patented technology and then threaten to sue the firm when it has made substantial investments and is willing to pay a large amount of money.

Patent Trolling

4. Causes of Patent Trolling

4.1. Volume of Patent Applications According to a research paper published in the Southern California Law Journal, a large number of patents that are rejected in a year are resubmitted in a few years time. Also, many of the applications filed have over 20 claims each. This puts tremendous pressure on the Patent Office to clear the backlog of applications filed. As a result, the Patent Office in the USA approves on an average 85 to 95% of all patent applications filed. This, in turn, results in a number of ambiguous patents being issued every year and the other firms pursuing research in any related area cannot be certain that the claims of the patented technology can be invalidated in any litigation. 4.2. Broad-based Patents As a consequence of the number of patent applications being approved every year, many of the approved patents tend to be generic or do not meet the patentability standards. This provides the patent trolls necessary means to enforce the overbroad patents that are aimed at large groups of companies, at times even whole industries. This allows the troll company to take value for something it did not even invent because the issued patent is well beyond the invention. 4.3. Risky Litigation The outcome of a patent related case is highly unpredictable. The reasons for this are varied ranging from subjective application of patentability standards to volatility of jury determinations. Also, pursuing litigation, even in cases where a company in reasonably certain of invalidating the issued patent is very expensive. This may deter the smaller companies from pursuing litigation. In general, the risks associated with litigation outweigh the costs of settlement or licensing. 4.4. Undermining of Patent Grants Patents are issued with a view to providing an inventor with an incentive to share the invention with the society in exchange for exclusive rights to using the patented technology for a given period of time. In contrast, when patent trolls obtain patent rights, they do so with a view to enforcing the exclusionary right bestowed by the patent and not to contribute to the society at large. As a result, the society is actually worse off by the enforcement of such a patent. 4.5. Lack of Alternative Technologies In many cases, the firms that infringe on the patent rights of the troll companies do not have any alternative ways of dealing with these trolls. In a traditional patent related dispute, a targeted company may use its portfolio of patents to arrive at cross-licensing agreements. However, patent trolls do not intend to implement their patents, this strategy would not work when dealing with the troll companies. Also, lack of inclination on the part of trolls to create long-standing business relationships restricts the ability of other firms to protect themselves against infringement litigation. 4.6. Possibility of nationwide litigation Registered organisations are subject to suit wherever they do business. This means that the larger firms can be sued nationwide. The pace of litigation in certain regions tends to add to the cost of litigation and thus provide an incentive for the patent trolls to file suits in these locations.

Patent Trolling

5. Defenses against Patent trolling

The manufacturers adopt the following strategies to guard against patent trolls. 5.1. Design Arounds This strategy involves investing in an alternative to a patented invention that does not infringe the patents claims. The information regarding the invention is available as a part of the patent which can be used as a guide in developing an alternative. The amount of license fee that a patent troll can demand is limited by the alternative cost of designing around the trolls patents. 5.2. Patent Watch Patent Watch is a process for monitoring newly issued patents on a periodic basis to see if any of these patents might be of interest. Corporations usually circulate the results of a patent watch to the appropriate technical people to determine if any newly issued patents are of interest. 5.3. Clearance Search In this strategy, a clearance search is performed for patents and pending patent applications that cover the important features of a potential product before its initial development or commercial introduction. This will help eliminate the possibility of a later challenge by any party for infringement of patent rights. 5.4. Opposition Proceedings An opposition proceeding is an administrative process available under patent law in most jurisdictions which allows third parties to dispute the validity of a granted patent. 5.5. Litigation A company that has been sued for infringement may choose to go the offensive way and challenge the validity of the patents themselves. This may be done by finding inventions that invalidates the patentability of the technology. It may also challenge whether the technology is infringing or may attempt to show patent misuse. As a possible reaction to this strategy, patent trolls may back down or lessen their demands. 5.6. Patent Infringement Insurance Patent infringement insurance is an insurance policy provided by one or more insurance companies to protect either an investor or a third party from the risks are inadvertently infringing a patent. For inventors, this may cover the legal costs in case they have to sue an infringer to enforce the patent. 5.7. Defensive Patent aggregation A defensive patent aggregation (DPA) is the purchasing of patents or patent rights to keep such patents out of the hands of entities that would assert them against operating companies. Increasingly aggregations are focused on purchasing patents and patent rights in the open market which directly impacts the businesses of the aggregations members.

Patent Trolling

6. US Context
Patent trolling has been largely observed in the United States and hereto it has been concentrated in the information technology industry. One of the primary reasons for this has been a tendency on the part of the Patents Office to grant patents easily. This has allowed the patent trolls to maintain vague and broadbased patents. Another factor contributing to the rise of patent troll cases in the United States is the practice of each party bearing the cost of the litigation on its own. This provides an incentive to the patent trolls to engage in litigation against alleged infringers regardless of the consequence of the litigation. Reluctance on the part of the judicial system to employ the doctrines of laches and estoppel when considering infringement claims also aids the trolls. A laches defense might be claimed where a patent holder has been aware of the patent infringing activity for a long period of time but did not take action against the infringer until a long period of time has passed. The patent trolls strategy involves waiting for a firm to infringe so that they can make the maximum profit. If patent holders are forced to assert their claims as soon as they become aware of the potential infringement, it might reduce the viability of this strategy. An estoppel could be raised against a claim of infringement where a patent holder has made a representation that it will not enforce the patent and the infringer has relied on that presentation. The use of the doctrine of estoppel might have the greatest effect where patents held by bankrupt businesses are then obtained by other parties. The original patent holder may have had a policy of not enforcing certain patents, and users of the patented technology may have relied on the fact that the patents would not be enforced. An increased application of the estoppel doctrine could thus eliminate this opportunity for patent troll-like activity The unavailability of compulsory licensing also aids the patent trolls in hoarding the patents for long periods of time and wait for an unwitting party to infringe on its patent rights. However, the recommendation for inclusion of this clause has met with strong opposition in the United States as it will result in legitimate patent holders also receiving less than the market value of their patented technology. There are aspects of the US patent law that appear to be uncertain and subject to interpretation of the presiding judges or the jury. This legal uncertainty acts to the advantage of patent trolls because the alleged infringers in an infringement action cannot accurately predict whether or not the action has legal merit. However, many of the above shortcomings of the US patent law are being looked into by the Congress and the Patent Reform Act (2005) was the starting point for this change. Few of the changes suggested as a part of this Reform were: Apportionment of damages i.e. the court would be required to calculate damages based upon the value added by the claimed invention alone and not in combination with any non-claimed elements. Wilful Infringement i.e. the notice of infringement would include the patent, the claims and the infringing product or process. It would also preclude a finding of wilfulness if the infringer has an informed good belief that it was not infringing. Post-grant Opposition i.e. the possibility of opposing the validity of the patent after the date of grant of the patent so as deter entities from applying for flimsy patents.

Patent Trolling

7. Indian Context
7.1. Indian Patents Act The Indian Patents Act, 1970 provides for patent protection in India. The Patent Law in India has the following salient features that decide whether a patent will be granted or not: The Object The object of the patent law is to encourage scientific research, new technology and industrial progress. Inventive Step The Patent is granted only for an invention which has novelty and utility Useful The patentable invention in addition to being a new manufacture must also be useful. Improvement In order to be patentable, an improvement should be more than a mere workshop improvement and must independently satisfy the test of invention or inventive step The guiding tests To decide whether an alleged invention involves novelty and an inventive step, certain broad criteria can be indicated. Firstly if the "manner of manufacture" patented, was publicly known, used or practised in the country before or at the date of the patent, it will be negative novelty or 'subject matter'. Secondly, the alleged discovery must not be the obvious or natural suggestion of what was previously known. 7.2. Amendments The Indian Patents Act has been amended a number of times over the past few years. The 2005 Amendment to the Patents Act has effectively reduced the problem of patent trolls in India. Most trolling activity occurs in the field of technology patents. This Act does not consider computer programs and business methods as an invention, as described in Chapter II. Also, the Act allows opposition to the grant of a patent up to one year after the grant on certain grounds. The Intellectual Property Appellate Board, which is an administrative body designed to dispose disputes quickly, reduces costs of litigation, such that small entities which are targeted by trolls need not worry about the high cost of litigation to defend their patents. Section 84 of the India Patents Act deals with compulsory licensing which provides for an establishment of a compulsory licence when a patent holder does not exploit the technology disclosed in the patent and unreasonable refuses to grant licenses to practice the patent to other parties. In India, the grant of compulsory license is possible at any time after the expiration of 3 years from the date of grant of the patent on the grounds, invention not being available to the public at a reasonably affordable price or the reasonable requirements of the public has not been satisfied. In an application for compulsory licence, the Controller of Patents is required to consider, whether the applicant has made efforts to obtain a licence from the patentee on reasonable terms and conditions and such efforts have not been successful within a reasonable period as the Controller may deem fit. Many of the patent laws in the Patent Act have been designed with a view to encouraging the implementation of the patented technology within India. Section 84(7) states that the reasonable requirements of the public are deemed unsatisfied if the patented invention is not worked in the territory of India on a commercial scale to an adequate extent or is not being so worked to the fullest extent that is reasonably practicable.

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Appendix
eBay v/s MercExchange L.L.C eBay operates a popular Internet Web site that allows private sellers to list goods they wish to sell, either through an auction or at a fixed price. Half.com, a wholly owned subsidiary of eBay, operates a similar Web site. MercExchange, L. L. C., holds a number of patents, including a business method patent for an electronic market designed to facilitate the sale of goods between private individuals by establishing a central authority to promote trust among participants. MercExchange LLC, sued eBay Inc. and its subsidiary Half.com Inc., alleging infringement of three business-method patents, including U.S. Patent No. 5,845,265, which is directed to facilitating the electronic sale of goods between private individuals by establishing a central authority to promote trust among participants. A jury found the '265 patent valid and infringed, but the district judge denied MercExchange's request for a permanent injunction, finding that MercExchange did not face irreparable harm from eBay's continuing infringement because it did not practice the inventions itself, and it had shown a willingness to license the patents to others. On appeal, the Federal Circuit affirmed the jury verdict. But the Federal Circuit reversed the district court's denial of a permanent injunction, concluding that the case was not sufficiently exceptional to justify the denial of a permanent injunction. In the Supreme Court Justice Clarence Thomas noted that permanent injunctive relief was a matter of equitable discretion, and found that the principles of equity set forth in the traditional four-prong test for granting permanent injunctions applied with "equal force" to disputes arising under the Patent Act. The following are outlined in four pronged test That it has suffered irreparable injury; That remedies available at law, such as monetary damages, are inadequate to compensate for that injury; That, considering the balance of hardships between the patent holder and patent infringer, a remedy in equity is warranted; and That the public interest would not be disserved by a permanent injunction.

Patent Act also declares that patents shall have the attributes of personal property, 261, including the right to exclude others from making, using, offering for sale, or selling the invention, 154(a)(1). According to the Court of Appeals, this statutory right to exclude alone justifies its general rule in favour of permanent injunctive relief. But the Court determined that the "right to exclude" others from making, using, offering for sale or selling a patented invention under the Patent Act is distinct from the remedies under the Patent Act. The Court provided some guidance on how the four-prong test should be applied in patent cases. Specifically, the Court rejected the district court's conclusion that the irreparable-harm prong could not be satisfied where the patent holder was willing to license the patent and was not engaged in commercial activity in practicing the patent. The Court wrote that such a patent holder may still be able to satisfy the four-factor test, and found "no basis for categorically denying" patent holders the opportunity to do so. In sum, the Court found that "Just as the District Court erred in its categorical denial of injunctive relief, the Court of Appeals erred in its categorical grant of such relief." Because neither court below correctly applied the traditional four-prong test, the Supreme Court vacated the judgment of the Federal Circuit and remanded the case so that the district court could apply the traditional test in the first instance.

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In a concurring opinion, Chief Justice John Roberts, Jr., joined by Justices Antonin Scalia and Ruth Bader Ginsburg, seemed to express the view that the traditional four-factor test should not lead to widespread change. The Chief Justice noted that for two centuries, courts have granted injunctive relief upon a finding of infringement in the vast majority of cases. He wrote that when it comes to applying the fourfactor test, "a page of history is worth a volume of logic." In a separate concurring opinion, however, Justice Anthony Kennedy, joined by Justices John Paul Stevens, David Souter and Stephen Breyer, focused on the recent rise of patent-holding companies that do not use patents "as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees." Justice Kennedy wrote that such companies can use the possibility of injunctive relief "to charge exorbitant fees" to license their patents. While not controlling Supreme Court precedent, it is worth noting that at least four justices (majority) were of the view that where the patented invention is a small component of the accused product and the threat of an injunction is employed simply for undue leverage in negotiations, "legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest. Result On July 30, 2007, the District Court once again issued an order denying the injunction, ruling that, based on MercExchange's history of licensing or attempting to license the patent, monetary damages of $30 million dollars was a sufficient remedy. On February 28, 2008, the parties announced that they had reached a settlement after six years of litigation. Under the settlement, MercExchange was to assign the patents to eBay; the terms of the settlement were otherwise confidential

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Bibliography Journals: Davis, R. (2008). Failed Attempts to Dwarf the Patent Trolls. Cornell Journal of Law and Public Policy , 17 (431), 431-452. Lateef, I., & Stowell, J. (2007). A Supreme End to Patent Trolls. Orange County Lawyer . Luxardo, V. (2007). Illegitimate Patent Enforcement in the US. Emory International Law Review , 20, 791832. V, R. The Effect of Patent Trolls on Innovation. Websites: Wikipedia. (n.d.). Patent Troll. Retrieved http://en.wikipedia.org/wiki/Patent_troll August 29, 2011, from Wikipedia:

Predatory Business Practices. (n.d.). Retrieved August 30, 2011, from Bizshifts's Blog: http://bizshifts.wordpress.com/2011/02/03/predatory-business-practices-%E2%80%9Cpatent-sharkspatent-trolls%E2%80%9D/ Case: EBAY INC. ET AL. v. MERCEXCHANGE, L. L. C., 05-130 (Supreme Court of the United States May 15, 2006).