The Rise of the ‘Patent Troll’

By HunterMaclean Attorneys

For E-Commerce Law & Policy

A growing trend of patent infringement litigation has emerged in the world of technology start-ups, which has offered a potentially lucrative payday for a non-practising entity (NPE, a patent owner who does not manufacture or use the patented invention, but seeks to enforce its right through the negotiation of licenses and litigation(1)), otherwise known as a ‘patent troll’. ‘Patent troll’ has been used since 1993 as a term for the purchaser of the patent, often from a bankrupt firm, who sues another company claiming that one of its products infringes on the purchased patent, however it never intends to manufacture that product or supply the patented service.

As of 2004, the pre-litigation cost to defend a suit was typically $1M and up to $2.5M for a complete defence at trial against the patent troll(2). According to a recent Boston University study, patent litigation cost $29M in 2011 in the US alone(3). Because the costs and risks are so high and juries are uncertain, defendants may feel forced to settle non-meritorious suits they consider frivolous for several hundred thousand dollars(4). The non-manufacturing status of the patent troll has one major strategic advantage: the defendant cannot countersue for infringement. Whereas the counterclaim typically aids as a basis for settlement and a threat for mutual injunction; in this case, the patent troll does not make, use or sell technology, so the possibility of a countersuit does not exist(5). Other tactics trolls employ are suing multiple defendants at the same time, using patents over and over again, and using the same set of counsel retained on a contingent fee.

Perhaps one of the most seminal cases involving nonpractising entities is NTP v. RIM. On 13 November 2001 NTP, a non-practising entity, first filed a complaint against Research in Motion, for patent infringement based upon its sales of the Blackberry device which uses an email delivery system and other technology, allowing the user to send and receive emails while out of the office(6). The case settled with RIM paying NTP $612.5M to continue to use the patent in its product manufacture and avoid a shut down by way of injunction. This case shone a spotlight on the problem of patent trolls. Here, RIM settled for a large sum just to avoid an injunction that would halt sales and production of its Blackberry.

Months later, the US Supreme Court showed its disdain for the settlement and the current culture of patent trolls in its ruling in eBay v. MercExchange, LLC, 547 U.S. 388 (2006). The Supreme Court held that rather than automatically granting an injunction in the case of patent infringement, courts must apply a reasonableness test to determine if an injunction is warranted(7). Subsequently, many courts have now denied patent trolls the leverage of an injunction in the finding of liability and relieved that fear from the defendant, which was pushing them towards unreasonable settlement.

The reasonableness test is as follows: 1) the plaintiff has suffered an irreparable injury, 2) that remedies available at law compensate that injury, 3) that an equitable remedy is warranted in light of the balance of the hardships between the plaintiff and the defendant, and 4) that the public interest would not be disserved by the granting of the injunction(8).

In July 2012, NTP, Inc. settled a patent suit with multiple defendants, such as AT&T, Verizon Wireless, Sprint Nextel Corp, T Mobile USA, Apple Inc., HTC Corp, LG Electronics, Yahoo Inc., and Microsoft Corp. (list not inclusive) regarding an email delivery system for an undisclosed amount(9). Non-practising entity NTP sued on the same or similar patents as in the RIM case and sued multiple defendants at once to limit costs and increase earning potential.

So in the wake of eBay v. MercExchange is the climate of patent trolls susceptible to real change? On 23 July 2012 Representative Peter DeFazio, a Democrat from Oregon, and Representative Jason Chaffetz, a Republican from Utah, cosponsored the Saving High-Tech Innovations from Egregious Legal Disputes Act of 2012 (SHIELD). The purpose of the proposed law is to protect American tech companies from frivolous patent lawsuits that cost jobs and resources and put the financial burden on patent trolls that buy patents solely to sue the American tech startups that created the products(10). The SHIELD Act is supported by a broad coalition of software and computer hardware companies, consumer groups and venture capitalists(11). According to Representative Chaffetz, this bill combats the problem of patent trolls by moving to a ‘loser pays’ system for software and hardware patent litigation, which will allow defendants to recoup money spent to successfully defend themselves against frivolous lawsuits(12).

The SHIELD Act and eBay v. MercExchange are both steps in a pro-defendant direction. From a societal perspective, patent law must constantly evolve to meet the changing technological advances of today in order to withstand the pitfalls of tomorrow.
1. Jones, Miranda (2007) ‘Casenote: Permanent Injunction, a remedy by any other name is patently not the same: how eBay v. MercExchange affects the patent right of non-practising entities.’
2. Craig, Tyler (2004) Patent Pirates search for Texas Treasure (www.sugr.com/PDFSearch/09202004_patentpirates.pdf).
3. www.defazio.house.gov
4. Ibid.
5. Intel Corp v. Advanced Micro Devices, Inc., 12 F3d 908 (9th Cir. 1993) cert. denied, 512 U.S. 1205 (1994).
6. NTP, Inc. v. Research in Motion Ltd., 392 F.3d 1336 Fed Cir. (2004).
7. Ibid.
8. Ibid.
9. Associated Press 23 July 2012.
10. www.defazio.house.gov
11. Ibid.
12. Ibid.
To download a PDF of the full newsletter, click here.