Corporations that invest heavily in research and development generally have greater value embodied in intangible assets (e.g. patents and other intellectual property) than in tangible ones. Industries adopt varied approaches to manage such intangible assets. Pharmaceutical companies, for example, focus on protecting a key patent, while technology companies have to cooperate with one another because a complex product can incorporate thousands of patents, many of which are held by other companies. Patents have thus become a kind of currency exchanged among such companies.
Recently, however, companies, specifically in the technology sector, have been attacked by non-practising entities referred to as “patent trolls” or “patent sharks”, which are firms with hidden intellectual property that threaten to sue when their rights are inadvertently infringed. The ambush generally appears from an unknown source and corporations are usually unable to identify the opponent until it is too late for them to react. Also, the conventional line of defence, designed for tackling visible competitors, is completely non-applicable for this type of guerrilla warfare.
Patent trolls include non-practising entities that either opportunistically or intentionally profit from payments by companies (for compensation, damages, licence fees or royalty) that inadvertently infringe on the trolls’ IP rights. Interestingly, troll activity is perfectly legal but extremely dangerous to the target corporations. Patent trolls sometimes hold patents based on their own inventions, but obtain licences for, or acquire (from bankrupt companies), patents that they can turn against manufacturers.
Patent trolls are active in many technical fields, but they focus primarily on computing, telecommunications, and mobile communications. Experts agree that much troll activity has been fuelled by legal inefficiencies.
Patent trolls can put enormous pressure on manufacturers by threatening to shut their operations using a preliminary injunction. This strategy is especially effective in a fast-paced, complex industry like mobile phone operations, where halting machinery, even for a day, can put the most established player out of business (e.g. Network Time Protocol (NTP) v Research In Motion (RIM)).
Faced with the acute risk of an unfavourable decision, RIM had to settle for US$612.5 million, paying a fortune for rights that were dubious at best, given that all five NTP patents had already been preliminarily invalidated by the US Patent and Trademark Office and that two of them had received final rejections. Thus, weak patents can be just as dangerous as strong ones when injunctions put a troll’s target under tight time constraints.
Patent trolls can also be awarded excessive damages at the conclusion of an infringement suit. This happens because courts might fail to distinguish between two important types of patents: the first, which has great intrinsic value because the protected technology is critical for a manufacturer’s invention and it is difficult to avoid infringement by “inventing around” it; and the second with less intrinsic value, offering patent holders little opportunity for revenue through licensing, since manufacturers can often invent around the technology.
The second type remains hidden and assumes appreciable value as the basis for a lawsuit in which the manufacturer inadvertently integrates the patented technology into a product. This is because, in determining damages, the courts generally apply standard industry royalty rates and do not account for potentially low-cost invent-around.
In retaliation, hi-tech players and other interested entities are contesting heavily for policy changes. In the US, certain decisions by the Supreme Court have created a far less conducive environment for trolls in the US. Two rulings assume relevance: In eBay Inc v MercExchange in 2006, the court held that granting a permanent injunction on the grounds of patent infringement would no longer be automatic, making it harder for patent holders and trolls to obtain such relief. The ruling in KSR International v Teleflex Inc, in 2007, has made obtaining patents for trivial inventions difficult, while making their invalidations much easier.
But will this lead to the extinction of patent trolls in the US? By the end of 2006, around 45 firms were identified as patent trolls with 135 known predatory patents, which probably represents the tip of the iceberg. In spite of policy changes, troll activity may continue unless target corporations choose to fight back.
Most large corporations take a tough stance once a troll has made a claim. Others consider settling when the amount is manageable. For smaller entities, however, settlement is the only alternative to a costly trial. Nevertheless, corporations of all sizes need to tackle patent trolls before they get to court.
To avoid troll attacks, corporations should re-examine their patent portfolios to cross-license with competitors; develop smarter, simpler standards and design module-based components; cooperate with competitors; ensure that functional groups within and among firms share information about possible troll attacks; and discourage the practise of patent filing for less significant inventions.
TS Sharat is a senior patent engineer and leads the Intellectual Property Support Services Unit at Clairvolex Knowledge Processes, a Delhi-based legal outsourcing firm.
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