Attacks On Patent Trolls Draw Concerns

By Erin Coe

Portfolio Media, New York (March 6, 2008)--Patent trolls, which rely on a business model of acquiring and asserting patents, are generally disparaged by critics as clogging the courts with meritless suits and driving up the costs of patent litigation.

But some patent experts are calling for a better definition and overall understanding of patent trolls amid concerns that the negative campaign against them is beginning to give shape to pending legislation and Supreme Court decisions that aim to rein in patent holders’ rights.

Joshua R. Slavitt, a partner at Pepper Hamilton LLP, said he is troubled that attacks on patent trolls appear to be having an impact on Congress as it tinkers with the Patent Reform Act – the most significant legislation for intellectual property since 1952.

“My concern is that the way in which this legislation is modified and passed may be influenced by a one-sided presentation. Those in a comparable situation to trolls will be disadvantaged in ways that may not have been intended,” Slavitt said.

Even lawyers who defend clients against patent trolls admit the label is a dirty word in the IP playbook.

“It’s a pejorative term. It’s like pornography – you know it when you see it,” said Kenneth A. Liebman, chairman of the IP group at Faegre & Benson LLP.

But many would argue that trolls are not so easy to identify. Part of the problem with criticizing firms that do not manufacture their own products but acquire the inventions of others is that the definition is too broad, according to Eugene R. Quinn Jr., a partner at White & Quinn PC.

“If patent trolls are defined that way, then that would capture universities, federal laboratories and high-tech research and development based start-up companies, or in other words, those who we can all agree are not trolls,” Quinn said.

However, if patent trolls are instead defined as those who do not innovate, then that definition could include large companies that no longer innovate but acquire companies that do, according to Quinn.

Advocates of patent trolls like to point out that trolls can take on cases for individual inventors who would otherwise not have the means to assert their patents and that they also provide patent marketplace liquidity.

But those favorable voices for trolls tend to get drowned out by critics who clamor that trolls are increasing the number of lawsuits, asserting weak patents, and forcing defendants to shell out more money on litigation and less on research and development.

The attack on trolls appears to be making some headway with lawmakers. The Patent Reform Act includes one provision that would make it harder for plaintiffs to forum-shop in plaintiff-friendly courts like the U.S. District Court for the Eastern District of Texas by requiring plaintiffs to sue in a jurisdiction where the defendant has a physical facility.

Another provision would limit the apportionment of damages and determine whether the invention at issue is an integral part of the product, such as the motherboard of a computer, or just an add-on, such as a power cord. Another measure would allow post-grant opposition proceedings so that after a patent is granted, its validity could still be challenged before the U.S. Patent and Trademark Office.

“We’re seeing legislation that is cutting back on patent rights, and I don’t think that’s a good idea. It’s short-sighted and not good for the state of the U.S. economy, which is driven by innovation,” said Lee Carl Bromberg, co-founder of Bromberg & Sunstein LLP.

The criticism of trolls also seems to be playing into decisions by the U.S. Supreme Court, which has curbed the rights of patent holders in recent years.

The high court ruled unanimously in May 2006, in eBay Inc. v. MercExchange LLC, that winning a patent infringement case did not automatically warrant an injunction against the infringer.

“That’s significant because it reduces the bargaining positions of the patent holder. If its operations could be shut down, an infringer has an incentive to pay a lot of money to prevent that result. But if a patent holder can only get an order requiring damages, the ability to gain from the patent is reduced,” Bromberg said.

In another setback for patent holders, the Supreme Court modified the definition of obviousness in KSR v. Teleflex in April, making it easier for patents to be challenged on obviousness and invalidity claims, according to Bromberg.

Quinn said a few really bad actors are giving the rest of patent trolls a bad name.

“I have no problem debating what to do with those who file frivolous lawsuits, but how can you legitimately chastise those that are winning?” Quinn said.

One case that incensed troll critics was a patent suit brought by patent-holding company NTP Inc. against Blackberry maker Research in Motion Ltd. RIM ended up agreeing in March 2006 to fork over $612.5 million in order to settle the suit that threatened to shut down its popular Blackberry service with a potential injunction.

During the trial, the exasperated federal judge in Virginia urged the parties to settle and made it clear that embattled RIM had little to look forward to.

Bromberg said what falls off the radar screen is that NTP had offered to settle the case with RIM before trial and would have received pennies on the dollar compared to what it ended up getting, but RIM adamantly refused to settle.

He also noted that the case shows how trolls highlight the value of IP and help translate it into dollars.

“One of the difficulties of IP is figuring out how much it is worth. The more evidence we have by license agreements or litigated results, the better we are able to calibrate IP,” Bromberg said.

Patent trolls also provide a secondary market for small companies and individual inventors.

“If a small company or inventor wants to license or litigate a patent, they may not be able to afford it. It’s $3 million to enforce a patent at minimum,” said Steven Rubin, counsel at WolfBlock LLP.

Slavitt said patent trolls are in a better position to bring a patent case than an individual inventor with limited funds or a law firm working on a contingency fee basis because defendants know they can strategically wear down an individual or firm by dragging out the case, whereas a patent troll is in it for the long haul.

“Without trolls, individual inventors are left without any recourse,” Slavitt said.

Patent troll advocates said the campaign against trolls is predominately driven by large companies, which are often the target of patent trolls’ suits.

“These large companies are parading out patent trolls as evil so that they can forward their own agenda, which is to make it more difficult for them to be sued for patent infringement,” Quinn said.

James E. Malackowski, the chief executive officer for intellectual capital merchant banc Ocean Tomo LLC, said the criticism is overblown and that patent trolls, or patent licensing and enforcing companies as he called them, account for a relatively small amount of patent lawsuits.

“Patent licensing and enforcing companies are transitory. They’re a catalyst in a weak marketplace today, but they will be out-priced and disappear because their business is relatively fragile. As the market becomes more efficient, I don’t think most will survive,” he said.

He warned that the patent reforms before Congress are “grossly misdirected” because even if lawmakers eliminate weak patents, they are not taking into account that the marketplace is making stronger patents available.

“Patent licensing and enforcing companies will buy C quality, B quality and maybe even A quality patents – the very issue people are afraid of, they’re only making worse. These companies will still be in court, but with strong patents, and the cases will be more difficult to defeat,” he said.