The United States Patent and Trademark Office (USPTO) defines a patent as a license granted by a government for an invention, be it a new process, manufactured article, or a useful and new improvement (utility patent), original ornamental design (design patent), or a new and distinct variety of a plant (plant patent). It is often issued for 20 years from the date of filing, which gives the patent holder a good chunk of time to exclusively produce the patented product and also to pursue claims against others that infringe on their patent.

USPTO defines the right granted by a patent as the “right to exclude others from making, using, offering for sale, or selling” the invention in the US or “importing” the invention into the US. And it is this “right to exclude others” that has been exploited by patent trolls for decades for their financial benefit.

Key Takeaways

  • Patent trolls are companies that find ways to make money on patent-infringement lawsuits.
  • The trolls buy cheap patents from bankrupt companies, but never actually produce anything.
  • Instead, the trolls find companies or individuals that appear to infringe upon a patent they own and exploit them.
  • They exploit the patent-infringers by demanding licensing fees and then threaten them with lawsuits if they won't comply.

Who Are Patent Trolls?

Patent trolls, more formally referred to as Non-Practicing Entities (NPEs) or Patent Assertion Entities (PAEs), are companies that make money on patent-infringement lawsuits. Unlike operating companies that use their patents to produce and sell their product, patent trolls often acquire patents cheaply from bankrupt companies and do not use those patents in operations, but rather charge licensing fees to other businesses and individuals that appear to infringe upon a patent that they own. They will typically threaten these businesses with a lawsuit if they do not comply.

Licensing fees can range anywhere from tens of thousands to hundreds of thousands of dollars, whereas patent lawsuits can cost in the millions of dollars. Hence, many companies prefer to settle, even if they believe there to be no patent infringement. Incidents of patent troll litigation are more prevalent in the US than in Europe. Europe follows the “loser pays” practice, wherein the losing party in a lawsuit pays the legal fees of both parties. This discourages frivolous suits based on broad, low-quality patents. U.S. law, on the other hand, states that each party to a lawsuit must pay its share of legal fees.

One way to mitigate risks associated with patent-troll litigation is to hire patent-tracking companies to buy potentially problematic patents in the market before patent trolls scoop them up and use them against operating entities.

How Patent Trolls Work

Patent trolls are on a constant lookout for any existing technologies or new applications that might potentially infringe on their portfolio of patents. Once a potential infringement has been identified, the trolls go on to develop an attack plan. Often, it is the weakest and the most vulnerable in the target industry that is pursued, since an easy first win sets up a precedent that will determine future resistance on the part of others in the industry to pay licensing fees. 

Smaller targets, often mom-and-pop shops, receive demand letters full of legal jargon alleging patent infringement. Succumbing to these often-unfounded threats, many small business owners would rather pay to settle than to pursue the battle in court, which could divert considerable financial resources from their core research and operations. Settling may not, however, be the best solution even when it comes to monetary considerations. Patent trolls, sensing a ‘soft’ target, may set their path on multiple future claims, turning a short-term economic advantage of a one-time payoff into long-term funds drain from the target.

The vast majority of patent-infringement lawsuits filed by patent trolls are in the software and mobile device sectors, with smaller private companies with revenues under $100 million being the primary target.

Patent Suits Declining

Overall, patent litigation in the U.S. dropped around 7% in 2018, from 2017 levels, according to RPX Corp's most recent "Patent Litigation and Marketplace Report." Overall, more than 3,600 new suits were filed at the district court and Patent Trial and Appeal Board (PTAB). That's a nearly 40% drop from 2015 levels, reflecting an overall trend in patent-infringement lawsuits partially as a result of a 2017 U.S. Supreme Court ruling on TC Heartland LLC v. Kraft Foods Group Brands LLC.

Supreme Court Ruling Impact

TC Heartland, which was sued for patent infringement by Kraft, asked the Supreme Court to reinstate an older rule that features more restrictive venue guidelines, based on the argument that Congress didn't intend for recent changes in general venue rules to be extended to patent cases. The Supreme Court essentially agreed, tightening the law on patent litigation venue, and giving defendants more ammunition to argue improper venue. Because of this, there has been a small decline in the number of lawsuits, as well as a shift in where suits are filed, with fewer suits filed in the Eastern District of Texas, and more in venues such as the District of Delaware and the Northern District of California.