Nonpracticing Entities, or NPEs for short, have come under a great deal of criticism lately. Commonly known as “patent trolls,” these are entities that do not manufacture anything but simply sue companies for patent infringement. They have been compared to the “modern day mafia.” President Obama has referred to them as “extortionists.” Congress is seriously considering amending the Patent Act to stop patent-troll lawsuits.
However, lost in the name-calling and rush to judgment is whether so-called patent trolls actually deserve this criticism — and what exactly is a patent troll anyway?
The demonization of NPEs has been largely led by companies that have themselves been the unwelcome targets of numerous patent infringement lawsuits. Through their lobbying efforts and reference to truly egregious cases, they have convinced Congress that the patent system is broken and in need of major repair, even though Congress substantially amended the patent laws less than three years ago. In particular, opponents of patent trolls often cite a June 2013 report from the President’s Council of Economic Advisers that concluded an explosion of patent-troll litigation occurred from 2010 to 2012.
The problem is that this conclusion is fundamentally flawed. Although it correctly found that the raw total number of patent lawsuits filed by NPEs substantially increased during that period, it inexplicably failed to consider an important and basic change to patent litigation made by the 2011 America Invents Act (AIA).
That change made simply counting the total number of lawsuits filed after the adoption of the AIA misleading when compared to pre-AIA lawsuits. The AIA prohibited patent owners from including multiple, unrelated defendants in a single lawsuit based on a commonly asserted patent, which had been the common practice before the AIA’s enactment. Now, patent holders must file separate lawsuits against each defendant
According to a recent report by three patent law professors who conducted an in-depth analysis, the so-called “explosion” of patent-troll litigation between 2010 and 2012 is “simply a mirage.” This report concluded that “calls for urgently needed patent system reforms seem exaggerated.” Surely, Congress should determine that the system is actually broken before attempting a fix.
Even apart from this, no consensus exists as to what type of entity should be considered a patent troll. Indeed, contrary to criticism, some types of NPEs actually do play a constructive role in the patent system and contribute greatly to advancement of technology.
Many prestigious universities would qualify as patent trolls, since they do not generally manufacture products and seek to enforce patents. However, universities and other research institutions are responsible for important innovation and scientific research. In addition, licensing and enforcement of patent rights provide a valuable source of revenue for many institutions. Congress should consider the impact that its proposed legislation would have on them.
Similar to universities are commercial companies that develop technology for the express purpose of licensing to others. Although they do not manufacture products, their innovations are beneficial to society by advancing scientific know-how. If these companies could not recoup their investment and profit from it, there would be no incentive to invest, and advances in science would be at risk.
Next, should individual inventors enforcing their own patents be considered patent trolls? Many individuals lack the financial resources to commercially exploit their inventions, but should they be treated differently from entities that have the ability to manufacture products? Other common NPEs are failed operating or startup companies. These companies, for whatever reason, have been unable to successfully manufacture products and, often, the only remaining valuable assets are patents. The revenue from patent enforcement can provide a partial return to the original investors, who may have lost large sums on their failed investment. There is no cogent argument why investors in these companies should be limited in their ability to recover at least part of their original investments.
The only category left, and the one that has caused the most consternation, is the financial speculator who purchases patents simply to make money. For a variety of reasons, they are not constrained in their ability to bring a patent litigation lawsuit even when the payoff may be limited. When faced with defending a patent infringement lawsuit against such an entity, many companies may rightly believe that they are the victims of a shakedown artist.
Even if this understanding is accurate, Congress should consider whether the impact of these speculators on the patent system is great enough to warrant substantial changes to the patent system that may weaken patent protection and lead to the loss of much needed technological innovation.
Large companies have done an outstanding lobbying job of shaping the debate about NPEs. They’ve managed to create the illusion that patent trolls have caused an explosion in litigation that jeopardizes the patent system. Before acting, Congress would be wise to consider the impact that the proposed fixes would have on the patent system and whether less drastic steps would solve the problem.
Peter J. Toren is a partner with Weisbrod Matteis & Copley in Washington, where he specializes in patent litigation.