It is hard to love a troll, and some feel the same way about patent trolls, the pejorative term for a nonpracticing entity (NPE) that sues a company for infringing its patent. Some feel that NPEs, which do not practice the invention covered by their patent, are like mythical trolls, who lived under bridges and collected tolls, even though they did not themselves build the bridge. Harry Potter taught us to love witches, Shrek taught us to love ogres, but notwithstanding Russ Berrie, trolls tend to get a bad rap. Companies like Apple, Microsoft and Canon have all been sued by NPEs, which often obtain jury verdicts in the hundreds of millions of dollars.

The goals of the patent system are to reward inventors and to spur innovation. Many argue that patent trolls satisfy neither goal and that we need legislation to stop what they argue is a parasitic tax on innovation. However, like Shrek’s version of ogres, trolls are also like onions, and only by unpeeling their various layers can we learn to understand the different types of patent trolls and appreciate the different ways in which they can help reward inventors and spur innovation.

The entity most commonly referred to as a patent troll is a company that scours the market for patents, buys them, and then sues a host of companies for infringing those patents. The victims of these NPEs are often giants in the electronics, computer and Internet fields, with hosts of lobbyists looking out for their interests. Much of the anti-patent legislation in recent years has been a reaction to such NPEs.

By analogy, there has been a lot of backlash against companies that deal in stock options and derivatives. Some argue that companies would have had their IPOs funded without the existence of stock options and that banks would have given home mortgages even if credit default swaps had never been created. Some on Wall Street will explain that although these instruments don’t actually raise money to start a business or buy a home, they provide liquidity to the market and indirectly help homebuyers and entrepreneurs. Similarly, one could argue that this class of NPE provides liquidity to the field of patents, and some might argue that these entities indirectly spur innovation. Of course, the companies on the receiving end of the patent infringement complaint will emphasize other effects of these NPEs.

A second group of NPEs are companies that do invent and make things, but also have licensing divisions. These companies often have huge research and development (R&D) budgets, obtain hundreds of patents and produce many of the items we use every day. However, most companies do not bring every one of their innovations to market. Therefore, rather than let their patents collect dust like Rembrandts in the attic, many companies have opened up licensing divisions. These divisions often market their innovations and license some of their unused know-how and patents to others. These companies sometimes bring patent infringement suits, even in areas where they have no licensees. They often prefer to bring patent infringement suits against companies that are not their typical competitors, so that there is little chance of a retaliatory patent infringement suit. One could argue that the ability to profit from a company’s under-used innovations helps fund R&D budgets, and therefore helps spur innovation—a primary purpose of the patent system.

A final category of NPEs is comprised of investors who fund patent litigation, looking for huge returns on their investments. Many inventors and small businesses have invented new and useful technologies, tried to license them to larger entities, but were not successful. After negotiations with those larger entities break down, the would-be licensors sometimes feel as if the potential licensee stole their inventions. However, a lack the funds to pursue patent infringement litigation can act as a strong deterrent to pursuing a lawsuit. In the past, large companies were sometimes tempted to simply use these companies’ or inventors’ innovations, secure in the knowledge that these entities could not afford to sue them for patent infringement in Federal Court.

Today, patent infringement litigation is frequently funded by such NPEs. This provides inventors and small companies with a means to stop larger companies with deeper pockets from using their inventions without a license or a fear of being sued. This funded patent litigation can take many different forms, and a full explanation is beyond the scope of this article. However, the threat of funded patent litigation can provide the means for smaller entities to license their inventions at a fair price. If the larger entity decides to simply use the patented technology, there is a growing group of entities willing to fund the litigation for a piece of the potential patent infringement damage recovery. Not only does funded patent litigation help reward the inventor for their innovations, it arguably encourages smaller entities to develop inventions with less fear that a larger company will not negotiate a license in good faith.

Thus, as or our children (or we) have seen with Shrek’s explanation that ogres are like onions, NPE patent “trolls” also can have many different layers, many of which serve admirable purposes and which do help spur innovation. Of course, some NPEs do not litigate in good faith and some hope to settle early on questionable claims because the cost of defending against a patent infringement litigation is so high. However, just because an entity does not practice the technology disclosed in its patent, does not confirm that they are up to no good. Therefore, before Congress enacts legislation in this area, it is to be hoped that it acquires a full understanding of the non-practicing entity in all of its forms and likenesses.