New Report: How Patent Trolls and Their Lawyers are Wreaking Havoc on Businesses

NEW YORK, NY – On Monday, August 5, the Manhattan Institute’s Center for Legal Policy released the 18th report in its Trial Lawyers, Inc. series, focusing on litigation by “patent trolls”—companies that produce no goods or services but acquire and seek to enforce patent rights. Though intended to support innovation, patent law is increasingly undercutting American technological progress in the computing and software sector. The “patent tax” adds 20 percent to the cost of research and development in software and electronics, and in 2011, Google and Apple spent more on patent litigation and acquisition than on R&D. Highlighting the significance of modern patent litigation, on Saturday, August 3, President Obama vetoed the ruling of the International Trade Commission (ITC) that would have blocked the importation of various Apple products based on Samsung’s patent-infringement claims—the first presidential override of an ITC decision in over 25 years.

In 2012, 62 percent of all patent litigation was brought in the name of “patent trolls,” also commonly referred to as “patent assertion entities” (PAEs)— companies that produce no goods or services themselves but acquire patent rights and seek to enforce them against businesses producing goods or services using related technologies. Litigation by patent trolls is rapidly increasing:

• The number of patent lawsuits filed by patent trolls grew from 466 in 2006 to 2,914 in 2012, an increase of 526 percent in just six years.
• The direct costs of litigation by patent trolls in 2011 totaled $29 billion—up from only $7 billion in 2005.
• In 2011, 2,150 companies were forced to mount 5,842 defenses against patent-troll-initiated lawsuits—up from only 1,401 defenses in 2005.

Who’s hurt by patent-troll lawsuits?

Patent-troll litigation disproportionately burdens the software sector. Software patents comprise just 12 percent of all patents issued but 74 percent of the most-litigated patents—both because software patents are often vague and poorly defined and because computer programs are ubiquitous, with hundreds or even thousands of software packages embedded in commonly manufactured products.

Increasingly, the cost of patent litigation is falling on small businesses: 55 percent of defendants in patent-troll lawsuits filed in 2012 had under $10 million in annual revenues. In addition, patent-troll lawsuits are becoming more likely to target end-users of technology products than technology companies themselves: In 2012, more patent-troll lawsuits targeted non-tech companies than tech companies.

What are some examples of patent-troll lawsuit abuse?

• In 2011, Innovatio IP Ventures LLC, which was affiliated with the “king of the patent trolls,” Robert Niro, acquired a Wi-Fi technology patent. The patent troll then mailed “demand letters” seeking licensing payments from over 8,000 small businesses such as hotels and coffee shops that offered Wi-Fi services to their customers.
• In 2012, MPHJ Technology Investments LLC, “the scanner troll,” acquired a patent for a one-button scan-and-send-to-email technology. Some 40 legal entities affiliated with the company then sent letters to hundreds of small- and medium-sized businesses demanding $1,000 per worker in royalties for allegedly infringing on MPHJ’s patent by using printers and scanners with similar technologies.

Where do patent trolls file lawsuits?

Under loose U.S. jurisdictional rules, attorneys for patent trolls try to “shop” their lawsuits to venues likely to handle their claims favorably:

• The Eastern District of Texas emerged as the nation’s foremost magnet court for patent lawsuits. Judge T. John Ward was appointed in 1999 and adopted a set of local procedures for handling patent litigation that sped up claims and frequently let patent cases go to trial rather than be dismissed. Last year, the district’s patent docket accounted for over 22 percent of all patent cases filed nationwide.
• Since a 2006 Supreme Court decision, eBay v. MercExchange, made it more difficult to obtain judicial orders to stop selling a product in cases of alleged patent infringement, patent trolls started taking their cases to the U.S. International Trade Commission (ITC), where the ruling did not apply. Between 2006 and 2011, the number of defendants named in investigations initiated by patent trolls at the ITC rose from 4 to 235.

How can patent-troll lawsuit abuse be curbed?

After critically discussing proposed legislation and executive actions being advanced to ameliorate patent-litigation abuse—including policy proposals outlined in the 2013 White House report, Patent Assertion and U.S. Innovation—this update offers further policy suggestions. Included in the report’s recommendations are a “loser-pays” rule for all patent litigation to deter nuisance lawsuits, as well as venue-filing requirements to curb forum shopping.

Click here to read the full report.