Are patent trolls smothering innovation?

Making Way for Patent Trolls: The Changing Face of Patents

The idea of licensing patents isn't new. In 1895, an inventor named George B. Selden patented a gasoline-engine-driven carriage. Though he wasn't successful as an automobile manufacturer, he collected plenty of fees from manufacturers in the burgeoning car market. In 1911, his patent was challenged successfully by Henry Ford when an appeals court ruled that the engine then used in cars differed from Selden's version [source: Raustiala, Koch].

The market for patents has generally been seen as a good thing. An inventor who couldn't afford to develop his or her idea could receive cash from a patent troll and let the troll enforce the patent. That cash was an incentive to keep inventing. Today's NPEs claim they are the middlemen who make it easier for that patent market to operate.

Several developments in the patent system have made it easier for patent trolls to thrive in recent years. In 1998, for example, a federal court ruling required the Patent Office to issue patents for computer software, including software for business activities like on-line auctions [source: Popper]. Previously, patents were issued mainly for devices or physical processes. Software patents, which refer only to computer code, are harder for inspectors to evaluate and compare; many "fuzzy" software patents are unclear about what they cover [source: Plummer].

Additionally, the Patent Office receives 520,000 applications in a year -- that's about 1,425 every day -- and its 6,500 inspectors are hard-pressed to investigate each application thoroughly [source: Raustiala]. They sometimes end up issuing patents that should not have been awarded. The sheer number and poor quality of patents make it harder for technology companies to be sure they aren't infringing on an existing or pending patent.

Many argue that the cost of patent litigation works to patent trolls advantage, too. Bringing or defending a patent lawsuit is expensive, with legal costs and lawyers' fees reaching into the millions of dollars. And if a defendant company loses a suit, it may be liable for triple damages in a case of willful infringement. It may also face an injunction against using the technology. Companies almost always settle patent suits rather than risk judgment, no matter what the merits of case. They end up paying a fee to use the disputed technology.

The term patent troll could apply to any company that takes advantage of these factors to make money. It's usually not used for patent holders like universities that create ideas in research labs and then license them. Instead, the term is reserved for nonpracticing entities (NPEs) whose primary business is acquiring patents and using them to extract licensing fees from other companies. Some companies that have been labeled patent trolls are Intellectual Ventures Management, LLC; Acacia Research Corp.; and Lodsys, LLC.

In the next section, we'll look at the tactics that patent trolls use to successfully challenge other companies.