Are patent trolls smothering innovation?

Patent Trolls in Action: Tactics and Case Studies

Patent trolls have had their biggest impact on the computer software industry. By one estimate, NPEs have brought 41 percent of the patent litigation involving software patents [source: Bessen]. Much of the criticism of patent trolls has focused on the tactics the companies use in order to pursue their interests within the patent system. Common troll strategies include the following:

  • Patent trolls produce no products. Normally, technology companies, if sued for patent infringement by a competitor, can countersue over infringement of their own patents. But NPEs don't use the patents they own to produce products, so this defense is not available to the target company when the troll comes knocking.
  • Trolls amass patents related to a target company. By purchasing many patents focused on one area, they are able to cite so many instances of possible infringement that it makes it harder and more expensive for the target company to defend the suit.
  • They sue multiple defendants. This reduces their legal costs per defendant and makes for a large potential payoff.
  • They pay lawyers a contingent fee. The attorneys are only paid if they win the case. Legal costs for the NPEs are reduced; for the target company they're sky-high.
  • They claim a percent of the total revenue from the product. Though the patent may cover only a small aspect of the technology, the award can amount to millions for a successful product.

Sometimes these tactics are very successful. For example, in 2006, NTP Corp., a patent holding company, settled a patent suit with Research in Motion, the maker of the BlackBerry device, for $612.5 million. They received this sum even though questions were raised about the validity of NTP's patents [source: Kelley].

But patent troll tactics don't always work. In 2011, an NPE called Eon-Net LP lost a suit against the savings and loan holding company Flagstar Bancorp. Eon-Net had sued Flagstar for using technology that infringed on Eon-Net's patent for "a system and method for inputting information from a document ... effectuating a paperless office." A federal district court found the claims baseless. The court pointed out that Eon-Net had brought more than 100 infringement suits, each followed with quick offer to settle -- activity typical of a patent troll [source: Chappell].

But the fact that 97 percent of infringement suits are settled before trial suggests that, given the trolls' advantages, target companies would rather pay off trolls than fight them in court [source: Raustiala]. How has this affected the landscape of innovation in the United States? Read on to the next page to find out.