Patent Troll Problems – The Good, The Bad, And The Ugly

A recent case, Smartflash LLC v. Apple Inc, which Apple described as a prime example of why the US patent system is flawed, saw the company ordered to pay over $532.9 million in damages.

Smartflash LLC, a Texas-based entity, sued Apple in May 2013 on the grounds that Apple had infringed 3 of its patents in their iTunes software. According to The New York Times, Smartflash alleged that Apple’s software infringed on Smartflash’s “patents related to access and storage of downloaded songs, videos and games.” The U.S. District Court for the District of Texas (Tyler) found Apple to have used Smartflash’s patents, and done so wilfully.

According to Bloomberg Apple issued a statement that the plaintiff does not create products, provide jobs and has a limited U.S. presence.  So, Apple effectively sees Smartflash as a patent troll.

What is a patent troll?

Trolls are entities that do not make or sell anything but exist solely so as to exploit rights in patents that they often obtain from another company. They are disliked because they control essential facilities and make demands of those who use them.

The dividing line between being a patent troll, which has an expressly negative connotation, and an entity that enforces its patents as a legitimate business model, is that trolls do not manufacture products where the patent is used. So, the patent is not related to something inside its core competency.

The IPKat notes that this can be a difficult distinction to make as it is common within certain industries for companies to hold patents that are not directly related to a product that they produce.

Also, one way in which patent trolls arguably have a socially useful function is outlined by Steven Rubin, a New York Intellectual Property lawyer. He argues that cases initiated by patent trolls are part of a business model that results in creating an environment favourable to innovation. By licensing their patents to trolls, inventors are able to enlist the help of these entities to fight the bigger players like Microsoft in order to defend their patents.

According to Rubin, “most inventors barely have enough money to file for a patent application. Even if the inventor can afford to get the patent to grant, patent litigation is exorbitantly costly, frequently requiring millions of dollars to fund. Individual inventors, and even small or medium-sized companies, cannot afford such fees without another company to finance the litigation or at least to license or buy the patent…The inventor may never realise any benefit from his toils.”

Lodsys

On the other hand, an example of the negative impact a patent troll can have is illustrated by the activities of Lodsys who obtained a portfolio of patents from Intellectual Ventures, and began targeting small App developers a few years ago about patent infringement.

In 2011, Electronic Frontier Foundation reported on Lodsys’s claims against App developers. Even though the developers were often using technology which Apple or Google required them to use to develop Apps on the Apple or Android platforms, small developers were being targeted by Lodsys rather than Apple or Google. The Lodsys litigation was not ultimately successful for the patent troll. Nevertheless, it had a significant impact on the industry, and caused a lot of anxiety within the developer community.

Need for reform

A related problem that creates an unsatisfactory situation is the high damages awarded in patent cases. It means that patent litigation has a dampening effect on innovation, and this has led to demands in the USA to reform the patent system.

The challenges facing innovators under the current patent regime, and the broken nature of the patent system is discussed in the “Defend Innovation” whitepaper. This advocates measures for policymakers to fix the system.

Patent trolling while it exists in Europe, is far less prevalent than in the United States, possibly because in the UK there is a real disincentive to litigation as the losing party has to pay the costs of the other side

So as The National Law Review, points out it is not necessarily that the forum is more accepting of such cases in the United States, but that there are few ramifications for patent trolls who file a lawsuit and then are not successful in litigation. The general rule in the United States is that each party pays for their own litigation costs.

Approach to patenting

All this raises the question of what people’s purpose is in filing patents. Generally, people file patents for both offensive and defensive purposes.

Patents used offensively may result in licensing revenue and, sometimes, in damages awards from litigation, such as happens for “patent trolls”.

Most patents are used defensively or for portfolio padding.

Patents used defensively are aimed at making it less attractive for a competitor to sue. For example, if you infringe a competitor’s patents and they also infringe yours, litigation may be pointless as both sides would have to spend a large amount on legal fees and would achieve only a small sum, if anything by way of monetary damages

Patent padding is used for marketing purposes so a company can claim that it is more innovative than its competitors in a given market.

Conclusion

Reuters reports that despite the moves to reform this area over the past year, patent litigation is on the rise, and Apple failed in its attempt to have the case dismissed earlier in the year. It did its utmost to avoid litigation altogether by arguing that the plaintiff’s inventions were both too basic to be patented and that other patents, previously filed, exist and cover the same technology.

Smartflash had originally sought $852 million. Apple conceded that the damages calculation was flawed and that at best, $4.5 million should be paid, yet the jury decided that the appropriate damages award should be $532.9 million.