Patent Trolls in the Cross Hairs

Patent trolls – sometimes referred to as patent assertion entities – have attracted significant attention of late. Trolls are a subset of patent owners that neither develop nor commercialize technology. Their typical business model involves acquiring patents and obtaining royalties through licensing. This activity can, in theory, allow small inventors to monetize their technological developments and thereby encourage innovative activity. As President Obama rightly noted last February, however, some trolls “just try[] to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.” Rather than promote innovation, these attempts to collect unjustified tolls may be more likely to subvert technological development.

In addition to manufacturers of allegedly infringing technologies, trolls have targeted users of products that incorporate the technologies. For example, a patent troll has claimed that Wi-Fi technology infringes its patents and sent letters demanding royalties from coffee shops, hotels, and others that provide free Internet access to customers. Facing the threat of costly litigation and potentially ruinous liabilities, small businesses targeted by trolls often comply with the demand letters rather than mount a defense in court. Because they do not manufacture any products, patent trolls are not constrained by the threat of patent infringement counterclaims. And, instead of needing to maintain a reputation for fair dealing, a troll known for scorched earth tactics is more likely to maximize royalties.

A bill introduced by Congressman Bob Goodlatte and passed by the House of Representatives in December would, among other things, require trolls to identify the patents allegedly infringed in their court complaints and permit manufacturers to defend troll lawsuits brought against their customers. A comparable bill has been introduced in the Senate – the preferable approach because it does not include fee shifting, which we see as a dangerous precedent. The White House has directed the Patent and Trademark Office to tighten procedural standards for patentability and mandate greater transparency over patent ownership. These reforms would raise the costs of troll activity and, in general, hold the promise of reducing abusive patent enforcement.

The states have also taken the initiative to address troll misconduct. Earlier this week, New York Attorney General Eric Schneiderman reached a settlement with a prominent troll. The deal imposes a variety of obligations on the troll, including due diligence on potential infringers before making accusations and, in demand letters, disclosure of its true identity and an explanation of its infringement claims.

Abusive troll behavior may be a violation or arise from a violation of the antitrust laws. Some trolls have acquired large patent portfolios and thereupon initiated abusive enforcement campaigns using patents that the previous owners had neither the ability nor incentive to enforce in that manner. On occasion, they have reneged on commitments to license patents included in technical standards on reasonable and non-discriminatory terms. Competing manufacturers have jointly transferred their patents to a troll and entrusted it to enforce patents against rivals and their customers. In their enforcement campaigns, trolls have sometimes failed to disclose the relevant patent(s) to their targets, leaving them ignorant of the scope of their liabilities and vulnerable to extortion. These practices may run afoul of the antitrust prohibitions on monopolization, anticompetitive acquisitions and restraints, or deceptive methods of competition.

The antitrust laws in their present form can and should play a key role in addressing the troll problem. The Department of Justice (DOJ) and Federal Trade Commission (FTC), as well as injured parties, can bring enforcement actions against trolls that engage in anticompetitive behavior. Importantly, antitrust lawsuits against trolls can proceed without any action from Congress. For example, in 2008, the FTC brought a successful case against a troll that had acquired patents incorporated into the Ethernet standard and disowned a pre-existing licensing commitment. While the antitrust laws are unlikely to be a panacea for harmful troll behavior, they have the potential to curtail abusive behavior to a significant degree.

In September, the FTC proposed to use its broad investigative authority to examine patent trolls. Subject to approval from the Office of Management and Budget, this study would likely shed important light on the structure of trolls, their patent enforcement practices, and their relationships with other actors in the technology marketplace. The FTC would develop a broad empirical record on patent trolls. These findings would inform a comprehensive policy response to the problem of abusive patent trolls.

At the same time, the DOJ and the FTC should not defer enforcement action until the completion of the study or the enactment of new legislation. They have the authority under the antitrust laws to act now. Troll activity is costly for users and makers of high technology products and has the potential to retard innovation. If the DOJ and the FTC have evidence of troll behavior that likely violates the antitrust laws, they should not hesitate to bring their substantial legal powers and resources to bear against this socially pernicious conduct.

Bert Foer is the President and Sandeep Vaheesan is Special Counsel of the American Antitrust Institute.