Predatory Business Practices: Patent Sharks, Patent Trolls…

In December 2009 Nokia asked the U.S. International Trade Commission (ITC) to intervene and ban import of patent-infringing iPhones and MacBooks, accusing Apple of building its entire gadget business on the backs of other people’s work. This, in turn, provoked Apple which also asked the ITC to ban Nokia import. Apple has meanwhile accepted the ITC investigation over Nokia’s claims.

According to Apple Insider, a Piper Jaffray analyst Gene Munster estimates that Nokia wants a “1 percent to 2 percent royalty on every iPhone sold,” or about $6 to $12 per handset. Multiply that with 50 million iPhones sold to date and you get a cool $600 million in compensation. It must be said that the outcome of this patent infringement lawsuit cannot be determined at this stage because the case will likely drag out for years before the ruling is reached.

A patent is a set of exclusive rights granted by a government to an inventor or applicant for a limited amount of time (normally 20 years from the filing date). A modern patent provides the right to exclude others from making, using, selling, offering for sale, or importing the patented invention. Generally, patents are enforced only through private actions; namely, through civil lawsuits or licensing agreements. There is an ongoing debate about whether the benefits of patents out-weight the costs, particularly in Europe with respect to software patents.

In the article “Patent Sharks” by Joachim Henkel and Markus Reitzig write: Companies that focus heavily on research and development generally have more value tied up in intangible assets—patents and other intellectual property—than they do in material assets. Different sectors take very different approaches to managing those resources. For, example, pharmaceutical companies play hardball—they’ll do anything to protect a key patent.

That’s not so surprising when you consider that a single patent can sometimes safeguard an entire product worth billions. Technology companies, however, have to cooperate with one another because a complex product can incorporate several thousand patents, many of which are held by other organizations. The patents, therefore, become a form of currency exchanged among them.

However there are predators; technology companies can be attacked, metaphorically, by patent sharks or patent trolls. Patent sharks or trolls are entities that—opportunistically or intentionally—profit from payments by companies that inadvertently infringe on the sharks’ IP rights simply because they never even knew those rights existed. Though the patent sharks’ activity is perfectly legal, companies must understand that they are extremely dangerous and can cause a great deal of financial harm.

They sometimes hold patents based on their own inventions, but an increasing proportion license in, or acquire patents that they can then turn against companies. This kind of business is not only growing in importance, it’s also attracting more venture capital than it has in the past, according to Buckmaster de Wolf, senior counsel of litigation and legal policy at General Electric…

Joachim Henkel and Markus Reitzig write: The challenge for manufacturers is enormous. For example, chip maker Intel  paid Intergraph, Inc. at least $675 million for infringement of its Clipper processor patents—even though Intergraph stopped manufacturing hardware years before and has never used some of the patents it holds in its products.

Another shark, Asure Software (formerly known as Forgent Networks), has also realized enormous revenues: more than $100 million from a single (acquired) patent. And the situation is getting worse. Sharks are no longer a purely U.S. phenomenon; they have surfaced in international waters. As Klaus Hacker, the head of Deutsche Telekom’s patent department, explained, “Given that recent legislation has made life harder for patent sharks in the United States, I expect to see increased patent shark activity in Europe.”

Sharks can put enormous pressure on manufacturers by threatening to shut down their operations using a preliminary injunction. This tactic is especially effective in a fast-paced, complex industry like mobile phone operations, where closing the doors—no matter how briefly—can put even an established player out of business. Consider what happened to Research in Motion (RIM), which builds the best-selling BlackBerry… NTP, a pure patent-holding company, first filed suit against RIM in 2000 for violation of five of its patents and petitioned the court for an injunction on the sale and support of BlackBerry devices… RIM settled only one week later for $612.5 million—paying a fortune for rights that were dubious at best…

In the article “Android: Swimming With the Patent Sharks” by Matt Asay writes: Google Android has been on a tear in recent months, claiming 32 percent of all new smartphone purchases, according to Nielsen data. However, there are a rash of lawsuits directly or indirectly aimed at Android, including Apple, Microsoft, and Oracle.  Lawsuits, after all, appear to be par for the course in the mobile market, with at least 20 lawsuits being flung between companies as diverse as Kodak, Oracle, Toshiba, Samsung, and RIM…

In the article “Judge Bans the Term ‘Patent Troll’ — And the History of Patent Sharking…” writes: Patent sharks or patent trolls are not new and there are interesting parallels with patent fights of the 19th century, when so-called “patent sharks” bought up dormant patents on farm equipment and then went around suing farmers who were unknowingly infringing.

Parallels go even further. Right before this happened, there had been some changes in what the patent office considered patentable. Also, other industries outside the farm equipment industry fought back to prevent any real patent reform from being enacted — just as others outside the tech industry are now fighting against today’s patent reform…

In the article “On Sharks, Trolls, and Their Patent Prey—Unrealistic Damage Awards and Firms’ Strategies of Being Infringed” by Markus Reitzig,  Joachim Henkeland Christopher Heath, write:  Patent trolls (or sharks) are patent holding individuals or firms who trap R&D intensive manufacturers in patent infringement situations in order to receive damage awards for the illegitimate use of their technology… Our central finding; courts are awarding unrealistic consideration (large unrealistic financial penalties) for inadvertent infringers, and these large awards are the primary fuel for sharks to operate profitably…

In the article “Patent Sharks, Euro Perspective on Circumnavigating Them” Write: One repeated premise is the problem of “hidden” patents, and companies’ lack of awareness until being sued for infringement. Drawing upon the lurking “shark” metaphor… had Boston Scientific known of [Dr.] Saffran’s patent while it was developing its stent, then “it most likely would have invented around his [Saffran’s’] technology.”

However, one must ask the question: Why would a company proceed to launch a billion dollar product, without having “known” what was in published, issued patents, and not having “known” in 2003 of an ‘invent-around’ option for a patent issued in 1997; seems like taking on avoidable, forseeable risks….

In the article “Technological Innovation and Intellectual Property, Patent sharks” writes: Patent trolls or sharks have been in the news: Verizon, Google, Cisco, HP and other companies have created a joint effort to buy up patents that trolls might otherwise use against them. It will be interesting to see whether this strategy will take bad patents off the market or whether it might, instead, simply increase demand, thus increasing the price…

In the article “Patent Trolls on Markets for Technology –An Empirical Analysis of Trolls’ Patent Acquisitions” by Timo Fischer, Joachim Henkel1 write:  Patent trolls, or non-practicing entities (NPEs), are firms whose business model is focused on enforcing patents against infringers and thus to receive damages or settlement payments. Patent trolls are considered by some as a serious threat to innovation in high-tech industries, and have received considerable attention from policy makers…

Trolls seem to be able to acquire patents that are most appropriate for their business model. Compared to practicing firms, trolls focus on patents that (a) have a broad scope and are thus infringed upon with a high probability, and (b) lie in patent thickets and thus have a high substitution cost. Most importantly, and contrary to common belief, (c) troll patents on average are of significantly higher quality and have a high probability of being upheld in court…

Timo Fischer, Joachim Henkel write: Patent sharks or trolls seek to generate profits mainly or exclusively from licensing or selling their patented technology to a manufacturing firm that, at the point in time when fees are claimed, already infringes on the shark’s patent and is therefore under particular pressure to reach an agreement with the shark.” The term “non-producing entity” or “non-practicing entity” is often used synonymously to “patent troll” and “patent shark” and has the advantage of avoiding a derogatory connotation.

However, it equally describes pure research firms and institutions that seek to license their technologies, i.e., before infringement occurred. To avoid this misunderstanding, the common term “patent shark or troll” is used. A firm fitting the above definition may indeed behave like a proverbial malicious troll by deliberately hiding its patents, but it may also represent a serious inventor who failed to license his inventions and years later finds them infringed…

In order to avoid being sued and pressed for license payments by patent trolls, practicing firms must find ways to impede the shark or troll business.  For example, practicing firms must establish better patent clearing and monitoring processes, so that the risk of inadvertent infringement is minimized.

Also, practicing firms must try to find ways to hinder patent trolls from acquiring patents that could affect their business… However, as long as trolls and sharks succeed in reaching settlements and defendants settle without litigation; a substantive solution will be elusive.