Patent Trolls: A Drain on Innovation? - AIPLA … · Patent Trolls: A Drain on Innovation? PATENT TROLLS: DEFINING TERMS What is a Patent Troll? 2 Patent Trolls & Innovation ... they

Presentation to A*STAR

Peter H. Kang, Esq.

Sidley Austin LLP – Palo Alto Office

April 20, 2012

AIPLA (IPFEC) – Delegation to Singapore

Patent Trolls: A Drain on Innovation?

http://www.aipla.org/

PATENT TROLLS: DEFINING TERMS

What is a Patent Troll?

Patent Trolls & Innovation - A*STAR - AIPLA - Peter Kang 2


Patent Trolls: Perspectives

•Peter Detkin, VP, Intel

Corp. (then)


• Peter Detkin, Co-Founder,

Intellectual Ventures (now)

"We were sued for libel for the use

of the term 'patent extortionists' so I

came up with 'patent trolls,'" Detkin

said. "A patent troll is somebody

who tries to make a lot of money off

a patent that they are not practicing

and have no intention of practicing

and in most cases never practiced.” - B. Sandburg, “Trolling for Dollars”, The Recorder (July 30,

2001)

NPR’s “This American Life” program

“quotes Silicon Valley venture capitalist

Chris Sacca comparing Intellectual

Ventures’ patent licensing operations

to ’a mafia-style shakedown.’ In the

story, Intellectual Ventures executive

Peter Detkin calls that

assertion ’ridiculous and offensive.’“ - T. Bishop, “Intellectual Ventures responds to This American Life

exposé: ‘We fundamentally disagree’”, GeekWire (July 24, 2011)


Patent Trolls: Eye of the Beholder

"I have mixed feelings about

those organizations. From an

ethical standpoint, they're almost

like ambulance chasers," said

Andy Gibbs, CEO of

PatentCafe.com Inc., a Web site

that focuses on intellectual

property issues.” - B. Sandburg, “Trolling for Dollars”, The Recorder (July 30, 2001)


“[T]the real issue [is] - that ideas have value

and inventors who invest time, money and

emotional resources into protecting those

ideas with patents have a right to recognize a

return on their investments. Intellectual

Ventures is challenging the status quo…. Our

value proposition is simple: we want to provide

an efficient way for patent holders to get paid

for the inventions they own, and in turn, for

technology companies to gain easy access to

the invention rights they need or may need as

they enter new markets.” - T. Bishop, “Intellectual Ventures responds to This American Life

exposé: ‘We fundamentally disagree’”, GeekWire (July 24, 2011)


Patent Trolls vs. Non-Practicing Entities

• Universities

• Research Institutes

• Government Agencies

• Corporate R&D labs

• Individual inventors

• Non-core businesses



Categories of Non-Practicing Entities

• Research and Development Entities:

• use patent license fees to fund technology development;

• Patent-Assertion Entities:

• primarily use patents to get and distribute licensing fees, rather than to support the development or

transfer of technology;

• Defensive Patent Trusts:

• acquire patents so that they will not be used to sue their licensees

• Startups:

• acquire patents primarily in order to deter copying and attract financing.

• As a company’s business evolves, it may move from one category to another

- Prof. Colleen V. Chien, Santa Clara University Law School: C. Chien, “From Arms Race to Marketplace: The Complex Patent Ecosystem and Its

Implications for the Patent System”, 62 Hastings L. J. 297, 328 (2011)



Evolution from Practicing to

Non-Practicing Entity

- Prof. Colleen V. Chien, Santa Clara University Law School: C. Chien, “From Arms Race to Marketplace: The Complex Patent

Ecosystem and Its Implications for the Patent System”, 62 Hastings L. J. 297, 325 (2011)



Patent Thickets

“The patent thickets problem, a form of “tragedy of the anticommons,” is a

phenomenon by which people underuse scarce resources because of overlapping

ownership. In the patent thickets, a technology is prone to underuse because of the

high costs of licensing resulting from multiple ownership stakes in the same

technology. The patent thicket problem is at the forefront in corporate settings, as

evidenced by the defensive use of patent portfolios.” - J. McDonough, “The Myth of the Patent Troll”, 56 Emory L. J. 189, 202 (2006)



Patent Trolls & Patent Thickets

“[T]he collection of patents and the subsequent

need to invent around patents can stifle innovation.

This argument has merit. However, this problem

implicates the patent thicket problem.” - J. McDonough, “The Myth of the Patent Troll”, 56 Emory L. J. 189, 224 (2006)



Patent Trolls Exacerbate Patent Thickets

•“Patent dealers are generally immune from the effects of defensive patenting

because they do not manufacture products, and therefore there is no basis for a

potential countersuit. Consequently, a company’s extensive patent portfolio

creates no countersuit threat, and the patent dealer does not have to factor in the

cost of a countersuit when deciding whether to bring a lawsuit. As a result of this

immunity to the use of defensive patent portfolios, the patent thickets problem is

more evident when patent dealers are involved in a suit.” - J. McDonough, “The Myth of the Patent Troll”, 56 Emory L. J. 189, 203 (2006)



Patent Trolls & Patent Quality

“Bad patents are being issued daily: the

issuance of patents for the protection of

inventions like the crust-free peanut

butter and jelly sandwich, a method of

exercising a housecat with a laser

pointer, and a method for swinging on a

swing illustrate the status quo.” - J. McDonough, “The Myth of the Patent Troll”, 56 Emory L. J. 189, 202

(2006)



Patent Trolls: Asymmetric Conflicts

“In the marketplace, the inverse is true—the wide diversity of business

models means that companies can exploit asymmetries to their advantage.

Companies that do not make products target the revenues of those that do.

Such patentees are not burdened by the need to manage investor expectations

or minimize disruption to the company’s core business. Some practicing

companies have also taken advantage of asymmetric exposure between

themselves and their targets by suing companies that work in areas that they

do not, making them invulnerable to countersuit.” - C. Chien, “From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications for the Patent System”, 62 Hastings L. J. 297, 317-18

(2011)



Patent Trolls vs. Practicing Entities

“We can argue all day about the finer points, but there is one very distinct quality of TiVo's

that sets it apart from the trolls. TiVo actually makes and sells things. Rambus and

Intellectual Ventures don't. This seemingly irrelevant fact actually makes a world of

difference. Rambus can file lawsuits all day long without ever being sued back -- there are

no products sales to block, no profits made from infringing on the rights of others. But

TiVo is open to all sorts of retaliation because the company makes and sells both hardware

and software. So if TiVo launches a lawsuit, it had better be sure about its merits, because

a bad attack can backfire with a vengeance. By contrast, Acacia and friends can simply roll

the dice, shrug their shoulders at the occasional setback, and keep betting until they hit a

big payday.”

- A. Bylund, “Is TiVo a Patent Troll Now?”, The Motley Fool (Oct. 14, 2011)



Patent Trolls: $500B Drain in the U.S. Alone

“Patent trolls could have cost US businesses as much as $500 billion in

stock value over the last 20 years, according to a study from the Boston

University School of Law. The study, entitled The Private and Social

Costs of Patent Trolls, looked at stock prices between 1990 and 2010

to establish how much corporate value was lost when an organisation

was sued for patent infringement. The average loss to a company's

stock following a patent suit, says the report, was $122 million.” - K. Aziz, “Patent trolls cost US economy half a trillion dollars says study”, Intellectual Property Magazine (Sept. 21, 2011)



Patent Trolls & Software

The researchers “excluded intangibles in their study, such as employee

distractions, legal uncertainty and product redesigns. Additionally, only

publicly held companies were included in the research, neglecting the cost to

smaller private companies who were forced to litigate or went out of business.

The authors used a database of 1,630 patent troll lawsuits compiled by Patent

Freedom. Software patents accounted for about 62% of the lawsuits. In

contrast, only two percent of the lawsuits involved drug or chemical patents

and six percent involved mechanical patents.” - K. Aziz, “Patent trolls cost US economy half a trillion dollars says study”, Intellectual Property Magazine (Sept. 21, 2011)



Patent Trolls:

Insufficient Innovation Incentives?

“Of course, NPE litigation might also produce dynamic gains in social welfare if transfers

to independent inventors increase innovation incentives…. The investment that NPEs

make in acquiring patents … is small compared ot the defendants’ losses: $1.7 billion,

or about 2% of the defendants’ losses…. The investment made in patents are also

included in the NPE’s intangible assets [for 2010].… It is less than $600 million, about

1% of the defendants’ losses…. In any case, we can state that less than 2% of the

defendants’ losses could represent a transfer to independent inventors and quite possibly

the true figure is much smaller than 2%.”

- J. Bessen, et al., “The Private and Social Costs of Patent Trolls”, Boston University School of Law Working Paper No. 11-45 at p. 19 (Sept. 19,

2011)



“Patent Dealers”:

Promote the Useful Arts & Sciences?

•“Patent dealers more effectively distribute knowledge throughout the population:

• First, by increasing patent liquidity and decreasing risk, patent dealers incentivize individual

inventors and small entities to invent, making more technology available to the public.

• Second, [b]y acting as a market intermediary for patents, collecting information regarding patents

and their associated industries, and forming relationships with corporations, a patent dealer

becomes a focal point for those who create and seek technology. This results in easier and broader

access to inventions.

• Third, patent dealers encourage people to invent around Patents. With knowledge that patents

will be enforced by patent dealers, potential infringers are forced to either license technology, or

increase research and development to invent around these patents.

•Regardless of the choice, the end result for the public is broader access to works.”

- J. McDonough, “The Myth of the Patent Troll”, 56 Emory L. J. 189, 222 (2006)



“Patent Dealers”:

Promote the Useful Arts & Sciences?

“Patent dealers also promote the advancement of

innovation for the same Reasons. The presence of patent

dealers in the market allows individual inventors and small

entities to gain easy access to the patent market. Increased

patent liquidity and reduced risk gives inventors more

incentive to invent, which results in advancement within

that particular industry.” - J. McDonough, “The Myth of the Patent Troll”, 56 Emory L. J. 189, 223 (2006)



Patent Trolls as Public Companies:

Maximizing Shareholder Value?

“Forgent CEO Dick Snyder insists he’s merely providing maximum value to shareholders. ‘This country was built on

innovation, and in the Constitution there is a provision in there to protect innovation through patenting,’ said Snyder, a

former executive at Hewlett-Packard Co. and Dell Inc. ‘It’s the American way, and we’re just doing what we believe is

the right thing to gain value from what we own.’ For Forgent and other companies, the business model is paying off.

In the quarter ended Oct. 31, 80 percent of Forgent’s revenue came from licensing deals on just one digital image

patent it obtained years ago in an acquisition.

Elsewhere, Research in Motion Ltd., maker of the popular BlackBerry e-mail device, this month settled its long-

running patent dispute with NTP Inc. for $612.5 million. The Supreme Court, meanwhile, is expected to consider a

patent dispute between eBay Inc. and patent-holder MercExchange this year.

Forgent’s biggest earner — generating $108.4 million in settlements and licensing fees in the past three years — has

been U.S. Patent No. 4,698,672, issued in 1987 and obtained years ago in an acquisition. At the heart of the so-called

672 patent is something ubiquitous in the technology world: the JPEG format for digital pictures.”

- ‘Patent trolling' firms sue their way to profits, MSNBC (Mar. 18, 2006)



Patent Trolls As Investments

“James Altucher's friend recently bought back his search-monetization patents from the

wreckage of Lycos. And he formed a company with them. And now that company is

merging with a public company called Vringo. And Vringo, Altucher says, will use the

patents it has just acquired to go into a new business--patent trolling. James Altucher

says he has read all the relevant patents and Google's description of how its search

monetization works and believes that Vringo will have a strong case against Google.

Altucher points out that Google has generated about $67 billion of revenue from search

over the past decade, so there's a lot of money to go after. So Altucher has also bought

Vringo stock.”

- H. Blodget, “A New Patent-Infringement Lawsuit Could Totally Demolish Google's Stock”, Business Insider, March 31, 2012

Patent Trolls & Innovation - A*STAR- AIPLA - Peter Kang 20


Patent Dealers: Market Efficiency?

“[P]atent dealers make the patent market more efficient

through buying and licensing patents. Patent dealers create

a credible threat of litigation, which encourages exchange,

makes patents more liquid, and facilitates market clearing

through price equalization. As a result, the patent market

becomes more efficient.” - J. McDonough, “The Myth of the Patent Troll”, 56 Emory L. J. 189, 211 (2006)



Limiting Trolls: No Automatic Injunctions

• In eBay v. MercExchange, the Supreme Court overruled decades of Federal Circuit

precedent which supported virtually automatic permanent injunctions to a patent

owner who prevails at trial. eBay Inc v. MercExchange, LLC, 547 U.S. 388 (2006).

• Prevailing patent owners must show the traditional four-factors to obtain a

permanent injunction:

• Irreparable harm;

• Inadequate remedy at law;

• Balance of hardships; and

• Public interest.



Automatic Injunctions: The ITC

“The ITC’s recent decision in Cable Connectors (In the Matter of Certain Coaxial Cable

Connectors and Components Thereof and Products Containing the Same, Inv. No. 337-TA-650)

has not only opened the door for nonpracticing entities, it has defined the path by which

such entities can be successful in meeting the threshold requirement of a domestic

industry. The ITC ruled a “domestic industry” can be established by a complainant who

documents litigation expenses and proves that they are “substantial” and “related to

licensing.” Given this newly articulated standard, the bar established for meeting the

domestic industry requirement appears remarkably low and there is little doubt that the

ITC will become the next rocket docket for nonpracticing entities.” - J. Horvack, “Patent Trolls' New Forum: The ITC”, Law360 (Aug. 23, 2010)



AIA and Patent Trolls: Non-Joinder

(a) JOINDER OF ACCUSED INFRINGERS. -With respect to any civil action arising under any Act of Congress

relating to patents … parties that are accused infringers may be joined in one action as defendants or counter claim

defendants, or have their actions consolidated for trial, or counterclaim defendants only if-

(1) any right to relief is asserted against the parties jointly, severally, or in the alternative with respect to or arising out

of the same transaction, occurrence or series of transactions or occurrences relating to the making, using, importing

into the United States, offering for sale, or selling of the same accused product or process; and

(2) questions of fact common to all defendants or counterclaim defendants will arise in the action.

(b) ALLEGATIONS INSUFFICIENT FOR JOINDER. – For purposes of this subsection, accused infringers may not

be joined in one action as defendants or counterclaim defendants, or have their actions consolidated for trial, based

solely on allegations that they each have infringed the patent or patents in suit.

- 35 U.S.C. section 299



AIA: Patent “Con-Troll”

“The economics of mass patent enforcement have changed. A patent owner will no longer be able to

casually sue a multitude of parties with a single filing, participate in proceedings in a single action in a

single venue likely convenient only for the plaintiff, and thereby expeditiously pursue a recovery against

numerous disparate parties. Actions will have to be filed individually against each accused infringer. The

patent owner will have to participate in, contend with and address procedural and substantive aspects of

each action.

It might be expected that individual actions against individual accused entities will have to be brought in

venues more appropriate to the respective accused parties. Otherwise, an action against an individual

defendant will be more likely subject to transfer to a more appropriate venue if the defendant seeks

transfer, without the baggage of numerous other defendants anchoring an action in an ill-suited forum

chosen by the patent owner.” - C. Gorenstein, “America Invents Act Exercises “Con-Troll” Over Patent Litigation, IP WatchDog (Sept. 19, 2011)



AIA: Missed Opportunity?

“[C]ertain commentators have argued that Congress did not go far enough to stop patent

trolling. Suggested measures such as damages limitations tied to the patent's specific

contribution over prior technology, mandatory bifurcation of trials on liability and damages,

as well as interlocutory appeals of claims construction rulings were not enacted.

•Also, patent defense litigators have been watching closely as this law, entering into its sixth

month of practical application by the courts, to see whether "commonality" will be

interpreted as narrowly as they believe the AIA requires. At this early stage, however, it

appears that Congress's joinder overhaul, if not a magical fix, is nevertheless a daunting new

hurdle for patent trolls.” - M. Kelly, “Does the America Invents Act Signal an End to 'Patent Trolls'?”, The Legal Intelligencer (Mar. 23, 2012)



AIA & “Patent Mills”

“The capacity of trolls to file patents quickly is most observable in the case of so-

called patent mills. A patent mill is an entity that simply churns out patents, like

Intellectual Ventures or Walker Digital Labs…. Intellectual Ventures secures

roughly 500 patents every year. Without accusing Intellectual Ventures of being

an entity that overreaches, it is easy to imagine that in a “race to file,” such an

entity would be that much quicker and better equipped to file a patent than a

start up enterprise. Indeed, one of the concerns about the transition to a first-

to-file system is that start up enterprises will be adversely affected since the

process of filing a patent costs money and takes time/expertise.”

- K. Dhadialla, “Patent Trolls Under the Patent Reform Act”, Berkeley Tech. L.J. Bolt (Oct. 15, 2011),



Court Rulings Impacting Patent Trolls

• KSR – obviousness

• Post-Bilski Federal Circuit opinions – Fort Properties v. American

Master Lease LLC, (Fed. Cir. Mar. 6, 2012) (computer aided

process unpatentable)

• Medimmune – DJ actions

• In re TS Tech; In re Microsoft; In re Acer – venue and transfer out of

the E.D. Texas



Patent Trolls: Threat to Civil Liberties?

“This is because the state, at least in its current iteration, is largely geared

toward protecting the powerful against disruptive forces…. It’s all part

and parcel of the same system, whether we’re talking about food libel

laws, patent-trolling, internet censorship, indefinite detention in the

War on Terror, or no-knock SWAT raids, the pepper-spraying of peaceful

protesters- the law is increasingly tilted against the individual and against

freedom.” - E. Kain, “SOPA, the NDAA, and Patent-Trolling: Why Americans Need a Civil Liberties Caucus”, Forbes (Dec.

10, 2011)



CONCLUSION - Q&A

• Patent Trolls:

Challenges & Opportunities

•Questions & Answers

30 Patent Trolls & Innovation - A*STAR - AIPLA - Peter Kang


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Peter H. Kang, Esq.

Sidley Austin LLP

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THANK YOU


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Copyright 2012© Peter H. Kang, Sidley Austin LLP. Notice: The materials presented herein are intended for the

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Patent Trolls: A Drain on Innovation? - AIPLA … · Patent Trolls: A Drain on Innovation? PATENT TROLLS: DEFINING TERMS What is a Patent Troll? 2 Patent Trolls & Innovation ... they