The United States is quickly becoming a far less hospitable environment for patent trolls. A so-called “patent troll,” or less derogatorily, a “patent holding company” is an entity whose sole business is amassing large portfolios of patents. The patents are often bought from companies on the verge of bankruptcy. 112 Penn St. L. Rev. 29, at 296. The patent troll has no interest in creating, manufacturing, or otherwise distributing any products, but rather seeks to target companies who are unknowingly infringing upon an existing patent which they own. Id. Besides attacking companies who have been using a product or technique for many years without any notice or contemplation of infringement, another common target is the budding young venture. A patent troll, knowing that an invention integrated into a new venture infringes on a patent it owns, waits until many millions of dollars have been invested in the venture before attacking the unsuspecting young company with threats of litigation. Id. at 299.
The general tactic is to demand a licensing agreement with a company, and then if refused, sue the company, demanding monetary damages and injunctive relief. Id. at 297. The injunctive relief has been a swift and effective litigative tactic for patent trolls, as companies will often settle rather than risk an injunction which could grind their business to a halt, or cost them many times the settlement amount to fight. Id.
One example of a successful patent troll is Asure Technologies (changed name from Forgent Networks in 2007), which took in at least $100 million in settlements with technology companies from a single patent. Id. at 303. After acquiring the exclusive right to the JPEG method of image compression, it sued over forty companies for infringement. Id. Virtually all the companies, including Dell computers, chose to settle rather fight the suits, because of the threats of injunction and protracted litigation.
The Supreme Court was the first to effectively limit the power of the patent trolls. Up until its decision in eBay Inc. v. MercExchange, L.L.C, courts had been granting patent holding companies injunctive relief as a matter of course. 547 U.S. at 388. MercExchange had sued eBay, claiming it owned the right to the “Buy Now” feature integrated in the eBay interface. Id. at 390. The district court refused to grant injunctive relief, because it applied the four-factor test of injunctive relief derived from courts of equity. Id. That equity tradition gives courts wide discretion in deciding when injunctive relief is appropriate. Id. But the Federal Circuit reversed, holding that under the Patent Act injunctive relief for patent infringements should be granted as a “general rule” and only denied in “exceptional circumstances.” Id. quoting 401 F.3d 1323, 1339 (2005). The Court vacated the Federal Circuit decision, holding that the discretionary four-factor test should be applied generally to patent cases. Id. In Justice Kennedy’s concurring opinion he explicitly noted the public threat posed by patent trolls:
“When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.” Id. at 396-97.
Now, seven years after the Court’s first strike, Congress is making a bi-partisan move to further threaten the livelihood of the patent troll. On December 5th, 2013 the House of Representatives voted 325-91 in favor to pass the “Innovation Act.” That Act would require the patent holding companies to disclose the owner of the patent before litigation, rather than maintain cover behind a “web of shell companies.” It would heighten pleading standards and require early court decisions as to the validity of contested patents. It would also require mandatory sanctions for “frivolous” patent infringement claims. Another goal of the Act is limiting costs of discovery so that patent trolls cannot “extort money” from businesses. Along those same lines, it would allow small-businesses to take advantage of the possible preclusive effects of adjudications, by permitting them to postpone litigation until larger companies complete their own similar patent lawsuits.
The strong bipartisan support for the Innovation Act can be explained by the large number of small businesses all over the United States who have been threatened by patent trolls. Even restaurants and grocery stores have had to shell out money to assess potential liabilities, after receiving demands for payment in the mail. These establishments have received threats of patent lawsuits over their providing Wi-Fi services to patrons, or offering links to online mapping to be located by potential customers. The expanding reach of the patent trolls, into the spaces of the politically important small-businesses, likely has created the (rare) agreement between members of congress that something needed to be done. (The Economist, Dec.7th, “Trolls on the Hill.”)
If the law is enacted, it will likely be an effective challenge to the livelihood of the patent troll. But there are concerning questions which will require time and experience to answer. What will be the unintended effects of these rules and regulations on future claims of legitimate, bona fide patent holders? And at what point will the constitutional empowerment of “promot[ing] the progress of science…and inventors” come into conflict with the more recent reactions to the well-founded fear of the patent troll? (See Article I, Section 8, Clause 8).