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Jul. 30, 2015

The Conversation: Give existing reforms a chance to kill patent trolls, by Timothy Holbrook

This post originally appeared in The Conversation on July 30, 2015.

Two hundred twenty-five years ago, on July 31 1790, the first patent was issued in the United States. It covered a method of making a fertilizer ingredient, potash.

How times have changed! Over eight million patents later, we’ve moved from fertilizer to a revolution in genetics and digital technologies. Thousands of patents have been issued on computer software and methods of doing business.

Patents are supposed to encourage such dramatic innovation by providing inventors a limited period of time where they can exclude others from using their invention. Nevertheless, the law can struggle to keep up with new technologies. Software and business-method patents have created strain on the way our patent system operates. In particular, these patents have been frequently used by what critics have dubbed the “patent troll.”

Patent trolling for profit

What exactly are “patent trolls?” Their less pejorative appellation is Patent Assertion Entities (PAEs). PAEs generally are business entities that have only one asset, a patent. Typically they buy these patents from small inventors or bankrupt companies. PAEs don’t manufacture anything. Their entire business model is to threaten to sue people for patent infringement in hopes of getting licensing fees for the patent.

The PAE model is effective. Patent litigation is expensive for companies, costing potentially millions of dollars. Once sued by a PAE, many companies prefer to settle to avoid the cost, regardless of the merits of the case.

PAEs, on the other hand, have few litigation expenses. Their only asset is the patent, and often their lawyers take the case on a contingency fee basis, so the lawyer gets paid only if and when the money comes in. Settle the case, then move on to the next target.

A popular statistic thrown around is that 60% of United States patent lawsuits filed in 2013 were brought by PAEs, leading many to view PAEs as parasites.

Congress has reacted, with patent reform legislation on the verge of passing. The legislation is targeted at trolls and contains myriad provisions: creating standards for pleading a case far beyond other forms of litigation, making the loser pay in patent litigation and limiting discovery until the court has interpreted what the patent covers. There seems to be much enthusiasm for such reform, with reform bills making it out of committee in both the House and the Senate in a surprising show of bipartisanship.

Except, we don’t need it, at least not yet.