PATENT TROLLS: BANE OR BOON?

Submitted by Kathleen Mykytyn

INTRODUCTION

Patent trolls – who are they, what do they do, where did they come from, and is there anything good about them?  These are but some of the questions that relate to them.  The so-called patent trolls are not limited to the US, but are located worldwide, so this perspective adds to the equivocality associated with them as well.  Currently, patent trolls have been closely associated with computer software, especially that involving business method patents.  They have been both criticized and defended for their actions.  One problem lies in recognizing who a patent troll may be.  The purpose of this paper is to identify, describe, and present arguments surrounding patent trolls.  When it is felt to be necessary, some of the conclusions about patent trolls will be challenged so as to elicit debate.

In the next section, patent trolls are defined.  Then, a review of the events that opened the door for the patenting of computer software business methods patents is submitted.  In that section, the background of computer software business methods patents is addressed.  Following that, the emergence of patent trolls and the factors that brought about their existence is discussed.  Next, both the positive and negative aspects of patent trolls are presented.  Alternatives to purported controversies are then reviewed that examine the legal issues involving business process patents and patent trolls, and alternative solutions are proposed.  Finally, a brief summary and a conclusion are offered.

PATENT TROLLS DEFINED

A patent troll is described as a company that owns and licenses patents but does not practice any patents itself.  It is a term generally used to describe firms that acquire patents only to extract exorbitant licensing fees or settlements from companies on dubious infringement claims[1].  These companies hold a portfolio of patents, and their only business is licensing out those patents and enforcing them against those who refuse to license their product.  It is a derogatory term that is used for those who enforce patents against one or more infringers that is seen to be aggressive and opportunistic and is generally used against corporations both large and small.

These companies are differentiated from other companies in that they are non-practicing entities (NPE), i.e., they neither use nor manufacture the patented invention[2].  Whether or not one agrees with the tactics of these management companies, they have been christened as patent trolls which is a metaphor that was coined by Peter Detkin in 2001[3].  Currently, patent trolls are closely associated with computer software involving business method patents[4].

Chuang notes that because companies like pharmaceuticals usually depend on only one patent, they are not as susceptible as the software industry to broad-patent attacks of infringement by a patent troll[5].  The reason for this is because a pharmaceutical drug will have only one or two patents covering it, as drugs are usually complex chemical compounds; the company can better monitor prior art[6] as well as patents being granted and frequently prevent litigation before it starts[7].  On the other hand, software patents, particularly business methods software, are broad and may include numerous claims.  When even a small portion of the patent is infringed, injunctions, large settlements, or expensive licenses may be demanded, thus making them attractive acquisitions for patent trolls[8].

Unfortunately, the definition of patent trolls may be too broad.  If the definition of a patent troll is an organization that neither uses nor manufactures a patented invention, then universities could fit the description of patent troll.  Chung stated that under the 1980 Bayh-Dole Act, congress allows universities to reap the benefits of government funded research by permitting them to sell or license these funded patents to private organizations, ergo they could be designated a patent troll because they make money from patents they neither use nor plan to use[9]

Under the current definition of a patent troll, others would share this “distinction.”  Thomas Edison would be considered the first patent troll.  He had 1,093 patents, and even though many of his inventions were incorporated into products, he made a fortune from patents that he neither manufactured nor used[10].  Many large companies today hold patent portfolios, but they do not use all of them directly in their businesses.

Even reputable, established companies that actually do make products may qualify as patent trolls.  Eastman Kodak filed suit against Sun Microsystems in 2002 alleging that Sun's Java programming language infringed three of its patents[11].  These patents were not developed by Kodak; they obtained ownership of them only after they acquired the original developer, Wang Laboratories, Inc., in 1997[12].  Kodak's patents were found infringed, and Sun settled with Kodak for $92 million[13].  Since Kodak used programming language patents against Sun and is not in the programming language business, Kodak can be considered a patent troll under the patent troll definition[14].

THE ADVENT OF SOFTWARE PATENTS

Patents have been established as the most potent form of intellectual property (IP) protection.  In order to obtain a patent in the United States (US) and in other countries, an invention is rigorously examined and scrutinized by not only the United States Patent Office (USPTO), but patent offices throughout the world, such as the German Patent and Trademark Office and the European Patent Office.  There are differences of opinion as to what invention may or may not be granted a patent.  This is especially true when it comes to computer software having to do with business processes.

As early as 1981, Flewellen[15] asserted that since there was a constantly expanding need by businesses for software that exceeded the pace at which programs were being developed, there was a need for a mechanism, such as a patent, to encourage the development of such software by providing legal protection of the software developer’s investment.  Yet, there had been considerable controversy regarding whether software was even patentable.  Although computer programmers consistently proclaimed their need for patents on software in order to compete with established computer industries, patent protection was not easily or consistently available for much of this earlier period[16], especially in the US.

That changed, however, in 1981 when the US Supreme Court held that software could be patented[17].  This case and the creation of the Court of Appeals for the Federal Circuit (CAFC) in 1982 have led to an increase in the number of patent filings and the number of patents issued for computer software[18].  The US Supreme Court’s decision to provide for the patentability of software in the 1981 Diamond v. Diehr[19] case is significant.  The Court declared that a claim for an invention using a computer for one or more steps of a process was valid subject matter for patent protection.  Specifically, the Court stated that “a claim drawn to subject matter otherwise statutory (a manufacturing process, in this case) does not become nonstatutory simply because it uses a mathematical formula, computer program, or digital computer”[20].  The result of this decision has led to a proliferation of software-related inventions. 

The strengthening of the patent system with respect to software has also been reflected in other court decisions.  In 1982, the first reported case involving the validity of a patent on software was brought before the District Court in Delaware.  In this case, Paine Webber challenged the validity of the patent obtained by Merrill Lynch on its Cash Management Account (CMA)[21].  Paine Webber argued that the CMA was a business method and that business methods and systems cannot be patented.  Paine Webber argued that the method claimed by Merrill Lynch simply described a series of steps that could be carried out by hand with the aid of paper, pencil and telephone.  The Court held that the claims recited were patentable subject matter because they taught a method of operating a computer.

This case may have been instrumental in motivating organizations to invest in the development of in-house business-related software, since the investment could now be protected from competitors if it is patented.  Since that time, Merrill Lynch has obtained 39 out of 41 US patents that could be labeled as a business method, i.e. business processes that could be performed without a computer.  Other financial institutions that have developed so-called business methods software include Goldman Sachs, Citibank, MasterCard, Bank of America, and Visa, to name but a few.  Like other similar firms, these are not companies that develop software applications for resale; generally, they are for internal use only.  Figure 1 exhibits the growth in software business method patents since 1975 to the present time[22].

Figure 1

A committee of the State Bar of Michigan published a survey in 1988 that concluded that the patentability of software was firmly established and that the Patent Office was issuing a large number of patents for a wide variety of computer software applications[23].  The survey also noted that the use of patents to protect these applications was becoming more attractive to software developers due to the powerful form of legal protection patents provide and due, particularly, to the changing judicial attitudes toward patents in general.

EMERGENCE OF PATENT TROLLS

In 1998, the Court of Appeals for the Federal Circuit (CAFC) made a ruling in State Street Bank[24] similar to the Merrill Lynch case in that computer-based business method patents were held to be patentable subject matter.  Subsequent to the State Street Bank ruling, small software companies sprang up to take advantage of this incident; large amounts of business methods software were being developed and patented. 

After the dot.com bubble burst at the turn of this century, there were many software companies with large patent portfolios and no financial backing necessary for marketing their software products[25].  Also, most of these smaller companies did not have the resources or the legal competencies to challenge established companies who may infringe their patents.  It is not surprising then that companies would be created to take advantage of these developments, i.e., companies that specialize in the management of patent portfolios[26].  They would know how to enforce patents aggressively against large established companies, raise funds to support the continuing development and exploitation of the technology, and facilitate the exploitation of the patent by licensing it to the firms best placed to use it[27].  Some of these firms include Acacia Technologies Group, Altitude Capital, Intellectual Ventures, and Rembrandt IP Management[28].

Internationally, similar companies have arisen.  SISVEL is such a company with offices in Italy, Germany, the US, Japan, and China.  It bears a strong resemblance to the definition of a patent troll in that it would be considered to be an NPE as noted in its mission statement on its webpage.[29]  It states that its mission is to act as a bridge between manufacturers that require access to key technology and patent owners that wish to license their portfolios to finance further research, defend property rights internationally, help companies promote and license their inventions, and promote a global culture of respect for intellectual property[30].

PATENT TROLLS: POSITIVE/NEGATIVE ASPECTS

Negative Aspects

Controversial issues involving patent trolls include the fact that they are NPEs and may cause market failures by inhibiting some products from reaching consumers because companies face large costs researching patent infringement claims; they may also avoid researching infringement claims because of the penalty for willful infringement can be treble damages[31]  Further, critics claim that these patent trolls can demand settlements that exceed the true economic value of the patent, and since they are NPEs they have nothing to lose by halting the manufacture of a product[32].

Patent trolls use the power of financial threat to convince companies to settle since the expense of patent litigation can be over $2 million for each patent[33].  It has been reported that in the late 1900s and early 2000s, one such patent troll, TechSearch, made millions of dollars primarily from a patent it acquired on a method of transmitting data between computers[34].  Nearly 100 companies including UAL Corp., Sears, Roebuck and Co. and Hyatt Corp chose to pay TechSearch to license the technology rather than take the fight to court[35].

The power to exclude is enjoyed by a patent holder and can be crippling to an infringer in that through injunctive relief, all production must cease.  This concern was expressed by the Supreme Court:  Justice Kennedy’s concurrence in eBay Inc. v. MercExchange, Inc. was based on a four-factor test rather than an automatic presumption that a patent holder is entitled to injunctive relief[36]  While some have felt that the Supreme Court veered from past decisions and went too far in their decision, it nevertheless stands[37].

This decision could be helpful to companies that are concerned with costly infringing litigation and the costs involved in stopping activities that are deemed infringing.  Justice Kennedy's statements insinuate that patent trolls do not deserve injunctions and that patents on small components, such as those contained in computer software, would fail factors two and four of the eBay test[38].  While this appears to be a positive step towards containing patent troll litigation, it is but one step that will not settle the controversies involving them.

Positive Aspects

            In the entrepreneurial world, small software companies, or even independent inventors who patent their creations, face a myriad of obstacles trying to market their products.  For example, if the software creates a new and practical way of storing data, then the “consumer” would most likely be a large, established corporation, like Microsoft.  Unfortunately, they may not possess the financial and legal competencies necessary for successful negotiations with an established firm that has such competencies[39]. 

            Further, these large, established firms have both the financial and legal resources that may tend to wear down these smaller inventors.  This point is emphasized by Detkin[40], who cites a number of tactics that negotiators for these firms use.  They are:

1.      The initial contact is followed by an infinite round of “telephone tag.”

2.      The first meeting is generally an introduction that can be drawn out from six to eighteen months of discussion and argument mainly about:

a.       Prior art

b.      The inventions use in the market place

c.       The validity and enforcement of the patent.

3.      Finally, after dragging out the negotiations, the company often declines to license the patent under any reasonable terms.

If the large firms decide to infringe a patent, they are at a distinct advantage because they can afford large legal fees and lengthy delays that can run from three to seven years for patent suits.  They can drag their feet for years.  This was evident when, in 2000, eBay entered into negotiations with MercExchange to purchase its online auction patent portfolio[41].  When eBay abandoned negotiations, it continued to use MercExchange’s IP.  MercExchange sued eBay in a jury trial and won – this was in 2003.  After going to the District Court and the Court of Appeals for the Federal Circuit, the suit finally reached the Supreme where it was decided on May 15, 2006[42] in eBay’s favor.

Since patent trolls have financial and legal competencies, they are in a better position to deal with large companies who use the tactics described above.  Small companies and independent software developers would surely be better served by companies labeled as patent trolls.  The benefits that patent trolls create would incentivize inventors to innovate so that they can continue to further the progress of science and useful arts[43].

ALTERNATIVE SOLUTIONS TO THE PATENT TROLL CONTROVERSY

            It has been posited that the patent term for software patents should be shortened because they have shorter timelines due to the rapid changes in software technology[44].  The patent monopoly granted for twenty years provides incentives in the software industry for patent trolls to assert outdated patents against new technologies which would drain resources away from research and development[45].  A term of not more than five years has been suggested[46].

If this idea were to gain traction and be approved, the controversy over whether business process software should be patented would probably be solved.  An examination of 30 randomly selected patents in Class 705/30 (Accounting) of the USPTO revealed that the average time it takes from application to patent issuance is about four years; on the average, it takes just as long for a small company or independent inventor to negotiate licensing rights with a large company.  Since the term of a new patent is 20 years from the date the application for the patent was filed[47], if the term, as suggested above is no longer than 5 years, by the time the patent is issued, it would expire about 1 year after it is issued.  Further, the time from application to issuance appears to be longer now than in the past.  Unless a special policy is created to address this situation, filing for a software patent would not be worth the time or money.

Another solution to the patent troll controversy seems to be gaining in popularity:  patent auctions conducted online.  Auctions would eliminate the time involved in negotiations with less than enthusiastic larger companies.  As the demand increases for new software applications, auctions could provide patent owners with a return on their investment more rapidly.

Larger companies have been doing this for some time.  As an example, currently, Hewlett Packard (HP) has 5000 patents available for license or sale[48].  Two of the patents currently being auctioned are Graphics software[49] and User Interface software[50].  New companies and investment groups are being formed to buy, sell, license, broker, or sell patents; venture capital and private equity are coming into these businesses[51].

While the patent troll has seemed to be the only alternative for small companies or independent inventors to make use of, the two alternatives above should be investigated and researched to determine their viability with respect to business process software.

CONCLUSION

The friction that exists between large established companies and smaller companies or independent inventors should come to an end.  The attitude of the larger firms seems to be, “what’s mine is mine and what’s yours is mine too.”  This kind of attitude just creates animosity that surely pushes the smaller competitors to patent trolls.

One last interesting point:  Peter Detkin, the creator of the metaphor, “patent troll,” is the founder and vice-chairman of Intellectual Ventures, a company that has been labeled as a patent troll[52]

 

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[1]  Troy L. Gwartney, “Harmonizing the Exclusionary Rights of Patents with Compulsory Licensing,” William and Mary Law Review, 50, March 2009, p. 1395-1438.

[2] Colleen V. Chien, “Of Trolls, Davids, Goliaths, and Kings: Narratives and Evidence in the Litigation of High-Tech Patents.” North Carolina Law Review, 87, June 2009, p. 1571-1616.

[3] Peter N. Detkin, “Leveling the Patent Playing Field,” John Marshall Review Intellectual Property Law, 6, Summer, 2007, p. 636-644.

[4] William L. LaFuze, “Patent Trolling,” 21^st Annual Intellectual Assets & Technology Law Institute, October, 2006.

[5] Ashley Chuang, “Fixing the Failures of Software Patent Protection: Deterring Patent Trolling by Applying Industry Specific Patentability Standards,” Southern California Interdisciplinary Law Journal, 16, Fall 2006, p. 215-251.

[6] Prior art refers to any and all information about a given invention that has been made available to the general public, in any form, during a specified period of time. http://www.gaebler.com/Prior-Art.htm, last accessed on 10/14/2009.

[7] Id.

[8] Lee Anne Fennel, “Adjusting Alienability,” Harvard Law Review, 122, March 2009, p. 1403-1465.

[9]  Ho-Sung Chung, “The Supreme Court Unjustly declares Open Season on Patent Dealers,” University of Illinois Journal of Law, Technology and Policy, Spring 2009, p. 227-250.

[10] James F. McDonough III, “The Myth of the Patent Troll: An alternative View of the Function of Patent Dealers in an Idea Economy, Emory Law Journal, 56, 2006, p. 189-228

[11]  Scarlet Pruitt, Update: Kodak Wins Patent Lawsuit Against Sun, InfoWorld, Oct. 4, 2004, http://www.infoworld.com/article/04/10/04/HNkodakwins_ 1.html.

[12] Id.

[13]  Paul Krill et al., Sun Settles Java Suit with Kodak, InfoWorld, Oct. 8, 2004, http://www.infoworld.com/article/04/10/08/41NNsunkodak_1.html.

[14] See Ho-Sung Chung supra note 9.

[15] L.N. Flewellen, “An Anomaly in the Patent System: The Uncertain Status of Computer Software’” Rutgers Computer & Technology Law Journal, 1981, 8(2), p. 273-303.

[16] John R. Allison, Abe Dunn, & Ronald J. Mann, “Software Patents, Incumbents, and Entry,” Texas Law Review, 85, June 2007, p. 1579-1625.

[17] Diamond v. Diehr, 450 U.S. 175 (1981).

[18]Bender, D. and Barkume, A.R., “Patents for Software-Related Inventions,” Software Law Journal, 5, 1992, 279-298.

[19] See Diamond, supra note 17.

[20]  Id at 197.

[21]  Paine, Webber v. Merrill Lynch, Pierce, 564 F. Supp. 1358 (1983).

[22] Only a random sampling of categories available in the USPTO classification database, Automated Electrical Financial or Business Practice or Management Arrangement, was used.  The categories were: bill preparation, finance (e.g. banking, investment, or credit), accounting, and bill distribution or payment.

[23]  Survey of United States software patents issued from July 1987 through December 1987.  Proprietary Rights Committee, Computer Law Section, State Bar of Michigan, 1988).

[24] State Street Bank & Trust Co. v. Signature Financial Group, Inc. 149 F.3d 1368, 1998.

[25] See William L. LaFuze supra Note 4.

[26] Id.

[27] See John R. Allison, supra note 16.

[28] Id.

[29] http://www.sisvel.com/english/aboutus/mission , last accessed on 10/25/2009

[30]  http://www.sisvel.com/english/aboutus/mission.  Last accessed on 10/28/2009.

[31] Marc Morgan, “Stop Looking Under the Bridge for Imaginary Creatures: A Comment Examining Who Really Deserves the Title Patent Troll,” Federal Circuit Bar Journal, 17, 2007, p. 165-180.

[32]  Id.

[33]  See Peter N. Detkin supra at Note 3.

[34] Brenda Sandburg, “You May Not Have a Choice. Trolling for Dollars,” Law.Com, July 30, 2001. http://www.phonetel.com/pdfs/LWTrolls.pdf, last accessed on 10/25/2009.

[35] Id.

[36]  eBay Inc. v. MercExchange, L.L.C., 126 s. Ct. 1837, 1842 (2006), (Kennedy, J., concurring).

[37] See Ho-Sung Chung supra Note 9.

[38] Factor 2 states that remedies available at law, such as monetary damages, are inadequate to compensate for that injury and Factor 4, states that the public interest would not be disserved by a permanent injunction.

[39] See John R. Allison, supra note 16.

[40] See Peter N. Detkin supra Note 3

[41]  at http://en.wikipedia.org/wiki/EBay_Inc._v._MercExchange,_L.L.C.

[42] Id.

[43] See Ho-Sung Chung supra Note 9.

[44] See Ashley Chuang supra Note 5.

[45] Id.

[46]  An Open Letter from Jeff Bezos on the Subject of Patents (Mar. 9, 2000), available at http://www.oreilly.com/news/amazon_patents.html.  Last accessed on 10/19/2009.

[47] http://www.uspto.gov/patents/process/index.jsp, last accessed on 10/26/2009.

[48]  http://h20229.www2.hp.com/hpvps/OnlinePatentSales.html

[49] These patents relate to graphics software for generating faces, graphically representing image logs, image clipping, generating photo-realistic images, etc.

[50] These patents relate to graphical user interfaces on portable scanners, facilitating speech recognition in user interfaces, stylus friendly user interfaces, and controlling the display of application windows.

[51]  Steve Lohr, “Patent Auctions Offer Protections to Inventors,”  The New York Times, Sept. 20, 2009.  http://www.nytimes.com/2009/09/21/technology/21patent.html. Last accessed on 10/28/2009.

[52]  See John R. Allison, supra note 16.