October 23, 2012

Who Are the Trolls?

Digital Technology & E-Commerce Blog
David P. Sofge

The September 16 delivery date for the GAO study on “non-practicing entities” (NPEs) and "patent assertion entities" (PAEs) under the America Invents Act has come and gone, and a report is now expected by November or December. The study is expected to, among other things, analyze the volume of litigation in the twenty years before enactment of the America Invents Act, the volume of meritless cases found after judicial review, the costs of such litigation and its economic impact on the economy, as well as any benefits created by NPEs or PAEs.

In the meantime the debate over NPEs and other new IP “monetizers,” fueled most recently by high-profile editorials in the New York Times and The Atlantic, continues to rise in decibel level and intensity. Indeed, a recent academic study has found that suits brought by patent monetizers have risen significantly over the last five years.

The conflict is sometimes portrayed as one between operating companies, who use and produce products based on patents and other intellectual property, and patent trolls with no business other than the monetization of patents and other IP, either through lawsuits asserting infringement of "flimsy" patents or, more often, through licensing arrangements negotiated under the threat of costly litigation.

The reality may be different. Studies using data drawn from public filings or produced in litigation demonstrate that members and licensees of NPEs not infrequently include major technology operating companies, affiliates of financial institutions, and, to a lesser degree, prominent U.S. and foreign universities. In addition, ‘patent defense’ alliances and companies acquire IP of strategic importance to particular industries, issue non-exclusive licenses to their members, and then assign on the patent rights (subject to the member licenses, of course) to others - sometimes to classic “trolls” who then bring infringement actions against those who did not join the patent defense group.

The complex relationships among the participants in this new IP ecosystem are further obscured under layers of related corporations and limited liability companies formed in multiple jurisdictions (described as “shell companies” by targeted defendants). These complex entity arrangements may provide limited liability against counterclaims in litigation. They also offer a comfortable degree of privacy for NPEs’ prominent members and investors, who may otherwise be confronted with awkward questions about their association with litigious behavior.

The GAO report, when released, may shed light on these relationships and their impact on the economy. Whether that will be a welcome development for the participants in the complex new IP ecosystem is another matter entirely.

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