Typology of a Patent Troll

Typology of a Patent Troll
                        Tim Pohlmann, Berlin Institute of Technology

ABSTRACT

Patent trolls have many faces, since the media uses the expression in various cases. The patent
troll phenomenon thus seems to be an ambiguous term that is discussed in several directions.
This paper reveals that a patent troll as such does not have a distinct shape of appearance.
Analysis redeems a troll classification from firms’ characteristics and shows that a troll can
only be defined by its behavior of enforcing its IPR. Using 10 cases out of which four are
treated in detail, the analysis reveals a distinct typology of troll behavior. Consequently any
corporation could be a patent troll when a certain behavior is distinctly identified.

INTRODUCTION

A patent troll is a person or entity who acquires ownership of a patent without the intention of
actually using it to produce a product. In many cases did not actually engage in developing the
technology (McDonough, 2006). They are not inventors who operate their own research, offer
it for sale or licensing early on in the process, and then defend their rights against
infringements. But, they are entities that – opportunistically or on purpose – profit from
payments by companies that inadvertently infringe on the trolls’ Intellectual property rights
(Henkel & Reitzig, 2008). There is the fear that these rather small entities use the courts as a
mechanism to extract economic rents from large companies (Ball & Kesan, 2009). The term:
“patent troll” is legally not established. It is a pejorative synonym used for non-manufacturing
entities (NPE) and was popularized by the Intel Manager Peter Dektin in 2001, who used it to
describe TechSearch and their lawyer during a patent litigation. Other related expressions are
patent marketer, patent dealer, patent shark or are pictured by a comparison like David vs.
Goliath (Chien, 2009). The term patent shark already appears in a publication that dates back
into the 19. century.

"The operations of patent sharks sometimes compel an inventor to obtain patents for articles
which are never meant to be placed on the market. A fellow often gets up a machine, and
somebody else comes along, and by getting patents through for certain parts, can give the
inventor a great deal of bother and make him pay well, even if the inventor gets control of it.“
(Thomas Edison, 1898)

There has been a discussion in the U.S. media if universities are patent trolls. Universities are
non-practicing-entities that share some characteristics with trolls (McDonough, 2006). Though,
the differences are, that (a) the universities do not hide their patents and (b) most universities
licenses give the licensee the right to avoid lawsuit and provide valuable know-how via
technology transfer and thus maximizing the social impact of technology (Lemley, 2007).
Furthermore, there is a much broader definition implying that all patent licensing and
enforcement entities who take legal actions have been named patent trolls (Chien, 2009).

THE BUSINESS MODEL: PATENT TROLL

The business model seems to follow a defined structure, purchase and secure patents, hide
until the market for a certain technology develops and the patents play a considerable role and
finally turn patents against manufacturers to obtain high royalty fees (Henkel & Reitzig,
2008). They are solely interested in the exclusion right, not in the underlying knowledge
(Fischer, 2009). The patent trolls make an appearance when the targeted product has already
become a key or basic technology and irreversible investments have been made by the
unconscious infringer. In this lock-in situation there is no chance to invent around certain
patents or even stop using the technology. From an industry perspective the cost of not using
the intellectual property, due to (a) costs of the loss of future profits and (b) cost of
complementary technologies, increases in proceeding phase of technology implementation.
Obviously, trolls avoid the established rationales of understanding firms’ patent based
cooperation of either exclusion or cross-licensing to co-exist (Henkel & Reitzig, 2007).
Hence, they seem to be in a position to negotiate licensing fees that are grossly out of
alignment with their contribution to the alleged infringer’s product or service (Sag & Rohde,
2006). Their bargaining power tends to result in opportunistic behavior so that the troll claims
excessive compensation.
In the context of standard setting strategic behaviors regarding essential patents has led to
contentions. Especially the litigation cases of Rambus, the company that was firstly associated
with the so called “patent ambush” behavior, raised the attention of antitrust authorities and
reinforced the political discussion about IP regulations concerning standards (Hovenkamp,
2008; Bensen & Levinson, 2009; Devlin, 2009). Patent ambush accrues when companies that
participate in a standardization process withhold information of essential IPR and in hindsight
assert that their patents are infringed.
Trolls produce uncertainty for innovators and their activities may lead to royalties which are a
multiple of what the victim, as legitimate licensee, would have been willing to pay ex-ante

(Reitzig et al., 2006). An important problem is the asymmetric information between troll and
unintentional infringer – companies often do not even know the troll´s IP exists. For the last
decades R&D multinationals have been building up patent thickets with incremental
inventions. It is hard to overlook those thickets because they are an overlapping set of patent
rights requiring that those seeking to commercialize new technology obtain licenses from
multiple patentees. Today’s patent trolls seem to place their bets on corporate carelessness or
monitoring deficiency, i.e. to perform a patent research prior to own patent application and
have better information at an earlier stage about patents likely to issue (Henkel & Reitzig,
2007). With multiple overlapping patents, and under a system in which patent applications are
secret and patents slow to issue there is major threat of hold-up (Shapiro, 2001).

Patent extortion will remain a viable strategy in technologically crowded industries when
trolls choose patents on inventions that can be invented around rather easily before
infringement, but are sufficiently sophisticated to be upheld in court and create significant
mid-term switching costs for manufacturers after infringement (Henkel & Reitzig, 2007). In
contrast, patent trolls and their supporters claim that NPEs enhance innovation and
competition by providing capital to independent inventors and creating an efficient market for
trade in technological information (Shrestha, 2010). Policy makers have given remarkable
regard to this topic (e.g. U.S. Federal Trade Commission, 2003; Lemley, 2007) and discuss
suggestions for patent reform based on theoretical and empirical findings.

LITERATURE

Legal methods of the troll business have been studied and researched (Magliocca, 2007;
Golden, 2007; Lemley, 2007) and provided few empirical evidence on troll type patent
lawsuits (Lerner, 2006; Magliocca, 2007; Reitzig et al., 2010), and illuminated the various
strategies underlying the troll business and its sustainability to policy changes (Reitzig et al.
2006; Henkel & Reitzig, 2007). A great number of infringement cases involving NPEs do not
reach court, but the infringer rather settles the dispute by paying royalty fees, being afraid of
high legal costs and a long time period before verdict is passed (Fischer, 2009). Furthermore,
there is a lack of data availability for cases that last up in court or the data is difficult to
record. Reitzig et al. pick up on the patent troll phenomenon and examine it from a theoretical
perspective, encompassing legal, managerial, and economic aspects. And use a game-
theoretical approach to model the behavior of trolls and their victims (Reitzig et al., 2006). In
addition, they examine international perspective compensatory payment rules of small patent-
holding entities and large manufacturers within their theoretical model. The main finding is

that the unrealistic high compensation through court ruling is the central stipulation for trolls
to operate cost-efficient.

Chien selects the focus on the litigation of high-tech patents using data from the Stanford
Intellectual Property Clearinghouse for cases initiated in U.S. District Courts from January
2000 through March 2008. He found that NPEs bring only a minority of patent suits: 17
percent of high-tech patent suits in the examined period. But they often name multiple
defendants and sometimes, rather than sue, are sued, for declaratory judgment (Chien, 2009).
Including lawsuits with multiple defendants and counting declaratory judgment cases, the
NPE share increases to 28 percent of all high-tech patent cases. In addition the share of NPE
suits appears to have been rising over time. Though, he also found that public and large
private firms initiated 42 percent of all suits examined. To study the development related to
patent decisions, PricewaterhouseCoopers focused on 1,435 district court patent decisions
issued since 1995. Key findings are that damage awards for patent trolls have averaged more
than double those for practicing entities in this time period and NPEs have been successful 29
percent of the time overall versus 41 percent for practicing entities. Furthermore, there is a
close correlation between which federal district court is chosen by the plaintiff and the higher
success rate and higher median compensation awards – 33 percent cases involving an patent
troll as patent holder where filed five federal district courts. The same applies to the disparity
between jury and tribunal cases (Levko et al., 2009). Fischer et al. draw on a dataset of 565
patents acquired by known patent trolls between 1997 and 2007, and compared them to 1,130
patents acquired by practicing firms. They could disprove the common belief that patent trolls
focus only on minor technologies. Their patents are of significantly higher quality than those
in the control group. This means that the patent troll business method is sustainable in the
long run and cannot be terminated by lifting minimum patent quality (Fischer et al.; 2009).
The patent database from the U.S. Patent and Trademark Office (PTO) and infringement
litigation information from Stanford Law School’s Intellectual Property Litigation
Clearinghouse (IPLC) is being evaluated in the review from Shrestha. The analysis tests some
of the arguments made in favor and against patent trolls and to determine whether these firms
have a positive or negative effect on innovation (Shrestha, 2010).

METHODOLOGY

Empirical work has been conducted to understand the practices of patent trolls and to better
evaluate their role in highly patent intensive markets. However, these analyses always lag a
distinct classification of patent troll behavior. This paper identifies 10 cases from the public

media but also from on-public interviews to better define different appearances of patent
trolls. Therefore an in depth analysis of four selected cases was conducted by interviewing all
involved parties. All interviews were transcribed and the use of information was permitted by
all participants. Since all cases are very specific and evolved implications in several directions
a standard questionnaire was used but extended by further questions on a case by case basis. If
it was not possible to talk to both sides (plaintiff and defendant) other concerned parties were
interviewed. Thus all cases were build upon balanced sources of information.

CASE STUDY ANALYSIS
…to be translated
TYPOLOGY
…to be translated
CONCLUSION
…to be translated

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