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‘Patent trolls’ – major threats to SMEs and innovation

Patent trolls’, more formally known as Patent Assertion Entities (PAEs) are firms which do not make or sell anything, but exist solely so as to exploit rights in patents that they obtain from another company. This makes them an increasing threat to innovative SMEs. According to an article in the Harvard Business Review, the number of companies sued by ‘trolls’ has grown nine-fold in the past decade, meaning that the majority of patent lawsuits are now filed by PAEs.

Intellectual Property

How ‘patent trolls’ operate

‘Patent trolls’ often buy cheap patents from bankrupt companies, but instead of using these patents to sell a product, they charge licensing fees to other businesses who infringe upon one of ‘their’ patents. The companies targeted can be large multinationals, such as Google or Amazon, but based on data collected in the United States, over 50% of them make less than $10 million a year. As the average cost of defending a ‘patent troll’ lawsuit is over $3.2 million, financing a trial can be enough to put a start-up out of business.

A cautionary tale for app developers

A recent news story about app developer Austin Meyer, who was sued simply for uploading an app to Google Play, shows the typical tactics used by ‘patent trolls’. Perhaps shockingly, Meyer was prosecuted because ‘patent troll’ company Uniloc claims to own the idea of the Google Play Store itself. After the app developer successfully challenged the initial assertion, Uniloc changed the claim, accusing him of violating a different assertion contained in their vaguely worded patent. Suing a company like Google (which, of course, has the resources and expertise to defend itself in a litigation) would not end well for a ‘patent troll’, which is why they go after small companies, such as Meyer’s business. Most SMEs cannot pay the costs of the trial and are eventually forced to settle, granting that the ‘patent troll’ wins. Having said that, some companies have a history of crushing ‘trolls’ in court; electronics retailer Newegg has become something of a hero in ‘patent troll’ litigation for having long decided that it would never settle a patent case. One of its most significant wins was its victory in 2013 against a company that named a long list of fellow retailers (such as J. Crew and Macy’s) for infringing its patent for e-commerce shopping-cart technology. The outcome has hugely benefited any retailer who employs the same technology on its website.

International differences

The high number and poor quality of technology patents are among the reasons why the United States is especially popular with ‘trolls’. By 2011, the majority of patents in the country were software-related and software had also become the area of innovation most likely to be exposed to patent infringement suits. Language describing emerging technologies can also be inherently imprecise, giving rise to vague, unclear and overly broad patents, which should have never been issued and are ideal targets for ‘patent trolls’.

However, the problem of ‘patent trolls’ is not confined to the US. Among European countries, Germany is having a particularly tough time with relatively low cost litigation coupled with a legal system where the trial decision on infringement is usually obtained before one on the validity of the patent – a distinct advantage to PAEs.

Luckily, to date, there have been relatively few cases in the United Kingdom. The UK’s ‘loser pays’ legal regime, discouraging the filing of frivolous lawsuits and the relatively small number of software patents (by contrast to the US) are the main reasons for that. In addition, a patented invention also needs to be capable of industrial application, which is not a requirement in the United States.

This said, however, a British start-up can easily be ruined by a big company seeking to get the patent struck out and the cost of defending it in the Intellectual Property Enterprise Court (IPEC) can run into millions.

What can companies do?

If a start-up has been served a lawsuit by a ‘patent troll’, it is crucial to seek expert legal advice – which hopefully may start with mediation, helping to avoid costly litigation.

We don’t claim to be experts in terms of ‘patents, or patent trolls’ – but know, and heartily recommend, lots of people who are, including patent attorney Bryn Williams at CreationIP www.creationip.com and David Flint, Senior Partner at Macroberts LLP www.macroberts.com


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