Back in late 2011, a company named Innovatio threatened to sue 8,000 coffee shops, hotels, and stores around the United States, claiming that the Wi-Fi networks they had set up for their customers were illegal. The networks, Innovatio claimed, violated patents it held on Wi-Fi technology. But Innovatio hadn’t invented Wi-Fi. In fact, it never invented, or even manufactured, anything. What Innovatio had done was simply purchase a bundle of patents from other inventors, and use those patents to sue others. And because defending yourself in court is never cheap, many of the defendants simply settled, paying Innovatio between $2,300 and $5,000, even though they had done nothing wrong.
This story is at the heart of a major debate today over our patent system—a system designed to encourage innovation by making sure that only inventors can use and profit from their inventions. During its 20-year life span, a patent gives the patent holder a valuable monopoly. To use a patent you have to be the inventor or pay the inventor. This system exists to incentivize people to invent – to add, in Abraham Lincoln’s words, “the fuel of interest to the fire of genius.”
Innovatio is what some intellectual property lawyers euphemistically call a “non-practicing entity”: a firm that buys patents from others. But many prefer the more colorful term “patent troll.” Like the famous troll in the Three Billy Goats gruff—who hid under a bridge he hadn’t built, and then demanded payment from innocent goats who simply wanted to get to the other side—patent trolls exact tribute from innocent users by suing them.
As the name implies, many consider the trolls a menace and a drain on the economy. The patent troll phenomenon is large and growing. Trolls accounted for more than half of the 4,000 patent infringement lawsuits filed in the U.S. last year, according to several studies, up from 45% the year before and from less than 30% in every prior year. And trolls come in a number of different varieties. Some aggressively threaten lawsuits based on invalid patents; that is, patents that should not have been granted because the underlying technology is too obvious. Some press very broad claims based on patents that make only narrow inventive claims. Some amass patents and threaten multiple lawsuits. In many of these cases, the targets understandably choose to pay rather than fight.
The question increasingly on the minds of many in Washington today is what, if anything, to do about patent trolls. Knocking them into the river, as the largest billy goat did to the troll in the folk tale, might be extreme (even as a metaphor). But recently, President Obama ordered federal regulators to begin exploring ways to rein in trolls. Is this possible?
A basic challenge is figuring out who is a troll and who isn’t. The simple fact is that patent trolls don’t look like storybook trolls. It is often difficult to tell a patent troll from a patentholder legitimately enforcing its rights. There is nothing illegal in buying or selling a patent—like land or licorice, there is a free market in patent rights. And there is no easy way to determine whether a a patent is valid. To figure out whether a patent enforcer is a troll, you have to do the work to understand whether there is a legitimate patent claim. And that usually requires going to court.
Some efforts are underway to punish trolls after the fact. The Attorney General of Vermont, William Sorrell, for example, sued a company called MPHJ that had gone after a group of non-profits in his state (including an organization that gives home care to developmentally disabled Vermonters) for using document scanners that supposedly violated MPHJ’s patents. Sorrell believed that MPHJ’s actions violated Vermont’s consumer protection laws.
And others have suggested that courts crack down on trolls by making them pay stiff sanctions when their claims are found to be meritless. The law already allows judges to shift the cost of litigation onto trolls; and there are efforts underway to convince judges to do so more often.
These efforts make sense, and they may help. But we suspect that efforts to counter trolls through the courts will prove mostly ineffective — for two reasons. First, there is too much money to be made by trolling, so imposing the risk of higher costs on trolls will likely have only marginal impact on their behavior. Second, and more important, figuring out who is a troll is not just a difficult question in individual lawsuits — it goes to the heart of our patent system.
Consider the basics dynamics of the patent system. Patents are expensive to get. Fees can exceed $25,000, and applications can require years of effort. Despite this, many dubious patents slip through. In fact, nearly half of the patents granted by the U.S. Patent and Trademark Office (PTO) that end up in court are held invalid.
Why are so many invalid? The PTO receives over 500,000 applications a year. That’s about 1,400 a day, many of which are exceedingly complex. The agency’s approximately 6,500 patent examiners are overburdened; on average each patent gets only about 16 hours of review. Virtually all experts agree that this is nowhere near enough time to properly assess something as valuable as a patent. Compounding the problem, patent examiners are rewarded for processing applications – and the easiest way to clear a file is to approve a patent. In short, the PTO examiners get paid to say yes.
Many of the patents they grant may be worthless as innovations. But they can be very nice bargaining chips, and this is the secret to the patent troll’s success. In our legal system, any patent the PTO has granted is valid unless proven otherwise. And to prove otherwise requires “clear and convincing evidence”—something that takes a lot of lawyer fees. The result is that wise defendants often pay rather than fight, even when they are pretty sure the patent is invalid. That’s why more than 97% of patent infringement suits are settled before trial.
And as it turns out, this sort of patent trolling isn’t a recent phenomenon — it’s been going on for a very long time. In 1895, George Selden obtained a patent for putting a gasoline engine on wheels. The patent should never have been granted: The idea was so obvious that many people around the world thought of it independently as soon as the first gasoline engines became available. Nevertheless, Selden threatened nascent carmakers with patent suits, collected a huge fortune in royalties, and made cars more expensive for years. It wasn’t until 1911, after Henry Ford refused to pay the licence fees and brought the matter to court, that the patent was declared invalid.
While patent trolling is not new, however, the explosion of technology in our lives has dramatically expanded the scope for trolling. Every car or smartphone that rolls off the assembly line today contains technology that implicates hundreds if not thousands of patents. Patents are everywhere—and that makes it easy for trolls to demand their tribute. Every penny that goes to license an invalid patent, or settle a meritless lawsuit, is a tax on innovators and consumers.
Congress certainly ought to allocate more resources to the PTO so that patent applications can be vetted more thoroughly. Perhaps too the Vermont Attorney General’s lawsuit, which seeks to have patent trolls held liable under the state’s consumer protection laws, may spawn similar efforts in other states. And thanks to President Obama’s urging, the federal government is expected to focus on using the antitrust laws to bring patent trolls to heel.
Still, trolls are likely to escape the current efforts to tame them. Even the federal government lacks the resources to intervene in more than a few high-profile cases, and most trolls — especially the slightly less greedy ones — will continue to do their work unmolested.
But there’s another strategy: Dwight Eisenhower famously said that if you can’t solve a problem, enlarge it. And Ike had a point. The problem of trolls is in many ways a problem of too many patents. We need to think carefully about where our nation needs patents and where it doesn’t. In industries like pharmaceuticals, where the costs of innovation are incredibly high, patents are often essential to allow innovators to recover their investments in new drugs. But in industries like software, where innovation is comparatively inexpensive, the case for patents is much weaker. If the Obama Administration wants to cage the patent trolls, it should go deeper and start to think about where patent rights can be rolled back without suppressing innovation.
Kal Raustiala is professor of law at UCLA. Christopher Jon Sprigman (@CJSprigman) is a professor at the New York University School of Law and co-director of the Engelberg Center on Innovation Law and Policy. Raustiala and Sprigman are authors of The Knockoff Economy: How Imitation Sparks Innovation.