The patent system is flawed, some would say broken. And patent trolls -- less pejoratively known as non-practicing entities (NPEs) -- are to blame, no matter how good a case they might make for their role in the patent ecosystem. Or are they? Trolls are an easy target because they don’t make anything, choosing instead to enforce patents against those who do.
But curing the patent problem requires general solutions … not ones targeted just at patent trolls.
The latest example of a troll-specific solution gone awry is the SHIELD Act (being debated in Congress right now), which would require all (and only) non-practicing entities to pay attorneys fees if they lose a lawsuit but not collect them if they win. These plaintiffs would also have to post a bond -- a type of insurance -- just to get into the courthouse door, no matter how meritorious their claim.
This singular focus on trolls has led to a proposal that sweeps in many unintended patent holders; excludes the most notorious patent assertion entities; and could even affect how mergers, acquisitions, and corporate financing are done in the future. These are just a few of the reasons why I’ve been scratching my head over the SHIELD Act.
Yes, the total social cost of troll litigation is huge -- in the billions -- when measured in terms of market capitalization loss, the drop in stock price of companies that get sued.
But that’s not the whole story.
#### Michael Risch
##### About
[Michael Risch](http://www.law.villanova.edu/our%20faculty/faculty%20profiles/michael%20risch.aspx) is an Associate Professor at Villanova University School of Law. Prior to that, he was a professor at the West Virginia University College of Law, an Olin Fellow in Law at Stanford Law School, and a partner at boutique IP law firm Russo & Hale LLP. Risch graduated from Stanford University and earned his law degree at the University of Chicago. His work has been cited by the U.S. Supreme Court.
__Myth: Trolls singularly cause market loss and increase litigation costs. __It turns out that a patent defendant’s percentage stock drop is bigger when a productive company sues it because competitive patent lawsuits also impact share price. Meanwhile, a publicly traded NPE’s stock drops even more than the defendant’s; if trolls are taking advantage of litigation, you would expect their value to increase with litigation. The reality is that litigation is costly for everyone, and NPEs would rather settle than litigate.
__Myth: Trolls’ aggregation of patents is harmful. __Because the recent America Invents Act requires NPEs to sue one defendant at a time, NPE cases now represent 60% of patent litigation. They represented only 30% in 2011. Still, volume is in the eye of the beholder -- Samsung would probably rather face 100 troll lawsuits than one Apple lawsuit. Furthermore, aggregation may actually be efficient, as I argue in a new research article: Many companies would rather face a portfolio of 100 patents than 100 different plaintiffs, each of which overvalues its few patents. The real issue is pricing.
__Myth: Troll patent assertions are meritless. __A Pricewaterhouse Coopers study found that NPEs win 23% of the time, but practicing entities only win only 34% of the time. If the case reaches trial, the win rate is equal (about 66%). My own study found that NPE patents are not found invalid much more often than product company patents. While many NPEs do bring more nuisance suits, most carefully examine their patents and only bring litigation when they are unable to license and believe the patent meritorious. Patent litigation is costly and wasteful, but troll litigation isn’t necessarily more costly than the others. ____
Problems with SHIELDing Against Trolls Alone
____A primary reason big companies hate trolls is that they cannot cross-license with them to avoid paying a license fee.
But cross-licensing against the threat of mutual destruction is no panacea to the patent problem, either. Cross-licensors are happy to exclude individuals and startups, which could halt disruptive innovation (just look at the patent blocking a low cost speech application for autistic children or Vlingo’s battle with Nuance).
>Curing the patent problem requires general solutions … not ones targeted just at patent trolls.
Big companies are to blame too: Microsoft is complained about in the same way as trolls. And Google’s Chief Legal Officer once lamented about a pool of “bogus patents” used as a “weapon” to stop innovation where cross-licensing was not an option, because it would be unable to assert patents to defend Android -- but the offending companies were Microsoft, Apple, and Oracle ... not trolls.
Finally, big companies are spinning their patents out to NPE “privateers” to enforce, just like any other troll. Notice how we attach a different, less harmful name to the same behavior? Yet the litigation is the same and the patents are the same; only the method of enforcement has changed. If the enforcement is harmful by an NPE, it will be harmful by a product company too.
Patents, many argue, should be stripped of their potency the minute they leave their original owners. Yet my study of highly litigious NPEs found that most NPEs obtain their patents from sources of new innovation: individuals and small product companies. No study has shown how an original-owner rule would affect incentives to invent, innovate, and commercialize disruptive technologies. Such a proposal would also devastate active design businesses whose business models were to create and then license technology, long before trolls became common.
As long as patents can be bought and sold, there will be non-practicing entities licensing and enforcing them. But focusing only on NPEs drains resources from the very real problems facing the entire system. Instead, we should focus on the *entire *patent system by:
Improving patent quality and pricing. More patents should be rejected, and especially weak software patents. Limiting these should continue regardless of who -- troll or product company -- owns those patents. We also need to develop better tools for pricing patent aggregation, so that companies spend less time debating each particular patent and more time valuing the portfolio.
Limiting and controlling damages. More predictable damages would help lower the settlement value of “cost of defense” nuisance suits and limit the ability for aggressive enforcers to demand unreasonable damages. Courts should issue tentative final injunction rulings early in the case, so that fear of unknown damages doesn’t force settlement.
Making litigation more efficient. Patent holders should be required to sue enabling technology manufacturers before targeting end users. Highly contentious claim issues should be heard and resolved early. Penalties should be enhanced for improper litigation tactics. Though the SHIELD Act misses the mark, a behavior-based fee shifting approach might be effective.__ __
Here’s the thing. The patent ecosystem is far more nuanced than conventional wisdom suggests, and its ills are not limited to NPEs. It’s a mistake to limit our criticism of software patents to just patent trolls, notes free software advocate Richard Stallman: “In this sense Apple, which isn’t a ‘troll’ by the usual definition, is the most dangerous patent aggressor today.”
Like Apple, many companies use employee inventions to build large patent portfolios. Everyone can leverage value out of systemic flaws. Patent solutions should therefore focus on patents and practices … not isolated perpetrators like trolls.
Editor's Note: Given the enormous influence of patents on technology and business -- and complexity of the issues involved -- Wired has been running a special series of expert opinions on "the patent fix*". To help move reform efforts forward, some of these proposals also advocate specific Solutions to the Software Patent Problem (as part of a conference hosted by the Santa Clara University High Tech Law Institute). *
Editor: Sonal Chokshi @smc90
