James F. Mcdonough Iii, the Myth of the Patent Troll: an Alternative View of the Function of Patent Dealers in an Idea

• Jurisdiction: United States,Federal
• Publication year: 2006
• Citation: Vol. 56 No. 1

THE MYTH OF THE PATENT TROLL:

AN ALTERNATIVE VIEW OF THE FUNCTION OF PATENT DEALERS IN AN IDEA ECONOMY†

INTRODUCTION

The evil patent trolls are here, or so the story goes. They have emerged from beneath the patent system's rusty trestles-old, dusty patents in hand. With reckless abandon they have brought some of corporate America's finest specimens humbly to their knees. They have earned the rebuke of the most revered publications-the New York Times,¹the Wall Street Journal,²and the

Washington Post,³to name a few. These giants are banging on the door of the

United States Supreme Court,⁴and they are the new mascot for lobbyists pushing major legal reform.⁵But who are these trolls, and why are they so feared? Are they ghastly monsters suffocating a burgeoning patent system, or are they gentle giants poised to carry the United States patent system beyond the twenty-first century?

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.⁶Instead, the patent troll buys the patent and either licenses the technology to a person or entity that will incorporate the patent into a product, or it sues a person believed to already have incorporated the technology in a product without permission.⁷Trolls are being almost universally denounced.⁸Critics argue that patent trolls do not promote innovation⁹and are causing excessive, baseless litigation.¹⁰Accordingly, judicial and legislative action is being undertaken to put a stop to the practices of trolls.

This Comment argues that, contrary to popular belief, patent trolls actually benefit society. These trolls act as a market intermediary in the patent market. Patent trolls provide liquidity, market clearing, and increased efficiency to the patent markets-the same benefits securities dealers supply capital markets. Ultimately, this Comment suggests that the emergence of patent trolls is simply a stage in the natural evolution of the patent market.

Part I begins with a discussion of the new idea economy and the operation of trolls therein. Part II highlights the problems inherent in referring to nonproducing patent holders as trolls and reclassifies them with a more accurate market-contextual label. Part III isolates the activities of patent trolls by decoupling two issues that are erroneously identified with them. Part IV describes how patent trolls make the patent market more efficient by realigning market participant incentives, making patents more liquid, and clearing the patent market. This Part also analyzes the emergence of patent trolls in the context of market evolution. Finally, Part V concludes by rebutting the two major objections to patent trolls: that they stunt innovation and spur unnecessary litigation.

I. THE IDEA ECONOMY AND THE TROLLS WITHIN

The economic landscape of the United States has changed dramatically in the last thirty-five years.¹¹Whereas the value of corporations used to be grounded in land, natural resources, and human capital, the driving force in the U.S. economy today is intellectual property.¹²It should not be surprising, then, to learn of the emergence of companies that specialize in management of intellectual property. In response to this emergence, there has been a concerted effort by large corporations and legislators, backed by the media, to put a stop to the practices of these entities pejoratively known as patent trolls.

A. The New Idea Economy

To appreciate the magnitude of the patent troll issue, a clear understanding of the importance of intellectual property to the U.S. economy is necessary. "[C]reativity, in the form of ideas, innovations, and inventions, has replaced gold, colonies, and raw materials as the new wealth of nations."¹³This paradigm shift is illustrated by several key quantitative measures. Over the last twenty years, technology firms have been patenting more, increasing patent scope, licensing more frequently, and revamping their business strategies in an effort to prioritize intellectual property.¹⁴Between 1970 and 2004, the annual number of patents issued by the U.S. Patent and Trademark Office increased from 67,964 to 181,302.¹⁵

Intellectual property is equally important to U.S. foreign trade. U.S. trade in intellectual property has consistently produced a trade surplus over the last

20 years.¹⁶Between 1987 and 2001 (the last year in which such data is available), annual U.S. receipts from intellectual property foreign trade rose from $9.9 billion to $38.7 billion, creating a net surplus of $22.3 billion in

2001.¹⁷

But, perhaps most convincing is the absolute shift in the economic landscape of the United States. The Economist recently observed:

In recent years intellectual property has received a lot more attention because ideas and innovations have become the most important resource, replacing land, energy and raw materials. As much as [75%] of the value of publicly traded companies in America comes from intangible assets, up from around 40% in the early 1980s.¹⁸

Alan Greenspan, former Chairman of the Federal Reserve Board, recently proclaimed that "[t]he economic product of the United States . . . has become

'predominantly conceptual.'"¹⁹Intellectual property has become the new economic foundation of the United States.²⁰

B. Patent Trolls in the Idea Economy

Given the importance of the patent system,²¹its integrity must be upheld.²²

Consequently, there need to be mechanisms of management for this system. Yet, individuals and investors acting in this capacity are criticized as trolls before a full understanding of their role in the patent economy is understood. This raises the question: are trolls really a threat to the integrity of the patent system? Answering the question demands a closer look at the trolls and the arguments against them.

1. The Anatomy of a Troll

Originally, nonproducing entities that purchased patents were referred to as patent extortionists.²³By the 1990s, these "unsavory characters who buy up obscure patents to extort money from innovative and law-abiding companies"²⁴came to be called "patent trolls." Peter Detkin, former assistant general counsel for Intel, created the term after Intel was "sued for libel for its use of the term 'patent extortionist.'"²⁵According to Mr. Detkin, "A patent troll is somebody who tries to make a lot of money off a patent that they are not practicing and have no intention of practicing and in most cases never practiced."²⁶Instead of producing products, the troll licenses and enforces patents.²⁷

More precisely, the nature of these so-called trolls can be boiled down to three general categories.²⁸At one end of the spectrum are individual owners of patented inventions that do not make a product but are suing a large corporation for infringement.²⁹In the middle are companies like Intellectual Ventures, an intellectual property think tank that generates ideas for the purpose of patenting, with an eye towards eventually licensing those patents.³⁰

On the other end of the spectrum are patent holding companies like Acacia Research Corporation, a company that purchases patents merely for licensing and enforcement purposes.³¹Notably, none of the activities associated with trolls are well-regarded in the corporate community.

2. Battling the Trolls: The Movement to Stop Trolls

The general attitudes toward trolls are almost uniformly negative.³²In fact, there are three ways in which efforts are being aggressively undertaken to stop them.³³In an attempt to curtail the activities of patent trolls, large corporations are seeking the option of having injunctions stayed when the patent holder is not in competition with the infringer.³⁴Further, large corporations are pushing for new legislation targeted at stopping trolls.³⁵Finally, several commentators have criticized them.³⁶

a. Legal Action: Trolling at the Supreme Court

There is substantial activity in the courts relating to patent trolls, and several parties in such cases have petitioned for certiorari to the U.S. Supreme Court.³⁷Three cases illustrate the trolls' ubiquitous presence: NTP, Inc. v. Research In Motion, Ltd.,³⁸Eolas Technologies, Inc. v. Microsoft Corp.,³⁹and MercExchange, L.L.C. v. eBay, Inc.⁴⁰In each case, a small, nonproducing entity sued a larger company to enforce a patent-the typical patent troll scenario.⁴¹

The Supreme Court granted certiorari in MercExchange, L.L.C. v. eBay, Inc.⁴²The main question in the case was whether the district court properly denied MercExchange's motion for injunctive relief against eBay, the alleged infringer.⁴³At issue in the case was eBay's fixed-price purchasing feature, which allows customers to purchase items that are listed on eBay's website for static, listed prices.⁴⁴MercExchange owns a patent that broadly covers the creation of an online marketplace where items can be offered under live auction conditions and at fixed prices for immediate purchase.⁴⁵

MercExchange claimed that eBay was infringing upon this patent.⁴⁶Although the district court jury verdict favored MercExchange, and found that eBay was infringing the patent, the court did not grant an injunction against eBay because it found that MercExchange's "willingness to license its patents [and] its lack of commercial activity in practicing its patents . . . are sufficient to rebut the presumption that it will suffer irreparable harm if an injunction does not issue."⁴⁷The Federal Circuit did not find the case to be "sufficiently exceptional to justify the denial of a permanent injunction," and it reversed the district court's denial of injunctive relief.⁴⁸The Supreme Court vacated the Federal Circuit decision and remanded after deciding that it is not necessary for a patent owner to actually practice the patent as a prerequisite to getting an injunction.⁴⁹However, in his concurring opinion, Justice Kennedy suggested that trial courts should consider whether the patent holder is a patent troll when considering whether to grant an...