In recent years there has been a notable influx of patent litigation that has—rather than foster innovation and enforce intellectual property—threatened companies and patent owners to receive lucrative settlements based on questionable claims. The intellectual property community is seeing a growing number of companies, commonly known as “patent trolls,” who’s business strategy is initiate claims against patent owners.  Implementing such litigation tactics has cost the economy billions of dollars, according to White House estimates. Patent trolls are more formally called Patent Assertion Entities, or “PAEs.”).

In the past two years, claims brought by patent trolls has roughly tripled, and these suits make up about 62% of all patent lawsuits in the United States.  In total, victims of patent trolls paid $29 billion in 2011, which is a 400% increase from 2005.  This figure does not include the additional tens of billions dollars lost in shareholder value.

The Obama Administration announced the release of a study on the issue that documents the significant toll patent trolls are taking on the nation’s economy and on innovation.  In light of this, the White House urged Congress to pass legislative measures to protect American innovators.

President Obama explained last year that patent trolls “don’t actually produce anything themselves. They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

Last year the White House estimated that patent trolls sent out more than 100,000 demand letters and threatened everyone “from Fortune 500 companies to corner coffee shops and even regular consumers to pay a settlement or face a day in court.”

number-of-patent-casesThe White House underscored in its comments that the focus on patent trolls is not designed or intended to make it more difficult to pursue legitimate intellectual property rights or to defend valid patents.  The Administration said that businesses of all sizes are vulnerable to these patent troll tactics, from the software giant with complex applications to the sole proprietor trying a technology product purchased over the counter.

In addition, the Administration remarked that the problem and proffered solutions were about more than just the company bottom-line.  When businesses are constantly worrying about abusive patent litigation, the White House said,  they are not able to devote as much  effort and resources into creating new products and serving customers. Further, the Administration noted that some of the largest innovators in the high-tech industry spend more money on patent litigation and acquisition than they do on research and development for new products.  The same is true of smaller companies, the Administration said.  Roughly 40% of technology startups targeted by patent trolls reported a significant impact on their business operations due the suit or threats of litigation.

According to Reuters, two of the largest PAE companies replied the Obama Administration’s call for legislation by saying that they were being unfairly targeted. “The idea that because you’re not actually making things, you shouldn’t be able to get a return on your investment, I think that’s wrong,” said Mark Swords, chief executive of Eolas.

PAE’s claim that they provide a specialized service that assists patent holders process their claims who might otherwise be trampled taking on large corporations with unlimited resources.

Matthew McAndrews, who represents one of the PAE companies, told Reuters, “Who gets to define an abusive patent litigation claim? It [The proposed legislation] places way too much emphasis on non-practicing entity.”

By: Kurt Mattson, J.D., LLM