Most inventors and manufacturers are aware of patents and the protection they afford to intellectual property (IP). While patent protection allows the patent holder to exploit a particular invention, there are entities and people who own and extort patents for profit without contributing to innovation. These groups of people are known as Patent Assertion Entities (PAEs), or more commonly, a patent troll.

How does a patent troll make money?

Patent trolls hold patents but do not make money by commercialising and manufacturing their patents. It is typical for patent trolls to acquire a portfolio of patents from small investors or bankrupt companies. The business model of patent trolls is to sue for patent infringement in the hopes of recouping the fees for the licensing of the patent. Patent trolls may send Letters of Demand to companies in innovative industries and make the accusation of patent infringement. Trolls follow innovative and tech-focussed industries in the hope that new technologies produce cash. Many companies want to avoid the risk and cost of litigation and abide by the demands of patent trolls, who legally own the patent, and pay the demand.

Why are companies paying off trolls and accepting their claims? In some instances, patents may be broad enough to be considered an infringement, and pursuing patent litigation would be too expensive and risky.

In the US, the primary victims of patent trolls are Google, Verizon, Apple, Samsung, Dell, Sony, Blackberry and Amazon. In 2015, Apple was ordered to pay $532.9 million to Smartflash LLC for infringing three US patents. As an example of patent trolling, it was highlighted that Smartflash creates no products and employs zero people, yet they successfully established their claim.

Impact of Patent Trolling

There is much debate surrounding the impact that patent trolls are making to innovation. It is clear patent litigation is harmful to innovation and has created a significant reduction to venture capital investment. This barrier creates the biggest blow to Research & Development spending in startups.

In 2013, a US ringtone company was involved in a stoush with a Chinese telecommunications giant over inventor’s rights in the Australian Federal Court. The telecommunications giant contended that the ringtone company were enforcing two patents purchased from Nokia for US$22 million. The case has been bogged down in preliminary matters after more than two years and highlights the litigious nature of patent troll enforcement.

The impact felt by patent trolls is also affirmed by US statistics that there are six times as many patent lawsuits in 2015 than in the 1980s. A common statistic highlighted in the US is that 60% of patent lawsuits filed in 2013 were brought about by patent trolls. This contributes to the view that reform is required to remove these patent extortionists from the abusing the system. If you have questions about protecting your invention or responding to a patent troll claim, get in touch with our patent lawyers.

Sophie Glover
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