Patent Troll Myths

RISCH.DOCX (DO NOT DELETE) 5/11/2012 5:13 PM Patent Troll Myths Michael Risch∗ I. II. INTRODUCTION ............................................................................ 458 BACKGROUND ............................................................................... 462 A. The Debate ........................................................................ 462 B. Evidence to Date................................................................ 466 III. METHODOLOGY AND DATA COLLECTION .................................... 467 A. Phase I: NPEs and Their Litigation .................................. 469 B. Phase II: Patents ................................................................ 471 C. Phase III: Initial Assignees ................................................ 473 IV. TESTING NPE CRITICISM .............................................................. 474 A. Are Litigious NPEs a Recent Phenomenon? .................... 474 B. Are All NPE Patents Business Methods? ........................... 475 C. Are NPE Patents and Infringement Claims Low Quality? .............................................................................. 478 1. Quality Indicia .............................................................. 478 2. Litigation Outcome ..................................................... 481 3. Do NPEs Bring Quality Cases?..................................... 484 D. Do NPE Patents Come from Nonproductive Endeavors? ......................................................................... 484 1. Who Obtained NPE Patents?....................................... 485 2. Corporate Patent Owners Were Productive Companies.................................................................... 486 i. Small/Large Entity Status ..................................... 486 ii. Industry Groups ..................................................... 487 iii. Financing ............................................................... 487 ∗ Associate Professor of Law, Villanova University School of Law. The author thanks Brian Broughman, Colleen Chien, Mark Lemley, Peter Menell, David Schwartz, commentors on various blogs, and participants of the 2011 Cyberlaw Colloquium, 2011 IP Scholars Conference, and 2010 Law & Society Association Conference (Law & Entrepreneurship group) for their helpful comments and feedback. The author further thanks Chris Reohr and PatentFreedom; the IP Litigation Clearinghouse; and John Allison, Mark Lemley, and Joshua Walker for providing data used in this study. This seemingly endless project could not have been completed without the seemingly endless support provided by the West Virginia College of Law and the Villanova University School of Law. Valuable research assistance was provided by Dustin Bednarz, Doug Behrens, Brian Corcoran, Richard Eiszner, Nate Griffith, Simran Kaur, and Josh Nightingale. 457 RISCH.DOCX (DO NOT DELETE) 458 5/11/2012 5:13 PM SETON HALL LAW REVIEW [Vol. 42:457 iv. Sales and Employees .............................................. 488 3. The Role of Individuals ............................................... 488 E. Do NPEs Get Their Patents from Fire Sales? ................... 489 F. Do NPEs Really Wait for an Industry to Develop? ........... 490 V. TESTING NPE JUSTIFICATIONS ..................................................... 491 A. Do NPEs Promote Investment in Startups? ...................... 491 B. Are Small Companies Crushed by Larger Infringers? ..... 494 C. Do NPEs Provide Better Enforcement Avenues for Individuals? ........................................................................ 494 VI. CONCLUSIONS .............................................................................. 497 I. INTRODUCTION It turns out that just about everything we thought about patent trolls—good or bad—is wrong. Using newly gathered data, this Article presents an ethnography of sorts about highly litigious nonpracticing entity (NPE) plaintiffs. The results are surprising: they show that the conventional wisdom about patent trolls likely finds its basis in anecdotal, but infrequently occurring, events. Instead, the patents enforced by so-called trolls—and the companies that obtained them—look a lot like other litigated patents and their owners. Scholars, practitioners, and entrepreneurial businesses have all recognized the growing number of patent plaintiffs who do not produce a product or sell a service, leaving them immune to a counter1 claim for patent infringement. Such immunity significantly reduces 2 the likelihood of a low-cost, cross-licensing settlement; the ten most 3 active NPEs generate legal costs of $500 million at a minimum. There are many types of NPEs—failed companies, universities, and individuals, to name a few. Other NPEs are in business simply to assert patents; they obtain their patents from others or even apply for their own. 1 See Daniel McCurdy, Patent Trolls Erode the Foundation of the U.S. Patent System, SCI. PROGRESS, Jan. 12, 2009, at 81, available at http://www.scienceprogress.org/wpcontent/uploads/2009/01/issue2/mccurdy.pdf (“NPEs do not derive any significant portion of their revenue from designing, developing, manufacturing, or selling products, they are essentially immune to counter-assertion claims by the companies from which they seek royalties.”). 2 For a good discussion of the importance of cross-claims and defensive patenting, see Colleen Chien, From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications for the Patent System, 62 HASTINGS L.J. 297 (2010). 3 The minimum legal costs generated by the ten most active NPEs is based on the estimate that the legal costs of a single NPE at the summary judgment stage are at least $500,000. See supra, note 46 and accompanying text. RISCH.DOCX (DO NOT DELETE) 2012] 5/11/2012 5:13 PM PATENT TROLL MYTHS 459 “Patent troll” is a pejorative moniker commonly assigned to 4 NPEs because they allegedly wait for an industry to develop, then appear to exact a toll on companies who commercialize the technol5 ogy. According to the detractors’ narrative, trolls are recent fly-by6 night shops that assert business-method and internet patents. Trolls 7 assert low-quality patents in low-quality litigation. They obtain pa8 tents from failed companies in fire sales. Worse, because trolls do not make anything, their patents do not provide anything of value to 9 society. In short, according to their critics, patent trolls represent a significant break from past practices and foreshadow the downfall of innovative society. 10 NPEs are not, however, without their defenders. According to their proponents, NPEs create patent markets, and those markets enhance investment in start-up companies by providing additional li11 quidity options. NPEs help businesses crushed by larger competi12 tors—competitors who infringe valid patents with impunity. NPEs allow individual inventors to monetize their inventions. These func13 tions, the proponents argue, (...truncated)