Recent years have seen a wave of efforts to control frivolous patent-infringement lawsuits perpetrated by so-called patent trolls. These started with the America Invents Act of 2011 and have been followed by the Patent Law Treaties Implementation Act of 2012 and the Patent Quality Improavement Act of 2013. Currently Congress is considering two new patent laws, the proposed “Innovation Act” and “Strong Patent Act.”

The aim of all the recent legislation has been to make it more difficult to obtain patents, to make it easier to challenge them, and to make it harder to enforce them. Critics of the patent system have attributed the increase in patent troll activity to America’s strong patent system; the recent legislation, in combination with recent Supreme Court decisions, has significantly weakened the system.

These changes have made companies and universities that rely on their inventions for revenue vulnerable, and patent trolls have now adapted their tactics accordingly. One could say that Congress has created a new breed of “anti-patent” troll. Unlike the traditional patent troll, who targets companies that have unwittingly infringed patents, the anti-patent troll targets innovative entities themselves.

How Do Anti-Patent Trolls Stalk Companies?

Anti-patent trolls operate through a newly created process for invalidating patents called “inter partes review,” or “IPR.” The IPR process allows any member of the public to ask the United States Patent and Trademark Office to reconsider its decision to grant a patent. If the IPR is granted, the challenger is then allowed to present documents, testimony, and other evidence that the patent is invalid. So far, IPR proceedings have invalidated patents at a very high rate, causing them to be dubbed “patent terminators.”

Currently we are aware of two subspecies of anti-patent troll: the “IPR extortionist” and the “Wall Street troll.”

The IPR extortionist uses the less complicated scheme of the two. An IPR extortionist will inform a patent owner that the troll has evidence that the patent is invalid and that the troll will use the evidence to institute an IPR unless the owner agrees to pay the troll. The troll might or might not provide the evidence to the owner beforehand, meaning that this species of troll can profit merely from bluffing.

The Wall Street troll has a more complicated scheme. It is also much more lucrative and destructive. The Wall Street troll identifies a publicly traded company that relies heavily on a patented technology. So far the targets have been small drug-discovery companies, which invest spectacularly large amounts of money in the development of a single drug. The Wall Street troll then searches for evidence that the company’s patent is potentially invalid. Then it takes a short position in the company’s stock. [1] Finally the Wall Street troll files an IPR to invalidate the company’s patent and makes sure that the IPR is well publicized to spook investors.

Unlike other species of patent troll, the Wall Street troll seeks to destroy the target company. Many companies, especially small drug companies, could potentially lose 100 percent of their value if they lose the patents for their core technologies. This creates a situation that is very lucrative for the Wall Street troll, because if the company’s stock loses all of its value the troll makes a windfall.

Most traditional “pro-patent” trolls actually want their target companies to endure and use their patented technology, because they earn royalties that way. The IPR extortionist is indifferent to the survival of the company, as it generally gets a onetime payment (this is true of some of the cheaper pro-patent trolls as well).

At present the Wall Street troll approach can directly victimize only a publicly traded company. However, patent trolls have proven extremely resourceful in the past, and it is foreseeable that Wall Street trolls may evolve ways to overcome this limitation.

In addition, Wall Street trolls indirectly threaten entities other than publicly traded companies that seek to sell or license their patent rights to publicly traded companies. Wall Street trolls profit as long as some publicly traded company will be hurt by invalidation of a patent, even if it does not own that patent.

For example, if a publicly traded drug company holds an exclusive license to a drug patent owned by a university (a common scenario), the troll can damage the drug company’s stock value by attacking the university’s patent.

What Is the Impact of Anti-Patent Trolls on Innovative Entities?

The evolution of the anti-patent troll introduces another serious risk for U.S. companies and universities that invest in technological innovation. Anti-patent trolls, especially Wall Street patent trolls, greatly magnify new patenting risks created by Congress and the courts because they have found a way to directly benefit from the destruction of patents. When Congress passed the recent patent-reform packages, it assumed that patents would be challenged by competitors wanting to use patented technology, and IPRs would only be filed in cases where the potential benefit of using the patented technology outweighed the considerable cost of the IPR. Therefore only active competitors interested in bringing products to market would have an incentive to file an IPR.

The anti-patent troll disproves this assumption, as the anti-patent troll is a pure profiteer that benefits only from the patent owner’s loss, and not from its competitors’ gains.

Should these practices continue to spread, they will have a negative impact on the value of technological innovation, particularly for small companies and university technology-transfer offices that rely on a small number of patents for a large portion of their revenue.

Current Patent-Reform Proposals Do Not Allay These Risks

Patent-reform proposals are making their way through the U.S. Congress, but these do not currently address the problem of anti-patent trolls. The reforms do try to address the perceived “tilt” of IPR proceedings in favor of challengers. For example, they would allow amendments during IPR, and would allow an approach to interpreting patents that makes them easier to defend. It has been proposed to require a party filing an IPR to prove that it is harmed by the patent being challenged, for the purpose of controlling the activities of anti-patent trolls. So far Congress has not shown much interest in such measures.

What Can Be Done to Reduce the Risk?

One obvious defense would be to reduce reliance on innovation as a business model. The effects of patent reform have been to favor imitators and disadvantage innovators, and the rise of the anti-patent troll shows that this trend is accelerating, not abating, in the United States.

For institutions that cannot turn away from innovation (such as universities), reliance on U.S. patents should be reduced. One can compensate by focusing on drugs and other inventions that are needed outside of the United States, especially in other industrialized countries with strong patent systems.

Trade secrecy protection is also an alternative to patents in the United States. Trade secrecy laws in the U.S. have been strengthened at the same time that patent laws have been weakened. [2] Trade secrecy is an attractive alternative for products intended mainly for the U.S. market. The balance between secrecy and patenting has always been a consideration for innovators, and the rise of anti-patent trolls is yet another nudge in the direction of secrecy. However, it is not an option for highly regulated products like drugs, medical devices, biologics, food additives, and pesticides, as information about those products must be revealed during the approval process. It is also a poor option for products with markets in foreign countries where trade secrecy laws may be weak.

As a final note, for privately held companies, the rise of the Wall Street troll introduces another disadvantage to going public (and an advantage to staying private) that should be taken into account.