Imagine your organization receives a letter from a random company demanding tens of thousands of dollars on claims of patent infringement. Now, further imagine that the alleged infringement pertains to patents that claim rights over novel forms of common internet-based functions like hyperlinks, drop-down menus, or instant messaging. Many companies have fallen victim to this scheme, and the perpetrators are commonly referred to as “patent trolls.” Patent trolls have been around for decades but, in recent years, we’ve seen an increase in patent litigation being filed by such entities. For the trolls, patent litigation often results in huge monetary gains via court judgments or settlements. For example, Apple was recently ordered by a federal court to pay a patent troll over $500 million in a patent trial. The filing of patent lawsuits is an upward trend, and many businesses are scrambling for solutions to this growing threat.
What are Patent Trolls? Patent trolls are individuals or entities that exploit the U.S. Patent System for monetary gain. Most patent trolls come in the form of a non-practicing entity (NPE) that holds a patent for a product or process but with no intentions of developing it. Generally, NPEs have no significant business assets or operations outside of patents and patent litigation. These entities acquire various patents and then issue demand letters or file infringement actions against hundreds of thousands of companies with hopes of reaching infringement settlements and/or receiving fees for patent license agreements. The costs of settling or paying for a patent license are typically much lower than the costs of defending against patent infringement lawsuits in court, thus many companies tend to make the obvious cost-driven decision to settle rather than entertaining expensive litigation matters. This has led to a profitable business model for patent trolls who can send out several hundred demand letters, file multiple patent infringement lawsuits, and then sit back to watch the settlement and license fee money accumulate in the aggregate. However, the success of patent trolls comes at the expense of many legitimate businesses.
An Increase in Patent Litigation Patent filings and patent litigation rose significantly in 2020, and NPEs are primarily responsible for this upward trend. Last year, with respect to high-tech industries, approximately 85% of new patent cases were filed by NPEs.i The Eastern District of Texas has developed a notorious reputation as the most popular setting for patent litigation filed by patent trolls; however, the Supreme Court’s ruling in T.C. Hartland, LLC v. Kraft Foods Group Brands, LLC (2017) has made it more difficult for NPEs to establish venue in this district. Thus, patent trolls have started establishing new hot venues for patent litigation in Delaware and the Western District of Texas. The Western District’s Waco Division welcomes the filing of new patent cases under the authority of Judge Alan Alright, a former patent litigator. The Waco Division received more than 800 patent cases by the end of 2020ii, which is more than any other district in the country and roughly 22% of all patent cases filed nationwide.iii With NPEs taking reign as patent plaintiffs, common patent defendants are usually large technology-based companies, such as Apple and Google. Moreover, this is not solely a domestic issue. Patent litigation is on the rise globally, as patent trolls have been aggressively targeting companies in Asia and Europe as well.
How to Respond to a Patent Troll Demand Letter or Lawsuit How you respond to a demand letter or lawsuit from a patent troll will ultimately depend on your specific circumstances. However, the following list provides some general insight and guidance for you to consider when faced with such a challenge.
- Consult a professional. Speaking with professionals experienced in the area of patent litigation will allow you to get a better understanding of your unique circumstances and the options you may have when responding to a demand letter or lawsuit.
- Determine the validity of the patents at issue. Some patent trolls may try to use expired, rejected, or invalid patents to mislead companies into paying illegitimate license fees. You must determine whether the patents alleged to be infringed upon are valid patents registered with the United States Patent and Trademark Office before making any decisions regarding your response to a demand letter or lawsuit.
- Determine the validity of the entity. You should also conduct due diligence to determine whether you are dealing with a legitimate business entity. Certain groups or individuals may hide behind the guise of false identifiers to take advantage of unsuspecting targets. Thus, it’s best practice for you to be certain of who you are dealing with and to establish a reliable point of contact with that entity.
- Determine whether you should litigate or pay the fee. Every organization will have unique circumstances and considerations when dealing with patent trolls. Thus, you should evaluate your organization’s specific operations to determine whether it would be a better decision to entertain patent litigation or to pay a settlement fee. Typically, the cost-centric approach would be to pay the fee and avoid the expenses of litigation; however, you may discover factors unique to your circumstances that make litigation more appealing.
- Aggressively negotiate for a low settlement/claim dismissal. Negotiating for a settlement amount much lower than the demand is essential. Generally, any settlement amount that is less than the cost of litigation would be ideal – but the trolls know this. Additionally, consider the strength of the alleged infringement. If the patent troll has a weak case of infringement, you may be able to use that position as leverage to negotiate a lower settlement or even no settlement with a refusal to pay on the demand.
- Consider collaborative efforts with other patent defendants. Pull resources and funds. Given the upward trend of patent litigation, there are probably multiple organizations dealing with the same patent troll at the same time. If you can identify other companies in similar situations, you may be able to pull resources together to better defend against patent trolls. For example, organizations defending against a common patent troll could share the costs of filing expensive patent trial petitions such as Inter Partes Review or Post Grant Review.
Although knowing how to react to a demand letter or lawsuit from a patent troll is extremely important, you could potentially save your organization a lot of time and resources if you reduce your exposure to patent litigation and patent troll threats before a problem arises.
How to Reduce Exposure to Future Patent Litigation To reduce your organization’s risk of exposure to potential patent litigation, you should consider the following points:
- Due diligence. In the early decision phase for a product, service, or program, conduct a landscape analysis to determine any potential infringement risks. If risks are discovered, consider designing around the protected intellectual property to avoid infringement.
- Develop a robust IP portfolio strategy. Evaluate whether any components of your organization’s operations are patentable. Progressively protecting your intellectual property on the front end may help reduce the risk of later being exposed to IP threats like patent trolls.
- Benchmark periodically. Remain vigilant and aware of IP activity with respect to other organizations in your industry. Conducting routine benchmark reports will allow your organization to get a better understanding of relevant patented property. Additionally, if you are in a high-risk industry, continuously monitoring the emergence of non-practicing entities could help to identify potential patent trolls before they strike.
- Develop a plan of action for infringement defense strategy. Your organization should develop a detailed plan of action outlining an infringement defense strategy in the event that you receive a demand letter or lawsuit from a patent troll.
- Review and revamp your IP agreements. Conduct a review of your intellectual property agreements regarding licenses and assignments. Each of these agreements should contain language regarding the transfer of patent rights to protect your organization and its affiliates.
These are excellent starting points, but to fully evaluate your current exposure to patent troll threats or other risks of patent litigation, you should consult a professional with experience in intellectual property and patent litigation.