United States: Innovators Beware! Patent Reform Creates The New "Anti-Patent" Troll

Last Updated: July 2 2015
Article by Nicholas J. Landau, Ph.D and Jake Neu

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 Improvement 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.

We continue to track this trend and will report on significant events periodically.

Footnotes

1 A "short position" is essentially a bet that the company's stock value will decline. If the company's stock value declines, the troll gets a payout proportional to the decline (on the other hand, if the stock appreciates, the troll loses money).

2 For a concise but somewhat dated review of that trend, see R. M. Halligan "Trade secrets v. patents: The new calculus" Landslide 2(6): 11-13.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions