Patent Trolls

                                                                                                                Patent Trolls

In its May 22, 2017 decision in Heartland v. Kraft Foods, the United States Supreme Court took action which may impede the activity of patent “trolls.”  The ruling could have wide-ranging ramifications throughout the world of intellectual property law and could help reduce the number of patent infringement lawsuits and the cost of litigation for defendants in those cases.  The Court’s action is a significant step towards making the U.S. patent enforcement process more efficient.

Patent trolls are parties who obtain multiple patents, through original patenting and through acquisition of patents from other parties, and generate revenue from those patents by demanding license payments from users of products that fall within the scope of the patents. The commercial model of the patent trolls depends upon their ability to extract license payments from users of the patented processes and inventions.  A key component of troll negotiating leverage is patent litigation.  The threat of a patent infringement lawsuit or the actual filing of such a lawsuit frequently forces targeted parties to consider license payments.  Potentially high costs of defending patent litigation often lead the targets of the trolls to agree to make license payments.  A troll’s target may calculate that the costs associated with license payments are substantially lower than the cost of litigation.  As the costs of defending in patent litigation increase, the bargaining power of the trolls also increases. 

Also known as “non-practicing entities” and “patent assertion entities,” these parties do not manufacture or sell products based on their patents.  Instead, they generate all of their revenue from licenses granted to other parties for the right to use “their” patented inventions. Non-practicing entities and patent assertion entities pay individual inventors for the right to license the patents of those inventors.  They generally purchase the patents outright, either paying a flat fee or some percentage of licensing revenues derived from the patents.

Patent assertion entities and non-practicing entities can serve many purposes. There is no inherent problem with the concept of non-practicing entities enforcing patent rights.  When operating effectively, patent assertion entities and other forms of non-practicing entities provide tools to assist individual inventors and non-commercial organizations to derive revenue from their inventions. 

Patent assertion entities generally acquire large numbers of patents, creating substantial patent portfolios.  By obtaining control over numerous related patents, patent assertion entities are better able to negotiate licenses than are individual patent holders.  It is often extremely difficult, for example, for the owner of a single patent to interest other parties in licensing the patent, as in many cases, access to a single invention is not adequate for effective use of the technology involved. 

It is generally easier to negotiate licenses for a “pool” of related patents than for individual, stand-alone patents.  Licenses for patent pools are usually more valuable to licensees than are licenses for individual patents. Furthermore, since patent assertion entities are in the business of developing licensing arrangement, they are significantly more effective at establishing commercial applications for patented inventions than are individual patent owners.  Conceptually, it is better for the inventors involved and for the economy overall if patent assertion entities exist.  Their existence helps to ensure that inventors will realize more revenues from their inventions than they would absent the patent assertion entities.

Difficulties arise, however, when patent assertion entities become overly aggressive through patent litigation.  When litigation becomes the primary commercial tool for patent assertion entities, many of the overall economic benefits patent assertion entities can offer to the economy are lost.  Litigation costs can be substantial and those costs do not contribute to overall economic productivity.

In 2016, the U.S. Federal Trade Commission published a study it conducted on patent assertion entities.  The FTC classified patent assertion entities into two categories.  The Commission described them as “Portfolio patent assertion entities” and “Litigation patent assertion entities.”  The FTC noted that Portfolio patent assertion entities are generally larger and better funded than are Litigation patent assertion entities.  The Commission also noted that Portfolio patent assertion entities s tend to rely far less on litigation in order to develop commercial licenses for their patents.  According to the FTC, Litigation patent assertion entities are currently responsible for approximately 96 percent of all U.S. patent litigation, yet they generate only about 20 percent of all patent licensing revenue.

As the FTC Study suggests, patent assertion entities that focus on patent license development, Portfolio patent assertion entities, make productive contributions to the overall economy.  In contrast, Litigation patent assertion entities appear to be far less productive.  An important challenge for U.S. patent policy is the development of mechanisms that foster greater reliance on Portfolio patent assertion entities and less reliance on Litigation patent assertion entities.

The recent Heartland v. Kraft Foods case may change the calculus for patent enforcers, and patent trolls specifically. In the Heartland case, Kraft Foods argued that Heartland infringed on Kraft patents when Heartland developed a manufacturing process for fruit drink mixes.  Kraft sued Heartland for patent infringement in federal court in Delaware. 

The key issue decided in the case was the issue of venue; i.e., the proper location in which to file the lawsuit. Heartland asked the court to transfer the case to federal court in Indiana, where Heartland is based, but the request was denied. 

The denial of Heartland’s request to transfer the case to Indiana was based on the lower court’s reliance on a ruling in the 1990 case, VE Holding Corporation  v. Johnson Gas Appliance Company, decided by the U.S. Court of Appeals for the Federal Circuit.  In that decision, the Federal Circuit concluded that defendants in patent infringement cases could be sued in any federal district in which the defendant was conducting business.  The Federal Circuit determined that the choice of court for patent infringement actions should parallel that applied in general litigation in the federal courts.  This interpretation opened the door for plaintiffs in patent infringement cases to select from many federal courts in which to initiate their litigation.

Eventually, a handful of federal district courts became so popular with patent trolls and other patent plaintiffs that they absorbed the majority of all patent cases.  The Eastern District of Texas, for example, currently processes more than 40 percent of all of the patent infringement cases filed in the United States.  Another one of the most popular federal districts for patent claims is the federal district court in Delaware, where Kraft chose to file its claims in the Heartland case.

In the Heartland case, the Supreme Court concluded that the Federal Circuit had improperly interpreted the 1948 Patent Act in its 1990 VE case ruling.  The Supreme Court determined that the Patent Act specifically requires that all patent infringement cases be filed in the federal district in which the defendant “resides.”  For business entities such as corporations, the Court asserted that patent cases against those entities must be filed in a federal district court in the state in which the business entity was established.

The impact of the Supreme Court’s holding is far-reaching. This ruling significantly limits the choice of courts available to all patent plaintiffs, including and especially patent trolls.  It means that all patent infringement defendants must now be sued in a federal district court in the state in which they reside.  This decision should substantially reduce the cost of patent infringement defense. Additionally, the decision should also reduce the ability of patent plaintiffs to select the most favorable forum.  Accordingly, the Supreme Court’s decision seems likely to alter significantly the cost calculations associated with the patent troll business model.

The Supreme Court’s ruling in the Heartland case seems likely to facilitate more productive patent assertion entity activity.  By making it more difficult for plaintiffs in patent infringement cases to choose exceptionally sympathetic courts, patent assertion entities and non-practicing entities will likely find their strategy more difficult to execute successfully.  The Court’s ruling will help reduce the costs of litigation defense for patent case defendants, a factor which is also likely to complicate the efforts of patent assertion entities focused on litigation.  Overall, the Heartland case may provide an important contribution to efforts to reduce the negative effects of patent enforcement by non-practicing entities.