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Patent Trolling Damages the Entire Economy

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They called it “the mother of all patent battles.” When the U.S. Court of Appeals for the Federal Circuit invalidated Soverain Software’s claim on the patent for the “shopping cart” feature on almost all e-commerce sites, many thought it was a turning point in the battle against “patent trolls.”

Although Soverain Software outwardly appeared to be a functioning enterprise complete with an impressive product suite, this image was in fact a carefully crafted façade.

Until the fateful court decision, Soverain Software was among the most feared patent assertion entities (PAEs) in the technology industry. By pressing its claim to the shopping cart patent in court, the company won a $40 million settlement from retailing giant Amazon.com, followed by decisions against Avon and Victoria’s Secret that netted $17.9 million. In 2012, Soverain launched a blitzkrieg of patent suits against Home Depot, Macy’s, Best Buy, Radio Shack, Walgreens and a relative unknown online retailer called Newegg.

However Newegg stood up to Soverain, even after it lost the initial case in a lower court. During its appeal, Newegg successfully illustrated that “prior art” existed for the shopping cart function, resulting in the dismissal of Soverain’s case against Newegg and all the other retailers.

But Soverain Software’s strong arm tactics shouldn’t have cost any company that much in time and resources to defeat a questionable patent claim. As I address in my new Heartland Institute white paper, “Why Patent Reforms Are Needed: Intellectual Property Abuses Threaten Innovation and Cost Consumers Billions,” patent trolls pervert the intentions of patent law, which is to assure inventors have the opportunity to profit from their innovations.

Patent trolls manufacture nothing, and unlike colleges and universities, which use patent royalties to advance further research, most non-practicing entities (NPEs) are shakedown artists. They often stockpile otherwise largely worthless patents purchased at fire sale prices, then attempt to claim rights to any innovator whose work seems similar enough to make infringement threats and claims.

The median damages awarded to trolls in 2013 was $4.3 million, a study by PricewaterhouseCoopers found, and the number of annual patent suits filed grew by 25 percent in 2013 to almost 6,500 cases. NPEs accounted for 67 percent of them, up from 28 percent five years ago.

Thankfully, defendants such as Newegg are winning at the appellate level, prompting more companies to defend themselves. The U.S. Supreme Court struck back at patent trolling in two rulings last year that will require complaints to be much more specific about the nature of the infringement. This will help filter out frivolous, vaguely worded filings yet still allow legitimate grievances to have their day in court.

Moreover, discussions regarding NPEs have broadened considerably; now including less traditional trolling such as foreign state-sponsored patent assertion entities that, similar to domestic trolls, bog down the global technology industry in legal battles over questionable infringement claims. Unlike domestic patent trolls, whose objective is a settlement, award, or license fee, state-sponsored PAEs are a new form of protectionism and government subsidization of private enterprise. These foreign entities orchestrate legal intellectual property battles in courts around the world and crown their native businesses as champions. Their targeting of foreign competition is essentially using litigation to subsidize their domestic interests.

Government-sponsored PAEs lock-up patents for any technology or device that might conceivably compete with its key domestic industries. Instead of slapping tariffs on imported products that compete with homegrown industries as they once did, governments are dubiously applying patent law to extract a “tax” on any product that threatens native commercial interests.

President Barack Obama – through executive orders to bolster the U.S. Patent and Trade Office – and Congress – through proposed legislation – are tackling patent abuse head on. While legislation stalled in 2014, the Republican leadership in both the Senate and House is moving forward with new legislation likely to win support from leading Democrats such as Sens. Patrick Leahy (D-VT) and Charles Schumer (D-NY).

Any new legislation should recognize that intellectual property protections were written into the Constitution. But NPEs have so twisted the process that they subvert the very innovation patent law is intended to nurture. These abuses of the process harm the broader economy and should be stopped.

Steven Titch is an independent policy analyst and policy advisor to The Heartland Institute. He is the author of “Why Patent Reforms Are Needed: Intellectual Property Abuses Threaten Innovation and Cost Consumers Billions.” Follow him on Twitter at @stevetitch.


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