Don't Feed the Patent Trolls

Not all patent owners exploit their patents by making and selling products. Rather, some monetize their patents through licensing in which case the entities are referred to as “Non-Practicing Entities” or "NPEs." Some NPEs own strong and valid patents, and engage in commercially reasonable licensing activities. Many educational institutions represent this type of NPE. However, some NPEs own patents of dubious validity, engage in heavy-handed licensing tactics, and have come to be known as "patent trolls." Some NPEs build portfolios of their own patents and others purchase patent portfolios from distressed entities. Because a patent troll’s portfolio is often weak, some say that a patent troll does not patent inventions, but rather, invents patents.

Critics argue that patent trolls don’t actually contribute anything useful for society. These trolls often do not develop the technology that they seek to enforce, nor do they make products that embody the technology itself. However, proponents argue that all NPEs, including patent trolls, offer an incentive for companies to invest in intellectual property as they provide a market where intellectual property can be sold in the future. Moreover, the value of a patent may be questionable for reasons other than its validity. An individual patent owner may lack the finances to assert a patent. Thus, even so-called patent trolls may arguably serve a useful purpose in supplying the funding to enforce meritorious patents.

Even though a patent troll’s patent portfolio may be of questionable validity, trolls are sometimes quite successful in monetizing their patents by sending out a vast number of cease and desist letters or by filing suit against a large number of alleged infringers. Patent trolls often sue hundreds of companies that use a certain technology by suing the end users of a product directly, rather than approaching the manufacturers of the allegedly infringing product individually. The rationale is twofold. First, the potential for numerous small settlements together often amount to a larger total than what could be obtained through a few larger settlements. Second, and perhaps more important, the manufacturers, facing larger settlement amounts, tend to have a stronger incentive to challenge the patents. In contrast, a user is often willing to settle for nuisance value. The successful patent troll counts on this second factor, with a business model that relies on the capitulation of its victims.

Targets of true patent trolls have different strategies for responding. Those who capitulate generally justify the position on economic grounds, settlement being more certain, and often less expensive than fighting. Others fight back and fight back hard, to make it clear that any patent troll will have to fight tooth and nail for every dollar sought.

Recently, a Lewis Roca client, Wine Country Gift Baskets, became the target of someone widely-identified as a patent troll, Leigh Rothschild, when one of his companies, Symbology Innovations LLC (“Symbology”) sued Wine Country Gift Baskets. Symbology sought to enforce United States Patent No. 8,424,752 (the '752 Patent) against Wine Country Gift Baskets for its use of QR codes on product catalogs that merely route customers to the Wine Country Gift Baskets’ website. In performing due diligence on Symbology, the firm’s legal team learned that the '752 Patent was part of a family of patents that Symbology has asserted against over 200 alleged infringers over the course of several years. Shortly after Wine Country Gift Baskets was served with Symbology’s complaint, it received a demand letter from Symbology seeking $65,000 to settle all claims for the alleged infringement of the ’752 Patent. However, Symbology’s attorney also noted that "Symbology has been very willing to entertain counteroffers."

This had all of the hallmarks of a patent troll:

• a lawsuit was filed without prior warning;
• it alleged infringement of a patent covering common technology;
• it was soon followed by a demand for monetary compensation with room for negotiation, suggesting that nuisance settlement was possible.

Instead of giving in, Wine Country Gift Baskets asked Lewis Roca how it might defend against the lawsuit. The firm did some research into the prior art, litigation, and prosecution history of the ’752 Patent and drafted an answer to the complaint with a detailed claim chart demonstrating the invalidity of the '752 Patent, which it then shared with Symbology along with a demand that Symbology dismiss its complaint against Wine Country Gift Baskets with prejudice. Symbology responded by refuting the evidence, but agreed to dismiss the complaint without prejudice. However, if Symbology filed a dismissal without prejudice, Symbology would still be able to refile the complaint at any time, maintaining a cloud of uncertainty over the continued use of QR codes by Wine Country Gift Baskets. Thus, the firm filed its answer to the complaint before responding to Symbology’s counteroffer of dismissing the compliant without prejudice. If Wine Country Gift Baskets had simply refused Symbology’s counteroffer, Symbology could have immediately withdrawn its complaint, unilaterally achieving the same desired result of its counteroffer to dismiss without prejudice. Once the answer was filed, however, the consent of Wine Country Gift Baskets was required for dismissal of the complaint in any manner. Wine Country Gift Baskets also threatened the ’752 patent with reexamination, a step that might cast a cloud on the patent, frustrating Symbology's future attempts to seek more licensees. The result of this bold strategy was that Symbology quickly agreed to dismiss the complaint with prejudice. Moreover, in the settlement agreement, Symbology released Wine Country Gift Baskets not only from all claims relating to the '752 Patent, but from all claims in the entire patent family, further agreeing to never sue Wine Country Gift Baskets for its use of QR code technology.

Patent trolls may do little to advance the evolution of technology, and may instead give legitimate NPEs a bad name. They may well be the business equivalent of a schoolyard bully. Sometimes you have to stand up to schoolyard bullies.

For more information, contact David Plumley at dplumley@lewisroca.com or Drew Wilson at dwilson@lewisroca.com.