Patent Risk Digest – October 2015

Patent Troll Activity Remains High Through Q3 2015

Through the first three quarters of 2015, patent troll lawsuit activity is still exceeding levels for the same period in 2014—and is holding steady compared to previous years. Patent trolls added 3,029 defendants to infringement lawsuit campaigns from January through September this year (see Figure 1).

Figure 1: Troll Litigation Campaign Defendants Added (YOY)

As reported in July, data through the first half of the year show smaller companies (with revenues less than $100 million) bearing the brunt—more than 65%—of 2015 filings.

'Adult' Patent Suits Highlight Trolls' Focus on Smaller Targets

Patent trolls have been increasingly successful in collecting a high number of quick infringement settlements because they focus on ideal targets: companies that will pay what they can—as quickly as possible—to end the distraction and expense of lawsuits that can cost from tens of thousands to millions of dollars to fight. It’s a business model that has gained momentum against smaller companies. And no industry is immune.

Case in point: a California-based troll—TZU Technologies—since June this year has sued nearly a dozen entities demanding cash for alleged infringement of US Patent No. 6,368,268, which covers technology used in the still-developing area of Internet-remote-controlled sex toys. The suits take aim at obvious targets: emerging companies in a highly competitive market—in this instance at the crossroads of adult entertainment and technology. As is typical in troll cases, the plaintiffs also looked for other targets whose connection to the matter might be more tenuous yet still provable. For example, one of the TZU Technologies suits named the crowdfunding company Kickstarter, alleging infringement because it funded development of a children’s toy that employs the same Internet-remote-control technology of the patented adult toys.

After three months in litigation, TZU Technologies dropped its case against Kickstarter, but the cases against all other defendants remain pending in the Central District of California.

Are 'IPRs' a Viable Weapon Against Patent Trolls?

In 2011, Congress passed legal reforms aimed at bringing greater balance to a system that puts defendants in patent troll lawsuits at an immediate, significant cost disadvantage, regardless of a case’s relative strength or weakness. One of those reforms created what’s now commonly known as an IPR—or an “inter partes review”. This procedure was designed to allow a party to quickly challenge—attempt to disprove the validity—of a patent. Proving the patent invalid undermines any infringement claim, and, if successful, effectively ends the litigation.

This tool has been helpful in many respects, particularly for larger companies with fully staffed legal departments or deeper resources to spend on specialized outside counsel. However, for smaller organizations, an IPR may not be a viable lifeline in a troll suit. Why?

A short cut—but still a journey

By law, an IPR can only last 18 months, from the filing of a petition to its conclusion. That’s speedy compared to traditional district court litigation. But to most companies with limited legal resources, 18 months is still a long time to be distracted by litigation.

Affordability is relative

Preliminary data show that, on average, an IPR campaign (challenging one or more claims in a patent) can cost about $278,000 even before a defendant’s petition is accepted by the Patent Trial and Appeal Board (PTAB) for hearing. By final written decision, a campaign can cost upwards of $500,000.

Again, larger companies or those with more extensive legal resources may be able to bear this expense—and more experienced defendants with mutual interests may collaborate on an IPR campaign, sharing costs. For other companies, though, IPRs may be overwhelmingly cost-prohibitive despite their advantages.

No guarantee of success

As in all legal proceedings, results are never a lock. IPRs are no different. In fact, recent data show that the PTAB, over time, has been instituting relatively fewer petitions—rejections often based on technicalities, as well as whether a challenge to a patent actually merits review (Figure 2).

Figure 2: A Downward Trend—Institution of IPR Petitions

In addition, for those patents that do proceed through the IPR process, many PTAB decisions are split—some claims are deemed valid while others are found invalid. Therefore, even successful IPRs are sometimes an incomplete solution to litigation.

Your Patent Litigation Risk

Patent trolls—also known as NPEs or non-practicing entities—have a simple business model. They acquire patents directly from inventors, through patent brokers, or from companies selling off assets, then target operating companies that may be infringing those patents and bring legal action to generate a payment.

The legal costs alone of a single infringement litigation can range from six figures to several million dollars. For large companies it is a frustrating problem that can reduce investment and profitability. For smaller companies, a patent troll attack can be fatal. Patent trolls have increasingly targeted companies—both suppliers and users of patented technologies—in a broadening range of business sectors. That means companies can be vulnerable just by running their websites, managing their E-commerce, providing WiFi access, using mobile devices, or deploying enterprise software solutions—all operations that utilize patented technologies.

RPX provides a suite of business solutions to reduce the expense and likelihood of such litigation. One is Patent Litigation Insurance, which combines a traditional claims-paying policy with select, proactive intervention in the patent market. RPX has a uniquely broad and deep store of litigation cost data, and with it has built a highly accurate actuarial model for patent troll risk and cost. Policies are customized to reflect a company’s size and risk profile.

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