You have probably heard it on the evening news, seen it in the newspaper or found it splashed across social media: patent trolls are ruining the US economy and must be stopped at all costs.
Patent trolls – that is, non-practicing entities – do pose problems for companies that are operating either at the edge of or outside the law. The truth is most companies will be the target of patent trolls from time to time. As a business owner, you’ve probably received a demand letter that asks you to settle an infringement of either a shipping or ecommerce patent; the troll probably asked for around $5,000-$15,000, a cost that is sometimes less than what would be required for you to have an attorney look at the case.
Despite their bad reputation, patent trolls are not all bad news. Not all operate in the manner above, and many actually fill a space in the patent market that is necessary for a healthy patent ecosystem.
Yes, patent trolls actually do provide a number of benefits!
The failed startup
Creating a successful business is no mean feat; in fact, failed startups are an all-too-common story. Many businesses begin with an inventor who has a great idea. They invest hundreds if not millions of dollars – and then it can all fall apart in the blink of an eye.
A common scenario is that the business applies for and acquires a number of patents. These patents usually have value, regardless of how well the company is going. However, patents are only worth money if people are willing to buy them. Often, large entities turn down offers to purchase patents from startups.
This where patents trolls step in – they are always in the market for patent assets! While they may not pay top dollar, they do pay something. I have found that for some clients, that something is actually more than the amount they invested in their startup. In fact, sometimes the amount paid by patent trolls is enough to classify the failed startup as a success – particularly if a large entity happens to be infringing the patents.
So does this mean that failed startups are patent trolls?
If a failed startup decides to enforce a patent, many would consider that startup to be a troll – i.e. they are a non-practicing entities enforcing patents and they would be demonized.
I believe that sort of ill feeling towards these types of trolls is unwarranted. The business founder or inventor has spent a lot of money – and probably sacrificed many years of their life – working towards building a successful company. When they are put out of a business by a larger entity that comes along and infringes the startup’s patent(s), it’s unfair.
Rather than view the startup as a troll, I instead believe that the larger entity is the problem as they took advantage of an economic disparity between the startup and themselves!
Trolls provide a marketplace for patent assets
Trolls serve a purpose: they provide a marketplace for patents assets that would otherwise be controlled by larger entities.
Trolls buy the patent assets from a failed startup – assets no one else is likely to buy. They pay good money for those patents – in some cases, millions of dollars – and then they use them to collect from the infringer (that is, the large entity that put the startup out of business in the first place).
To illustrate the point, I often use Sarah’s story.
Case Study - Future Proofing With Patents
As a young attorney I worked with an entrepreneur named Sarah. I created a patent portfolio for her over the space of three and half years – all the while implementing and refining a strategy that protected her startup’s products and also established market segment ownership in the direction the industry was heading. Unfortunately, investor issues meant that her company eventually closed its doors. Despite this, Sarah continued to personally fund the patent portfolio – the result was a portfolio five to 10 years ahead of the market. Over the year following the startup’s collapse, we marketed and sold the patent portfolio. We turned a profit on the venture – which is an uncommon occurrence in the case of a failed business.
The purchaser in Sarah’s case was essentially a patent troll. Initially, we tried to sell a patent to a larger entity whom we believed had infringed the patents – but they were not in the least bit interested. If the patent troll hadn’t bought Sarah’s patents, the larger entity could have infringed the patent with no fear of being sued by Sarah; this would have left Sarah out of pocket on millions of dollars. However, since Sarah received money from the trolls, she was able to reinvest in new startups – ultimately helping to create jobs and stimulate the economy.
The alternative to selling your patent assets to a troll is less enticing: one would be to sell for pennies on the dollar at auction, perhaps to an entity that contributed to your startup failing.
Re-telling Sarah’s story it’s hard to believe that patent trolls are bad.
So why do these trolls do what they do?
Typically, patent trolls aim to buy large numbers of patent assets from many startups and work towards creating a targeted portfolio – one that a large entity actually infringes. The troll documents the infringing activity and then uses the information to sue the entity.
In most cases the troll is painted as the villain as they are the ones suing. In some cases, they are providing a market need to buy and enforce the rights granted by the US government in a manner intended by the system for those that have no other recourse. Hardly the evil villains the Fortune 500 make them out to be!
The operating small business
Can trolls actually benefit small businesses?
Despite their bad reputation, patents trolls can actually be a good thing for small businesses and startups. Most trolls don’t suck money out of a company right when it’s just starting to earn money; instead, they target companies that are making several million dollars a year.
Large entities that copy a startup’s products and/or services are far more likely to put the startup out of business compared to a troll. The large entities have deep pockets and tend to infringe a startup’s patents when they know the startup doesn’t have the funds to defend itself.
Some time ago, I worked with a founder name Ryan. An entrepreneur, Ryan had struck a deal with a Big Box retailed to stock his products. Despite the substantial increase in revenue on offer, Ryan opted to turn down the deal.
Why did Ryan decline the offer? Because part of the contract Ryan had to sign stated that he must give away his rights to the Big Box retailer, allowing them to break down and reverse engineer his products – as well as place a competing product on the shelf directly opposite Ryan’s.
We looked into the case. The Big Box retailer had an interesting history: within 3 to 9 months of placing a new product on the shelf, the retailer would release a virtually identical generic version of the product to compete with the brand name. Of course, the price was often cheaper.
While Ryan had patents and wasn’t actually licensing them to the retailer, it was clear from the company’s history that they were willing to roll the dice and assume that Ryan didn’t have the funds to enforce his patents. And they were right – he didn’t.
Ryan had no choice but to pass on the deal, no matter how tempting it seemed at first glance.
However, there is an option available to founders like Ryan. It’s possible to license the rights to enforce (and therefore the rights to collect damages) to a patent troll. They have the money to enforce the patents – money the startup doesn’t have. Even if the troll doesn’t obtain a cease and desist order from the competitor, they can often obtain a royalty license that effectively drives the cost of the competitor’s products up – helping the smaller startup to compete in terms of cost. In some cases, the startup may actually receive some revenue from the troll or a portion of the royalty – albeit a small portion – all of which can help with funding and growth.
So what’s the bottom line?
Yes, it is true that some patent trolls pose a problem and effectively drive up the price of goods. However, not all trolls are actually trolls in the way the term is used; some help to boost the economy and support innovation.
The benefit I see in trolls comes from my experiences as an attorney working with startups. Some of my clients have been serial entrepreneurs who have built multiple successful businesses, however sometimes these businesses do fail. My clients have been able to sell their patent portfolios to patent trolls – helping to recoup their losses and/or fund their next venture.
Patent trolls are not all bad news; they have their place, and I know plenty of entrepreneurs who are better off for their existence!