Patent trolls are inevitable—companies don’t even check patent databases which gives trolls an in

Severin, managing partner. "The Case eBay Inc. vs. MercExchange LLC, It's Impact on NPEs and Patent Enforcement", Ipeg Institute, 3-31-2010, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1613585 LJS

More than anything else the aftermath of eBay concentrated on whether patent trolls¶ are indeed stifling innovation and how these "patent aggregators" could be stopped.¶ eBay was just a precursor to a much larger debate on patent trolls and their effect on¶ patent enforcement, that is still going on till date. Debates about Patent Reform have¶ a tendency to evolve also around the issue of patent trolls and whether they constitute¶ a threat to the patent system or to innovation (or both). As patent trolls produce no¶ goods, nor do they "practice" the patented invention themselves, trolls have been¶ labeled a "threat" to operating companies and therefore stifle innovative work by¶ those companies, who "independently invent 29" . These stories, routinely invoked by¶ the press, advocates, and academics, shape, according to Colleen V. Chien30 , public¶ understanding of the patent system. In her 2009 publication, Chien describes and¶ matches these stories 31 to empirical data on patent litigations to determine which¶ types of suits are most prevalent. Chien's publication is among the first systematic¶ attempts to place the various types of patent litigation within context. The author¶ focuses exclusively on the litigation of high-tech patents, covering hardware,¶ software, and financial inventions, using data from the Stanford Intellectual Property¶ for cases initiated in U.S. District Courts from January 2000¶ through March 2008. Chien's data show that the reality is more complicated than the¶ rhetoric regarding patent litigation. For instance, NPEs 33 bring only a minority of¶ patent suits: 17% of high-tech patent suits in the last eight years (28% of all high-tech¶ patent suits if one includes suits with multiple defendants and those that seek¶ declaratory judgment ("DJ"). This average reflects an increase in NPE suits as a¶ proportion of all suits over an eight-year period, from 22% in 2000-2001 to 36% from¶ 2006 to March 2008, counting defendants, or from 10% to 20%, counting cases 34.¶ Although an overall increase is seen in the number of patent litigations, data do not¶ support the view that this increase is solely due to NPEs. In terms of numbers NPE's¶ do not qualify as the prevalent patent litigators, although, admittedly, NPE's main¶ object and goal is to enforce patents they acquired. Enforcement by litigation is part¶ of their business.¶ According to several studies, individuals and small companies are more likely than¶ large companies to sue on their patents 35. Although there might be a difference¶ between small companies, individual patent owners and NPEs, all have one thing in¶ common, they seek remuneration for their inventions. Some have argued that NPE's¶ do not "invent" anything themselves. Even is this true, what difference does when¶ looking into enforcement of rights acquired? Whether it is a right acquired as result¶ of an own invention or a right that has been identified as a valuable one, analyzed,¶ checked by engineers as well as patent lawyers, prior art searched and thoroughly¶ prepared for EOU 36.¶ PricewaterhouseCoopers (PwC) has compiled a thorough database of patent damages¶ awards (from 1980 through 2008), collecting information about patent holder¶ success rates, appellate reversals and modifications, time-to-trial statistics (from¶ 1995 through 2008), and practicing versus NPE statistics (from 1995 through 2008).¶ Based on this study, they made several observations that are illustrative for assessing¶ the impact of NPEs 37.¶ Their findings, in a nutshell:¶ • Annual median damages award has ranged from $2.2 to $10.6¶ million, with no discernible trend since 1995¶ • Damages awards for NPEs have averaged more than double those for¶ practicing entities since 1995¶ • NPEs have been successful 29 percent of the time overall versus 41¶ percent for practicing entities, due to the relative lack of success for¶ NPEs at summary judgment; however, both have roughly a 2/3 win rate¶ at trial¶ • The disparity between jury and bench awards has widened and is¶ likely the contributing factor in the significant increase in use of juries¶ since 1995¶ • Reasonable royalties continue to be the predominant measure of¶ damages awards¶ • Alleged infringers increase their trial success rates slightly as plaintiffs¶ seeking declaratory judgment¶ • While the median time-to-trial has remained fairly constant since¶ 1995, significant variations exist between jurisdictions¶ • Certain federal district courts (particularly Virginia Eastern and Texas¶ Eastern) continue to be more favorable to patent holders, with shorter¶ time-to-trial, higher success rates, and higher median damages awards¶ • Five federal district courts accounted for 33 percent of all identified¶ decisions involving an NPE as the patent holder.¶ So is the NPE business model contemptible? We full heartedly disagree. One can¶ have ethical oppositions against a company whose only task it is to make money out¶ of patents. If this is because one despises capitalistic behavior in order to maximize¶ profits, one can say it's just a logical result of this political view to also denounce¶ NPE's acquisition of IP to gain profits. However many embrace IP as means to¶ protect value in (some) inventions but then subsequently denounce NPE's strive for¶ gain by enforcing that same IP. This is nothing less than hypocritical. Compare this¶ with other parties that "play" the market. If hedge funds gain from debt-laden¶ countries like Greece by arranging currency-swaps to masquerade losses or financial¶ distress, the financial world is heralding the players as "financial innovators". If the¶ use of market mechanisms is used to profit from Intellectual Property the players are¶ called "extortionists 38".¶ Investors who buy and develop real (immovable) property are often denounced as¶ "property speculators" only by those who have no idea what risks are involved in¶ assessing, valuating and subsequently developing such property. Is this in fact the¶ location for the property? Will eventually buyers take the offering or even like what¶ the developer presents as an "unique opportunity"? Are investors willing to take the¶ risk that the property, once renovated and assessed, will turn out to find no buyers?¶ Those business risks are commonly accepted and rewarded by paying upgraded and¶ sometimes inflated property prices. So why would an investor in intangible assets be¶ judged any different 39?¶ In this regard, one aspect of NPE's has remained underexposed in literature, namely¶ that NPEs have gone through considerable effort to locate and acquire patents that¶ remain undervalued, unused or overlooked by industry, or "operating" companies.¶ One way of looking to this is that NPE's acquire patents that "operating companies"¶ have either missed, ignored, dismissed or simply overlooked, despite sophisticated¶ databases offering all the opportunity to explore what is being patented in a certain¶ technical area. In fact, can anyone maintain that "he was not aware of a certain¶ patent"? That seems possible only if he did not look for the patent nor searched the¶ databases publicly and freely available from all major Patent Offices around the¶ world. Many patent professionals and information companies offer extensive search¶ tools. For a relatively low amounts anyone can find out "patented prior art" or which¶ (an how many) patents are granted prior to their own "independent" invention. But¶ that is only the easy part. When a new consumer electronics product is being¶ developed, may patented technologies are being licensed in from third parties.¶ Apple's iPod for example has hundreds of patented technologies, ranging from¶ wireless LAN facilities, to touch screen, motion controls (for shuffling), battery¶ power, etc. Existing technologies, not developed by others, in many cases patented,¶ are then either bought from the owners (by taking a license) or are being¶ circumvented by "designing around". A major task of any patent department e.g. of a¶ consumer electronics company, is to find out whether a product design that comes¶ from their in-house R&D group, is not touched upon by third party patents 40. Surely¶ it is, caused by the sheer number of patents, frequently impossible to weigh whether¶ some patents are indeed infringed by one's own product, or even to read all the¶ patents that seem relevant for the searched technology. When NPEs subsequently¶ reach a better result or a different opinion and buy that patent that was initially¶ discarded as irrelevant (e.g. because it was wrongfully held to be invalid) or¶ overlooked by the operating company, the company occasionally has to face¶ litigation. If not settled the operating company has then to accept the consequences¶ by paying damages as a result of its wrong infringement or incomplete database¶ analysis.¶ However, the reality is that many "operating" companies simply ignore patented¶ inventions by third parties, either willingly or unwillingly (meaning they do not check¶ any database prior to developing or researching their new product or process). From¶ a 2003 study by Motivaction, commissioned by the European Patent Office 41¶ information services are not as 50% to 70% of the companies surveyed are not aware¶ of the EPO’s patent information services. Even more troublesome is that a vast¶ majority of European companies simply do not recognize the relevance of patent¶ information for their own R&D efforts. A striking 31% of "EPC10"¶ , it¶ appeared that while the EPO (as an institution) is well known, the EPO’s patent¶ 42¶ disagreed with: "I have used patent information in the past to find out if someone¶ else has independently arrived at the same idea as mine", against 22% in the US.¶ - companies¶ disagreed with the statement "Information contained in patents is of commercial¶ advantage to my company", for only 14% of their US companies. 55% of EPC10¶ companies disagreed with: "I have used patent information in the past to solve¶ technical or engineering problems", against 36% in the US. 52% of EPC10 companies¶ So who is there to blame? Certainly not NPEs. They only expose widespread patent¶ ignoramus. In doing so most NPEs focus on high-tech patents for obvious reasons.¶ First they acquire patents from distressed or bankrupt companies 43, from companies¶ that have gone out of a certain business or from smaller SMEs that have neither the¶ expertise nor the money to enforce their patent rights. NPE's have to operate in an¶ imperfect market, contributing to their high risk strategies. Many even doubt that¶ there is such a thing as a "patent market" where demand and supply provide for a fair¶ price, rather than a very expensive lottery 44. As McDonough rightly points out,¶ patents are "illiquid commodities 45" because they are not "readily convertible into¶ cash 46". Without the presence of parties that have full faith and credit in the "patent¶ market", NPEs fulfill the role of "market makers", as they discover and extract the¶ value of a patent, be it in licensing negotiations or in enforcement strategies. Some¶ have taken the view that "patent value" maybe a illusive concept, because of the¶ impossibility of obtaining sufficient empirical data on each, patent "worthlessness"47¶ is prevalent, which only adds to the impossible task for NPE's to identify those¶ "value" patents that are valid, used and infringed by parties without being reasonably¶ compensated.¶ In that sense there is nothing wrong with most NPE's. The opposite is true if one sees¶ this phenomenon as a result of insufficient "patent mining" 48 as the process of¶ seeking relevant patents is often called. If the patents are the result of in house¶ innovative R&D output, asserting them against alleged infringers who use these¶ intangible assets in their own products in order to recoup investments in their R&D is¶ commonly regarded a smart business to maintain competitiveness or market share.¶ However, if these patents have been bought from a third party - either defunct or¶ bankrupt or from sellers of unused IP for a profit - with the purpose of enforcing it¶ against companies using the patented technology is then seen as "extortion" of¶ ethically behavior. Seldom is this seen as a smart policy and a sign of shrewd¶ entrepreneurship. What difference is there with other examples of buying assets with¶ an intention to "work" the asset for onward sales with a profit?¶ Obviously these patents have been bought by a party that decided to make value of¶ patents where the seller did not an opportunity to extract the full value, e..g because¶ they did not see the opportunities, or simply do not have the resources in manpower¶ or money to do it themselves. These companies have valid and sound reasons to sell¶ their patents. The price the buyer normally is willing to pay (having made the analysis¶ that they would be in a better position to make even more money of those patents,¶ backed by investors, than the original owner) reflects the potential and true value of¶ the patents. This is what NPEs regularly do and what we will increasingly see¶ happening. Many companies have an inventory of unused patents 49 that is not¶ subject to active value creating strategies, but rather used as defensive (and passive)¶ “freedom-to-operate” operations. One can hardly blame parties for looking to find¶ “Rembrandts in the attic” and come up with a viable value extracting enforcement¶ strategy for pursuing financial rewards from intangible assets, where the original¶ owners did not.