Patent Trolls and Efforts to Thwart Them
Patent troll business models
A patent troll is a company that acquires patents not to make products or develop technology, but purely to sue others for infringement and collect licensing fees or settlements. You'll also see them called non-practicing entities (NPEs) or patent assertion entities (PAEs).
Their business model works because of a basic asymmetry: defending a patent lawsuit is extremely expensive (often millions of dollars), so many companies would rather pay a settlement than fight, even if the infringement claim is weak.
Common tactics include:
- Acquiring broad or vague patents, especially in software, that could plausibly cover a wide range of products or services
- Sending demand letters to dozens or hundreds of companies at once, seeking quick settlements rather than actual trials
- Targeting small and medium-sized businesses (startups, local retailers, app developers) that lack the resources for prolonged litigation
- Exploiting uncertainty around patent validity and claim scope, since courts may not have examined whether the patent should have been granted in the first place
The core calculation is simple: if it costs a defendant $2 million to litigate and the troll offers to settle for $100,000, many defendants will pay even if they believe they'd win at trial.
Curbing abusive patent litigation
Efforts to address patent trolls have come from both Congress and the courts, with mixed results.
Legislative efforts:
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Leahy-Smith America Invents Act (AIA) of 2011: This is the most significant patent reform legislation in recent decades. It created two new administrative proceedings at the USPTO:
- Inter partes review (IPR): Allows anyone to challenge a patent's validity based on prior art. This is faster and far less expensive than a full federal lawsuit.
- Post-grant review (PGR): Allows broader challenges to a patent's validity within nine months of issuance. Both give defendants a way to knock out weak patents without enduring full-blown litigation.
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Innovation Act (proposed but never enacted): This bill would have required patent plaintiffs to provide more specific pleadings about what exactly was infringed, and included fee-shifting provisions (loser pays the winner's legal costs). It stalled due to opposition from pharmaceutical companies, universities, and other stakeholders who worried it would make enforcing legitimate patents harder too.
Judicial efforts:
- Courts have issued several rulings that limit troll leverage (discussed in detail in the next section).
- The overall effect has been meaningful but incomplete. Trolls adapt their strategies in response to new rules, and the fundamental cost asymmetry of patent litigation hasn't disappeared.
Supreme Court impact on patent enforcement
Four Supreme Court decisions have reshaped the landscape for patent trolls:
eBay Inc. v. MercExchange, L.L.C. (2006) Before this case, patent holders who won infringement suits almost automatically received injunctions (court orders blocking the infringer's product). The Court replaced that presumption with a four-factor test: the patent holder must show (1) irreparable harm, (2) inadequate remedies at law, (3) the balance of hardships favors an injunction, and (4) the public interest supports it. Since trolls don't make products, they struggle to show irreparable harm. This significantly reduced their ability to threaten injunctions as leverage in settlement negotiations.
KSR International Co. v. Teleflex Inc. (2007) This case made it easier to invalidate patents as obvious. The Court held that combining known elements in a predictable way doesn't deserve a patent, even if no single prior art reference shows the exact combination. This gave defendants a stronger tool to challenge the low-quality patents trolls often rely on.
Alice Corp. v. CLS Bank International (2014) The Court established a two-part test for patent eligibility under 35 U.S.C. § 101: (1) determine whether the patent claims are directed to an abstract idea, and (2) if so, ask whether the claims contain an "inventive concept" that transforms the abstract idea into something patentable. This decision has been used to invalidate many software and business method patents, which are the bread and butter of many troll portfolios.
TC Heartland LLC v. Kraft Foods Group Brands LLC (2017) This case restricted where patent lawsuits can be filed. A patent suit must now be brought either in the state where the defendant is incorporated or where the defendant has a regular and established place of business. Before this ruling, trolls heavily favored the Eastern District of Texas, known for fast schedules and plaintiff-friendly juries. TC Heartland sharply reduced that forum shopping.
Together, these decisions have given defendants more tools to fight back. But trolls continue to adapt, for example by targeting end users instead of manufacturers, or restructuring to establish presence in favorable jurisdictions.
Patent Licensing and Litigation Landscape
Patent licensing is central to how trolls operate. Rather than building products, they generate revenue by demanding royalties from companies that allegedly use the patented technology. For businesses on the receiving end, even meritless claims create real costs and disruption.
The tension between protecting legitimate patent rights and preventing abuse remains unresolved. Reforms that make it harder for trolls also risk making it harder for universities, individual inventors, and small companies to enforce valid patents. Striking that balance is the ongoing challenge of patent reform.