Is getting sued by a patent troll worse than getting sued by a competitor?

Chart from Unified Patents’ 2019 Patent Dispute Report

Patent enforcement lawsuits have been around for a century or more, from the sewing machine patents in 1851, Morse’s patent lawsuits on the telegraph in 1853, the Wright Brothers patent lawsuits around 1910, and on and on.

A big moment on the patent scene was the Blackberry patent lawsuit in the early 2000’s. A set of patents were asserted against Blackberry, and these patents were asserted by a non-practicing entity called NTP. NTP sued Blackberry, and when Blackberry refused to settle, NTP threatened to push Blackberry to shut down their entire network. At the time, the Blackberry was the must-have device, with millions of users.

The Blackberry lawsuit showed how a single, solitary inventor with a good set of patents can bring down one of the biggest telecom company in the world. It showed the power and leverage of intellectual property. This struck fear in some, but was opportunity for others.

Larger players emerged to purchase IP from failed startups – and then enforce the patents. Several different business models emerged, such as patent aggregators like Intellectual Ventures, auctions like Ocean Tomo, and others.

The Rise of the Trolls

After Blackberry, patents seemed to come out of the woodwork and be asserted everywhere. The term “patent troll” was coined a decade earlier, but the term became much more virulent in the 2000’s.

Several business models emerged in response to the patent trolls. RPX developed several sophisticated defensive measures to counteract the patent troll business models. One of RPX’s innovations is a defensive patent buying system. A “member” of RPX’s purchasing system will get an automatic license to any patents they buy. Essentially, this is a “catch and release” model, where hurtful patents can be taken off the market, licensed to everyone in the RPX network, and then re-sold. This system can split the cost of getting patents off the market between all of the members, but it also gives the patent owner a reasonable value for their patents, especially on a risk-adjusted basis.

RPX also sells a defensive insurance product that incorporates many of the features of RPX’s other products, which includes a very detailed database of all patent litigations.

Unified Patents is another defensive business model. Members of Unified Patents collectively pay for challenging patents through the Inter Partes Review process.

Which is Worse – Lawsuits from a Patent Troll or a Competitor?

A non-practicing entity is typically funded through a combination of litigation financing and contingency fee lawyers. Their sole aim is to get a license and collect money. They have no interest in stopping someone from competing – in fact, they want companies to practice the invention (after they pay their license fee).

The tried and true litigation scenario is to begin enforcing a patent against the smallest companies first. The thinking is simple: small companies do not have the capital to fight, so they are likely to roll over and pay a license fee. As long as the NPE asks for less than the cost of fighting a lawsuit, it makes business sense to pay the troll. A typical “nuisance” lawsuit like this might ask for $500,000 settlement.

The strategy continues by funding larger and larger lawsuits off the backs of the smaller lawsuits that settle right away. The NPE goes after bigger and bigger companies, now that they have a war chest and a list of “satisfied customers” who already paid their license fee.

With a troll, the objective is clear: collect money. There is no other reason.

When an operating company sues another operating company, the reasons for the litigation can be far more complex and nuanced – and the settlements can be much more interesting.

An operating company might want a competitor to cease and desist, rather than pay a license. The patent owner might want to keep their market to themselves, rather than just take a license fee or tax from their competitor. In this case, the defendant might be faced with a harder question: give up their product line or fight the patent. This might be much more expensive (in lost revenue) than any license could ever be.

From Unified Patent’s article above, the chart shows that about half of all patent lawsuits are between operating companies (competitors), and about half are from non-practicing entities.

Because the objectives of a non-practicing entity are pretty clear, it is much easier to fight a patent troll than a competitor. Also, it is likely to be a much more expensive battle with a competitor, since there are many more twists and turns, and therefore it is more uncertain.