Non-Practicing Entities (NPEs) or patent trolls maintain their dominance in patent disputes, particularly within high-tech sectors, with approximately 51% of patent cases being filed by NPEs in the first half of 2023. With recently proposed legislation, the number of cases might increase in 2024. William Belov, the CEO of Infatica.io, a company offering proxy services, shared how these changes will affect businesses and explore strategies companies can employ to combat NPEs.
Patent Trolls and How They Work
Patent lawsuits against companies are fairly common, and most entrepreneurs would settle with their opponents rather than defend themselves in court. The reason is simple: legal costs can be up to millions of dollars. This has become a fertile ground for so-called parent trolls, says Belov. These are NPEs which buy patents, but not to develop products themselves, but to extract settlements from well-funded companies.
Back in 2013, Kevin Kramer, who was the Deputy General Counsel for Intellectual Property at Yahoo Inc., remarked on the problem, saying that the high cost of litigation "means that settlement is almost always the least costly option, and the patent trolls know it."
This issue has not gone away since then, notes Belov. Instead, recent statistics show that patent lawsuits are a growing challenge for tech companies. In 2022, NPEs filed 63% of all patent cases, marking the highest percentage of NPE-filed suits since 2015. This trend continued into the first half of 2023, where approximately 51% of patent cases were filed by NPEs.
Main Targets of Trolls
Prominent tech giants like Google, Amazon, and Samsung frequently find themselves in the crosshairs of patent litigation. Nevertheless, trolls don't shy away from the small prey. A study by intellectual property analysis company HighTech-Solutions shows that over half of NPE-filed lawsuits target companies with revenues less than $25 million. This highlights a substantial risk for small and medium-sized businesses, including those in the proxy and internet service sectors, notes Belov. "While patent trolls primarily focus on companies involved in creating new technologies and developing software, even grocery stores, restaurants, and clothing shops can become their targets," he warns.
The developmental stage of a company is crucial, with studies indicating a correlation between patent trolls' targeting activity and IPOs (initial public offerings). Approximately 30% of lawsuits are filed within two years before to two years after an IPO, as reported by various studies, including one by TechCrunch, which found that 39% of NPE litigation occurred in this period. This strategy is viewed as a means for NPEs to disrupt due diligence for startups seeking financing. Businesses often choose to settle with trolls rather than risk complications before a stock launch. Research presented by CLS Blue Sky Blog from Columbia Law School also supports this trend, revealing that nearly half of U.S. product-producing companies surveyed, which went public between 2007 and 2012, received patent demands shortly before or within a year following their IPO.
"Alice" Decision and Novels in Patent Legislation
NPEs often acquire vague or abstract patents because these types of patents can be more broadly interpreted. This ambiguity makes it easier for trolls to assert infringement claims against a variety of companies, increasing the likelihood of successful litigation and potential settlements. "It becomes a strategic move to target a wider range of businesses without the need for specific product development or commercialization," Belov explains.
However, progress in the past decade, such as the Supreme Court's 2014 Alice v. CLS Bank decision, has put some limitations on this strategy. It established guidelines to determine what constitutes an abstract idea that cannot be patented. Specifically, it ruled that simply adding computer functionality to an abstract idea does not make it patentable. This decision has led to the invalidation of numerous patents, particularly those in the software and technology sectors, which were deemed too abstract or general to warrant patent protection. The Alice test allows courts to knock out most "do it on a computer" patents. While not flawless, Alice effectively protected internet users from some of the most egregious patent abuses.
However, recently proposed legislation can bring back vague patents. Introduced to Congress in July 2023, The Patent Eligibility Restoration Act (PERA), S. 2140, aims to revise the current standards set by the Alice decision, potentially altering the framework for determining what constitutes patent-eligible subject matter. While not directly canceling the Alice rules, PERA could significantly modify how they are applied. "If PERA passes, it will open the floodgates for far more vague and overbroad software patents. It can escalate the challenges faced by companies in dealing with patent-related litigations and might make it easier for patent trolls to operate," Belov warns. The proposed act has sparked active protest within the tech community, including those offering proxy server services, as they often rely on a range of patented technologies and are already in a "state of war" against NPEs.
Power of Crowdsourcing
Despite the new legislation, strategies to counter patent trolls will still be available. Belov provides examples of a web security and performance company Cloudflare. The company was among the first to actively combat trolls.
In 2016, Cloudflare faced a notorious patent troll named Blackbird Technologies. To counter this, the company initiated "Project Jengo," a fund designed to reward researchers documenting prior art. This information aimed to invalidate the specific patent in question, US 6453335 ('335 patent), as well as all patents held by Blackbird, leveraging crowdsourced research.
Furthermore, the company lodged ethics complaints against the co-founders of Blackbird Technologies in Massachusetts, Illinois, and at the United States Patent and Trademark Office (USPTO). These complaints were prompted by an assignment agreement filed with the USPTO, revealing Blackbird's purchase of the '335 patent from an inventor in October 2016 for a nominal $1.
"Cloudflare contended that the real compensation was significantly more, hinting that Blackbird might have acquired the cause of action or arranged to share any litigation proceeds with the inventor," Belov notes. The complaints centered on violations of professional conduct rules, which prohibit attorneys from buying a cause of action for their own use or sharing contingency fees with non-lawyers.
Cloudflare representatives argued that the 335 patent essentially described a fundamental design principle of the World Wide Web, specifically related to proxy servers. Thus, such software was already in widespread use by the priority date of the patent, and they claimed that the lawsuit represented an abuse of the patent system.
This effort was successful; the case against Cloudflare was dismissed, and two years and 275 unique submissions later, Blackbird's operations were significantly impacted. "This outcome marked a notable victory for Cloudflare and set a precedent in fighting patent trolls," Belov highlights.
More than that, Cloudflare distributed more than $50,000 in cash awards to eighteen people who submitted prior art as part of the crowdsourced effort. They gave out more than $25,000 to people in support of their submissions related to the '335 patent and awarded more than $30,000 to submitters in support of efforts to invalidate the other patents in Blackbird's portfolio.
"Continuous efforts in gathering and publishing prior art can lead to the creation of extensive databases. These resources, as Project Jengo proved, can be invaluable for companies facing patent infringement claims, providing them with ready access to evidence that could help their defense," Belov concludes.
