Patent Trolls: To Fight or to Settle, That is the Question

“Patent Troll,” or Non-Practicing Entity (NPE), is a derogatory term used to label people or companies that exploit patents as a business strategy. A patent troll acquires patents to make profits by bringing patent infringement lawsuits. Rather than actually going through lawsuits, trolls seek to extort early settlements by filing frivolous suits and asking relatively small sums. One federal district court has defined a patent troll as “somebody who tries to make a lot of money off a patent that they are not practicing and have no intention of practicing and … [have] never practiced.”

Not surprisingly, patent trolls create headaches for technology companies, especially for smaller IP holding firms. Once sued, there is a risk of spending millions of dollars on litigation. Moreover, there is a risk of actually losing the case. Due to the fear of these risks the companies face, they tend to settle. On the other hand, many companies choose to “fight hard” since settling with the trolls is just not the right thing to do. Those companies believe that fighting will give them a reputation as a tough target, which will make the trolls to sue them less often. Also, they argue that the money they save by in a long run will outweigh litigation costs. RPX Corporation, a patent risk management service provider, however, reports that “fighting hard” strategy may not be the best option.

First, RPX’s analysis shows that companies that stayed over 370 days in suit (a proxy for a tough-target reputation) saw the number of their NPE lawsuits grow at a similar rate compared to companies that were resolving cases in less than 370 days. This seems to suggest that NPEs do not necessarily make decisions in suing companies based on their reputation. Second, after examining over 500 litigations, RPX has concluded that patent troll cases that lasted longer than one year cost five times more than cases that lasted less than one year. In addition, it has been reported that NPEs are willing to settle for the lowest price near the start of the suit.

Despite these analysis results, some companies are still willing to fight. For example, Drew Curtis, the founder of Fark.com, continued to defend the company against Gooseberry Natural Resources when it was sued for infringing on Gooseberry’s patent for “creation and distribution of news releases via email” when big companies such as Yahoo or AOL settled out of the case. Six months into the litigation, Mr. Curtis settled for zero dollars plus wiping out the non-disclosure provision. At TED Talks, Mr. Curtis called patent trolls “terrorists,” claiming “the trolls have done more damage to the United States economy than any domestic or foreign terrorist organization in history, every year.” He offers a simple solution to patent troll suits – “don’t negotiate with terrorists.”

Another example is Newegg, an online retailer of computer hardware and software. Newegg is well known for its “fight hard” strategy when it comes to dealing with meritless patent trolls’ claims. Apparently, Newegg never lost a NPE case since 2006, including it’s recent win against the patent trolls that already has collected over forty-five million dollars in settlements against more than hundred other companies. Lee Cheng, Newegg’s Chief Legal Officer, points out that the settlement costs are ultimately passed to the customers and that paying trolls off only encourages and funds more lawsuits by them. These reasons are striking since Newegg is considering not only minimizing loss to the company but also its social responsibility.

Maybe RPX is correct in that there is no reason to fight hard if companies look at the NPE problem as another business transaction and make decision based only on the cost effectiveness. However, when patent trolls are harming the industry in general, it might not be all too bad for companies to think about what they could do to stop the trolls in a long run rather than what they could do to minimize their loss for the suit they are currently dealing with.

Jiyeon Barta is a J.D. candidate, 2017, at NYU School of Law.