What is a Patent Troll and Why Should Insurers of Software and Internet Based Companies Care?

Patent Trolls have Cost U.S. Software and Internet based Companies Billions in Litigation Costs and Untold Amounts in Unreported Licensing Fees 

Since the mid-2000s, U.S. software and internet based companies have been under attack by patent trolls where losses have numbered in the billions. Hopefully, this article will offer some guidance as to how to deal with this “patent war” that has been raging for over a decade. For carriers, this threat and the potential risk is nothing new.  That said, there are some corner stone considerations to  identify when offering policies that cover intellectual property rights.

So what exactly is a patent troll? If you have been insuring software and/or internet based companies and are not familiar with the term, count yourself amongst the lucky ones. Patent troll is a slang term used to describe a non-practicing entity (“NPE”) that holds numerous broadly worded software and/or technology patents that targets primarily small-to-mid-size companies in a new form of what some have referred to as legalized extortion.  So let us take a look at how it works:

Starting in the 1960s and hitting its height during the software boom of the early 1990s, a number of computer programmers and/or companies applied for and were awarded software patents by the United States Patent and Trademark Office (“USPTO”). The USPTO, not being very familiar with software coding at the time, approved a vast number of these patents which included very broad language as to what the patent covered. Fast forward to the mid-2000s and welcome the introduction of the patent troll. These NPEs went out and purchased these loosely worded patents. The kicker is that these NPEs do not actually use the patent or produce any products.  Instead, they just hold the rights to these very broadly worded software and/or technology patents. The troll then looks for software and/or technology based companies that use a process and/or technology that could possibly be covered by one of its patents. For example, a company that uses the internet for marketing is a target for a number of these trolls. Sound familiar?

After the troll identifies a potential target, it will then send what is called an infringement letter to the company which states that the company is infringing on the troll’s patent and unless the company agrees to pay a licensing fee, the troll will sue. If the company refuses, it is slapped with a lawsuit which can cost several hundreds of thousands of dollars to defend with no guarantees that a court will find the troll’s patent unenforceable. If the company agrees to pay the licensing fee, it opens the door for other trolls to send infringement letters.

In 2011, Georgetown Law Journal published that software patents made up 74% of the most litigated patents.[1] Also in 2011, Boston University School of Law performed a study that found patent trolls costs U.S. companies over $500 billion in litigation loses, with an average loss of $83 billion per year from 2007 through 2010 (in 2010 dollars).[2] These figures did not take into account licensing fees companies agreed to pay to the trolls to avoid an infringement lawsuit.

In the past, companies and insurers were being advised to pay these licensing fees; however, over the past two years a growing trend has been emerging to fight these trolls. Some companies have found that when they challenge these infringement letters and threaten the validity of the patent, these trolls have backed down. The 2011 Georgetown Law Journal article discussed above found that when trolls (NPEs) litigate a suit, they only win 8.0-9.2% of the time (taking into consideration default judgments); however, if troll is successful the damages accessed can be significant (as discussed above).[3]

Unfortunately, at this time, there does not appear to be a clear cut answer as to how to handle these trolls, whether to pay the licensing fee or take the risk that comes with the lawsuit. Companies and their insurers need to address each encounter with a troll on a case-by-case basis and ultimately make a business decision as to what is in the company’s best interest, the risk associated with the lawsuit or the risk that additional trolls may come knocking if they see the company has already paid one of them. Whatever the decision maybe, making sure the company and the carrier understand all their options is paramount.