The Impact Patent Trolls Have On Innovation

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Companies filing lawsuits over patents is nothing new. In fact, many big brands that do business together have a different relationship inside the courtroom (take, for example, Apple and Samsung). But the recent verdict on the Apple (AAPL) and VirnetX Holding Corporation (VHC) patent case has once again highlighted the misuse of patents by patent trolls to generate revenue by engaging target companies into lawsuits; a trend which is fast rising.

The U.S. court for the Eastern District of Texas gave a verdict in favor of VirnetX Holdings Corporation, ordering Apple to pay $625.6 million for infringing technology patented by VirnetX. The litigation goes back four years to 2012, when VirnetX first accused Apple of infringement. The old verdict had awarded $368.2 million to VirnetX, but Apple was granted relief by an appeals court and a retrial was ordered.

The suit filed by VirnetX accused Apple of using its patented technology for VPN on Demand, FaceTime and iMessage products. The recent verdict amount of $625.6 million includes $334.9 million as “royalties awarded to VirnetX based on an earlier patent infringement finding” and $290.7 million for newer claims based on the jury’s findings that “Apple’s modified VPN On-Demand, iMessage and FaceTime services infringed VirnetX’s patents and that Apple’s infringement was willful.” Apple has filed for a mistrial in the case.  

A Rising Trend

The case between Apple and VirnetX over patents differs from patent cases between technology giants such as Apple, Samsung, Microsoft (MSFT) or IBM (IBM). How are they different?

VirnetX can be described as a patent troll, a type of non-practicing entity (or NPE) that owns many patents without the intention of actually developing a product based on it. Patent trolls acquire patents for a business strategy wherein they earn income by licensing patents or collecting settlements from patent suits.

For example, VirnetX’s patent portfolio includes over 112 US and international patents and over 75 pending applications. It jumped 47.39% on February 4 from $4.79 to $7.06 on the news of the verdict. Since non-practicing entities also include universities and other institutions, the NPEs which are patent trolls are often termed as ‘patent assertion entities’ or PAEs.

On the other hand, when technology companies like Apple, IBM, Samsung, or Microsoft file for patents, they intend to use those in products or processes. The lawsuits between such companies are to protect exclusivity of products and technology which is developed by spending huge sums on research and development, meant to capture a better market share through innovative products.

According to a report by UnitedPatents, “2015 saw the most patent disputes in history” increasing 13% over 2014. Of all the patent cases, 64% litigations belonged to the high-tech sector, covering technologies related to computing or consumer electronics. The high-tech sector witnessed maximum number of cases related to NPEs; of all 2015 high-tech cases, 88% involved NPEs, a rise of 10% over 2014. Out of the 88% high-tech cases involving NPEs, patent assertion entities sourced 94%; which reflects what patent trolls have been aggressively up to.

Preserving Innovation

While patents are meant to protect innovation, there is an increasing view that the patent system is being misused to harm what it was designed to protect. It is acknowledged that patent holding companies (NPEs) are an important part of the innovation ecosystem, as they help connect manufacturers with inventors, thereby “allowing inventors to focus on what they do best.”

But it is also evident that patent assertion entities (a type of NPE) are using patents as a weapon against large, small and inventor-driven companies to generate revenue by threatening companies with infringement of patent charges, presuming fair chances of out-of-court settlement. If not, targeted companies are dragged to court. In fact, even some practicing entities are joining PAEs in litigation tactics and are thus involved in patent abuse.

The activities by patent trolls result in heavy costs and harm innovation. A Harvard Business Review report shows that “patent trolls cost defendant firms $29 billion per year in direct out-of-pocket costs; in aggregate, patent litigation destroys over $60 billion in firm wealth each year.” It further said that, “these costs fall disproportionately on innovative firms: the more R&D a firm performs, the more likely it is to be sued for patent infringement, all else equal. And, although this fact alone does not prove that this litigation reduces firms’ innovation, other evidence suggests that this is exactly what happens.”

Something similar has been pointed out by a report by Executive Office of the President, “The practices of this group of firms, act to significantly retard innovation in the U.S. and result in economic “dead weight loss” in the form of reduced innovation, income, and jobs for the American economy. Improving policy in this area is challenging because maintaining the incentives for innovation provided by patents requires allowing litigation when patents are infringed, and because practicing firms sometimes act badly as well.”

Final Word

Apple showed surprise and disappointment on the verdict and said, "Cases like this simply reinforce the desperate need for patent reform.” While the debate over patent reforms continues, notorious patent trolls will keep challenging firms in and outside court, inflicting direct and social costs to the economy, and dishonor the role that patent holding firms are supposed play in the innovation ecosystem.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



More Headlines for: AAPL , VHC , MSFT , IBM


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