Patent trolls, non-practicing entities, patent monetization companies, or patent assertion entities: regardless of what they are called, in this particular context, when we refer to one of these organizations we are talking about an entity whose sole business is to collect patent licensing fees, whether through solicitation or litigation. These companies develop nothing, make nothing, sell nothing, distribute nothing, and import nothing. They are in the business of buying and enforcing patents.
Patent assertion entities (or PAEs) are a problem, not because of what they do, but because of the way in which they do it. PAEs have two chief tactics for making money. One type of PAE exploits the ignorance of the average business to leverage quick, relatively small payments from large numbers of accused infringers — sometimes without justification. Another type exploits imbalances in the patent system to extort money from businesses that innovate, manufacture, sell, distribute, and import goods and services. In either event, the goal is to extort money from practicing businesses or individuals because the cost of fighting the PAEs far exceeds the price of settling.
The first breed of PAEs is not out for large patent infringement judgments — in fact, they would probably prefer to stay out of court. No, these PAEs send out hundreds and hundreds of cease and desist letters to small businesses and individuals who seldom if ever deal with technology or patent litigation.
In these letters, the PAEs accuse the business or individual of infringing a patent (or a host of patents) and ask the accused infringer to pay for this infringement through some sort of licensing program. The PAE knows that the accused infringer has no familiarity with patent law, has no patent attorney on retainer, and likely has no familiarity with how to respond to claims of infringement. The PAE keeps pressure on the business or individual through a series of increasingly threatening letters until the accused infringer pays up.
But what the accused infringer may not know is that the PAE may not have actually evaluated the claims of infringement it is levying against the accused infringer. The PAE may not even know anything about the accused infringer other than the fact that they operate the type of business that in the past has forked over a payment to the PAE.
The accused infringer (often a small-business owner) may not be infringing. She may have excellent defenses or grounds for arguing why she is not infringing. And, in egregious cases, the asserted patents may already be subject to administrative review for being invalid. But the PAE will never share that information. Instead, the PAE bets that with enough pressure, the accused infringer will pay the licensing fee. The PAE also anticipates that even if one accused infringer resists, by sending the letter to hundreds and hundreds of accused infringers, the PAE will have enough success to turn a tidy profit.
Demand letters have become such a pervasive tactic that some states have filed bills directly targeting them. Wisconsin recently filed a bill that would empower the state attorney general to investigate threatening and non-specific infringement letters as a criminal violation of consumer protection laws. U.S. Sen. Claire McCaskill’s (D-MO) legislation follows a similar track and requires a number of minimum disclosures in demand letters, including the patent number of the technology in question and the specific claim of each patent that the technology has allegedly infringed.
It is unclear what effect these new laws may have on the problem of overly aggressive demand letters. Some have argued that the laws will unnecessarily burden legitimate cease and desist letters. Others fear unforeseen consequences. Ultimately, while likely impactful in the short term, over time, those guilty of the most egregious conduct will undoubtedly adjust their tactics to stay ahead of the game.
Jason Schwent is a partner in Thompson Coburn’s Intellectual Property group. He is the editorial director of the Patent Billy Goat. You can find Jason on Google+, Twitter, and reach him at (314) 552-6291 or firstname.lastname@example.org.