Beware of the troll

27 October 2005

Morag Macdonald

Having become a regular feature in the US, patent trolls are beginning to cast their nets across the Atlantic, and Europe needs to be prepared.

What is a patent troll? It is not a small furry creature living under a bridge with a sack of technology thrown over its shoulder. It is actually a US term describing a company that holds a portfolio of patents where the only business is licensing out those patents and enforcing them against those who refuse to take a licence.

This is a phenomenon that has become increasingly prevalent in recent years in the US - and one could be forgiven for thinking that is exactly where it would stay. However, the patent trolls are now starting to take an interest in foreign travel and are setting their sights on European industry.

Of course, licensing a valuable portfolio of patents is by no means a new idea. Many large companies around the world have developed a valuable and significant income stream for their businesses in this way. This is particularly so in the electronics industry. However, the thing that makes a patent troll stand out is that it does not have any form of manufacturing base and often will not have a research base either. Patent trolls may acquire part of a patent portfolio from a business that regards it as surplus to requirements, or they may licence in a portfolio in return for remitting a percentage of net earnings to the ultimate patent owner. They may also be a spin-off from a company that wants to exploit a portion of its patent portfolio independently from itself.

The novel difficulty with these patent trolls is that, because they do not have a manufacturing or research base of their own, the normal strategy for countering demands to take licences does not work. They will have no interest in entering into any cross-licences with those they wish to licence. They will not be concerned by a threat to any of their product lines due to the patent portfolio of their potential licensees.

Until now, the patent trolls have found rich pickings to satisfy them in the US. Europe is less attractive to their business model for a number of reasons. The main one of these is the way in which the patent litigation systems differ. In the US, if you lose a patent claim, you will only have to bear your own legal costs and not those of the winning party, as is the case to a greater extent in Europe. Meanwhile, bearing in mind the high cost of patent litigation in the US, the prospective licensee might decide it is commercially more worthwhile to pay for a licence than to have to pay the legal costs of litigation, which they will never recover, even if they win. Also, law firms in the US can take on patent litigation on behalf of patent trolls on a contingency basis, with the promise of a significant percentage of the damages and licensing fees. Potentially lucrative fee arrangements of this type are not permitted in Europe under various bar rules.

However, compared with the US, patent litigation costs are relatively low in Europe (even in the UK), and therefore the patent trolls are beginning to turn their greedy eyes to this continent.

So what do you do about all this? Know thy enemy, and make sure the board knows them too, before they come knocking on your door. Most innovative companies know their competitors and keep a watching brief on their patent filings. It is not always so easy to identify the patent trolls who may be a threat. You should always look to see if your competitors are having troll problems and watch for the patent litigation that is going on in your industry sector, as this may help to identify a threat on the horizon.

If you receive warning of a potential problem then you need to prepare to meet it, which means understanding what patents might be asserted against you, doing your own evaluation of their validity and checking them against not only your current products or services, but also against those in the pipeline. The latter may well be in a stage where it is still possible to make subtle alterations that can avoid the patents of concern, or at least give you cogent arguments to put forward on non-infringement.

Armed with this sort of analysis you can make a commercial assessment of what kind of licence fee you might be prepared to pay, if any, and at what stage you are prepared to put up a fight instead of taking the proffered licence. This should always be a commercial decision and not one on a point of principle, as principles can be very costly to the business at the end of the day. No matter how unpalatable a patent troll looks from the other side of a negotiating table, it is important to approach them with a clear and rational head. Bear in mind that the patent troll will have done its sums very carefully and will have devised a strategy, often of combined negotiation and litigation (some more sophisticated than others), and it is important that, given the time, you have an equally sophisticated counter-strategy.

One thing in Europe that can be significantly in your favour is that it is not just one country. This means that you can potentially plan a strategy using the different procedures of the different countries to best effect so as to keep the pressure up while negotiating a more acceptable arrangement. The key thing is not to be taken by surprise, because the most effective strategy needs careful thought and planning.

Of course, sometimes, the first you know of a demand from a patent troll is when they send a letter proffering a licence. These could be sent to all sorts of different people in the organisation and so it is important that procedures are in place to ensure that the -letter gets to the legal department and the relevant commercial director as soon as it arrives so as to give maximum time to map out a suitable strategy. Usually, one can buy a little time for this, but not if somebody in the post room has just sat on the letter for a month because they do not know who it should go to. Hopefully you will already have given some thought in general to your patent strategy and those of your competitors so that you will not be addressing the issue cold, but you will quickly need to mobilise those involved in working out that strategy, together with the board, to devise the appropriate defensive action.

The patent trolls are giving every sign of finding it comfortable and inviting in Europe, so when you see that first licence demand letter do not say that you have not been warned - the chief executive officer will not thank you for it.