Patent Auctions not the Solution for Patent Trolls

Amanda Carpenter is a JD Candidate at Osgoode Hall Law School.

On September 21, 2009, The New York Times featured an article entitled “Patent Auctions Offer Protections to Inventors”. This article is about the story of a small-inventor firm called Zoltar Satellite Alarm Systems and their battles with big corporations over its patented inventions.  In the mid-1990s this company filed two patent applications, one for a ‘personal alarm’ device that used GPS technology and another for a patent on personal alarms with navigational receivers in cell phones. The company showed its technology to cell phone equipment makers in the hopes of licensing it and after this, according to Zoltar’s founders, their ideas began appearing in big companies’ products.

Zoltar sued and their patents were found to be valid, but it was also found that the defendant company was not infringing them. Even though Zoltar lost its case, the big company settled with them, as did others. While they are ahead financially, Zoltar now plans to auction off its patents at an auction next month, hoping among other things to save money on legal fees. The article states that these auctions will help solve the legal problems of these small firms because prices will be determined not by the courts but by bidders and thus they will be fairly compensated.

There are two problems with this article. The first of these problems is that this small firm, Zoltar Satellite Systems, may not really be one of the “good guys”. In fact, it seems that they are a patent troll which, according to Wikipedia, is a “person or company that enforces its patent against one or more alleged infringers in a manner considered unduly aggressive or opportunistic, often with no intention to manufacture or market the patented invention.” They are neither a cell phone manufacturer nor do they produce GPS products. Nor do they even have a website, which is odd for any company, but especially for one that licences its technology to some of the biggest cell phone manufactures. With an estimated staff size of three employees (according to this site) it is unlikely that they would be able to develop a marketable product with their idea. Big companies don’t willingly infringe patents in general.  Patents suits really affect their stock prices and scare off investors, and in the US, willful infringement results in treble damages being awarded.  Also, big companies tend to have much more to lose than the other way around. A small company can sue a big company for infringement and claim all kinds of damages and get tens of millions or more. A big company can’t get much money out of a little company.

Secondly, patent auctions aren’t really a good thing, in that patents are typically trickier to value than financial investments.  It’s not just a matter of saying “since this a patent about cellular phones and GPS it must be worth a lot”. It really depends on the actual text of the patent, its claims, and the resulting scope. Some patents are so narrow that it is easy for a competitor to design around it. This means that it is both expensive and hard to value patents, and people bidding would have to be informed directly by legal experts. Also, most of the time there aren’t that many people interested in a patent – for example, in the Zoltar case only a half dozen cell phone manufacturers would have been interested in the patent. In which case, what is the point of the auction since each manufacturer could be contacted individually?

If the article seemed to be trying to support the independent inventor, it might be because they do generally have a hard time, but this is because of other reasons. It is hard to start a business and get enough investors, and it is unlikely for an independent inventor with very limited means to come up with an invention that large companies with hundreds of engineers haven’t already come up with. However, stating that they have problems simply because they have to battle big corporations over the use of their patents is not quite reality. In fact, there are cases of small companies battling big corporations and using this as quite a successful business model. There is the case of Ronald A. Katz who has obtained more than 50 US patents involving call center technology. He has earned more than a billion dollars in licensing fees, while aggressively suing companies who don’t take a licence.

2 Comments
  1. Glad you could draw the line between good and evil. What should the legal test for this be: how many employees? insufficient capital to bring a product to market? having a website?

    A patent is a monopoly granted by the government for an invention. It is the act of invention that the government chose to reward. It is not about bringing a product to market or any other consideration. A patent acknowledges and rewards pure research and development in exchange for disclosing that information to the public.

    Whether a big company chooses to license or infringe a patent is more of an economic decision than a legal decision. Would a big company license a patent from an independent inventor that can’t afford to bring and sustain a patent law suit? What is their risk even in a case where they clearly infringe (which are the rarest of cases)?

    Toronto based i4i had to obtain funding for it’s litigation against Microsoft. How much of their $250M judgment is going to the investor (the risk taker)?

    Your analysis is missing any sort of economic and risk analysis.

    An auction creates an open market for the patent where the players determine the value of the patent. I guess stock markets are also ‘not a good thing’ in your view since securities are also ‘tricky’ to value.

    Why do you assume only cell phone or GPS companies would be interested in the patent? The value they place on the patent is for defensive purposes or the cost of a single license. In the hands of a licensing company the value of the patent is in the potential licensing revenue up and down the distribution chain (chips, handsets, carriers). The licensing company has to balance this against licensing costs and litigation risk (which includes costs and validity/infringement risks). These are costs and risks that Zoltar no longer wishes to take.

    If a so-called ‘patent troll’ purchases a patent they are providing a service to inventors or R&D companies. They get an infusion of capital now without the licensing and litigation risk. They can then put that capital towards further R&D efforts (and in turn more patents). ‘Patent trolls’ may be bad if you’re a big company that is getting sued but they provide a service to those inventors and R&D companies. Remember patents are about encouraging R&D and inventing, ‘patent trolls’ facilitate this purpose of the Patent Act. Inventors can invent, manufacturers can manufacture products and ‘patent trolls’ can help ensure that inventors are rewarded.

  2. First of all, I resent the term “patent trolls”. Trolls come from Sweden and from what I read in your article, there’s no mention that the Zoltar company and employees are from Sweden.
    What they are is hard working, brain scratching, day dreaming American that take away from their life just to do something that can or may be of value to rest of the world. Troll is really a vulgar word to use to describe them (or me).

    How theft of IP happens?
    Simple, companies (as in people working in the company), weigh the odds of being sued or not and then with a nudge and a wink and other “proprietary knowledge I have about how they do it” they proceed with filing their own patent “which is easily traceable to the small guy patent Which is doable through a proprietary knowledge I have”, and then they start the intimidation process.

    Luckily for the small inventors, there are attorneys that want to do this kind of work on contingencies, so if the idea has merit and was granted a patent and others are already using it, there are many attorneys that can deal with the companies and their lawyers to get the true innovator his “Constitutionally Mandated” reward.

    As for your statement “A big company can’t get much money out of a little company” is totally the wrong assessment of the situation.
    Innovators innovate and if the big companies are using the innovation to produce and sell the product then they are already making money from the innovators before the innovator tries to get his/her rightful money back.

    Innovators and small business is what drive the world, literally. If the corporation rally want to put an end to lawsuit, they should agree to sign a non-compete and non-disclose document upfront.

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