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.