November 4, 2011
Intellectual Property (IP) lawsuits are big business these days. In fact, some companies and enterprising individuals use these lawsuits to make money—that is, filing lawsuits in order to get a monetary settlement is the business model. The phrase “patent trolls” was coined to describe companies that routinely pursue licenses and lawsuits in order to monetize their IP.
Why are they called trolls? Well, because like the troll under the bridge in the Three Billy Goats Gruff, you have to pay them a fee to cross the bridge to the other side and be free to sell your products or engage in other activities they accuse of infringing their IP.
Some people prefer to use the term non-practicing entity (NPE) instead. The idea is the same: they haven't commercialized a technology or created an original copyrighted work, but they extract a fee from others who do.
Tech companies need to know about trolls, because once they get to a certain size or state of health (read: VC cash-infused) they are more likely to become a patent troll target. Patent cases routinely cost $2-$5 million dollars to take the case through trial. And the cost of defending against complex patent litigations that involve over $1 billion in potential exposure can clock in over $10 million, including attorneys’ fees and costs. So trolls attempt to extract a nice nuisance fee early in the litigation. They know that many companies and their financial backers can't afford to defend the case or risk losing the litigation.
In the blogging world, the first high-profile copyright troll (Righthaven) has been systematically suing bloggers, Internet content authors, and site operators who reposted content originally available on certain newspaper sites. So even the little guys aren't immune (or evidently too small to ignore). So far, Righthaven has filed more than 250 copyright lawsuits around the United States.
So who are these trolls, and who funds their litigations? Well the answer depends on the troll, of course. But you may be surprised to learn that some are backed by a nice sprinkling of hedge funds, VC groups, pension funds, blue-chip tech companies, IP attorneys, and wealthy individual investors. That's right—your angel or VC investor may be funding the other team too.
Are you really surprised by this fact? VC investors are into an addictive high-risk and high-return funding game. IP monetization business models are just another creative way for a business to make money off IP assets. Just like many people who create startups, VC funds want to build valuable assets quickly, make a lot of money, and get out so they can do it all over again.
Here’s another fact that blurs some of the IP enforcement lines: some well known patent trolls also support healthy research and development departments and develop technology and products too. They may or may not bring these products to market, just like any other business.
I'm not attempting to defend or condemn the IP troll business model or its cast of characters. I'm just not going to attach a moral judgment to it, as many other people do. When I start to break down the business model and labels, it's really hard to define a particular set of characteristics that separate the “good trolls” from the “bad trolls.” In fact, many tech companies sue others on patents that they haven’t commercialized in their own product. Are they trolls?
Are you interested in learning more about the troll litigation business? If so, sign up for our DC Week event Rise of the Trolls on November 7th. Matt Levy (@MattLevyIP) and I (@AntigonePeyton) will cover the classic business model in more detail and give you some insight into who is involved. We'll also discuss some successful efforts to block Righthaven’s lawsuits.
Fellow Tech Cocktail blogger and NPR law fellow Blaire Jones (@VenEnthusiast) will also join us for a lively discussion about the shadowy figures that fund the troll business. We’ll see you next week.
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