The role of the U.S. patent system is to give inventors legal rights to their inventions for a period of time. Intellectual property rights protect creators of original inventions. Their purpose is to fuel innovation for consumers.
While many patent lawsuits are legitimate, litigation brought by “patent trolls” hinders innovation. Non-practicing entities (NPE), informally referred to as patent trolls, use patents as legal weapons. They are in the business of litigation and bring frivolous patent infringement claims. These lawsuits, or even the threat of litigation, cost American businesses millions of dollars annually.
According to the Harvard Business Review, patent trolls cost American businesses over $29 billion annually in direct out-of-pocket costs. The average settlement is millions of dollars. This impacts innovation, as companies would instead use the money to grow businesses and invest in research and development.
Apple’s Patent Troll Lawsuits
As one of the most valuable companies in the world, Apple has suffered from frivolous patent infringement lawsuits from many parties. Optis, a group of companies comprising PanOptis Patent Management, Optis Cellular, and Unwired Planet, has been a particularly active patent troll against the iPhone maker and has claimed as much as $7 billion from Apple.
In 2021, a Texas court ordered Apple to pay $300 million in royalties to Optis. The case involved patents relating to 4G LTE technology. Over a period of three years, Optis had purchased a handful of 4G LTE patents from Panasonic, Samsung, and LG. It’s significant to note that Optis acquired the patent rights for the sole purpose of bringing lawsuits against Apple.
A standard-essential patent involves patented technology that must be used to make an LTE device comply with an industry technical standard. Optis won the decision in the United States District Court for the Eastern District of Texas, a jurisdiction known for favoring patent trolls over licensees.
Apple issued a statement that asserted “Optis makes no products, and its sole business is to sue companies using patents they accumulate. We will continue to defend against their attempts to extract unreasonable payments for patents they acquire.”
Hedge Funds Behind Patent Trolls
Magnetar Capital, a Chicago-based hedge fund, focuses its investment strategy on patent trolls. The hedge fund supports non-practicing entities that attempt to extort judgments and settlements for their investors.
The patent troll litigation strategy has generated substantial returns for the hedge fund co-founded in 2006 by Alec Litowitz and Ross Laser. According to Magnetar Capital’s website, the hedge fund has an “experimental mentality” and is open to “novel structures.” In its earlier days, Magnetar Capital worked with mortgage-backed securities. When the 2008 financial crisis hit, Magnetar Capital came under federal investigation. The firm shifted investment strategies and today looks to patent troll litigation.
As the tech industry continues to grow, and in the absence of significant patent law reform, there will likely be an uptick in litigation finance opportunities. Companies will have to plan accordingly and set aside funds to pay potential judgments or settlements awarded to patent trolls.
SoftBank’s Fortress Investment Group launched a $400 million patent troll fund in 2018. The fund looks for companies with large patent portfolios to buy. It also lends money to small-cap companies with significant patent portfolios.
The Fortress Investment Group is an investment management firm whose investment strategy focuses on private equity, hedge funds, and credit funds. SoftBank bought Fortress in 2017 for $3.3 billion. To get around regulatory hurdles for deal approval, Fortress operates independently from SoftBank. Fortress’ patent troll fund is unique, especially because SoftBank invests in many tech companies sued by patent trolls.
The Legal Framework Behind U.S. Intellectual Property Rights
The United States Patent and Trademark Office (USPTO) plays a central role in intellectual property right enforcement. In 2011, the America Invents Act was passed to address patent infringement claims not made in good faith. It is estimated that 60% of all patent litigation involves non-practicing entities.
The America Invents Act created the inter partes review (IPR) process. Inter partes review involves an administrative proceeding at the USPTO. Unbiased, expert judges on the Patent Trial and Appeal Board assess the validity of patents.
The process is intended to resolve patent troll litigation in a more efficient manner than going to court. However, despite the intentions of the America Invents Act, many companies must still interface directly with the court system.