Patent trolls are killing innovation and damaging our economy

Congress and the U.S. Patent and Trademark Office need to act now to protect American innovators.

The Impact The Solution

Learn more about how patent trolls threaten American innovation and what we can do to stop them.

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Patent trolls do not build anything, develop new ideas, or create jobs. They are shell companies that buy up low-quality, unused patents and use them to exploit weaknesses in our legal system to extort huge verdicts and settlements from innovators and businesses across America.

The consequences for American innovation and our economy are immense — and it’s past time for Congress and the U.S. Patent and Trademark Office (USPTO) to bring back balance to our patent system. Inter partes review (IPR) must be restored at the USPTO so that once again U.S. innovators have access to transparent, expert review as a protection against meritless infringement claims.

The Impact

Patent trolls take $29 billion in direct out-of-pocket costs from targeted companies each year.

From 2019 to 2020, there was a nearly 20 percent increase in patent troll litigation.

Patent trolls account for nearly 60 percent of all patent-related litigation.

Companies that settle with patent trolls or lose to them in court reduce their investments in research and development by an average of over $160 million in the two years following the payment.

Abusive patent litigation undermines american manufacturing

American manufacturers generate about 11 percent of our country’s economic activity each year and employ tens of millions of Americans. These critical American innovators and employers are frequently the target of patent trolls, that do not produce anything of value.

Patent trolls are going after small, medium, and large manufacturers alike – preventing them from making the investments needed to grow and create jobs. Companies that settle with patent trolls or lose to them in court reduce investments in research and development by an average of more than $160 million in the two years following the payment. A separate study showed that when lawsuits weren’t dismissed, companies reduced their research and development investments by nearly 50 percent.

These patent infringement claims come in all shapes and sizes. In one case, Acushnet — the Massachusetts-based company that manufactures Titleist golf balls and Footjoy apparel — was sued by a patent troll for using Wi-Fi in their facilities. In another case, multiple U.S. auto manufacturers — including Ford, Chrysler, and General Motors — were targeted by a patent troll for having GPS in their cars. Cases like these highlight why patent reform is so necessary. Manufacturers need to be able to invest their human and financial resources in growing their business and making the products we use every day, not defending against shell companies trying to extort them for financial gain.

At the end of the day, abusive patent litigation means less economic growth and fewer good-paying American jobs.

While it is critical to address the damage done to larger job-creators and manufacturers, patent trolls don’t stop there. They also target vulnerable mom-and-pop shops on Main Street that may not have the resources to defend themselves against abusive, expensive patent litigation. In fact, more than half of their targets are small and medium sized businesses. Patent trolls send thousands of demand letters at once, threatening them with litigation.

CD Universe, a small, online retailer for games, music, and movies based in Connecticut, was sued by a patent troll and decided to settle because “fight[ing] it would have cost more than settling.” Another patent troll sent letters to more than 1,000 small businesses across the country threatening to sue unless the business paid $65,000 in licensing fees for the use of certain website functions – several small businesses did not have the resources to fight back and were forced into a settlement deal. This was the case for four small businesses in Washington – an electric supplies company, a bottle maker, a bookseller, and a bakery – that were each forced to pay between $15,000 to $20,000 as a result of abusive patent litigation.

We cannot let patent trolls continue to prey on our vulnerable small businesses.

Like Russian nesting dolls, patent trolls are often hidden behind layers of shell companies that are, in reality, controlled by hedge funds and other wealthy investors. Many of these hedge funds are foreign-owned, often by America’s adversaries. These groups don’t care about American intellectual property or innovation. Their sole focus is on generating returns for their investors by any means necessary, even at the expense of legitimate manufacturers and small businesses. And unfortunately the patent litigation business is booming, with additional investments being made in key sectors.

Patent trolls’ targeting of American manufacturers weakens our fragile supply chains and increases our reliance on foreign goods. In many cases, they strategically target critical industries like semiconductor chip manufacturers, those developing the next generation of 5G, auto manufacturers, and heavy machinery manufacturers, among many others. For foreign-funded litigators, it is a win-win situation: Either American manufacturers have to waste time and resources defending against these claims in court or the patent trolls get lucky and hit a jackpot ruling.

The lack of transparency around investor-funded litigation is deeply alarming. Every American should be able to know who owns an American patent, as well as how and when it was acquired. Professional patent litigators should not be allowed to extort American innovators while hiding their true identities.

We can’t let the greed of hedge funds and other litigation financiers come ahead of a patent system that promotes innovation and creates American jobs.

The Solutions

We have the power to fix this problem. There are already balanced, bipartisan solutions to root out bad actors and protect American innovators.

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First, President Biden’s new U.S. Patent and Trademark Office (USPTO) Director was recently confirmed by the Senate. The USPTO already has the tools needed to resolve patent disputes through expert arbiters on the Patent Trial Appeal Board (PTAB). Through the PTAB’s inter partes review (IPR) process, judges who are experts in both patent law and technology can more fairly resolve patent infringement claims, invalidating bad patents that never should have been issued in the first place when they are weaponized against manufacturers and innovators. It’s critical that the new USPTO Director strengthens PTAB and restores the IPR process, allowing the office to mediate these disputes, rather than forcing companies into costly and less effective jury trials.

This is a problem that Congress already addressed once before. A decade ago, the bipartisan America Invents Act (AIA) established IPR to negate the need for litigation. But the previous USPTO Director instituted the NHK-Fintiv Rule – which runs contrary to the AIA – making it more difficult for innovators to access IPR. Under the rule, reviews may be denied if court proceedings related to the infringement claim are already underway, even though the estimated trial date is wrong 95 percent of the time. These so-called discretionary denials can be issued without even assessing the merits of the patent or claim in question. Instead of receiving transparent, expert review, infringement claims are left to expensive litigation in front of non-expert juries.

That’s why Senator Patrick Leahy (D-VT) and Senator John Cornyn (R-TX) have introduced the Restoring the American Invents Act (RAIA). Their bill will reverse the damaging changes made to IPR by the previous PTO Director. Senator Leahy and Senator Thom Tillis (R-NC) have also introduced the Pride in Patent Ownership Act, which would give the public access to information about the true owner of patents. These two bipartisan, commonsense bills will increase transparency, bolster innovation, and strengthen America’s patent system.

It’s critical that Congress send these commonsense bills to President Biden’s desk and that the USPTO act now to restore IPR.