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Patent 'gold rush' to blame for patent sharks, patent trolls - IPWatchdog.com | Patents & Patent Law

Patent ‘gold rush’ to blame for patent sharks, patent trolls

By Neel Chatterjee
August 13, 2017

The present attention shown to the purported scourge of non-practicing entities, or “patent trolls,” especially in the realm of tech and software patents, may give the impression that this is a relatively new issue caused by factors unique to the rapid rise of the Internet. However, in fact, patent trolls – as well as calls for changes to the law to prevent them – date back to at least the 1800’s.  A look at their history suggests that they have more to do with fluidity in the definition of patentable subject matter than any unique feature of a particular class of inventions.

Patent Sharks

While many will point to George B. Selden as the “first patent troll” for his turn-of-the-century attempts to enforce his long delayed combustion engine patents against the nascent automotive industry, in fact a massive wave of non-practicing entities predated him.  In the years just after the Civil War a rash of non-practicing entities, then entitled “Patent Sharks” arose to much clamor and complaint, driving law suits and forcing settlement.    The big patent area back then:  agricultural product design patents.  The causes of this tide of litigation can be traced less to a sea change in invention and more to fundamental changes in the definition of what comprised a patentable invention.

1869 started one of the first debates about patentable subject matter.  In 1869, the Commissioner of the Patent Office issued Ex parte Crane which held that applicants could obtain a design patent for functional improvements, arguing that he was “unable to perceive any good reasons why designs for utility are not fairly and properly embraced within the [design] statute.” Congress bolstered this opinion by amending the design patent statute in 1870 to change the scope of patentable subject matter from any “new and original” design to any “new, useful, and original” design. The result of this expansion in the scope of what qualified as a design patent was an explosion of new design patents over common farm implements.  The rush was such that the next Patent Commissioner decried “[t]he idea of stretching the section in question to cover slight changes in the form of crowbars, spades, plows, scrapers, &c.” as “simply ridiculous, and tends to bring the whole system into disrepute.”

The boom in agricultural product design patents lead to a concomitant boom in threatened litigation and demands for licenses.  The owners of these new design patents were not interested in producing products, merely enforcing their recently obtained rights.  Patent owners sold their rights to “patent sharks “and “royalty agents” who scoured the countryside threatening farmers who were using common implements with lawsuits unless they were immediately paid between $10-100 (approximately $200-2000  in today’s dollars). And because these sharks targeted unsophisticated consumers in an era where legal representation in rural areas was poor, the farmers usually paid up. Venue shopping was rife, with sharks bringing suit in courts that were friendly to plaintiffs and inconvenient for defendants.  In one instance a single patent holder brought over 4000 suits in Iowa with the understanding that “unwary and unsuspecting farmers” would pay the license demand “rather than be dragged one hundred and fifty miles away from their homes, at great inconvenience and expense.” As time wore on, the NPEs became more refined, banding together to form “patent rings” to drive out competition,  broaden the scope of their enforceable rights, and subjecting farmers and competitors to wave after wave of royalty demands for the same or similar technology.

Unsurprisingly this led to declarations of public outrage akin to those seen today.  Congress railed against the “the useless and dormant patents which have been granted, and to the evils which result from their resuscitation by the Cossacks who follow the army of inventors,” and claimed that the Constitution “never contemplated a system that would authorize or permit an army of swindlers to prey upon communities and plunder the unwary and unsuspecting.” However, then as now, a split between powerful industrial interests appeared to prevent amendment of the patent laws to prevent such abuses.

Patent Trolls

The roots of the modern patent troll boom can be traced to a similar expansion in the definition of patentable subject matter sparked by the Federal Circuit’s 1998 State St. Bank & Trust Co. v. Signature Fin. Grp., Inc. decision eliminating the so-called “business method exception” for software that produced a “useful, concrete, and tangible result.”  In the 10 years following the Federal Circuit’s 1998 decision, the number of granted software patents expanded from approximately 30,000 per year to over 100,000 per year.

Moreover, the tactics employed in the modern era mirror those seen in the 1860s.   Again the expansion of patentable subject matter lead to a rise in entities seeking not to produce new products, but to enforce newly obtained rights. Hence, the business model for the majority of these non-practicing entities is focused less on winning large lawsuits as it is in compelling the target to acquire a license. Similar tactics have also evolved, from the well-known venue and forum shopping that put the Eastern District of Texas on the litigation map and helped drive targets to acquiesce to license demands to the development of the 21st century version of “Patent Rings” such as the evolution of Rockstar Consortium from the ashes of Nortel.

The main difference between the trolls of today and the sharks of old is one of scale.  To stretch the metaphor further:  the NPEs of the 1800s hunted less like sharks and more like whales, scooping up thousands of tiny licenses like krill. Today, we have these sorts of “whales.” In addition, NPEs are often well financed litigants capable of litigating for big dollars.

The debate between NPEs and practicing enterprises was also present in the 1860’s.  Courts did not frown upon entities that sought only to monetize an invention through license or lawsuit, but confirmed that such activities were essential to the right granted by Congress.  For example in 1908, only a few decades after the rise and fall of the Patent Sharks, the Supreme Court confronted arguments that a patent on “self-opening” paper bags should be considered invalid because the owner was not engaging in production of such products.  Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908).  The Court categorically rejected these arguments, responding:

As to the suggestion that competitors were excluded from the use of the new patent, we answer that such exclusion may be said to have been of the very essence of the right conferred by the patent, as it is the privilege of any owner of property to use or not use it, without question of motive.

Id. at 429.  Because the animating principle underlying the American patent system has always been the quid-pro-quo of a limited monopoly in exchange for the disclosure of an invention to the public, the fact that an inventor – or even later patent owner – might find more value in not using the invention is irrelevant to that patent’s validity.  The Continental Paper Bag Court stressed that Congress fully understood this arrangement, and its alternatives, and continued to endorse such a system:

It is manifest . . . that Congress has not “overlooked the subject of non-user of patented inventions.” And another fact may be mentioned. In some foreign countries the right granted to an inventor is affected by non-use. This policy, we must assume, Congress has not been ignorant of nor of its effects. It has, nevertheless, selected another policy; it has continued that policy through many years. We may assume that experience has demonstrated its wisdom and beneficial effect upon the arts and sciences.

Id. at 429-30.

In the years that followed, the Supreme Court consistently found that whether a patent owner practices an invention or not is of no consequence.   Even if there is evidence that a patent owner may have used a patent specifically for the mere suppression of competition and the generation of license fees, such evidence has no impact on the validity of the patent itself.  See, e.g., Special Equipment Co. v. Coe, 324 U.S. 370 (1945) (finding that intent to use a patent not to practice an invention but to prevent competition via injunction was a “legitimate” use).  In other words: “A patent owner is not in the position of a quasi-trustee for the public or under any obligation to see that the public acquires the free right to use the invention. He has no obligation either to use it or to grant its use to others.” Hartford-Empire Co. v. United States, 323 U.S. 386, 432 (1945).

Part of the reason Courts endorsed licensing type behavior was because many NPEs shared technology to help build more industries.  For example, “vulcanized” rubber was invented by Charles Goodyear and considered a revolutionary invention at the time.  To ensure widespread profitisation of the technology, Goodyear licensed his patents widely.  Indeed, the decades of inferior “pure” rubber products that predated Goodyear’s inventions had so soured the market that Goodyear himself could not have afforded the marketing and production scales necessary to convince consumers that his product was different. Moreover, both Goodyear and his licensees were often aggressive litigants, generating a fair share of the funding that lead to further inventions utilizing rubber through lawsuits against competitors and end-users alike.

Similarly, Thomas Edison (nicknamed the “Wizard of Menlo Park”) earned far more from his impressive and voluminous patent portfolio than the production of actual products.  Many of the famous Edison creations were flops when Edison tried to sell them, it was only when he began licensing his patents that  inventions like the phonograph and light-bulb actually took off.  Edison was also a prolific litigant and was well known for efforts to strangle competition using the vast array of patents his company held.

The Wright Brothers were also aggressive in seeking patents.  They aggressively licensed competitors, and, when Glen Curtiss would not pay, they engaged in an epic patent battle.  The Curtiss team commented that if someone jumped in the air and waved their arms, the brothers would sue.  The lawsuits expanded around the world.  In the end, these epic battles were eclipsed when the U.S. government needed plans for World War I.  It was at this point that one of the first “patent pools” was born.

Then, as now, it was true that many inventors lacked the business acumen to monetize a new creation or the resources to put it into production.  Additionally, during the hurly-burley of the industrial revolution and the subsequent messy birth of the electronic age both Congress and the courts recognized that it was far better to have a patent system where inventors and NPEs were encouraged to disclose inventions to the public – even if only to gain a short term monopoly that could be wielded against others – than to incentivize the widespread and inefficient use of trade secrets.

Take Away

During the 1800s, meaningful legislation to curtail the activity of patent sharks was blocked by powerful industry players who feared that such changes would impact their own patent portfolios.  Thus, then, as now, while broad substantive changes to the patent system were much talked about, they were unable to become law. Instead, what appeared to be more effective in stemming the tide of license demands and lawsuits was the establishment of organizations that allowed small farmers to band together to fight the sharks in court and in the court of public opinion: the farmers’ increasingly well-organized opposition took its toll on the sharks’ business—first, by raising the litigation costs involved in enforcing patent rights, and second, by changing the political environment in ways that discouraged local officials from aiding patent owners. By the time the Populist movement swept through the region in the 1890s, the problem had significantly abated.

Finally, thirty years after the start of the crisis, and well after it had mostly abated did Congress amend the Patent Act to remove design patent protection for functional items.

One of the most important conclusions that arises from the age of agricultural patent sharks is that scientific or technical sophistication at the PTO is less important than ambiguity in the law regarding patentability.  While it seems intuitive to blame the profusion of software and technical patents on examiners who simply rubber stamp any claim that contains the words “computer” or “via the internet,” such arguments are likely less salient when discussing the ability of the 1800s patent office to examine designs for farm implements.

Instead, in both instances there was a change in a fundamental definition of what comprised patentable subject matter, and that change brought a major building block of commerce into the ambit of the patent system.  In the age of the sharks, the farm remained the core of the U.S. economy, driving a gold rush of new patents covering every element of the farming process.  Such a rush also encourages the formation of patent thickets, as speculators scramble for any potentially protectable chunk  of the market. The same phenomenon drove the development of modern tech and software patents.  In the aftermath of State Street, once again the market found that the machinery that undergirded the economy was suddenly open to being patented, leading to a similar gold rush.

As we look back over the last 150 years, we can learn a lot about age-old patent debates.  As we appear to repeat similar refrains, understanding this history is a helpful tool in solving our current and future problems.

The Author

Neel Chatterjee

Neel Chatterjee is a partner in Goodwin’s Intellectual Property Practice. An internationally recognized technology litigator and trial lawyer, Mr. Chatterjee has a proven track record of wins in hard-to-win technology cases. His cases often break new ground in undefined areas of the law. Clients frequently turn to Mr. Chatterjee shortly before trial to handle complex technology cases. He is tireless in his efforts to save companies and product lines, as well as to protect core technologies of his clients. A key strategist on complex litigation spanning multiple venues, Mr. Chatterjee simplifies extremely complex concepts to ensure that the judges and juries understand the key issues in the case.

For morei information or to contact Mr. Chatterjee, please visit his Firm Profile Page.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 20 Comments comments. Join the discussion.

  1. Morgan IAT August 14, 2017 6:59 am

    Without wanting to dumb down this conversation, can we use the ‘stress spinner’ craze as an example here, and ask how or why so many patent rip-offs can flood a market so quickly…
    Like how does one actually protect a patent from people who do not respect such things and head off to countries where patents are impossible to protect, hit up a third-party manufacturer to produce the exact same product?

  2. erich spangenberg August 14, 2017 7:36 am

    Good post. It is fascinating to read curious statements from the likes of Issa, Goodlatte and Schumer and the popular press accounts where they clearly believe “trolls” and patent litigation are a new thing. Professor Adam Mossoff is one of the best on this topic.

    I am curious why you did not end the post with a bigger finish. Sure “we can learn a lot” from history. Why not tell us what you think we should learn from this history? Is it that the real problem is not “patent abuse” but rather “litigation abuse” and the politicians only focus on former and not the later? Is it that the arbitrage for bad patents (however defined) only exists because of a horrifically inefficient means to resolve these disputes (where the patent owner and infringer is rewarded for tossing every possible string of spaghetti at the wall–and the courts allow and encourage this to happen)? While we are on opposite sides for the most part, I hold you in far higher regard than most on your side of the ball–your background above understates your qualifications to comment on the topic and advance the dialogue.

  3. Edward Heller August 14, 2017 9:39 am

    You are right, the more things change the more they stay the same. Elizabeth I, who largely began the idea of issuing patents for invention, eventually had to repeal most of the patents that she originally issued because of public outcry. Then within a few years we have the Statute of Monopolies that repealed all prior monopoly patents, saving a small list. But that did not stop Charles I. His continued insistence on issuing monopoly patents (among other issues) eventually led to the English Civil War.

    Also it was the English who, circa 1710, came up with the idea of the specification enabling those of ordinary skill to make and use the invention. Lord Mansfield was very strong on enablement. Most of the patent validity litigation in England in the late 1700s was concerning the sufficiency of the specification.

  4. angry dude August 14, 2017 10:19 am

    Edward Heller@1

    “Most of the patent validity litigation in England in the late 1700s was concerning the sufficiency of the specification”

    Well, if this criteria is applied to big tech patents in US most of them will be found invalid for lack of sufficient specification (not even talking novelty or obviousness)
    Patent system in USA evolved from being a treasury of human knowledge and technological know-hows to legal gamesmanship between well capitalized entities
    To hell with such system

  5. Ternary August 14, 2017 10:20 am

    Excellent article Neel. An important aspect of these “gold rushes” was that independent inventors were able to freely participate as NPEs. Most of them not successfully financially. But many independent inventors contributed greatly to advancing the technology (electric light, electric power machinery, electric circuitry, etc.).

    Though companies did not like independent inventors, the public generally recognized and admired independent inventors.

    The current malaise is perhaps similar to what you describe, but it differs by the effectiveness of the system to deny independent inventors the benefits from their patents and having the public accept this nutty notion that “patents hinder innovation” without any recognition of contributions.

  6. SoftwareForTheWin August 14, 2017 11:59 am

    It’s surreal reading this article. It feels more like it was written 15 years ago. Snippets like this:

    “Thus, then, as now, while broad substantive changes to the patent system were much talked about, they were unable to become law. ”

    My suggestion to any startups reading this is to abandon any notion of going down the patent road. It will lead to nothing but $costs and resources and in the end the piece of paper is worthless. In fact, worse than worthless – it’ll be a liability. A liability because you will have to fight to keep it valid – over and over and over again.

    Instead of the patent road, write the software and choose an open source license. You’ll get about as much protection from copycats as patents provide (ie. not much) but you’ll be further ahead in terms of functioning software that can generate revenues. At least you won’t be under any delusion that you’ll be safe from copycats.

    Then this snippet further shows things won’t change for a long time (more than what anyone can wait):

    “Finally, thirty years after the start of the crisis, and well after it had mostly abated did Congress amend the Patent Act to remove design patent protection for functional items.”

    30 years!?!

  7. SoftwareForTheWin August 14, 2017 1:06 pm

    Angry Dude:

    “Patent system in USA evolved from being a treasury of human knowledge and technological know-hows to legal gamesmanship between well capitalized entities”

    Right, so clearly patent law has changed – and changed substantially. Not sure how the article can claim:

    “Thus, then, as now, while broad substantive changes to the patent system were much talked about, they were unable to become law.”

    How is PTAB not “substantive”?

  8. SoftwareForTheWin August 14, 2017 1:17 pm

    Angry Dude:

    “a treasury of human knowledge and technological know-hows”

    That treasury and know-how has become open source.

    Things like ‘treble damages’ only helped facilitate this by discouraging looking at patents.

    But it’s not all treble’s fault – in fact, more is the incongruentness of patents to engineers. To an engineer, open source software is not only much much much easier to read – but also provides instant use – often simply point to a software library and pull-in the functionality.

    What so many on this site fail to recognize is that all the changes in the past decade were intentional to help America compete internationally. Working software not only generates $revenues but also competes against other working software. An American company with no software and patents can’t outsell a foreign company with software (with or without patents).

    Congress was made aware of this, and given the 2 choices, decided to opt for enabling American companies to better compete by unshackling them from having to pay a tax to non-software entities.

    Amazon, Google, Facebook, etc generate significant foreign revenues – American patent law firms do not come close.

  9. angry dude August 14, 2017 2:27 pm

    SoftwareForTheWin@6

    “That treasury and know-how has become open source”

    Anybody is more than welcome to write open source libraries and routines I can use in my closed source and obfuscated compiled binaries (after some massaging)

    Trade secrets and code encryption (or at least obfuscation) from now on for me

    I am talking about embedded software though

    open source ? thanks but no thanks

  10. Benny August 14, 2017 3:01 pm

    AD,
    Open source licenses don’t let you do that. Open source actually does encourage innovation.

  11. angry dude August 14, 2017 4:40 pm

    Benny@8

    patent “exclusive rights” don’t let them do it either
    see how it worked for me ?
    screw open source and screw “innovation”
    my bank account is all that matters at this stage of my life

  12. Sanjay Prasad August 14, 2017 7:44 pm

    Thanks for the excellent article Neel. Nice to see a thoughtful, well researched piece.

  13. Benny August 15, 2017 1:43 am

    AD,
    “my bank account is all that matters at this stage of my life”

    May I never reach that stage. Some of us play with kittens, hang out with family and friends, and flush our bitterness down the john.

  14. Anon August 15, 2017 7:54 am

    Open source licenses don’t let you do that. Open source actually does encourage innovation.

    How so?

    (I am familiar with the canned buzzword laden canon, so I am looking for actual substantiation of this claim).

  15. Benny August 15, 2017 8:28 am

    Anon,
    It isn’t universal, but most open-source and shareware software comes with a license agreement which entitles the user to use, modify and re-distribute the software, but not for commercial use, and often requires the user to extend the original agreement to any software incorporating the open-source, freeware, or shareware.
    Such software usually serves as development tools rather than an end in themselves, or are embedded in hardware products where the end user does not pay for, or purchase separately the software.
    Manufacturers often distribute open source libraries to encourage the sale of the hardware chips that run the software.
    I am bundling open source, freeware and shareware in the same comment since a)most uses of open source software do not modify the source code and treat it as freeware, and b)the limitations of the user license are generally similar.

    Open source encourages innovation by providing easily accessible tools for the development of products which incorporate software. Take a look at Kickstarter and count how many potentially patentable and commercially viable projects include open source software, such as Arduino or Rasberry Pi libraries at their heart.

  16. angry dude August 15, 2017 9:40 am

    Benny@12
    “Some of us play with kittens, hang out with family and friends, and flush our bitterness down the john.”

    And some of us have to come up with ways to pay college tuition for several kids after wasting equivalent or more money on US Patent system
    Dude, you must be independently wealthy
    May I ask a question: does it have anything to do with your efficient infringer attitude – pilfering inventions from USPTO database after checking that patent holder can’t afford patent litigation ?

    “a license agreement which entitles the user to use, modify and re-distribute the software, but not for commercial use, and often requires the user to extend the original agreement to any software incorporating the open-source, freeware, or shareware.”

    yeah, right..

    and patent entitles patent holder to the right to exclude others from making, selling etc etc etc

    You do not live on this planet, dude

  17. Benny August 15, 2017 9:53 am

    AD,
    I’m not wealthy. There is little correlation between wealth and happiness.
    I get paid a salary – and not one I can boast about – by a corporation that invests in R&D, patent filings, and patent litigation If I were to invent, in my free time, a nuclear powered mousetrap I wouldn’t patent it – my chances of getting rich off it are less than if I invested the drafting/filing/prosecution/maintenance costs in the state lottery. I figured that one out early on in the game.
    I’ll let you in on another little secret – we learn a tremendous amount by watching others fail. Fail to prosecute an application to a valuable (i.e, not overly narrow) patent, failure to commercialize a patent, etc.

  18. Anon August 15, 2017 11:11 am

    Benny @ 15,

    I understand the business model (perhaps better than you 😉 ), I was asking specifically for substantiation of the innovation encouraging comment.

  19. angry dude August 15, 2017 1:14 pm

    Benny@17
    “my chances of getting rich off it are less than if I invested the drafting/filing/prosecution/maintenance costs in the state lottery”

    There used to be some kind of a semblance of a free patent market in US back in the days where anyone could sell their (valid technology) patent for a reasonable price

    This market is now gone thanks to obama, scotus, potus, congress, cafc, uspto, ptab, district courts etc etc and big big thanks to google & co including overseas “friends” of us patent system like you, dude
    well done
    congratulations

  20. Benny August 15, 2017 2:49 pm

    You’re welcome, dude.

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