THE PATENT TROLL NON-PROBLEM by wxr16887

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									                              THE PATENT TROLL NON-PROBLEM
                                         Ted Hagelin
                              Board of Advisors Professor of Law
                              Syracuse University College of Law

                                              Paper Abstract
         The question of the proper test a court should use in deciding whether to issue a
permanent injunction in a patent infringement case is suffused with concern over so-called patent
trolls. Justices, judges and academics worry that permanent injunctions provide patent trolls
with a bargaining club that can be used to extract hold-up fees from unsuspecting productive
firms. This concern is especially great where the patent troll claims infringement of only one or
two patents in a product or process that incorporates multiple patents. The fear here is that the
prospect of a permanent injunction on the sale of all products, or the use of an entire process,
allows a patent troll to obtain a windfall settlement share of the product or process value that is
far greater than the value of the patents alleged to be infringed. In short, in the eyes of patent
troll critics, patent trolls serve no beneficial social purpose; rather they impose costly social
harms in the form of vexatious litigation, extraction of exorbitant settlement fees and deterrence
of innovation.
         In this paper, I first suggest a re-conception and re-definition of the terms used in the
patent troll debate that allow a more careful comparison of the motivations of patent owners. I
then argue that the free purchase and sale of patents by patent trolls, and other entities, serves a
beneficial economic function by increasing the value of patents and making new capital available
for future research and development. Finally, I argue that the concern over patent troll abuse of
the patent system can be addressed through changes in the law that are far less sweeping than
reversal of 100 years of equity practice in patent infringement cases.
         In re-conceiving and re-defining the terms used in the patent troll debate, I suggest that
all patent owners are patent speculators; that is, they invest in the acquisition of patents in the
hope of realizing financial gain from the patents. Firms which acquire patents through internal
research and development efforts, and practice these patents, speculate on the commercial value
of the products or processes protected by the patents. Firms which acquire patents through
internal research and development efforts for the purpose of licensing speculate on the licensing
value of these patents to other firms for development of commercial products or processes.
Firms which acquire patents for infringement defense purposes, or to prevent engineering around
core patents, speculate on the value of the commercial products or processes which are being
defended or fenced off. Universities and other non-profit research organizations that acquire
patents through internal research and development efforts also speculate on the licensing value of
these patents to for-profit firms for development of commercial products or processes.
(Although some might be uncomfortable with the notion of universities and non-profit research
organizations speculating on the value of their discoveries, every university and non-profit
research organization evaluates the commercial potential of a discovery before deciding whether
to incur the cost of prosecuting a patent application.)
         The so-called patent trolls are also patent speculators. The only difference between
patent trolls and other patent speculators is that patent trolls generally acquire patents through
purchases rather than through internal research and development. I suggest, therefore, that all
patent owners are engaged in patent speculation, that we should drop the use of the pejorative
term “patent troll” from the debate over permanent injunctions, and that the rights and remedies



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of patent owners should not be differentiated based upon the means by which patent owners
acquired their patents. (Hereafter, I will refer to “patent trolls” as “patent purchase speculators.”)
        With respect to the beneficial economic function served by patent purchase speculators, I
argue that the un-encumbered purchase and sale of assets is essential to realize the full value of
assets. So long as buyers of assets place a higher value on the assets than the sellers of assets,
the purchase and sale of assets will benefit both buyers and the sellers, assets will be put to
higher valued uses and new capital will made available in asset markets. Real property and
personal property markets are based on this fundamental economic tenet.
        The same is true for patents. The open purchase and sale of patents allows the full value
of patents to be realized, and this results in new capital available for investment in future
research and development, and the generation of new patents. Some examples of how the
transfer of patents generates new capital include the sale of patents in bankruptcy proceedings
(one of the most common means by which patent purchase speculators acquire patents), the use
of patents as collateral for loans (securitization) and the use of patents as trust assets for the
issuance of bonds (monetization). In each of these cases, new capital is made available for
further investment in research and development, and in each of these cases the new capital would
not be available if patents could not be freely purchased and sold. Any limitations that are
placed on patents that are purchased and sold, such as denial of permanent injunctions in the case
of patent infringement, lessens the value of these patents and diminishes the new capital these
patents are able to generate.
        (I acknowledge that some persons believe that intellectual property should not be treated
as real or personal property, but rather as a sui generis form of property with more socialistic
attributes. This is a debate that is well worth having, but it is a debate that should be conducted
directly on the merits, not indirectly on questions of withholding infringement remedies or
granting infringement rights.)
        Finally, I argue that concern over abuse of the patent system by patent purchase
speculators can be addressed by changes in patent law that are far less sweeping than denial of
permanent injunctions. These changes, which could be implemented either through patent
reform legislation or through new case law, depending on the issue, include changes in prior user
rights, changes in the calculation of infringement damages and changes in the scope of
permanent injunctions.
        The concern over patent purchase speculators waiting to file infringement actions until
innocent firms have invested large sunk costs in the alleged infringing products or processes can
be addressed by allowing a prior user right infringement defense to all persons who have reduced
to practice, or actually practiced, the alleged infringing technology prior to the time the patent is
published or is issued. A complete prior user right defense that would deny patent owners the
right to damages and injunctions could only be enacted through new patent legislation.
However, a court could consider an infringer’s prior user status in awarding damages and in
determining whether to issue a permanent injunction.
        The concern over patent purchase speculators extracting windfall damages from innocent
infringers can be addressed by abandoning the “entire market value rule” and allowing damages
only for the portion of the product or process alleged to be infringing. I have developed a
method which can do this by associating multiple patents in a product or process with various
price and performance parameters for the product or process, and then calculating the value of
the patents based upon their relative competitive advantage contribution to the value of the entire
product or process. I do not claim that this method is decimal-point accurate. However, I do



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contend that this method is no less accurate than the methods currently used for calculating
infringement damages, and is far more accurate than the calculation of damages based upon the
“entire market value rule” when the infringing product or process contains multiple patents and
the patents alleged to be infringed cover only a portion of the infringing product or process.
        Finally, the concern over the bargaining club that permanent injunctions give to patent
purchase speculators can be addressed by granting proportionate injunctions. Even if the
prospect of windfall damages is removed through damage calculations based on the relative
competitive advantage contribution of the allegedly infringed patents, if the patent owner can
nonetheless obtain a permanent injunction on all products or entire processes, the patent owner
will have a bargaining advantage that will allow the patent owner to demand a settlement fee in
excess of the value of the alleged infringing patents. However, this bargaining advantage could
be removed by granting proportionate injunctions using the same method suggested above for
the calculation of damages. Proportionate injunctions would enjoin the making, selling or using
of products or processes above a set level. For example, if a defendant is found to have infringed
a patent in a product and the competitive advantage contribution of the patent to the product’s
value is calculated to be 10%, a proportionate injunction would enjoin 10% of the product’s
sales. If the defendant’s base year sales were 200 units and the average sales increase was 5%
per year, in the first year of the permanent injunction sales would be capped at 189 units ((200 x
1.05) x .9). As in all injunction cases, a court would retain continuing jurisdiction over the
injunction and could modify the capped amount of making, selling or using a product or process
as future conditions warrant. Again, I do not claim that structuring the grant of a proportionate
injunction is decimal-point accurate. However, I do contend that structuring a proportionate
injunction is a far more accurate remedy than permanently enjoining all products or entire
processes, or denying permanent injunctions all together.
        The four principal benefits of these proposals are (i) they place parties in patent
infringement suits in equal bargaining positions, (ii) they do not differentiate between patent
owners based on the means by which patents were acquired, (iii) they continue to treat patents as
personal property with all the attendant rights and remedies, and (iv) they apply uniformly to all
technology sectors.




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