‘Patent trolls’ on the prowl for ‘smart’ product providers

Defending a company against a patent infringement complaint is “incredibly slow and incredibly expensive. It’s just torturous”, says Alan Trefler, chief executive of US-based software company Pegasystems.

He should know. When a patent claim first landed on his desk back in 2013, Mr Trefler never dreamt it would end up in court, he says. The two patents being asserted by the complainants did not seem to him — or his legal advisers — to come even close to describing how Pegasystems’ flagship product, SmartBPM Suite, worked.

The company that had filed the claim, YYZ, was a “patent assertion entity” or “non-practising entity”, a company whose only business is holding patents acquired directly from inventors through patent brokers or from companies selling off intellectual property assets, and then approaching companies it deems to infringe upon those patents with a view to getting settlement money from them.

To many people, particularly skittish executives in the heavily targeted high-tech industry, such companies have become known as “patent trolls”.

The term “troll” is a loaded one, but it springs from many companies’ perceptions that the patent actions they face are unjustified. Defending them, as Mr Trefler points out, is costly and time-consuming and can seriously damage shareholder value.

There are significant numbers of such cases. Recent figures from patent litigation specialist RPX, show that in 2015, 3,604 cases were filed in the US by non-practising entities.

“But the complexity of the patent system in most domains, compounded with the growth of these entities whose sole objective is to make licensing money from patents they buy from others, is doing a great deal of harm in terms of the risk scenario facing businesses,” says Shireen Smith, an intellectual property lawyer at specialist legal firm Azrights.

Chris Thornham, a London-based partner and patent specialist at law firm Taylor Wessing, says claims from non-practising entities are on the rise in Europe and that trend seems likely to continue as more manufacturers bring out “smart” products that rely on components from third-party manufacturers and software licensed from other companies.

In addition, the EU faces a huge change to its patent law regime, with the establishment of a Unitary Patent and Unified Patent Court (UPC) in 2017. This aims to introduce a single system for patent protection across the EU.

The complexity of the patent system …is doing a great deal of harm in terms of the risk scenario facing businesses

“Once the UPC is up and running, any patent holder can bring a claim that covers the whole of the EU. [Plaintiffs will] finally have the ability to claim the sorts of sums that are more commonly seen in the US today,” says Mr Thornham. “That means that the UPC could make the EU a preferred territory for patent owners wishing to seek enforcement.”

Either way, because of the very high cost of fighting litigation, many companies facing a patent claim from a non-practising entity prefer to settle out of court, even if they feel they are likely to win.

But that was not Mr Trefler’s approach. Pegasystems spent two years defending its case against YYZ, as part of a joint defence group that also included Hewlett-Packard, Adobe, Software AG and BMC.

Ultimately, Software AG and BMC both decided to settle, but in October 2015, Pegasystems, HP and Adobe won an outright victory when US District Judge Sue Robinson ruled against YYZ.

Mr Trefler says Pegasystems is now countersuing YYZ seeking damages. He also plans to lobby for action against non-practising entities.

“Some people at Pegasystems thought it would be more cost-effective to settle,” he says. “And you know what? They were right, it would have been. But I strongly believe that, if a patent claim is without merit, then it’s your moral obligation to step up and defend yourself, not just for the good of your company, but for the good of the patent system as a whole.”

However, Mr Thornham at Taylor Wessing says: “When I have a client who calls me up and says we’ve had a claim of patent infringement against us, my first piece of advice is not to panic.

What you need to establish first is whether the claim has any validity and is likely to stand up. Then you need to consider whether it’s worth defending. If you think that it’s a worthless claim, but you could dispose of it quickly with a £10,000 payment, then a rational decision might be to pay off that claim.”

The term “patent troll”, he adds, is “unhelpfully emotive”. In risk management terms, what’s needed “is a cool business head, to calibrate what’s at stake to your business, whether you decide to defend a patent infringement case — or not”.