7 March 2017
Article

Software & IP: Patent trolls in the UPC landscape

Patent trolls have the primary purpose of generating funds, for example through licensing on the basis of patent portfolios which are often obtained from another party. Depending on the type of patent troll, the ratification of the UPC treaty will affect the strategy that a given business decides to implement.

Patent trolls are usually smaller companies or even individuals who build up a patent portfolio with the aim of taking legal action against other companies for patent infringement or to enforce licensing agreements. Such companies usually have no intention of manufacturing products by themselves which are based on patents in their possessions.

Patent Trolls have built up a negative reputation. They are seen as an obstacle to technological progress by means of which other companies result in being paralysed by the aggressive attitude towards intellectual property (IP). Nonetheless, some qualification is appropriate and a distinction should be made among distinct types of patent trolls.

A well-known example of a patent troll is the company MOSAID, which played an important role in the Microsoft-Nokia deal. This company buys patent portfolios of other companies, for example when they are no longer seen as essential for the future business of the selling company. MOSAID then uses these patent portfolios to enforce licensing agreements with parties that use the patented technology. A portion of the licence fees go back to the company that originally built and sold the patent portfolio. Such structures may, therefore, be profitable for both the seller of the patent portfolio and for the patent troll. In that way, the seller gets reimbursed for the R&D effort that was necessary to create the patent portfolio and, on the other hand, the patent troll receives a fee for managing the patent portfolio and the enforcement costs.

However, not every patent troll falls within the business model described above. Some patent trolls focus on acquiring relatively inexpensive and less strong patent rights. These rights are then used to obtain a settlement of licensing fees from third parties, in which the licensing fee is less than the legal costs of a lawsuit. In such cases, usually no funds go back to the seller of the patent rights.

Another example strongly related to patent trolls is given by a business model developed by the hedge fund manager Kylie Bass together with the IP expert Erich Spangenberg. According to this model, the company attacks the validity of other companies' crucial patents. The essence of this business model is that the share-price of the patent-holding company is highly dependent on whether or not these patents are valid. The most well-known examples are in the pharmaceutical industry, where the existence of patents on the so-called blockbuster drugs determines to a large extent the share price, as well as the price of the patented blockbuster drug itself. According to the business model, the crucial patent is attacked while, at the same time, a fall in the patent-holding company's share price is speculated on. If the attack on the patent turns out to be successful and the patent is invalidated, for example, the company's share price will fall sharply and the patent troll will be able to profit from it. It is easy to imagine that this type of business model will also be applied to other technology areas, such as the IT industry.

 

On 14th December 2016, the United Kingdom signed the 'UPC Protocol on Privileges and Immunities'. Previously, the United Kingdom had already stated that, despite Brexit, it would have ratified the UPC (Unified Patent Court) Agreement. The UPC's ratification is getting closer.

The UPC offers the patent holder advantages regarding the enforcement of its patent rights, making it possible to get an injunction on the trade, use and offer of the patented technology in the UPC Treaty Member states. Such an injunction is currently possible only if the patent holder undertakes separate proceedings in each country. Implementation of the UPC will significantly lower the costs of an injunction in several countries. With the advent of the UPC, it is thus easier for a party, such as a patent troll, to enforce an injunction for multiple countries at the same time.

On the other hand, implementation of the UPC provides for a harmonisation in the way in which the validity of patents is judged. This is particularly important for software patents, since the validity of such patents can currently be judged differently within the various European jurisdictions. This provides the patent troll with the possibility of forum shopping, i.e. choosing the most favourable jurisdiction in which to undertake legal proceedings.

At the moment, there are quite a lot of software patents whose validity can be contested in the light of the current legislation. The UPC is expected to diminish the chances of a successful attack against such patents by a patent troll. However, the opposite may be true for strong patents. The effect of the UPC Treaty on patent trolls will, therefore, depend heavily on the business model that these companies pursue.

After the ratification of the UPC, it is not automatically given that the Unified Patent Court will get exclusive competence to assess European patents. During a transitional period, the patent holder has in fact the option of demonstrating that its European patents should not fall under the UPC's competence: this is known as an opt-out. This decision may be reversed during the transitional period by means of an opt-in. This option may still provide patent trolls with an option, at least during the transitional period, to go forum shopping and to confront the alleged infringer with extensive, complex, and expensive proceedings in order to enforce a licence.

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