In today’s interconnected global economy, securing protection of intellectual property (IP), such as trademarks and patents, is an indispensable requirement for businesses. Trademarks function as an identifier for distinguishing the goods and services of one entity from those of others. This could be brand names, a color combination, or logos, for example. Trademarks play a pivotal role in worldwide branding and marketing strategies, as companies seek to provide their goods and services to a public that is less restricted by international borders. A patent is a form of intellectual property protection that gives the creator of an invention the exclusive legal right to market, sell, manufacture, and profit from that technology. Historically, patent protection was designed to encourage innovation and the disclosure of the details of new inventions.
In some countries, such as the United States, Australia, and India, the “first-to-use” principle is followed, which establishes that exclusive rights to the patent or trademark is granted to those parties that start using the IP first in commerce. In contrast, the “first-to-file” principle is followed in other countries such as China, Russia, and Japan, as well as in the European Union, and establishes that the right to the trademark/patent belongs to the business whose application has the earliest date of filing. In first-to-file countries, the date of filing is important, not the date when the trademark was first used in commerce. Most countries in the world are first-to-file IP countries, regardless of who used it first. Unfortunately, trolls can operate successfully in either system.
Enter the Trolls
Applying for a trademark that has already been registered in other countries or for different goods/services with the purpose of extracting financial benefits is considered an opportunistic trademark registration. Opportunistic trademark registrations can include applying for a translated trademark, a company name, domain name, logo, or even a color used by a new or well-known mark. For example, a nonpracticing entity (NPE) that doesn’t use a mark in conjunction with the actual sale of goods or services files for a trademark in China, based on a legitimate brand owner’s mark before the owner enters the Chinese market. When the original brand owner tries to tap the Chinese market, they find their mark already hijacked. These NPE trademark holders that generate or attempt to generate earnings by enforcing their trademarks through malicious litigation are commonly defined as “trademark trolls.”
Similarly, a company that obtains the rights to one or more patents in order to profit by means of licensing or litigation, rather than by producing its own goods or services, might be considered a “patent troll.” (For more details, see “What Is Trademark or Patent Trolling?”) This can be particularly threatening in regard to digital technology and software, including fintech, whereby patents often consist of only general terminology, vague terms, or computer jargon, and no actual programming code.
What Is Trademark or Patent Trolling?It’s a practice in which individuals or companies (“trolls”) acquire intellectual property (IP) rights with the sole intention of using them to generate revenue through licensing fees or litigation, rather than producing actual products or services. This practice can be especially harmful to small businesses, which often lack the resources to defend themselves against infringement lawsuits. |
The menace of trolling is more prevalent in first-to-file countries because trolls don’t have to invest or bring a patent or trademark into “use.” However, even in first-to-use countries, the issue of trademark trolling is common. In the U.S., for example, which is a first-to-use country, to obtain federal registration with the U.S. Patent and Trademark Office, a trademark must be used in U.S. commerce via the sale of goods or services. To fulfill the use requirement, applicants often submit photos of their products bearing the trademark in question or submit screenshots that show their trademarked products are available for purchase online. Unfortunately, in the Digital Age, trolls can easily put a newfound trademark to supposed “use” by creating a website, equipping the site with a secure payment method, and “using” the trademark there. Others simply submit “dummy” specimens, digitally altered photos of goods supposedly bearing the mark sought to be registered.
Small businesses may be targeted by NPEs or IP trolls because they often lack the legal resources and expertise to navigate complex litigation, and settling a patent or trademark lawsuit can be expensive and time-consuming. In some cases, these trolls may use the threat of litigation to extract licensing fees from small businesses or the outright purchase of brand rights for an exorbitant fee, even if the troll’s patent or trademark in question is of dubious validity because the troll was first to register in his country.
Impact on Small Business and Innovation
Abusive patent lawsuits are on the rise, and the impact on American innovation is devastating. U.S. patent litigation statistics show that total litigation more than doubled from 2005 to a peak in 2011-2012 but has dropped by half since then. Most of that long-term trend has been driven by NPE companies whose primary focus is making money from patent licensing, not providing services or goods, while for companies that derive most of their total revenue from product sales or services (operating companies), patent litigation has been on a gentle downtrend since 2005 (see Figure 1).
Source: What 15 Years of US Patent Litigation Data Reveal About the IP Market, RPX Insight, January 25, 2021.
In the first three quarters of 2022, 64% of all patent lawsuits in the U.S. were filed by NPEs. In the high-tech space, patent trolls filed 88% of all lawsuits. NPEs targeted high-tech companies 95% of the time in 2022, while non-NPEs targeted high-tech companies only 27% of the time (see Figure 2).
Source: 2022 Patent Dispute Report: 3rd Quarter in Review, Unified Patents, October 3, 2022.
While patent trolls have been a nuisance for years, the explosion of technology in fintech has created a target-rich environment for those trolling the industry. Fifty years ago, financial services meant moving paper money around. Now the industry is a maze of cutting-edge technologies—cybersecurity, Big Data, networking, cloud computing, encryption, and mobile payments—perfect for patent trolls to file dubious claims.
Research by Boston University shows that patent trolls cost defendant organizations $29 billion per year in direct out-of-pocket costs; in aggregate, patent litigation destroys more than $60 billion in company wealth each year, and mean damages in a patent lawsuit are about $21 million. Further, these costs fall disproportionately on innovative entities: The more research and development (R&D) a company performs, the more likely it is to be sued for patent infringement, all else equal (see Figure 3).
Source: James Bessen, The Evidence Is In: Patent Trolls Do Hurt Innovation, Harvard Business Review, November 2014.
Studies by MIT researchers found, for example, that medical imaging businesses sued by patent trolls reported reduced revenues and innovations relative to other comparable companies not sued. The study confirmed that reduced revenues weren’t due to a suppression in underlying demand by hospitals, but instead linked to a lack of incremental product innovation during the period of litigation.
Although large companies tend to dominate patent headlines, a Santa Clara Law School research study found that the biggest impact is on small start-ups—companies with less than $100 million in annual revenue. They represent at least 66% of unique defendants in troll suits, and at least 55% of unique defendants in troll suits make $10 million per year or less. Those companies that settle with patent trolls, or lose to them in court, wind up reducing investments in R&D by an average of more than $160 million over the next two years. Of survey respondents, a large percentage reported a “significant operational impact,” such as delayed hiring or achievement of a milestone, change in the product, pivot in business strategy, shutting down a business line or the entire business, and/or lost valuation. The smaller the company, the more likely it was to report one or more significant operational impacts.
Countries Combating IP Trolling
According to Patent Trolls and Startup Employment, published by Ian Appel, Joan Farre-Mensa, and Elena Simintzi, “Anti-troll legislation is also associated with fewer business bankruptcies. Financing appears to be a key channel driving our findings: in states with an already established VC presence, the passage of anti-troll laws leads to a 19% increase in the number of firms receiving VC funding.” Their findings suggest that measures aimed at curbing the litigation threat posed by patent trolls may play an important role in reducing the financing frictions faced by small businesses.
In recent years, there have been multiple court verdicts, in addition to efforts to reform IP laws, to reduce the impact of these trolls on small businesses and the broader economy. This may include reforms to the system to make it more difficult for patent trolls to acquire and assert weak or vague patents, as well as measures to streamline the litigation process and reduce the costs of defending against frivolous lawsuits.
Europe. The Court of Justice of the European Union has stated in several cases that a trademark application made without any intention to use the mark in relation to goods and/or services constitutes bad faith and thus can be invalidated.
India. A statutory provision recognizing the prior use of a trademark is provided under Section 34 of the Trade Marks Act, 1999. This section protects vested rights so that the proprietor of a registered trademark or registered user can’t interfere with the use of any identical or similar mark if the person has been using the mark from an earlier date.
China. The 2013 amendments to the Trademark Law of the People’s Republic of China provided exemptions from the liability to compensate infringement of a registered trademark, including in situations where the owner of the registered trademark “is neither able to prove its actual use of the registered trademark during the past three years prior to the lawsuit, nor able to prove other losses suffered as a result of the infringement.”
China’s Supreme People’s Court struck a heavy blow to trademark trolls in its 2018 Uniqlo judgment, demonstrating that bad faith trademark holders and the malicious litigations they initiate won’t be supported by the court. In keeping pace with that decision, the Chinese legislature enacted amendments to the Trademark Law in April 2019 to address bad faith trademark registration. Under the 2019 amendments, if an individual, company, or organization files a malicious trademark application without an intent to use the mark, the application shall be rejected and constitutes grounds for opposition and invalidation.
The amendments further provide that if trademark agencies know, or should have known, that their client is filing a malicious trademark application without an intent to use the mark, the trademark agencies should decline to file the application for their client or they’ll be subject to fines. Furthermore, malicious trademark applications are punishable by the administrative authorities, and malicious trademark litigations are likewise punishable by the courts.
U.S. In 2011, the U.S. Congress recognized that its patent system needed a significant overhaul and a large bipartisan majority in the House of Representatives and Senate passed the Leahy-Smith America Invents Act (AIA). The AIA made several changes, shifting the U.S. from a first-to-invent to a first-to-file patent system and creating a review process at the Patent Trial and Appeal Board to allow expert judges to review patents of questionable validity.
In June 2014, in what was a “bad day for bad patents,” the U.S. Supreme Court in the case of Alice Corp. v. CLS Bank International unanimously struck down the concept of an abstract software patent, by which the court ruled that applying the words “on a computer” to an abstract idea doesn’t make it patentable. The Alice precedent has been effective in knocking out many software patents that should never have been issued in the first place.
If Your Business Falls Prey to a Troll
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Strategic Considerations
To protect against patent or trademark trolls, small businesses can take several steps. First, business owners should think globally when it comes to protecting intellectual property. Securing patent and trademark rights in the U.S. may seem sufficient, but if your company plans (or hopes) to expand internationally in the future, consider proactively filing IP applications in those countries, especially in first-to-file jurisdictions, as a defense against infringement claims. This should include filing transliteration trademarks in the local language of the country. Under the Madrid System, one can file one application for several countries by paying only one official fee, with the priority claim helping to establish rights in these countries before the date of application.
Be diligent in researching and identifying any patents, trademarks, or possible trolls that may be relevant to your business’s products or services before you expand to other countries. Another option may be to hire a company to monitor trademark or patent rights. This can help avoid infringing on existing patents and potentially being targeted by trolls.
Keep abreast of the changes in the local laws of a relevant country. For example, in June 2019, Canada changed its trademark laws from first-to-use to first-to-file. Small businesses should seek out legal advice and support to help navigate any IP disputes that may arise. Small businesses can also consider purchasing liability insurance that covers infringement claims.
December 2023
