Study: Patent Trolls In US Use Business Method Patents To Target More Firms

Patent assertion entities in the United States have done well from software patents. These companies, which some call “patent trolls,” have garnered a clear majority of their revenues by licensing software patents and suing those who refuse to purchase licences. But these companies’ reliance on software patents may be coming to an end. In recent years, these companies are increasingly exploiting business method patents, and by doing so are targeting a much larger range of businesses, according to a recently released study.

The 4 September study [pdf] by PatentFreedom, a consultancy that advises businesses on how to deal with patent assertion entities (PAEs), looked at over 3,700 patent infringement suits filed by PAEs in US during the past ten years. At least 954 of these suits were based on business method patents, according to the study.

Since 2004, the number of companies sued for violating PAEs’ business method patents has increased sharply. It has shot up an average of 28 percent annually, the study found.

It is not just the absolute number of defendants that has grown. Of the total number of businesses sued by PAEs, a growing percentage were sued for violating PAEs’ business method patents. Back in 2005-06, 27 percent of companies sued by PAEs allegedly infringed business method patents. By 2011-12, that number rose to 41 percent, according to the study.

There’s a good reason why PAEs are using business method patents to sue so many more firms. These patents often apply to an unusually wide range of companies. “Suppose a PAE has a patent on a mousetrap, who can the patent be asserted against? There are a limited number of companies in the mousetrap industry. But a business method patent might, for instance, cover Oracle, Google, a cement company – pretty much anyone who has a website. These patents really broaden the range of companies that are susceptible to being sued,” said Dale Lazar, a partner in the Washington, DC office of DLA Piper, a law firm.

Modest Shift in Industry Sectors

High tech companies are the primary targets of PAE litigation. They suffer the vast majority of PAE suits.

When PAEs assert business method patents, they still often sue high tech firms. Such companies comprise 42 percent of the firms sued over the past ten years for violating PAEs’ business method patents, according to PatentFreedom’s study.

Moreover, these tech companies could still be involved in the majority of PAE business method litigations. The PatentFreedom study looks at unique defendants, not the number of times a defendant is sued. Thus the study counts a tech firm that is sued dozens of times the same as a bank that is sued once.

Still, the study does indicate that the majority of firms sued for violating PAEs’ business method patents work outside the tech sector. The largest number of non-tech defendants come from the retail sector (17 percent), followed by the financial services sector (13 percent), auto and transport sector (8 percent), and consumer product sector (5 percent).

The study also shows that the number of non-tech firms sued for violating PAEs’ business method patents has increased dramatically over the past ten years. The number of financial services firms sued rose an average of 38 percent annually. The number of retail firms sued increased an average of 25 percent annually, and the number of other non-high tech firms sued increased by 23 percent.

But while PAEs are asserting their business method patents against a growing number of non-tech firms, they are also asserting these patents against a growing number of tech firms. In fact, the study does not indicate that the ratio of tech to non-tech defendants has changed significantly over the past ten years. Note that the total number of firms sued for violating PAEs’ business method patents rose by an annual average of 28 percent, and this average rise was bested by only one type of non-tech defendants, financial services firms (38 percent annual increase). The increase in number of retail defendants fell a bit below the overall average (just 25 percent) and the rise in other non-tech defendants drooped significantly behind the average (23 percent).

In short, although PAEs are bringing more suits based on business method patents, the study provides no evidence that these patents are changing the extent to which PAEs target non-tech firms, as opposed to tech firms. The study indicates at most that, thanks to business method patents, PAEs are concentrating more on financial services firms.

Size Matters More

The study implies that the growing use of business method patents has changed PAEs’ litigation strategy in another way. PAEs have become far more likely to sue small companies.

Over the past ten years, the number of firms with over $10 billion in annual revenue that were sued for infringing PAEs’ business method patents rose an average of 23 percent annually. The number of firms with $100 million to $10 billion in annual revenues that were sued increased by about the same amount, an average of 22 percent annually. This stands in stark contrast to the extent to which small businesses, with revenues below $100 million, were sued. The number of such small businesses that have been sued for violating PAE business method patents has leaped 39 percent per year.

This has produced a significant shift in PAEs’ business method patent litigation. In 2005-06, 33 percent of the unique defendants in these lawsuits were businesses with revenues below $100 million. By 2011-12, these small businesses constituted 43 percent of the PAEs’ defendants. Meanwhile, the percentage of defendants that are very large companies (with revenues over $10 billion) fell from 31 percent in 2005-06 to 24 percent in 2011-12.

However, other research shows that PAEs’ increased targeting of small companies is not unique to business method patents. A 2012 study by Professor Colleen Chien of Santa Clara University Law School found that companies with less than $100 million in annual revenue represent at least 66 percent of unique defendants sued by PAEs. Thus, the growing number of small businesses sued for violating PAEs’ business method patents is simply part of a larger trend of PAEs increasingly targeting small businesses. (As of 16 Sept., Prof. Chien has taken a leave of absence from her teaching duties and will be serving as a White House advisor on intellectual property and innovation.)

There are several good reasons for PAEs to prey on smaller companies, but the main one is that these defendants lack the financial resources to defend themselves in court. Patent infringement cases in the US typically drag on for years and cost each party millions of dollars in legal fees. This is a particularly onerous burden for small companies, so they often have little choice but to reach some sort of settlement with PAE plaintiffs. Larger companies, which are better able to defend themselves, are less inviting prey for PAEs.

Overall, the PatentFreedom study indicates that PAEs are using business method patents much the same way as other patents. PAEs are using their patents to sue more companies in all industries and are increasingly going after small businesses.