Source: AI-Generated
Innovation fuels progress, but it also creates opportunities for exploitation. Enter the troll: Shadowy figures that lie in wait, using IP law as a tool of extortion rather than protection.
Unlike the real creators, these actors contribute nothing to create the assets they claim to protect. Instead, their business model revolves around extracting settlements or litigation wins from unsuspecting innovators. They take advantage of loopholes in the IP laws, using IP rights enforcement to negotiate licenses and settlements, or pursuing litigation to earn a judgment sum.
In this post, we’ll take a peek at what’s under the hood of a classic troll operation, exploring different strategies they use to profit from the innovation of others. We’ll then assess their impact along with legal responses that have emerged over the years to combat this menace.
IP trolling tactics
IP trolls enforce intellectual property rights to make profits through litigations and settlements. They do this through hardball legal tactics (frivolous litigation, vexatious litigation, strategic lawsuits against public participation (SLAPP), chilling effects, etc.), and across IP classes.
Copyright trolling
Copyright trolls employ loopholes in copyright law, using search tools like Pixsy1 to scour the web for proof of copyright infringements over generic content or content they do not truly own. An example of such infringement may include non-compliance with CC (Creative Commons) License agreements, where the infringer fails to credit a copyright holder in line with the license or outright use of licensed material without seeking prior authorization from the copyright holder.
They then send out mass demand letters to the alleged infringers, extorting them through settlement, often backed by the threat of legal action. Victims are usually small businesses that succumb to the pressure of having to enter potential litigation with limited resources.
Trademark trolling
In trademark law, IP trolls also find a favorable clime for their activity. When a trademark troll registers a trademark, commercial use is not the motive, but to assume priority over third parties using those marks. Alternatively, they may earn license fees or settlements from a third-party use of the mark.
One major loophole IP trolls exploit to achieve this is the first-to-file system, practiced in regions like Russia, Japan, China, and the European Union. In granting IP protection, the system assigns rights to an applicant with the earliest application date. This is unlike the first-to-use system in countries like the United States and India, granting IP protection only when an applicant can show that the mark is already being used in trade.
The first-to-file system is the IP trolls’ stomping ground, as they can blindside original creators in registering marks without proving actual use in commerce. Well-known marks can also be claimed in other countries, effectively precluding legitimate applicants from claiming rights in the trademark in such regions.
However, IP trolls are not confined to first-to-file systems alone. They also thrive in countries like the United States, where the first-to-use system is practiced. While they do not have the advantage of speedy filing, they may well game the system by fabricating an Intent-to-Use (ITU) application.
In the United States, an ITU application allows an applicant to secure a filing date for a trademark before using it in commerce, provided they intend to use the mark in the future. However, some trademark trolls exploit this provision by submitting false or misleading information about their intent to use the mark.
They do this by creating fake prototypes or falsifying documents showing that the document is already in the market such as purchase orders, receipts, and invoices. Some even go as far as to create a digital store or website displaying the mark in use.
Patent trolling
In properly scoping actors that may be considered IP trolls, it’s worth noting that not all NPEs and PAEs are IP trolls. In fact, NPEs include individual inventors and institutions like R&D (Research & Development) firms and educational institutions that hold patents to protect their innovations.
Patent trolling follows an ‘acquire, target, and sue’ sequence:
- Acquire generic patents that may reasonably be infringed in innovation-heavy industries. at a low cost.
- Target businesses that may reasonably infringe these patent rights.
- When they infringe, threaten to sue to extract settlements, or sue.
Before the Supreme Court’s decision in TC Heartland LLC v. Kraft Foods Group Brands LLC, patent owners could file infringement suits in any district where the accused infringer was based. This flexibility allowed trolls to look for courts that may likely yield favorable outcomes, regardless of where the actual infringement occurred. This tactic is known as Forum Shopping.
Jurisdictions like the Eastern District of Texas, known for pro-plaintiff rulings2 and high speed-to-resolution are a haven for trolls. Depending on the value of their claim, a troll may create connections to such a district by incorporating a shell company (to set up shop) to meet the legal threshold for bringing a suit within that jurisdiction.
Shell companies also provide cover for IP trolls to litigate aggressively while remaining anonymous. If they lose, they simply have to wind up or declare bankruptcy to avoid paying the judgment sum.
Arguments for and against IP trolls
Some have argued that trolls are vital to protecting IP rights. However unethical, the knock-on effect of their activities forms the thrust of their defense; Patent trolls create a market for innovation by providing liquidity and insurance for innovators. They also generate revenue and litigation costs that drive economic growth.
The fear of falling prey to an IP troll may also compel companies to scrutinize their IP & licensing practices. In addition, their aggressive approach to enforcement will bring the importance of respecting IP laws into public consciousness, potentially deterring willful infringement. As such, they should be internalized as a part of the IP ecosystem.
Many have held these lines of argument to be overly simplistic, and understandably, companies are up in arms about this practice. Besides the disruption to business that comes with litigation, trolls deter companies from pursuing new innovations due to fear of infringing on existing patents. The financial implications on businesses are also steep.
Impacts of IP trolling on innovation and business
For any IP troll, the likelihood of an infringement means a lucrative payday. But this comes at a greater cost. Seeds of investor skepticism are sown when trolls challenge the validity of IP assets (for instance, by filing for Inter Partes Reviews on Patents or court litigation) to hold target companies to ransom. This disrupts potential IPOs and M&As, shattering investor confidence and prospects for funding innovative projects.
The high-stakes nature of these claims leads victims to cough up settlement sums, taking comfort in the notion that litigation would deal a far more devastating blow to their finances. But once the dust settles, one may imagine that companies develop cold feet in pursuing new ideas. Legitimate inventions may overlap with broad patents held by trolls, leading to repeat infringements and repeat troll attacks.
The chilling effect this has on innovation may play out in the form of abandoned research3, delays in product launch, and fear, preventing businesses from innovating boldly. For firms bold enough to proceed, end-users are made to pay more than fair market value due to attempts to internalize litigation costs.
Consider the recent episode involving TikTok sensation Jools Lebron, who plunged into panic4 due to concerns that a certain Jefferson Bates beat her to the trademark “VERY DEMURE . . VERY MINDFUL . . . “ It would later emerge that the alleged ‘Trademark troll’ (as he was reported to have filed multiple applications pending before the USPTO) registered the trademark in connection with advertising, marketing, and promotional services.
Contrary to initial fears, Lebron would not be barred from using the Trademark if she registered it in a different category. In a twist of poetic justice, Section 45 of the Trademark Act5 would appear to further reinforce Lebron’s priority in the trademark — regardless of category.
The argument goes thus: If Jefferson Bates is unable to prove a bona fide use of the trademark in commerce, he may lose the rights if the trademark application is challenged. The Trademark Law explains “Use in Commerce” to mean “the bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark.”
Having used the phrase severally in brand collaborations on TikTok, Lebron would be deemed to have used the mark in connection with the sale of a good/service in line with the USPTO requirements.
By and large, the Lebron episode spotlights the climate of fear, uncertainty, and dismay that may leave an innovator worried about what could become of their IP asset, rather than keeping their eye on the prize. Continued exploitation of IP rights for profit may lead people to question whether IP law functions as a weapon or a shield. This confusion may further erode confidence in the value and fairness in IP law & policy.
Why is IP trolling common in the US?
Photo by Vincent M.A. Janssen
To say that IP trolling is an American invention would be misleading. But many reasons contribute to why IP trolling thrives in the US. To start with the obvious: There’s a market for it; The prevalence of capital-backed Startups and SMEs coupled with a landscape that allows frivolous litigations make the US a hotbed of IP trolling.
European jurisdictions operate the “Loser-Pays” principle (the losing side in litigation shoulders the legal costs of the winning side). Conversely, US law leaves each party to bear their legal costs. The threat of litigation therefore takes on new lifeblood, as trolls capitalize on the victims’ fear of expending steep legal costs to strongarm defendants.
The conservative approach the European Patent Office (EPO) employs during patent examination is fashioned to exclude vague or overly broad patents — the sort usually acquired by Patent trolls. This is unlike the USPTO’s more liberal stance which grants trolls with leeway to register weak patents.
Centralized systems like the Unified Patent Courts (UPC) afford judges greater discretion. This allows them to rule without losing sight of the ramifications of their awards and injunctions in patent trials. Such discretionary allowances will deter trolls from pursuing aggressive litigation strategies, unlike in the US where most courts and judges are not specialized and are slavishly tied to the pleadings of the parties in granting claims.
Legislative and judicial responses to IP trolling
In the United States, the Leahy-Smith America Invents Act (AIA) of 2011 reduced opportunistic claims by IP Trolls (particularly patent trolls) by introducing a first-to-file system, which replaced the prior first-to-invent system. Before then, inventors who had not filed a patent in respect of an invention could claim infringement against anyone with a similar invention.
The AIA also created a review process under the aegis of the Patent Trial and Appeal Board to scrutinize patent applications of questionable motives. Per § 311 of the AIA, any third party can petition for an IPR (Inter Partes Review) of a patent. This process allows the USPTO to weed out weak patents acquired by trolls, helping to ensure that only robust, valid patents remain enforceable.
In TC Heartland LLC v. Kraft Foods Group Brands LLC (2017), the Supreme Court limited forum shopping, a common troll tactic, by requiring patent cases to be filed in districts where defendants are incorporated or have a business presence. This decision has minimized the chances for trolls to file in “friendly” courts, particularly the Eastern District of Texas.
The American case of Nautilus v. Biosig has also established that an expert must scrutinize and understand a patent with “reasonable certainty” for it to be valid. In another case, Limelight v. Akamai, the court ruled that where a patent covered a series of steps, a third party would not be held to have infringed on the patent where they carried out those steps.
The U.S. Supreme Court administered the final blow to patents in Alice Corp. v. CLS Bank International, where it discountenanced the idea of “an abstract software patent”. Prior to this, such patents were granted in respect of inventions that were still an abstraction but existed digitally. The applicant would then use the words “on a computer” to indicate that the patent, though valid and meriting protection, is yet to be applied.
Tellingly, this precedent has been instrumental in striking out many software patents that should not have been granted. The US Supreme Court’s decision in MedImmune v. Genentech also pre-empts trolls, as it opened the pathway to declaratory judgments, which may help infringers prove non-infringement or invalidity of the patent pending negotiations or before entering into litigation.
Across the EU, the Court of Justice of the EU has held on numerous occasions that a lack of intention to use a mark in connection with a good and/or service is bad-faith and therefore sufficient to deny an application for a trademark.
China is not left out of the league of countries taking proactive steps to curb trolls, especially those who cash in on the first-to-file system. In a case involving Uniqlo Trading Co. Ltd. and Guangzhou Compass Exhibition Service Co. Ltd6, the China Supreme Court ruled against a company attempting to register Uniqlo-related marks in bad faith, emphasizing the role of genuine commercial use in trademark applications. This decision led to the 2019 amendment to the Chinese Trademark Law, which empowers the CTO (Chinese Trademark Office) to deny trademark applications made in bad faith in their early stage.
Way forward . . .
Left unchecked, the scourge of IP trolling threatens to upset the foundations of innovation-based economies. As lawmakers work to sanitize the IP ecosystem of trolls, emphasis must be placed on implementing more stringent criteria for granting IP rights, forcing applicants to show good faith use.
Implementing measures to render IP trolling unprofitable could bring significant benefits to global economies. Strategies like fee-shifting, which place the financial burden of meritless litigation on the trolls, would deter frivolous claims and alleviate the economic pressure on genuine innovators.
The US Supreme Court did not miss out on a chance to validate this strategy in Octane Fitness v. Icon Health and Fitness and Highmark v. Allcare. Now, prevailing parties in patent infringement disputes can recover attorney fees from the losing party. It didn’t take quite long to start reaping the rewards. Rackspace, a cloud company, successfully defeated an alleged troll, Rotatable Technology in a dispute over a patent covering rotating screen technology. Rackspace also noted that it has become “much easier for those of us who are sued by a troll to recoup our fees from these extortion attempts,” justifying the “business decision to pursue every case to the hilt.”
As policy efforts and judicial intervention combine to curb exploitative practices, the Intellectual Property space can better fulfill its intended purpose: fostering innovation and protecting creators.
Endnotes
- https://www.pixsy.com/
- https://scholar.smu.edu/cgi/viewcontent.cgi?article=1146&context=scitech
- https://mackinstitute.wharton.upenn.edu/wp-content/uploads/2022/03/Huang-Kenneth-et-al._Escaping-the-Patent-Trolls.pdf
- https://www.tiktok.com/@ga_news/video/7408336626046471470?q=jools%20lebron%20trademark%20demure&t=1732191517121
- https://www.bitlaw.com/source/15usc/index.html
- Guangzhou Compass Exhibition Service Co., Ltd. and Guangzhou Zhongwei Enterprise Management Consulting Service Co., Ltd. v. Uniqlo Trading Co., Ltd. et al
