Abstract:
This chapter examines the impact of non-practicing entities (NPEs), often labeled as “patent trolls,” on the U.S. patent system. It explores how concerns over opportunistic litigation influenced major policy shifts, including the Supreme Court’s eBay v. MercExchange decision. Empirical research on NPE litigation remains inconclusive, with some studies overstating its negative effects while others highlight its role in innovation. Despite conflicting evidence, the perception of widespread NPE abuse led to legal changes that weakened injunctive relief for all patent owners. The America Invents Act (AIA) and the Patent Trial and Appeal Board (PTAB) further shifted the balance against patentees. While the eBay ruling sought to prevent litigation abuse, it disproportionately harmed small innovators reliant on patent enforcement. The ruling also created a two-tier patent system favoring large corporations over independent inventors. Ultimately, it is argued that restricting injunctions redistribute wealth from innovators to major technology firms.
Chapters in the Book:
- Part 3- Unmaking Patent Law
- Chapter 9- Patent Trolls and the Demise of the Injunction (p.191-206)
Summary
9. Patent Trolls and the Demise of the Injunction
In early 2006, corporate America was concerned about a patent infringement lawsuit by NTP against RIM, the maker of Blackberry. The litigation was of interest because the parties had not settled. NTP had a strong chance of securing an injunction, potentially shutting down Blackberry services relied upon by businesses and government agencies. In the end, the case settled for $612.5 million, which was widely criticized as excessive given the perceived value of NTP’s patent. The lawsuit fueled concerns about opportunistic patent litigation by non-practicing entities (NPEs), also known as “patent trolls.” In this business strategy, the NPE acquires and holds patents for licensing and litigation rather than producing innovations itself. Crucially, while some NPEs monetize legitimate R&D investments, others seek windfall settlements through nuisance lawsuits. The business strategy becomes more successful, the stronger the ability to threaten an injunction. This is because it increases the likelihood of inflated settlements from litigation targets. If such opportunistic litigation is widespread, it indicates that the patent system prioritizes rent-seeking, over incentivizing genuine innovation. While this view is widely accepted in policy and academic circles, it is important to assess the strength of that view by carefully examining the evidence.
The patent system, like all civil litigation, is susceptible to abuse due to judicial errors and litigation costs. Therefore, there may be a certain portion of licensing entities that are engaging in litigation strategies for opportunistic purposes. However, there is also a portion of infringement suits brought by NPEs that promote the constructive purpose of defending their IP rights. Ironically, NTP, the plaintiff in the Blackberry lawsuit, exemplifies a “good NPE” scenario, because it was founded by an inventor with legitimate patents. The characteristics of the NPE entity in the Blackberry litigation stand in tension with popular beliefs concerning NPE litigation. This is because it is often assumed that all NPE litigation is opportunistic and socially harmful. For example, various government reports and court rulings (including the FTC, the Supreme Court, and the White House) have expressed concerns about NPEs. A policy consensus has emerged across multiple branches of government to address perceived NPE-related issues.
NPE litigation is one of the most extensively studied areas of patent infringement litigation. Yet, the characterization of all NPEs as entirely harmful is uncertain. For sure, there may be some NPEs that engage in bad-faith litigation. However, many NPEs operate legitimately and should not receive the same legal treatment. Notably, the assumption that NPEs drive abusive litigation has justified broad policy changes, including restricting injunctive relief for all patent owners. If NPEs do not predominately engage in opportunistic litigation, then constraining the availability of injunctive relief would constitute a case of judicial overreach.
9.1. Does NPE Infringement Litigation Really Destroy $83 Billion a Year?
When speaking of the “patent troll problem,” the discussion usually refers to the assertion that patent litigation brought by NPEs imposes tens of billions of dollars in social costs annually. Bessen and Meurer concluded in 2008 that shareholders in large public firms outside the pharmaceutical and chemical industries are generally made worse off by the patent system. A subsequent paper from 2011 concluded that public firms targeted by infringement suits brought by NPE plaintiffs incurred in the aggregate $83 billion annually in costs. The authors estimated that, in aggregate, the “lost wealth” attributable to NPE suits against publicly traded firms amounted to approximately $500 billion between 1990- 2010. Those dramatic results supported the conclusion that NPE patent litigation represents a “very large disincentive to innovation.” In a third study, Bessen and Meurer estimated that NPE infringement lawsuits cost defendants $29 billion in direct costs annually.
Data shows that all three publications attributing high economic costs to NPE litigation activities have been widely cited in academia, business, and policy discussions. However, these estimates have been criticized for not considering patent benefits or misclassifying settlements as costs. Others challenged the event-study methodology underlying these estimates, raising concerns about its validity. Despite these critiques, Bessen and Meurer’s work remains dominant in academic discourse, with far more citations than subsequent critical research. Remarkably, this means that much of the NPE debate has been substantially driven by the same contribution early in the development of relevant scholarly literature.
9.1.1. Event Study Methodology
Both the 2008 book by Bessen and Meurer and the 2011 paper by Bessen, Ford, and Meurer rely on short-term stock market reactions. Though, this may not accurately reflect long-term economic impacts. For example, market overreaction to bad news can exaggerate losses attributed to patent infringement lawsuits. Extending the measurement window to 25 days, as attempted in the 2011 study, does not resolve this issue since litigation outcomes are determined over much longer periods.
These results stand in contrast with Ron Katznelson, one of the main critics of these studies, who tracked stock performance over entire litigation lifecycles. He found that firms’ market values often recovered and even showed net positive performances.
9.1.2. Private vs. Social Losses
The $83 billion estimate may be an accurate measure of the economic loss suffered by a publicly traded target of a patent infringement suit. However, it does not reflect the net economic impact of NPE litigation. As suggested by Rosemarie Ziedonis, this is because a firm’s stock decline after a lawsuit does not necessarily indicate a social loss. If a manufacturing company’s decline in value is due to paying damages for negligent business practices, the decline reflects efficient internalization of social costs. Similarly, litigation may ensure fair returns, rather than harm the economy. In other words, compensation for infringement can benefit innovators and strengthen confidence in the patent system. Therefore, even if correct, the $83 billion figure alone does not determine whether NPE litigation has a positive or negative economic impact.
9.2. Are NPEs Responsible for Most Patent Litigation?
A critical claim driving policy actions on the “NPE problem” is that patent trolls make up a majority of patent infringement litigation. This assertion appeared in a White House report in 2013 which stated that NPEs represented 60% of all patent infringement lawsuits in 2012. Other reports, like those by the Electronic Frontier Foundation (2015) and Unified Patents (2023), echoed this claim. This high incidence of NPE litigation suggests the patent system is “broken” and benefits strategic litigants rather than incentivizing innovation. However, peer-reviewed studies and reports, including a 2013 Government Accountability Office (GAO) report, found that NPEs initiated only 24% (as of 2011) or between 12%-28% (1995-2011) of all patent infringement suits. These numbers are much lower than the 60% figure from the 2013 report.
Critically, the GAO report also found that the largest portion of the increase in patent infringement litigation was not due to increased litigation by NPEs. Rather, the increase was through litigation by operational companies. This has two important implications. First, it suggests that much of the increase in patent infringement litigation cannot be automatically attributed to NPEs. Second, it suggests that the increase in patent litigation reflected the fact that some operational firms had shifted toward monetization strategies that relied on licensing patents. When Christopher Beauchamp’s research is applied to the increase in patents, the rise in total patent litigation after the Federal Circuit’s establishment is not historically exceptional. (The establishment of the Federal Circuit in 1982 as the exclusive appellate court for patent cases strengthened patent enforcement, influencing both litigation trends and innovation incentives.) Together, the White House report and the GAO report provide the upper and lower bounds for the range of estimates of the portion of patent litigation attributed to NPEs. Despite these discrepancies, empirical research has established two points. First, NPEs are a material portion of the patent litigation landscape as measured by suits filed annually. Second, NPE litigation has represented an increasing portion of all patent infringement litigation since approximately the mid- 2000s.
It must be said that the existing research on NPE litigation is more complex and less precise than often assumed by scholars, policymakers, or the press. Thus, common beliefs may have overestimated the volume of NPE litigation and assumed most NPEs engage in opportunistic strategies. This implies that not all NPE litigation raises policy concerns. It is concerning only when it is proven that NPEs engage in opportunistic litigation for settlement windfalls.
A key difficulty in achieving consensus is the complexity of defining NPEs in a manner that is neither over- nor under-inclusive. A study of over 7,500 lawsuits revealed significant diversity among NPE entities, including patent aggregators and individual inventors. This research shows that NPEs are more diverse than the “patent troll” label suggests, with many playing socially constructive roles in innovation. To be clear, NPEs constitute a significant portion of total patent litigation activity, and a nontrivial portion of NPE litigation is likely driven by opportunistic objectives. However, the overall impact of NPEs on litigation is still unclear. A 2019 study found that while NPE patent acquisitions promote upstream innovation, they can harm downstream innovation. Hence it is challenging to make any general statement about the overall assessment of their impact. These complexities are overlooked in policy discussions that are based on assertions that NPEs are the single most important driver of patent infringement litigation.
9.3. The Legal Payoff: eBay v MercExchange
Dramatic episodes such as the NTP v. RIM litigation appeared to support the view that the patent system had been captured by an army of plaintiff lawyers. Shortly after the settlement, the Supreme Court decided eBay v. MercExchange which addressed the standard that courts should apply in determining whether to issue an injunction against an infringing party. Prior to this case, courts automatically granted permanent injunctions when a patent was found valid and infringed, with exceptions based on public interest. This presumption favoring injunctions against infringers was so well-rooted in U.S. case law that it persisted periods in which courts were especially hostile to infringement claims. In the year prior to the case, courts had granted an injunction in all of the cases in which patentees had sought an injunction against infringers. In eBay v. MercExchange, the Supreme Court overturned this presumption, requiring courts to apply a four-factor test to decide on injunctions, even after proving infringement. In the aftermath, the Court’s decision sparked differing opinions, with some justices emphasizing the need for caution regarding injunctive relief, especially in cases involving patent trolls. A concurring opinion by Justice Kennedy, highlighted the rise of opportunistic litigation by entities focused solely on licensing and patent litigation. He suggested that courts applying the eBay test should consider whether monetary damages would suffice when patent holders sought licensing fees rather than market share. This view contrasted with the Court’s unanimous opinion, which rejected a broad rule against granting injunctions and criticized lower courts for overly expansive interpretations.
Another problem of the eBay decision was that it generated significant press coverage, which focused mainly on “patent trolls”. Christopher Seaman’s study examined infringement cases during the seven-and-a-half-year period following eBay. He found that NPEs secured injunctive relief only 16% of the time, compared to 80% for other patentees. In addition, Seaman suggested that courts had adopted a collateral rule, denying injunctive relief for practicing patentees when the infringer did not affect their core business. Clearly the “patent troll” concept had captured a key element of patent law jurisprudence.
More recently, some courts have extended eBay’s rationale to operational companies in direct competition. An example is the Apple v. Samsung case, where Apple failed to secure an injunction. The court required Apple to show that the infringing features “drive consumer demand for Samsung’s infringing products.” While the Federal Circuit subsequently rejected this court’s application, Apple’s inability to secure an injunction is indicative of a legal environment where patents’ proprietary nature is weakened. The lower courts’ application of eBay has implemented a fundamental change in patent law without legislative action. Effectively, it has led to a two-tier patent system, where practicing patentees in direct competition have a higher likelihood of securing an injunction. This shift contradicts eBay’s guidance, which warned against categorical rules that would deny injunctive relief to certain patent owners.
9.4. Closing Thoughts
The eBay decision, influenced by concerns about “patent troll” litigation, has significantly impacted the availability of injunctive relief in patent cases. Some members of the Supreme Court joined a concurring opinion, which has had broader consequences than anticipated. Post-eBay case law weakened patent rights, benefiting integrated producers, distributors, and platforms that rely on economies of scale. This shift disadvantages vertically disintegrated companies that focus on R&D and rely on patents to monetize innovations. The result is a redistribution of wealth from innovators to large implementers and incumbents. By restricting injunctions to deter opportunistic patentees, the Court may have unintentionally protected large corporations over smaller tech innovators.
