Trolls, lawsuits and higher costs: How mega patent deals affect businesses and consumers

In mythology, trolls are often portrayed as large brutes with little creativity and even worse manners who enjoy devouring innocent people.  In stories and songs alike, they are often found hiding under bridges, waiting for their unsuspecting prey to pass by. 

Fiction, it seems, often resembles reality.

On Monday, AOL announced that it has sold 800 of its patents to Microsoft for $1.056 billion, a move that the company says is in the interest of "unlocking value" for customers. Brad Smith, General Counsel and Executive Vice President, Legal and Corporate Affairs for Microsoft, says that the company has had interest in the patents for years and that, "AOL ran a competitive auction and by participating, Microsoft was able to achieve our two primary goals: obtaining a durable license to the full AOL portfolio and ownership of certain patents that complement our existing portfolio."

This action by Microsoft is also a proactive strategy to prevent litigation involving intellectual property.

In the United States, we have our own class of ill-mannered brute called patent trolls who, in some of their behaviors, resemble the creatures from whom they got their names. Unfortunately, these trolls are non-mythical beings who enjoy hiring lawyers and instead of hiding under bridges, they congregate in the United States District Court for the Eastern District of Texas.

Apparently, that district has a reputation for feeding the trolls, which as any park ranger or zookeeper will tell you, is a very bad idea. In a recent research article entitled “The Destructive Nature of Patent Trolling,” Nicholas Pell -- a fellow Patexia community member -- summarizes the detrimental effects of such behavior as related to the technology sector.  Such behavior typically costs consumers across all critical sectors in which research and innovation are necessary not only in order to survive as a business, but also for the greater good of society.

As with mythological trolls, these patent trolls -- also more politely called non-producing entities (NPEs) -- seem to enjoy preying on innocent individuals and corporations by filing patent lawsuits, thus interrupting commerce, stifling innovation and increasing costs for consumers.

For example, in 2006, Blackberry manufacturer Research In Motion (RIM) had to pay $612.5 million to settle a lawsuit filed by NTP -- a company which acquires patents as holdings but does not create any value outside of this -- despite a patent office finding that the patents held by NTP were considered invalid.

This is sort of behavior -- which is now becoming a trend because it is often rewarded -- has become such a problem that a Department of Commerce report published in 2010 advocated a complete re-haul of the existing system to reduce “inefficient court challenges,” which is a fancy way of saying lawsuits with questionable merits. In turn, the Department of Commerce believes this will reduce the cost of such hearings significantly and also benefit consumers by 8 to 15 dollars for each dollar invested by those who innovate. While patent trolls are a central figure in such thinking, now that Pandora has been let out of the box, the creators of innovation have to invest considerable sums into preventing such tactics from affecting their operations, even when another company that historically has created value files the lawsuit.

Back to Microsoft and the implications of its deal with AOL. While this deal will cause AOL to lose well over half of its patents, it is a smart move from a tax standpoint from a company that made only $13 million in profit on its $2.2 billion in revenues last year.  The company plans to claim a capital loss, and "as a result, cash taxes in connection with the sale should be immaterial," essentially meaning that it has no direct effect on AOL's end users and investors. The deal will, however, have a more significant impact on Microsoft (and its patrons).

In 2007, Microsoft bought $240 million (or 1.6 percent) of preferred stock in Facebook. This was clearly a wise move as that investment is now worth over twice its original value, but it also means that AOL can no longer sue Facebook over the patent infringements that it has been claiming. The only downside to this deal is on the consumer end: that billion dollars has to come from somewhere, so costs will likely rise to accommodate the expenses of the deal.

Facebook did some damage control of its own by buying 750 IBM patents in order to protect itself from lawsuits from Yahoo.  In a recent article, Nicholas Pell calls this "white hat counter-trolling" and writes that the patents purchased will allow Facebook to "defend themselves against an IP lawsuit by saying that they own similar patents that are older than the ones Yahoo claims they infringed upon."

This strategy, while highly effective, is not uncommon. Patexia member Heidi Duran wrote in November about a patent auction in which Apple, Microsoft and RIM joined forces with three other companies to offer the winning bid of $4.5 billion. While these companies seem like unlikely partners, she writes that "the motivation to join forces was twofold: to own the patents themselves and to keep them away from Google."

Trolls, whether they are trying to eat our favorite hobbit, hiding under a bridge, or filing lawsuits in Texas, do not contribute to the greater good. Because of this, existing patent and intellectual property laws -- which at one time were used to encourage innovation by protecting the rights of those with positive intent -- are in need of a complete overhaul.

In the myths of old, a troll could be destroyed by exposure to direct sunlight. This type of thinking may not be too far off in reality.  Intellectual property law reform, which reduces frivolous lawsuits while protecting those who innovate instead of those who litigate, will have a similar effect on patent trolls.