Patent Trolls as Racketeers?

December 3, 2012

Patent Troll RacketeersIn litigation it initiated against patent holding company, Innovatio IP Ventures LLC, Cisco Systems, Inc. and its co-plaintiffs, Motorola Solutions, Inc. and Netgear, Inc., have raised the stakes in the legal battle between technology companies and ”non-practicing patent entities” (also sometimes referred to as “patent trolls”).  In that case, the plaintiffs contend that mass patent litigation threatened against thousands of individual businesses that are users of products containing allegedly infringing technologies constitutes illegal racketeering on the part of the patent owners.

It is now common for patent owners to threaten or instigate patent infringement litigation against companies that use products containing allegedly infringing technologies.  Cisco and its co-plaintiffs claim, for example, that Innovatio sent 8,000 letters directly to businesses using Wi-Fi networking products manufactured by the plaintiffs.  Cisco claims that the letters threaten the customers with patent infringement litigation.  Many of the targeted businesses are small enterprises in non-technology industries, such as restaurants, hotels, and retailers who offer Wi-Fi access to their customers.

Cisco claims that this practice of targeting users of technologies, instead of the manufacturers who integrate the technologies into products, is improper and illegal.  Innovatio responds by noting, among other things, that patent law permits patent owners to enforce their rights against any party who makes, sells, or uses the protected technology without permission.

Tactically, the motivation behind patent owners taking action against users of products that incorporate the protected technologies instead of against the parties who integrate the technologies into the products seems clear.  It is often more likely that the end users, who are generally not technology-expert companies, will agree more quickly to pay the patent owners to settle the dispute than would the product manufacturers.

The motivation of the plaintiffs in this case also seems clear.  Cisco and the other major technology companies are searching for ways to protect their customers.  Those customers are not well-positioned to take defensive action in patent infringement litigation.  If the threat of patent litigation grows, customers may hesitate before purchasing the technology-based products manufactured by Cisco and others.  Additionally, quick settlements agreed to by the customers may adversely affect the defenses mounted by the technology companies in patent litigation brought directly against them.

There are clearly limits on the ability of patent owners to apply their rights.  For example, antitrust law and patent law itself prohibit use of patent rights to unreasonably impede competition.  There is little doubt that, under some circumstances, enforcement of patent rights against users of products in which allegedly infringing technologies are embedded could constitute racketeering.  It is far from certain, however, if the incidents identified by Cisco and its co-plaintiffs in this case are, in fact, illegal.

By making these claims, Cisco and the other plaintiffs have raised the stakes in the ongoing dispute between technology users and patent owners.  It seems likely that the plaintiffs are fully aware that their prospects of success in the case are highly uncertain.  Cisco and the other plaintiffs may not be overly concerned about whether or not they win this particular case.  The most important aspect of the case for them may well be the public platform the case provides for highlighting the significant potential adverse economic impact that can be caused by misuse of patent rights.