Patent Trolls: What Are They and How Can They Harm Your Business?

Patents allow inventors and entrepreneurs to prevent other companies from manufacturing, selling, or using their patented inventions for a set period of time. Governments grant these rights in exchange for detailed public disclosure of the innovation. A patent is essentially a temporary monopoly granted to a business or individual that allows them to profit from their unique innovations. When used correctly, patents encourage innovation by rewarding creativity and novelty while simultaneously fending off intellectual theft. However, the U.S. patent system is not infallible, and it can be abused.

Businesses have a right to protect their intellectual property, including pursuing a patent infringement claim against someone using their patent. However, some companies exploit the US patent system by using patent infringement claims solely to profit. These “non-practicing entities,” sometimes called “patent trolls,” file claims without intending to use the patent to develop a service or product. Their actions are not illegal, but many consider these practices unethical, especially when patent trolls target small businesses.

The mere threat of a patent troll lawsuit is more than just theoretical. Patent trolls do not create products or services; instead, they acquire broad or vague patents and then threaten companies with costly litigation unless a settlement is paid. These lawsuits can drain resources, disrupt operations, and derail growth. Understanding how patent trolls operate and how to protect your Illinois business from them is essential in today’s innovation-heavy marketplace. If your business is the victim of patent trolls, a Naperville, IL business law attorney can help you protect your rights and avoid costly mistakes.

What Are the Differences Between a Legitimate Patent Holder and a Non-Practicing Entity (NPE)?

A legitimate patent holder actively uses the patented invention in their business, while a non-practicing entity (NPE) does not and focuses on monetizing the patent through licensing or litigation. A legitimate patent holder commercializes the technology, while an NPE obtains patents solely to generate revenue by licensing them or suing companies that do. The business model of the legitimate patent holder involves the production, sale, or operation of a patented technology. An NPE acquires patents for the sole purpose of litigation.

For example, a company that invents a new kind of engine and manufactures cars that use it is a legitimate patent holder. The NPE would buy a patent for the engine, or one very similar to it, and then sue the company for infringement. So, patent trolls buy or register multiple patents – many of which are old or overly broad. Then, when another party invents a service or product, the patent troll files a lawsuit claiming that the inventor is using their patent.

The state of Illinois is particularly susceptible to patent trolls because it is home to a large number of technology and software companies with a long history of innovation. Many patent trolls focus solely on small businesses because they tend to have fewer resources and legal expertise and a greater incentive to settle rather than litigate. Patent trolls often target companies with large cash reserves or those that have recently secured funding, regardless of where they are based. The industries that are most commonly hit in Illinois include:

• Software developers
• E-Commerce sellers like Amazon and Etsy storefronts
• Healthcare tech and medical device startup companies
• Manufacturing and automation firms
• FinTech and logistics companies

What Are Some of the More Common Patent Troll Tactics?

Companies may receive a mass-mailing, aggressive “demand letter” from patent trolls or be served with a threatening lawsuit with a very short response window. There will be a threat to file a lawsuit unless the licensing fee is paid. This licensing fee is often set just below the cost of defending a lawsuit, encouraging settlements out of fear and financial cost.

Patent trolls generally sue smaller companies to build up capital and create leverage to use against larger companies later. There may also be a threat to stop the target company’s product from being sold, which can be devastating for a business.

Patent trolls often use shell companies or other complex corporate structures, making it difficult for potential licensees to know who they are dealing with. In some cases, an entire industry with the same patent will be targeted, or portfolios from bankrupt companies will be purchased to revive old claims.  

To avoid the possibility of litigation costs, massive damage awards, or an exclusion order from the United States International Trade Commission (USITC), most businesses sued by patent trolls settle or agree to pay licensing fees. This is precisely what the patent trolls are banking on.

How Patent Trolls Harm Illinois Businesses

Legal defense against a patent troll can cost as much as six figures, which most small businesses cannot afford. A lawsuit against a small business can disrupt investor funding rounds and divert leadership from essential daily operations, even delaying product releases. In severe cases of patent trolling, the company may be forced to redesign software or business processes.

Patent trolling can cause reputational harm and fear from partners, vendors, and investors. Because of this, competitors may even use patent trolls to slow innovation and undermine investment in research and development indirectly.

Are Patent Demand Letters Legitimate?

Many demand letters from patent trolls lack legal merit; in some cases, the Illinois Deceptive Practices Act (815 ILCS 505/2SSS) or the Federal Patent Act may apply. States can regulate bad-faith assertions of patent infringement in some of these patent-trolling cases. The FTC has recently been cracking down on patent troll behavior nationwide.

If your business receives a patent troll demand letter, do not ignore the letter but avoid contacting the troll directly. Keep thorough records of all documents and communication, and consult a business law attorney as soon as possible who can assess whether the patent claims actually apply to your product. The attorney can also determine whether early settlement will be strategic or harmful.

How to Protect Your Small or Medium-Sized Business from Intellectual Property Lawsuits

The threat of lawsuits impedes innovation and hurts small businesses. Over half of the companies targeted by patent trolls have annual revenues of less than $10 million per year. Innovators are forced to walk on eggshells, constantly worrying about the threat of legislative blackmail.

If you own a small or medium-sized company, it is crucial to take proactive measures to protect yourself against patent trolls. Work with a business law attorney familiar with intellectual property laws who can help you protect your company and handle any demand letters or infringement claims you receive.

Contact the Naperville Business Law Attorneys at the Gierach Law Firm

Unfortunately, many small and mid-sized companies find they are being targeted by parasites with bad intentions. Make sure you have a legal advocate in your corner. The Naperville business lawyers at the Gierach Law Firm provide dependable legal guidance to business owners and business leaders. 

We also offer an Outsourced General Counsel program, which is perfect for companies that are too small for in-house legal counsel but still want the peace of mind that comes with having a lawyer on their team. Call 630-756-1160 to schedule your initial meeting.