The Vonage Trilogy: A Case Study in "Patent Bullying"

By Sichelman, Ted | Notre Dame Law Review, December 2014 | Go to article overview

The Vonage Trilogy: A Case Study in "Patent Bullying"


Sichelman, Ted, Notre Dame Law Review


ABSTRACT

This Article presents an in-depth case study of a series of infringement suits filed by "patent bullies. " Unlike the oft-discussed "patent trolls"--which typically sell no products or services and perform no R&D--patent bullies are large, established operating companies that threaten or institute costly patent infringement actions of dubious merit against smaller companies, usually in order to suppress competition or gamer licensing fees. In an ideal world of high-quality patents and optimal patent licensing and litigation, infringement suits by aggressive incumbents would have a cleansing, almost Darwinian effect. Yet, defects and distortions in patent examination, licensing, and litigation--the very problems that are raised constantly in the context of patent trolls--generally apply with equal and, often, greater force to patent bullies. Nonetheless, patent bullies have scarcely been discussed in the academic literature or popular press, especially in recent years.

This Article examines three patent infringement suits filed by incumbent telecommunications carriers--Sprint, Verizon, and AT&T--against Vonage, then an early-stage company providing consumer telephone services over the Internet. Based on a detailed analysis of the patents-at-issue, prior art, court documents, and news accounts, it shows that the incumbents were able to exploit defects in the patent system in order to prevent disruptive technologies from competing with their outmoded products and services. Because startups like Vonage typically lack the resources to vigorously defend against even weak patent suits, patent bullying can result in severe anticompetitive effects. The incumbents in the Vonage suits achieved their intended result--drastically reducing Vonage's stock price, severely weakening its position in the market, and placing it at the brink of insolvency. This case study demonstrates that further theoretical and empirical study is warranted to assess the full extent of the patent bullying problem.

INTRODUCTION: THE OVERLOOKED PROBLEM OF PATENT BULLYING

In the last ten years or so, academics, the media, the Federal Trade Commission, and the Supreme Court have been fixated on so-called "patent trolls"--loosely, entities and individuals that generate the bulk of their revenue from patent litigation and licensing, but do not make and sell products that embody their patents and that, typically, perform little to no research and development relating to their patents. (1) Yet, the exact problem trolls present to the patent system has remained somewhat elusive. (2)

Many focus their attention on the non-practicing nature of trolls, exhorting that patentholders that do not sell commercial products embodying their patents are behaving contrary to the goals of the patent system. (3)

However, this view is clearly wrong, at least as a descriptive matter, because the Supreme Court has firmly held that "it is the privilege of any owner of property [including patents] to use or not use it, without question of motive." (4) Indeed, the most widely accepted explanation of the patent system--the "reward theory"--posits that patents are designed to spur invention and its disclosure in patents to the public, but generally are unnecessary to promote the commercialization of inventions. (5) Instead, reward theorists believe that once inventions are created and disclosed, the market will efficiently yield commercial embodiments of those inventions. (6) Although there is a strong normative argument that the patent system should actively promote commercialization--and I am squarely in favor of this view--American patent law has long shied away from this approach. (7) Thus, under current law, trolls not commercializing their inventions can scarcely justify the views of those aligned against them. (8)

Another oft-touted criticism of trolls is that they perform little to no research and development (R&D) on their patents. …

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