Over the years H. Ross Perot has been called a great many things. The self-made billionaire and two-time presidential candidate has been labeled everything from a genius to a kook. Recently, however, Perot has garnered a new epithet. Many IP experts argue the Texas businessman is a patent troll.

Perot's transformation occurred in early July when he became the principal investor in the Ocean Tomo Capital Fund. The $200 million fund claims to be the first private equity fund to invest solely in firms with undervalued IP.

Many in the IP community eye the fund with suspicion. They believe the fund will invest in small companies that produce little, but which own patents that can be asserted against the products of other, more lucrative enterprises. These Ocean Tomo-backed companies are positioned to launch a wave of infringement actions that could force larger, successful businesses to pay millions of dollars to defend themselves in court–and possibly hundreds of millions of dollars in settlements or court-awarded damages.

The small companies that engage in such behavior are sometimes called Patent Licensing and Enforcement Companies (PLECs). More often, they are derisively labeled patent trolls.

Ocean Tomo vehemently denies it's a troll. James Malackowski, president and CEO of I|C|M|B Ocean Tomo, the merchant bank that operates the fund, says the company only puts its money into businesses that want to expand their sales of goods and services based on their IP. Malackowski adds that one big reason his company is staying away from the PLEC business is that Ocean Tomo does a lot of IP valuations for large companies, and suing these clients for infringement would jeopardize that segment of Ocean Tomo's business.

If Ocean Tomo were to become a patent troll, it wouldn't be alone. A growing number of established companies are jumping into this line of work.

“It has become more and more apparent that this is a business to be in,” says David Simon, chief patent counsel for Intel Corp.

This development is bad news for other businesses, consumers and the overall U.S. economy, according to many IP experts. Moreover, unless Congress makes some major changes to the country's patent system, many fear that the problem will only get worse.

“More and more companies will spend more and more money arguing over IP rights and proportionately less money on developing new technologies,” warns Adam Jaffe, an economist at Brandeis University. “That's good for lawyers, but not for anyone else.”

Money Makers

Patent trolls have been around a long time, but the problem has grown dramatically in recent years. One reason is that the courts have become more responsive to infringement charges.

“The legal landscape has changed over the past two decades, making it more likely that if you sue, you'll win and get big damages,” Jaffe says.

Another factor is that the Internet has created particularly juicy targets for PLECs' lawsuits. E-mail, instant messaging and many other online products and services have leapt in value as more and more people adopt them. If any such technology infringes a patent, the patent owner can reap a windfall.

For instance, Forgent Networks claims to own a patent on the popular JPEG format for compressing digital images online. In the past three years, it used this patent to wring out more than $100 million in licensing fees from various companies, including Adobe Systems and Macromedia. Forgent claims its patent covers digital cameras, personal digital assistants, cellular phones, printers, scanners and other devices.

The U.S. Patent and Trademark Office (PTO) also has encouraged PLECs by granting a lot of broad, but questionable, patents. “Examiners are too lax in enforcing the requirement that inventions be novel,” Jaffe says. Patent trolls then use the dubious patents to squeeze money from other businesses.

Eolas Technologies, for instance, obtained a patent for enabling a Web browser to automatically open up another program–such as a PDF reader–years after many companies were already using such technology. The validity of this patent was widely criticized, but that didn't stop the company from winning a $521 million infringement verdict against Microsoft. The courts overturned the verdict after the PTO threw out the patent in a rare re-examination procedure, which belatedly found that Eolas' invention was not really new. As of this writing, however, Eolas continues to press its case before the PTO and courts.

An Unfair Fight

Another strength of patent trolls is that many companies are afraid to fight them in court–and for good reason. A company targeted by a troll has a lot at stake. If the troll wins an infringement suit against the company, the defendant could be hit with hundreds of millions of dollars in damages and an injunction that prevents the company from selling its key products. Thus, firms faced with even a small chance of losing in court often take the safe road and simply pay off the troll.

Moreover, the outcome of a patent lawsuit is extremely unpredictable. “Patent litigation is so risky, few lawyers will tell us our chances of losing are just 1 in 10,” Simon says.

This unpredictability doesn't bother patent trolls because they have little to lose in a suit. They may not even pay attorneys' fees because their attorneys frequently work on a contingency fee basis.

“If the court rules against them, they just lose $50,000, and if they win, they win a whole lot more,” Simon says.

Patent trolls have yet another important advantage in trials: jury bias. Trolls often portray themselves in court as small inventors fighting big corporations, and in such situations, jurors frequently want to help the little guy.

This bias against big companies is greater than companies and their counsel often realize, according to Kimberly Moore, who teaches patent law at George Mason University School of Law. Moore recently completed a study of patent lawsuits and found that when an individual sues a company in a bench trial, each side has an equal chance of winning. When a patent trial goes before a jury, however, the individual is significantly more likely to win. If corporate counsel realized the extent of jury bias, the attorneys would try harder to avoid jury trials, Moore says.

Risky Business

With all of these advantages, it's no wonder that many individuals and companies have decided to join the ranks of the trolls. One of the most famous converts is Peter Detkin, who invented the term “patent troll” in 2001 while serving as in-house counsel for Intel. Detkin is now a managing director at Intellectual Ventures, which most observers characterize as a troll.

Intellectual Ventures is a somewhat different type of troll. Instead of acquiring companies with patents, the five-year-old company has its own scientists who are attempting to come up with patentable inventions in a wide variety of fields. At the end of the day, however, the company's goal is to make money by licensing patents, not by manufacturing or selling products.

Some big names support Intellectual Ventures. Nathan Myhrvold, the former chief technology officer for Microsoft, co-founded the company. Google, Microsoft and Intel all reportedly invested in the company, and each has received licenses for technology Intellectual Ventures invented.

Despite the growing allure of the PLEC industry, companies may want to think twice before jumping into this line of work. Consider the situation of Acacia Research, one of the country's premier PLEC firms. The firm owns more than 130 patents and has made hundreds of licensing deals with a wide variety of companies, including Albertson's, Adidas, Hewlett-Packard, Sony, Target, T. Rowe Price, Nokia and Walt Disney Co. In 2004, Acacia's licensing division brought in $24 million–and was still almost $5 million in the red.

“It's not easy to set up a fully functioning licensing company,” says Paul Ryan, chairman and CEO of Acacia. “It's not an overnight thing.” He adds that Acacia's licensing arm is now close to breaking even.

Many companies, however, either don't know or don't care about the difficulties of patent licensing. “In the short horizon, being a patent troll looks very attractive, and new players are jumping into that business every day,” Malackowski says. “There's a groundswell of money seeking to get into that business.”