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The Right Way to Combat Patent Trolls

Tuesday, October 22, 2013

Although the problem of patent trolls is growing rapidly — a majority of patent lawsuits now involve such entities, costing billions of dollars annually — we should take care in our efforts to combat them.

“To live,” Henrik Ibsen once wrote, “is to war with trolls.”

American businesses, consumers, and lawmakers can sympathize with the famed Norwegian playwright as they have grown increasingly frustrated with often frivolous lawsuits filed by so-called “patent trolls,” or entities that hold patents and assert them against others but don’t design, develop, or manufacture any actual products.

In response, the anti-troll forces have fought back in the courts, state legislatures, and Congress, all in an effort to defang the beast. But while some of these measures are appropriate, others go too far. In resolving a serious problem, we need to be careful not to throw the baby out with the bathwater when that baby (our patent system) has promoted American innovation for centuries.

A bit of background first. Patent trolls are also known as “non-practicing entities” (NPEs) or “patent assertion entities” (PAEs), namely, companies formed with the purpose of threatening or filing suit on the basis of their patent holdings. The patent statute imposes no requirement that a patent holder actually practice its patent; a patent is a negative, exclusionary right that confers no corresponding responsibility upon the patent holder to design or make anything.

Indeed, many companies, universities, and research institutes around the world develop groundbreaking technology that they protect through patents and then license to other companies that manufacture and commercialize it.

But many PAEs use litigation to target companies already creating such goods or services; recently, these entities have begun pursuing retailers and even end-users of such products.

A Growing Problem

Last June, the Executive Office of the President released a report entitled “Patent Assertion and U.S. Innovation” that examined various aspects of troll suits. “PAE activities,” the report contended, “hurt firms of all sizes. Although many significant settlements are from large companies, the majority of PAE suits target small and inventor-driven companies.” What’s more, the report found, “PAEs are increasingly targeting end users of products, including many small businesses.”

Trolls have begun pursuing retailers and even end users of products.

Specifically, according to the White House’s analysis, victims of patent trolls paid $29 billion to fight or settle infringement claims in 2011 alone. In addition, 62 percent of all patent lawsuits in America involve claims by patent trolls — a marked increase from 2006, when 19 percent of suits involved trolls’ claims. Moreover, 40 percent of tech startups who were sued by patent trolls “reported a significant impact on their business.”

This report followed on the heels of a detailed 2011 study by the Federal Trade Commission that found that by “purchasing and asserting patents against manufacturers already using the technology, rather than developing and transferring technology,” PAEs “can deter innovation by raising costs without making a technological contribution.”

Pushback against Patent Trolls

So how are industry and lawmakers fighting back?

First, with the Leahy-Smith America Invents Act, which came into effect in stages during the past several years. The act modestly tightened the requirements for obtaining a patent, chiefly by creating new avenues for accused infringers to challenge the validity of patents before the U.S. Patent and Trademark Office, rather than in court.

Second, in an insightful article in this magazine in August, Thomas Hemphill outlined a number of other efforts in some detail, including executive actions such as requiring PAEs to reveal the “real-party-in-interest” behind the curtain; the SHIELD Act currently being considered by Congress, which would compel losing parties in patent cases to pay the winners’ legal fees; and the STOP Act, also before Congress, which would further tighten Patent Office requirements for certain software patents.

Third, various states have begun using consumer protection laws to combat troll abuse. In May, Vermont filed a consumer protection complaint against one PAE that sent demand letters to “nonprofits that assist developmentally disabled Vermonters,” and the state legislature is mulling legislation that would target “bad faith assertions of patent infringement.”

Minnesota has also restricted the activities of the same company, compelling it to seek the state attorney general’s consent before sending any demand letters.

And Nebraska’s attorney general has singled out a different PAE for making potentially “false, misleading, or deceptive statements,” engaging in “baseless harassment,” and sending demand letters that “serve to advance no valid legal purpose.” In response, the company has sued the attorney general.

Striking a balance between patent rights and consumer protection in the context of patent litigation is not one of Congress’s strengths.

PAEs have gotten so nasty in their efforts that one California company, FindTheBest.com, has launched an unusual legal attack against a PAE called Lumen View Technology: accusing it of a violation of the Racketeer Influenced and Corrupt Organizations Act. FindTheBest claims that Lumen View and other affiliated entities have worked in concert to extort licensing fees and other settlements from a variety of companies. (Full disclosure: FindTheBest’s attorney, Joseph Leventhal, is a personal friend and colleague, although I have no involvement in the case).

But are these various efforts likely to serve their intended purposes? And, per the law of unintended consequences, might they go too far? I think the answers to these questions are, respectively, “mostly” and “quite possibly.”

There is no question that the patent troll problem has worsened in recent years, both in perception and in reality. Several PAEs have begun targeting consumers, end users, and even nonprofits with demand letters and litigation — attacks that are legally permissible but inherently suspect, as the recipients of those letters and lawsuits are least able and willing to hire attorneys to fight back against them.

Understandably, many in the technology sector expected the aforementioned America Invents Act to thwart most of these abuses, and when it did not, they have sought further-reaching changes to the patent regime.

But we must be skeptical of Congress’s ability to confront these issues, and not just because of Washington’s recent fiscal fiascoes. Striking a balance between patent rights and consumer protection in the context of patent litigation is not one of Congress's strengths, to put it mildly.

In the words of Paul Michel, the former chief judge of the Federal Circuit (the court that handles patent appeals) “Congress can't micromanage litigation effectively” and generally has an “abysmal” comprehension of patent law.

Possible Solutions

Some congressional efforts, in particular the SHIELD Act, deserve a fair hearing. Under current law, compelling the losing party to pay the winner’s attorney’s fees generally requires “exceptional” circumstances. But perhaps relaxing that standard somewhat is warranted.

The patent statute imposes no requirement that a patent holder actually practice its patent.

“One possible solution,” Leventhal says, “is to lower the exceptional case standard and go back to the 1946 standard of judicial ‘discretion’ so that the prospect of paying a winning defendant’s attorney’s fees is more likely than under the current standard.” Of course, lowering this threshold may impose a chilling effect on patentees with legitimate grievances, so it requires very careful consideration.

Another potential remedy would involve shielding consumers, other end users, and nonprofits from liability, or at least capping the damages to which they may be exposed. To be sure, consumers and charity organizations are not immune from the patent statute; they get — and deserve — no blank check to infringe patents. But largely because their pockets are shallower, and because it is hard to prevail in court against a nonprofit, they have rarely been the targets of patent litigation. Yet if those taboos are eroding, perhaps it is time to reinforce them by tweaking the rules.

But overall, the bedeviling problem of distinguishing true patent trolls from legitimate licensing companies persists. “The problem is clear, but the solution is not,” Leventhal says.

And so the debate rages on. The complete version of Ibsen’s quote is: “To live is to war with trolls, in the holds of the heart and mind.” In fighting against abuses of the patent system by modern-day trolls, we must take care to use both our hearts and our minds.

Michael M. Rosen, a contributor to The American, is an attorney and writer in San Diego.

FURTHER READING: Rosen also writes “Reversing Reverse Payments: The Actavis Decision,” “Patents Defended,” and “Software Patents: Reform, Not Repeal.” Thomas A. Hemphill writes the aforementioned article “The Paradox of Patent Assertion Entities.” Jeffrey Eisenach contributes “Trolling for a Patent Policy Fix” while Claude Barfield explains “Sorting Out the High-Tech Patent Mess.” Stuart James shares “Banter #112: The Patent Problem” and James Pethokoukis argues “Why One-Size-Fits-All Patent Law Is a Bad Idea.” 

Image by Dianna Ingram / Bergman Group

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