Patent Troll Legislation—Swinging Too Far?

By Chrystal Mancuso-Smith, Brett Johnson, and Joseph G. Pia

 

This article focuses on a perhaps--unanticipated conflict in patent law that has gained traction in both the media and the political arena and has become a major, ongoing issue in  society—the prevalence of “patent trolls.” Patent trolls are persons or entities who own patents but, for whatever reason, do not presently use the patent for its intended purpose, that is, to make a widget, but instead challenge the rights of others who may infringe on that patent. The US Patent and Trademark Office (USPTO) has defined patent infringement as “the act of making, using, selling, or offering to sell a patented invention, or importing into the United States a product covered by a claim of a patent without the permission of the patent owner.”

TERMINOLOGY

Patent law, as you might imagine, is a field replete with acronyms. Examples relevant to this article include the terms NPE (a non-practicing entity) and PAE (a patent-assertion entity). NPEs and PAEs are less pejorative terms to describe patent trolls. Notably, certain NPEs, such as university research laboratories, generally are excluded from being referred to as trolls though they technically may fall within the description of an NPE.

The NPEs actively, and quite often aggressively, seek to curtail the use of their patents by others without compensation, by first sending out demand letters that often result in a licensing agreement and fee, but they are not shy about filing suit. Use of the more  pejorative term—“troll”—has come into vogue more recently and groups together all of the “enforcers,”  regardless of the  veracity of their  underlying  enforcement efforts. As the  number of patents began to increase exponentially, so did  litigation over not only the  ownership and/or user rights to the patents, but also, of relevance here, disputes over whether a person or entity was infringing on a patent owned by another.

COMMON MISCONCEPTIONS

Of course, valid arguments can be made on both sides, and an in-depth analysis of the merits and weaknesses of both positions is not only extremely fact-dependent, but also is beyond the scope of this article. This article provides information as to some of the more common misperceptions/misconceptions of the NPE that its authors have observed through the recent efforts at the federal and state levels to address NPEs through the passage of legislation.

ENFORCEMENT OF NPE PATENTS IS HARDLY A NEW PHENOMENON

Despite the flurry of news articles and legislative proposals in the last several years—many written from a perspective of addressing this “new threat” to innovation and development—patent infringement claims from those who do not “practice” their invention, that is, patent trolls, are not a new phenomenon. Eli Whitney, the famed inventor of the cotton gin, generated proceeds from patent infringement litigation. Mr. Whitney did not achieve success in commercializing the cotton gin, but he spent years suing infringers. Indeed, the Patent Act does not, and never has, granted anyone any right to make or use anything; it grants the patent owner the right to exclude others from doing so without a license. Despite Mr. Whitney never achieving commercial success by selling the product himself, society benefited greatly from his invention.

When patent infringement cases brought by NPEs are looked at collectively, half of the cases were initiated prior to July 2005. For example, the Papst Licensing and Rates Technology filed its first cases in 1986. The bulk of the NPEs filed their first cases before 2000. The litigiousness of the NPEs, upon closer examination, appears to be attributed to the longevity of the NPE, rather than newness and aggressiveness. On  average, Papst Licensing, for example, has filed roughly two cases per year for the past 25 years, arguably far fewer than many practicing companies today.

A similar misconception is that the dominant form of NPE patents cover “business methods patents” (patents that cover a method of doing business, rather than an invention apparatus), which are favored by NPEs because these types of patents have broad coverage and are diffi cult to defend in a patent infringement suit. This is confirmed by studies, including a 2013 study by Patent Freedom, which have found that between 75 percent and 89 percent of NPE patents are not business-method patents. Instead, most of the patents are classified in the USPTO under “Communications and Computers” and “Mechanical Arts” with a minor number in the “Chemical Arts” categories.

With respect to patent quality, the authors of this article find that, contrary to the generalizations made, NPE litigation often is brought over important or influential patents. Of those that are fully litigated, only 28 percent are found invalid, in contrast to the 20 percent of other types of patents, which are found invalid through litigation.

Between 75 percent and 89 percent of NPE patents are not business-method patents. Instead, most of the patents are classified in the USPTO under “Communications and Computers” and “Mechanical Arts” with a minor number In the “Chemical Arts” categories.

PAE proponents also make general claims that do not appear to be fully supported by the facts and figures. For example, such proponents often defend their practice by claiming that the PAEs promote investment; however, this does not appear to be the case. One position favoring PAEs that is supported is the fact that PAEs do offer some amount of protection for individual inventors or small companies, who would be unable to enforce their patents against larger companies, to the extent that PAEs provide litigation funding and contingency fee support where litigation could not otherwise be funded by the small entities or individual inventors.

HISTORY OF PATENT LAW

The granting of exclusive rights to inventors of new products in the United States traces back to colonial Massachusetts where, in 1641, the Massachusetts General Court gave exclusive commercial rights to Samuel Winslow for his salt-making process, with other colonies and subsequently states soon following suit. By the end of the 18th century, the generalized patent law of the various states was not only conflicting but was burdensome to potential filers. This led to the decision to govern this area on a federal level, commencing with the Patent Act of 1790. Numerous amendments followed, culminating in the modern Patent Law as it exists today where patent cases are heard before the US Court of Appeals for the Federal Circuit.

RECENTLY ENACTED FEDERAL LEGISLATION AND CASE LAW

The Leahy–Smith America Invents Act, which amends 35 U.S.C. §§ 1 et seq., as well as recent case law, sought to address concerns that businesses were having to spend money in defending against meritless patent infringement claims. The Leahy–Smith Act added vari-ous measures and instituted a special review for Covered Business Methods (CBM) for a limited duration. For claims that fall within that category, a defendant to a patent infringement claim can seek to have the USPTO review the already-issued patent and potentially cancel the claims of an already-issued patent.

Business-method claims seem to draw the most scrutiny from society because an idea in the area of finance or other areas of business simply does not feel like a protectable “invention” like those in the hard sciences. Like Congress, the US Supreme Court recently has restricted patent coverage for business methods. Three Justices concurred in Alice Corp. Pty. Ltdv v. CLS Bank Int’l that, in their view, a business method can never be patentable.

Following Alice, the Federal Circuit invalidated an issued patent that covered a method of doing business, which involved claims that covered the exchange of advertising material in exchange for access to copy-righted material unpatentable. In Ultramercial v. Hulu, Inc., Judge Mayer separately concurred and wrote that “[t]he problem [in Alice] was not that the asserted claims disclosed no innovation, but that it was an entrepreneurial rather than a technological one.” Judge Mayer continued that “[i]n assessing patent eligibility, advances in non-technological disciplines—such as business, law, or the social sciences—simply do not count.” To this point, however, neither the Supreme Court nor Congress has categorically invalidated business-method patents.

Some big-business law firms have taken the approach that an IPR should be sought as a matter of course along with a stay of the district court litigation.

In addition to CBM proceedings, the Leahy–Smith Act provided for inter partes review (IPR) of patents that were not business-method patents. The IPR proceeding is similar to a trial, but it is conducted before a panel of three Administrative Law Judges at the USPTO. The proceedings must be conducted within 18 months of the fi ling of a petition but upon good cause can be extended to two years from the filing of the petition. Some big-business law firms have taken the approach that an IPR should be sought as a matter of course along with a stay of the district court litigation. For example, a partner at Hiscock & Barclay, LLC, presented a seminar wherein he recommended that defendants file an IPR to “burn the clock” and “grind [the plaintiff ] down.”

So, the Leahy–Smith Act provides at least three opportunities where the claims of a patent can be found invalid. First, it must pass through the USPTO, which is an extensive process that takes about three years, costs around $15,000, and is examined before being issued (or not issued) by an individual trained in the particular field of the invention. Second, if the patent ultimately issues, it is now common practice for defendants in a patent case to seek another review of the claims by a three-judge panel before the USPTO and seek a stay of litigation pending the IPR proceeding. Finally, if the defendant is not successful in invalidating the patent during the IPR, it will then seek to do so in the district court litigation. With so many different forums, it is very likely that someone will decide that the claims are invalid.

PROPOSED FEDERAL LEGISLATION

Recent proposed legislation is directed specifically toward making it more difficult for non-practicing entities to bring patent suits. The Innovation Act, H.R. 3309, sponsored by House Judiciary Chairman Robert Goodlatte, passed in the US House of Representatives on December 5, 2013, and requires: (1) heightened pleading requirements in that plaintiffs in infringement suits must identify all asserted patents and describe in a high degree of detail the alleged infringement, including the specific infringed claims of each patent and the name or model number of each accused product; (2) fee-shifting to the losing party, where the court must award the prevailing party reasonable fees and expenses incurred unless it finds the losing party was justified in its position; (3) additional ownership disclosure requirements, where patent holders must disclose all beneficial owners of a patent-in-suit, allowing a defendant to join such beneficial owners to the suit; and (4) preclusion from pursuing certain types of defendants in some circumstances, for example, where a plaintiff sues a product manufacturer and its customers, suits against customers may be stayed if the manufacturer agrees to handle the suit on behalf of its customers, avoiding duplicative defense costs.

One of the difficulties with the first suggested change, heightened pleading requirements, is that there often is a lack of publically available information to patent owners before filing suit. Although parties and their counsel have an obligation under Federal Rule of Civil Procedure 11 to have a good-faith basis before filing suit, the plaintiff in patent litigation often cannot know all products that infringe without the benefit of discovery. Should the heightened pleading requirements be required, it might be necessary to allow plaintiff s some form of pre-suit preliminary discovery in order to be able to make informed decisions and meet the heighted pleading standards. This is particularly true in cases involving methods of manufacture where there is often little to no public information about such things. Otherwise, ideas could be stolen and used without consequence.

One of the difficulties with the first suggested change, heightened pleading requirements, is that there often is a lack of publically available information to patent owners before filing suit.

With respect to the second proposal, fee-shifting, the standard default rule in the United States is that each party bears its own respective attorney fees. The current version of the Patent Act provides for attorney fees to the  prevailing party in “exceptional” cases,13 and the US Supreme Court recently lowered the standard, essentially moving from a subjective bad-faith standard to an objectively unreasonable standard. Arguments can be made for and against a fee-shifting approach, but it is not clear that patent litigation should be treated differently from other types of litigation in that regard. Proponents of a fee-shifting paradigm typically will argue that the prevailing party cannot be made whole if it still must pay attorney fees, while opponents of a fee-shifting provision typically will argue that the fee-shifting hurts the small party more than the big party because an award of attorney fees could be devastating, and in some cases, bankrupt a small company.

With respect to the third proposed change requiring additional ownership information, that information generally is sought and provided during discovery. Again, there does not appear to be any good reason to deviate from other areas of the law in this regard.

Finally, with respect to the last proposed change, which involves the ability of retailers to get out of the suit if the manufacturer of an infringing product agrees to be wholly responsible, the concern by patent owners of course is that the manufacturer will be insolvent in the event a judgment ultimately is obtained. Retailers argue that this is necessary to avoid costly litigation. In reality, though, in most cases, the retailer is indemnified by the manufacturer, and often a single law firm will represent all defendants in patent litigation.

STATE LEGISLATION

Many states also have jumped into the mix. Led by Vermont, more than 20 states have passed legislation aimed at curtailing patent enforcement. The laws generally state that meritless assertion of patents is a violation of the consumer protection laws of the state. Problems abound from this, including the fact that subject matter jurisdiction for patents lies exclusively with federal courts, thus implicating the federal preemption doctrine. To determine whether a patent claim lacks merit, the technology at issue must be understood. This raises not only a concern that an individual charged with enforcement of the respective state acts has complete discretion whether to bring a claim but also raises issues of federal preemption.

The states that have followed Vermont’s model include: Alabama, Georgia, Idaho, Louisiana, Maine, Maryland, Missouri, New Hampshire, North Carolina, Oregon, South Dakota, Utah, and Virginia.

Recently, in Activision TV, Inc. v. Bruning, the US District Court for the District of Nebraska found that the Nebraska State Attorney General’s Office had over-stepped its bounds in seeking to enforce anti-patent litigation.16 The federal court ordered the Nebraska Attorney General to pay $725,000 for attorney fees to affected parties because the attorney general had sent a cease-and-desist letter to a law firm representing  purported “patent trolls.” The attorney fees award amounts to more than 10 percent of the total annual budget for the Nebraska Attorney General’s Office.

UTAH'S STATE ACT

In the 2014 General Session, House Bill 117 was proposed in an effort to set minimum standards for demand letters in patent infringement matters. The bill was supported by a number of Utah organizations, including, among others, the Utah Association of Realtors, the Utah Bankers’ Association, the Utah Food Industry, the League of Credit Unions, the Mining Association, and the Utah Technology Counsel. The bill, later enacted and codified as Utah Code Ann. §§ 78B-6-1901 through 1905, addressed the potential for a  bad-faith component to those individuals, not just NPEs, who send out demand letter(s) to Utah  residents or  business entities asserting patent infringement. Interestingly, the statute acknowledged the federal preemption issue at the start but stated that the statute did not “interfere[ ] with legitimate patent enforcement efforts” and instead sought “to protect Utah business … and to build Utah’s economy.”

The statute provides for both punitive damages up to $50,000, plus actual damages, attorney fees and costs for recipients of letters that are determined to have been sent in bad faith. Not only does the law allow a recipient to bring suit, but it also empowers the attorney general to conduct civil investigations and bring civil actions.

Lastly, the statute contains a bond provision, currently capped at $250,000.

Although this statute appears to have real teeth to discourage NPEs from sending out demand letters that may be of questionable merit, it is simply too early to evaluate the effectiveness and/or overall usefulness of this new law until cases work their way through the Utah court system.

HAVE WE POSSIBLY SWUNG TOO FAR?

Stephen Haber, a professor of political science and senior fellow of the Hoover Institution, and Ross Levine, a professor of business at the University of California, Berkeley, offer the opinion that the patent system is not broken and does not need to be fixed. Haber and Levine write that the “truth is that patent reform activists have not provided any evidence that the current patent system or Patent Monetization Entities—PME’s [sic], the technical, non-pejorative term for a ‘patent troll’—have hindered innovation and entrepreneurship.” They continue that “[r]esearch [they] conducted with Alexander Galetovic of the Universidad de Los Andes found that innovation rates have been strongest in exactly the industries that patent-reform advocates claim are suffering from ‘trolls’ and a broken patent system. The innovation in these industries is matched with a rapid decline in prices."

Utah Code Ann. §§ 78B-6-1901 through 1905, addressed the potential for a bad-faith component to those individuals, not just NPEs, who send out demand letter(s) to Utah residents or business entities asserting patent infringement.

They conclude that “[t]here is one basic reason behind the attacks on trolls: Big Money … . Indeed, some corporations are looking to gain a competitive edge by changing the rules of the game. … Corporations that pay large sums for patented technologies will point to lawsuits, trolls and anything else that will encourage lawmakers to pass such reforms. But when policy makers consider reforming the patent system, they should not rely on often repeated, but never substantiated, claims that patent trolls and lawsuits stymie innovation and the commercialization of complex technologies. They should demand robust evidence that the current system is slowing down innovation. That evidence does not exist.”20 Big business driven patent-reform legislation has not provided an answer to the question of why an individual inventor or small company should be provided less protection under the law than a goliath corporation.

Harbor and Levine do not really discuss the basic philosophical belief behind a patent system. The patent system rewards innovation. It grants the patent owner a limited-term monopoly in exchange for the requirement that a patent owner must disclose the technology sufficiently that one of “ordinary skill in the art” could make and practice the invention from reading the patent.

It is very difficult to convince an individual inventor that he or she should use resources to develop ideas or spend $15,000 or more of his or her own hard-earned money to obtain a patent if there is no way to enforce the patent if and when it is granted.

The alternative to patents is trade secrets because there is no incentive to disclose how to make and use the  patented invention, absent the patent system. The patent system rewards innovation and  disclosure in exchange for a limited-term monopoly. It is very  difficult to convince an individual inventor that he or she should use resources to develop ideas or spend $15,000 or more of his or her own hard-earned money to obtain a patent if there is no way to enforce the  patent if and when it is granted. Indeed, the patent system is really just a subcomponent of the capitalistic ideal that humans function best when they are given a direct incentive.

 

As published in The Computer & Internet Lawyer, October 2015, Volume 32, Number 10, pages 26–30,

with permission from Wolters Kluwer, New York, NY, 1-800-638-8437, www.wklawbusiness.com.