Patent trolls: a bridge too far?

Call them what you like, but they do make for good reading. IPPro investigates the accusations and initiatives being levelled at non-practicing entities

A troll lives under a bridge, spending its time eating whoever crosses, except, as the tales tell, goats. It also reportedly lives in a cave, and can be described as a dwarf or a giant. In modern parlance, a troll spends his or her time plaguing internet forums with insults in a bid to upset users and get a reaction. The modern-day troll also targets ‘the little guy’, presumably because it is bigger and it can.

The multiple applications of ‘troll’, while varied in their realism, are consistent in their negativity. ‘Patent trolls’, more respectfully known as non-practicing entities (NPEs), are litigious beasts that amass portfolios of unproven patents and enforce them against all and sundry, usually those who cannot afford to prove invalidity and find it easier to settle.

These entities are considered to be the worst form of NPE, and are commonly referred to as patent assertion entities (PAEs), although not here where possible, as that description is unreliable in its scope. Indeed, a number of speakers at the recent London Patent Summit bemoaned the use of the PAE label, arguing that it describes almost any entity that enforces a patent.

Intellectual Ventures, a holder of 70,000 intellectual property assets, of which nearly 40,000 are actively being monetised, earning the company $3 billion in cumulative licensing revenue, is largely considered to be an NPE.

But the company’s co-founder and vice chairman, Peter Detkin, takes issue with both the “patent troll” and NPE labels. He says: “As the political fight heats up the word ‘troll’ has been stretched to the point where it has almost no meaning and where legitimate market players are being swept in with the bad actors.”

“And the polite term for ‘patent troll’, non-practicing entity, is misleading and reflects a serious misunderstanding of how the patent system is supposed to work. We propose something much simpler: ‘patent holder’. That’s all that really matters, and puts the focus where it should be—on the patent itself. There isn’t a need to categorise the holder beyond that.”

Political pursuit

Whatever the description, the patent troll scourge—hyperbolic, but read on—has prompted a backlash in the US. In fact, it is such a contentious issue that President Barack Obama has waded into the fray. At the Fireside Hangout in February 2012, he said: “[PAEs] don’t actually produce anything themselves. They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

The White House issued a report into the behaviour of these entities a year later, on 4 June 2013. It also issued executive actions that the Obama administration is taking, and legislative measures that it is asking US Congress to pass to protect American innovators.

The issued report details the extent of the problem in the US, with estimates putting the cost of NPE settlements at $29 billion in 2011, a 400 percent increase from 2005.

The result, said Gene Sperling, director of the national economic council and assistant to the president for economic policy, is “costing the economy billions of dollars and undermining American innovation”.

In his blog post, he added: “Today, some of the largest innovators in high-tech spend more money on patent litigation and acquisition than they do on research and development for new products. Smaller companies are getting hit just as hard, and 40 percent of technology startups targeted by patent trolls reported a significant impact on their business operations due the suit or threat thereof.”

“It’s clear that the abuse of the patent system is stifling innovation and putting a drag on our economy. The trolling has gotten out of control, and it’s time to act.”

Trolling is the verb

Among the steps that the Obama administration wants to take will require patentees and applicants to disclose the ‘real party in interest’.

“[It requires] any party sending demand letters, filing an infringement suit or seeking [patent office] review of a patent to file updated ownership information, and enabling the [patent office] or district courts to impose sanctions for non-compliance”, said a White House statement.

Commenting in June on the ‘real party in interest’ administrative action, an Intellectual Ventures statement said: “[The company] believes ‘real party in interest’ proposals are misguided and merit further discussion, but we will of course comply with whatever regulations are enacted.”

Brian O’Shaughnessy, shareholder at the IP Law firm RatnerPrestia and regional vice president of the US at the Licensing Executive Society USA & Canada, where it is his job to act as public policy coordinator for statements that the society wishes to make on US legislative initiatives, points back to comments made by US Supreme Court Justice Potter Stewart when he was faced with a case covering pornography. He tried to define ‘obscenity’, but in frustration acknowledged that it defied definition. Instead, he said he would know it when he saw it.

“The same parallel applies here,” explains O’Shaughnessy. “Troll behaviour is something that defies definition. You cannot call someone a troll without having to write more exceptions into the rule that consume the rule itself. Once you start writing exceptions, then you invite gamesmanship. We can try to carve out universities and government labs, but then you have to carve out other entities, and the more you start doing that, the more you dive down into a rabbit hole that legislators are ill equipped to deal with.”

“I’m very concerned because I have a great fear that legislators using a tool that is terribly ill-suited to this issue will wind up trying to use a bomb instead of a scalpel.”

An example of new legislation aimed at addressing abusive patent litigation came on 23 October, in the form of a US House Judiciary Committee bill. The bipartisan Innovation Act “builds on the reforms that were made last Congress in the America Invents Act and addresses certain abusive practices taking place in our courts”, according to a statement.

The bill primarily aims to target abusive patent litigation, which its political backers stressed will tackle behaviour rather than individuals. It will not “diminish or devalue patent rights in any way”, while introducing heightened pleading standards and transparency provisions, and a modernised version of fee shifting.

House Judiciary Committee Chairman Bob Goodlatte said: “The bipartisan Innovation Act is designed to eliminate the abuses of our patent system, discourage frivolous patent litigation and keep US patent laws up to date. These important actions will help fuel the engine of American innovation and creativity, creating new jobs and growing our economy.”

The Intellectual Ventures statement in June went on to discuss legislative initiatives that had already put in place, namely the America Invents Act (AIA).

“Intellectual Ventures supports improvements to the patent system, and we supported the president when he introduced the American Invents Act in 2011. The AIA received broad, bipartisan support and represents an ambitious overhaul to the current patent system.”

“Although we appreciate some of the president’s current proposals and believe they could help alleviate some of the issues that persist in the current patent system, Intellectual Ventures would encourage lawmakers to continue pursuing the bold changes set forth as part of the AIA since they have yet to be fully adopted.”

Two aspects of the AIA specifically sought to examine and address NPE litigation. Article 34 of the act, which came into effect in March, obliged the US Government Accountability Office to assess the consequences of patent litigation brought by NPEs.

The office released its report in August, finding that NPEs are responsible for around 20 percent of patent litigation in the US.

The report described that, after fluctuating only slightly between 2000 and 2010, the number of patent infringement suits brought in the US increased by about a third in 2011. Attempting to explain this increase, the report noted that increasing numbers of “patent trolls” might have played a part.

It stated: “Stakeholders knowledgeable in patent litigation identified three key factors that likely contributed to many recent patent infringement lawsuits. First, several stakeholders [the office] interviewed said that many such lawsuits are related to the prevalence of patents with unclear property rights; for example, several of these stakeholders noted that software-related patents often had overly broad or unclear claims or both.”

“Second, some stakeholders said that the potential for large monetary awards from the courts, even for ideas that make only small contributions to a product, can be an incentive for patent owners to file infringement lawsuits.”

“Third, several stakeholders said that the recognition by companies that patents are a more valuable asset than once assumed may have contributed to recent patent infringement lawsuits.”

Section 19 of the AIA, already in effect, prohibits defendants from being joined in a suit unless there are questions of fact common to all of them. “The AIA had a rather notable effect on patent cases, in that it is now very difficult to name more than one defendant in a lawsuit,” says O’Shaughnessy.

The high bar for naming defendants in patent suits might also have affected the studies on NPE litigation carried out since its implementation.

O’Shaughnessy says: “Each defendant has to be named in an individual lawsuit. A troll might have brought a lawsuit against 15 different defendants a year ago, but today it’s 15 lawsuits. Consequently, that can be exploited to make it look like the number of lawsuits have increased dramatically due to troll activity, when the real fact of the matter is that litigation has not changed, merely the number of lawsuits.”

He adds that the premise behind legislative initiatives, and the studies used to support them, “is flawed—that NPE litigation is somehow crushing our judicial system”.

“In fact, when measured relative to the number of patents issued, the data show that the number of patent lawsuits today is below historic highs, and has remained steady for many decades.”

Unwanted attention

Another US agency taking an interest in NPEs is the Federal Trade Commission (FTC), which recently voted to seek public comments on a proposal to gather information from 25 companies that could make the NPE picture all the clearer.

In 2012, the anti-trust division of the Department of Justice along with the FTC sponsored a workshop to explore the impact of NPE activity on innovation and competition.

While workshop participants and commenters identified the potential damage that NPEs could cause, they noted that there was insufficient empirical data in the field and recommended that the FTC use its authority under Section 6(b) of the Federal Trade Commission Act—“effectively giving it a data generation authority by way of subpoena,” explains O’Shaughnessy.

“Patents are key to innovation and competition, so it’s important for us to get a better understanding of how PAEs operate,” said FTC chairperson Edith Ramirez.

“We want to use our 6(b) authority to expand the empirical picture on the costs and benefits of PAE activity. What we learn will support informed policy decisions.”

Previous studies have focused mainly on publicly available litigation data and concluded that NPE litigation is increasing. The FTC has congressional power to gather non-public data, such as licensing agreements, and patent acquisition, cost and revenue information that will provide a clearer view of NPE activity.

The FTC hopes to answer questions that stem directly from the debate surrounding NPEs, including how they are structured, and how much they earn through patent assertion. After public consultation, the FTC will submit a request to the Office of Management and Budget to comply with the Paperwork Reduction Act, seeking clearance for its proposal to send compulsory process issues to NPEs.

Russ Merbeth, chief policy counsel at Intellectual Ventures, welcomes the FTC’s attention. He says: “The market for patents has grown tremendously in the last decade, and it makes sense that its impact on the US economy is being studied by the competition and consumer protection authorities at the FTC. We believe the FTC analysis would help policymakers make decisions on patent reform based on business behaviours, not business models.

O’Shaughnessy comments: “By opening up such an enquiry, they can engage entities that are involved in IP acquisition, licensing, enforcement, or whatever, and demand otherwise confidential information.”

But he cautions: “This is going to be a long-term process—the FTC won’t send out requests for information for at least a year, because there is a lot left to be done before it can.”

Sleepless in settling

In the meantime, the patent troll problem is ongoing, as highlighted by Lodsys, which did not respond to a request for comment. It recently agreed to settle with IT security company Kaspersky Lab for nothing.
The NPE originally accused 55 defendants of patent infringement, but they have all settled with Lodsys since it was filed in the US District Court for the Eastern District of Texas, except Kaspersky Lab.

Lodsys agreed “a full and unconditional capitulation” ahead of the case going to trial on 7 October, according to Eugene Kaspersky, chief executive of Kaspersky Lab, with his company having to pay nothing to settle the litigation.

Similarly, Lodsys accused seven developers of infringing two patents in May 2011 by using iOS-based in-app purchasing technology, and later added another four to its complaint.

Apple intervened in the case, arguing that an existing licence agreement between it and Lodsys rendered the asserted patents exhausted in this case and so the developers were protected from liability.

But all of the developers settled, and US District Court for the Eastern District of Texas Judge Rodney Gilstrap granted Lodsys’s motion to dismiss Apple from its case against on 24 September.

This left the patent exhaustion question unanswered, much to the annoyance of the Electronic Frontier Foundation, which filed an amicus brief asking the court to rule on the merits of the licence issue, because a ruling on “whether or not Lodsys’s claims against iOS-based app developers are barred or exhausted by Apple’s licence would provide crucial guidance to millions of app developers”.

If an accused infringer chooses to go to court rather than settle with what it thinks is a true ‘troll’ that is bringing an arguably bogus case, the trial judge has tools available that can help.

O’Shaughnessy says: “The judge already has the ability to sanction abuse of conduct in the context of litigation. That is available through a couple of mechanisms, most notably Rule 11 of the Federal Rules of Civil Procedure. It obligates a litigant to do reasonable due diligence before bringing a lawsuit. If that isn’t done, and the litigant perpetuates the lawsuit, the judge can issue sanctions. They can range from monetary fines to dismissing the case with prejudice.”

He adds: “Judges traditionally don’t use that vehicle because of a fear that an overuse of Rule 11 sanctions would chill access to the court system. But I think the kind of legislation that is being proposed is potentially far more dangerous than a more aggressive use of Rule 11 might foster.”

The patent troll problem, however large, damaging and costly, is a reality, according to many. But before a solution must come understanding, and the fact that the problem has at least four different names—NPE, PAE, patent troll and patent holder—suggests that this is some way off.

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