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June 2013

The White House Takes On The Patent Trolls

Last week, the White House released its report on its strategy to combat “patent assertion entities” (PAEs -- affectionately known by many as “patent trolls”).  A PAE is a company that buys patents solely for the purpose of suing others for infringing the claims of the patent. Many people feel that patent trolls are abusing the patent system.

The basic conclusion of this June 4 report is that PAEs are a drain on the economy by supposedly filing frivolous lawsuits. According to the report, PAEs are responsible for 62 percent of all patent infringement suits (up from 29 percent in the past two years). The report accuses PAEs of “threatening to sue thousands of companies at once, without specific evidence of infringement against any of them; and asserting that their patents cover inventions not imagined at the time they were granted.”

As an example of the costs PAEs bore on society, the report points out that Apple and Google spent more money on patent litigation (and acquisition) in 2011 than they did on research and development. The report also states that PAEs threaten massive and costly discovery, and the large costs of defending one represents money that is not spent on research and development.

The report concludes that the best approach to the patent troll problem is not to ban trolls, but to tighten the rules to make life more difficult for them. In this regard, the report identifies three objectives: (1) have clearer patents with a higher standard of novelty and non-obviousness; (2) reduce the disparity of litigation costs between patent owners and technology users; and (3) have greater adaptability in the innovation system to the challenges posed by new technologies. To achieve these objectives, the report suggests several legislative recommendations and executive actions.

Legislative recommendations include: (1) requiring patent owners to disclose the real party in interest (to make the public know who is behind the lawsuit, and avoid the use of shell companies in patent litigation); (2) granting courts more discretion in awarding attorney’s fees as a sanction for abusive court filings; (3) expanding the new program for reviewing business method patents to further include reviewing “computer enabled” patents; (4) staying proceedings against consumers when a suit has been brought against vendors, retailers or manufacturers; and (5) promoting the public filing of demand letters in a public, searchable database.

Possible executive orders include: (1) making real party in interest the new default (by requiring the public patent ownership records to be up to date, thereby disclosing the “ultimate parent entity” controlling the patent); (2) requiring “functional claiming” in the context of software patents especially and maybe requiring glossaries in the patent specifications; (3) protecting consumers and end users from litigation if they “simply use the product as intended”; (4) strengthening International Trade Commission exclusion orders to be more in line with Supreme Court precedent to avoid PAE forum shopping as to the ITC; and (5) engaging in more community outreach through more roundtables.

The report also singles out software patents, saying that their scope and validity are very difficult to determine (as it is hard to separate the “function” of the software from the “means” by which that function is accomplished). According to the report, 82 percent of PAE defendants are supposedly sued on software patents.

Interestingly, the report also says that a phenomenon is occurring with software patents that is similar to what occurred with agricultural equipment and railroad equipment in the late 1800s. At that time, there was considerable uncertainty as to what the patent claims covered. The White House claims that this problem was solved by “changing the underlying conditions” (i.e., legislative changes) that rendered the business model no longer profitable so that litigation fell dramatically.

While many applaud the White House’s actions, there are doubts as to how some of these new procedures would actually work. For example, any move that sets different standards or thresholds for software patents in particular would be difficult to design and to enforce. Any system that treats one category of invention (software) different than others would be open to legal challenges. However, many countries find software generally unpatentable and the Federal Circuit Court of Appeals is  deeply split on the test for patent eligibility of software. In the May 10 Federal Circuit case of CLS Services v. Alice Corp., the 10 judges delivered seven different opinions, disagreeing fundamentally as to how software patentability is to be determined.

Additionally, the proposed special procedure to examine “computer enabled” patents would be vague in the extreme. Almost all inventions involve computers. Questions such as when is an invention “computer enabled” or simply calling for “clearer patents” is difficult as technology itself becomes more complex.

What we are more likely to see are calls for increased fee-shifting to “loser pays” scenarios and PAEs generally having a much harder time using shell companies to sue. It is also likely that we will see more activity by industry with companies banding together to fight PAEs by pooling invalidating prior art and by tracking the identity of trolls through their demand letters. This is similar to what happened in the late 1800s when the railroad companies banded together to fight infringement claims (rather than settling), and the patent claims themselves became narrower and clearer (as the technology became more codified).

Another issue the White House has not addressed in these proposals is the question of “patent inflation.” The railroad companies of the 1800s may have been fighting over a handful of patents, whereas nowadays some commentators have stated that a standard smartphone may be covered by thousands of different patents. There are now over 8 million U.S. patents in what can be described as a technology arms race. As more patents issue, it’s getting harder to look at them one by one. We’re also starting to see private companies tracking the actions of PAEs, with the pooling of prior art search results, and the crowdsourcing of patent searching. It will be interesting to see what the White House and/or Congress does next.

To read the White House report, click here.

To read the White House Fact Sheet explaining the report, click here.

Intellectual Property

David R. Heckadon

Intellectual Property