The Obama Administration has announced five executive actions and seven legislative proposals aimed at holding back the tsunami of litigation by patent trolls, and lawyers are weighing in on whether the recommendations will wall off the tidal waves or merely be sandbags on the shore.
“These are more symbolic, [rather] than having a meaningful impact,” said Anthony Biller, an intellectual property lawyer at Coats and Bennett in Cary, N.C.
“They’re addressing the symptoms of the problem, rather than the problem itself,” agreed Jacob S. Wharton, a patent attorney and partner at Womble Carlyle in Winston-Salem, N.C.
But James Bessen, a professor at Boston University Law School who co-authored a study on patent trolls, said he was pleased to see the White House “get aggressive in this area.”
“I like all the ideas; some will be more effective than others,” he said.
According to his study, litigation by patent trolls cost $29 billion in 2011 in direct out-of-pocket legal expenses and payments to patent trolls.
Patent trolls, also known as patent assertion entities, are shell companies that buy up patents but do not invent anything themselves. Their purpose is to sue, or collect money by threatening to sue, companies for infringing the patents they own.
Their presence has ballooned. In 2007, patent trolls brought 22 percent of patent litigation nationwide, and by 2012 trolls accounted for 40 percent of patent lawsuits, according to another study by Professor Robin Feldman of the University of California Hastings College of Law in San Francisco.
The type of company at the mercy of patent trolls has also changed.
Patent trolls used to be a concern for only the tech giants of the world, most notably in the “smartphone wars,” but lately they have begun to threaten small businesses not involved in the tech industry.
“This is hitting Main Street,” said Wharton, who represents construction and engineering firms with as few as 20 employees threatened by a patent troll called MPHJ Technology Investments LLC.
MPHJ Technology owns 40 shell companies, including one that holds a patent on scanner technology. MPHJ has sent demand letters to businesses nationwide seeking $1,000 for each employee who used any device to scan and email documents, such as a copy machine. Outcry from local businesses in Vermont prompted the state legislature to pass the first law in the country that creates a cause of action for “bad faith assertion” of patent infringement — a right to sue the suers, so to speak. Vermont Attorney General Bill Sorrell has also filed a lawsuit against MPHJ Technologies for violating state consumer protection laws.
‘Smash and grab’
The executive actions taken by President Barack Obama that will have the greatest effect are those that change the way the U.S. Patent and Trademark Office operates, Bessen said.
That’s because the root of the patent troll problem, according to Bessen, is that thousands of patents are still being issued that are too broad and invalid from the start.
One of the executive actions will “tighten functional claiming.” Functional claims are patents that broadly cover all methods of doing something, instead of specifying a particular way to solve a problem.
It’s like patenting “a means to cure cancer” instead of “curing cancer with radiation,” Bessen said.
“Functional claiming allows patenting of the problem, not the solution, so you find a lot vague wording and patenting of the trivially obvious,” such as patenting all methods of rejecting a call on a phone, instead of patenting a single method, he said.
Patent trolls benefit from functional claiming because they purchase these broadly defined patents and sue any user of any method covered by the patent.
Bessen also gives the thumbs-up to another of Obama’s executive actions that makes it harder for patent trolls to get an “exclusion order” from the International Trade Commission to bar a company from importing an allegedly infringing item. Patent trolls have used this tactic to make an end-run around getting injunctive relief from a judge.
On the legislative side, Feldman said the proposals that require more transparency from patent trolls will make it harder for trolls to collect on frivolous demands.
Typically, she said, patent trolls send a demand letter to a business accusing it of infringing their patents, without telling the target company which patent is infringed, which technology it covers or how it infringes. The troll then asks for money to go away, and forces the company to sign a non-disclosure agreement that keeps everything about the alleged infringement secret.
“It’s a smash-and-grab operation,” she said. “The leverage is that it costs between $1 million and $6 million in legal fees for a patent lawsuit, so a settlement that costs less is rational for a company.”
Feldman advocates requiring the real owner of a troll to identify itself and the public filing of demand letters — two of the legislative recommendations — because that would expose empty demand letters and allow small businesses to work with each other rather than be in the dark.
‘De minimis impact’
Patent litigators are skeptical about whether the proposals will bring about real change.
“They will have a de minimis impact,” said Biller.
He says patent trolls don’t profit from anonymity, so he is not impressed by recommendations that require exposing the owners of patent trolls.
“I don’t think it’s a controversial point that the reason patent trolls exist is for money. So long as it’s a highly profitable venture, this is going to go on,” he said.
One of Obama’s legislative recommendations is to give judges more discretion to award attorney fees as a sanction against abusive claims.
But Biller thinks there should be mandatory fee-shifting for a losing party in a patent troll suit. He also recommends a tort-reform style approach to patent troll litigation, including capping damages and removing injunctive relief for any non-practicing patent entity until it becomes a “practicing patent entity” by inventing something, rather than simply buying others’ patents.
Two relevant bills have been introduced in Congress this year. The latest bill, The Patent Quality Improvement Act, introduced by Sen. Charles E. Schumer, D-N.Y., in May, would allow anyone threatened with an infringement suit over a business-method patent, including all software patents, to seek reexamination of the patent and its scope by the Patent and Trademark Office. Earlier this year, Reps. Peter DeFazio, D-Ore., and Jason Chaffetz, R-Utah, introduced the SHIELD Act, which would impose a loser-pays system on patent troll lawsuits.
While Wharton agreed that the White House proposals are more bark than bite, he said he would not want to see legislation that imposes strict rules, such as mandatory fee-shifting.
“I’m no friend of patent trolls, but I also represent an industry that seeks patent protection for inventions, everyone from apparel manufacturers to firearms manufacturers to pharmaceutical companies who are going out and getting patent applications and want to be able to enforce them,” he said. “What concerns me is if the White House or Congress goes too far and makes it so threatening to bring a patent infringement suit that legitimate companies are fearful to do so.”