Tuesday, August 13, 2013

Addressing Improper Patent Litigation

Non-practicing entity (NPE) or patent assertion entity (PAE) are organizations that are most commonly lumped into the debate about patent trolls. Patent trolls are regarded as individuals or companies that have little to no research base, but purchase patents from other companies and then enforce those patents against alleged infringers in an overly aggressive and illegitimate matter because the patent holder has no intention of making commercial use of the patent themselves. Instead the threat of litigation is typically used to extort higher than appropriate licensing fees so the NPE can collect a quick dollar. While some praise NPEs for allowing startups and other small businesses an opportunity to better enforce their patents, enforcing a patent against others with no intention to commercialize or license the patented idea/technology at a fair price defiles the very purpose of the patent and is an inherent detriment on society both economically and culturally. Unfortunately there are too many individuals/companies that care only about their personal finances, not about the positive development of society; therefore, it is important to develop strategies to eliminate the benefits for behaving like a patent troll. Note that it must be understood that not all NPEs are patent trolls.

In addition to providing an unnecessary cultural and creative developmental barrier the quantitative economic costs facilitated by patent trolls are enormous estimated at 29 billion dollars in the U.S. in 2011 (note this estimate does not include opportunity costs only direct capital costs).1 In fact “patent trolling” was thought to make up approximately 61% of all patent litigation in 2011 and 2012.2 However, this economic damage could have been worse if not for the ruling from eBay v. MercExchange in 2006, which eliminated blanket permanent injunctions simply for patent infringement instead reaffirming the necessity of the four factors judgment when determining the level and length of injunction, if any at all.3 This decision limited the ability of patent trolls to “threatened” permanent injunctions as a negotiation tool during possible licensing agreements, which has been thought to limit the boldness of the settlement demands.

Another one of the problems with patent trolls is the structure of their organization limits the “defensive” options of the alleged infringer individual/company. The lack of manufacturing limits the ability to monitor activities by competitors and their existing patents to searching patent databases, thus infringement might only be recognized after significant investment is made in production and infrastructure. Also counter-suits typically lack significance against individuals/companies that generate income from litigation over direct commerce. Litigation costs for these types of plaintiffs are typically less than for the defense limiting mutual assured destruction tactics (i.e. litigation costs bankrupting both parties). Finally patent misuse claims are also difficult because of the necessity of anti-trust violations born from manufacturing dominance, which is lacking for a patent troll due to a limited/non-existent manufacturing basis.

In one attempt to combat patent trolls, in September 2011 the Leahy-Smith America Invents Act (AIA) officially became law with its central provisions going into effect last March (officially March 16, 2013). The most important features of this legislation are a change in patent prominence from “first to invent” (FTI) to “first inventor to file” (FITF) system, which also eliminated interference proceedings and an expansion of post-grant opposition options for outside parties. While this legislation has good intentions, there is little reason to suspect that it will have a significant impact on reducing improper patent litigation over the coming years and in fact it may create more problems than solutions in the overall patent environment.

For example switching prominence from FTI to FITF demonstrates no real advantages (it is somewhat ironic that this is the system utilized by the rest of the world sans the Philippines). The original idea was to eliminate interference costs and procedures as well as reduce costs and increase efficiency for acquisition of foreign patents. For example FTI focuses on when a patent applicant can prove “invention” of the idea through documentation of when it was put into practice (i.e. prototype construction). If two inventors file patent applications on the same invention an interference hearing is conducted to determine which inventor conceived of the patentable concept first in appropriate form. Basically even if inventor A applied for a patent a month after inventor B, if inventor A created a prototype two years before inventor B, inventor A would be first in line for receiving the patent. Interestingly enough while interference hearings can be expensive they are actually quite rare relative to the number of patent applications filed each year.

Under FITF interference costs are eliminated because the date of idea conception is no longer relevant only the official date of application for the patent matters. Unfortunately this system gives rise to derivation proceedings, which can more expensive than interference hearings. Derivation proceedings are exactly what they sound like, individual/company A has a patent application challenged by individual/company B on the grounds that individual/company A independently conceived of the patentable idea. Most derivation proceedings will focus on the petitioner claiming that the defendant developed the idea from ideas conceived by the plaintiff.

One of the chief problems with FITF is that the need for the inventor to file creates a “race to the Patent Office” mentality, which more than likely will decrease patent quality (ideas must be kept secret for fear of being scooped on the patent) and increase overall work for the USPTO because of fear that similar ideas may cast a broad net eliminating the patentability of other ideas. In these patent office races larger companies with in-house patent lawyers have a huge advantage over smaller companies that have to contract out patent applications to independent patent lawyers. The idea of “best mode” disclosure is also handicapped by FITF. Also new prior art published after the invention date but before the filing date could eliminate the validity of valid patentable ideas. Finally it will be interesting in the future to see if any patent attorneys are sued by a prospective patent holder for filing the appropriate patent application paperwork after a second company despite receiving the material earlier.

Some could counter that FITF eliminates hidden prior art and their ability to unfairly restrict other patent applications. Hidden prior arts are inventions that have no patent application filling, thus cannot be found through a database search, but in FTI would force the rejection of all relevant patents issued before the filing, but after the invention. However, to address this fear by changing FTI to FITF is similar in ridiculousness to how Republicans try to deal with alleged voter fraud through forcing the use of voter IDs. Basically both systems punish millions of individuals/companies for the bad behavior of say seven people because both incidents of violation are so incredibly rare. In both situations there are much better and fairer solutions if one is genuinely interested in actually addressing those rare outliers. Overall changing FTI to FITF was perplexing and more than likely will create more problems than solutions.

Some believe that AIA policy of restricting plaintiffs from filing large multi-defendant lawsuits versus filing multiple serial lawsuits will limit litigation abuse of bad patents. Another element thought to be limiting are executive orders requiring the USPTO to create a structured policy governing more frequent updates to patent ownership and NPEs having to publicly file their demand letters. Unfortunately there are problems with expecting significantly limitation from these new policies.

First, NPEs have already adjusted to the lack of multi-defendant filing capacity by asking for courts to consolidate pre-trial proceedings through multi-district litigation filings (a strategy allowed by the United States Judicial Panel on Multidistrict Litigation), which limits the disadvantages of disallowing multi-defendants. Second, the public demand letter issue is rather irrelevant because NPEs can simply file a lawsuit before sending a demand letter eliminating any detriment born from a public announcement, especially because the threat of a lawsuit is the power behind the letter and lawsuits are much less expensive for NPEs. Third, these changes do not influence the use of “exclusive licensees” as the motivator behind the initiation of infringement litigation.

The expansion of post-grant opposition options also appeared positive initially, but has not produced and probably will not produce the anticipated results. The principle element to post-grant opposition changes is allowing a third party to challenge patent validity. There are three significant elements to this third party challenge potential: 1) pre-issuance third-party submissions; 2) post-grant review; 3) inter partes review. Unfortunately despite these changes the probability that they will reduce the approval of bad patents or litigation involving bad patents is questionable.

First, for pre-issuance third-party challenges it is rare that a third party will have sufficient knowledge of ongoing patent applications, unless that third party is a plant or sponsored by some organization, because such applications are difficult to locate and track. Second, most patents only become relevant after an individual or company begins producing a marketable product, not while a patent is pending. This behavior also limits the effectiveness of the time period (nine months) associated with the post-grant review process. After the expiration of the nine-month initial post-grant review period the AIA allows for inter partes review. However, this type of review is not the same as the current inter partes review in the reexamination process as judgment responsibilities are transferred from the USPTO to administrative law judges on the Patent Trial and Appeals Board and the review standard is raised from “substantial new question of patentability” to “reasonable likelihood” with regards to whether or not the patent will be overturned upon actual reexamination.4 These two changes should reduce the number of inter partes reexaminations granted due to third party request.

Furthermore reexamination requests are typically utilized as supplement to patent litigation not substitution for it. For example in 2008 30% of ex parte reexaminations and 62% of inter partes reexaminations were enacted due to pending litigation.5 Also expansion of post-grant reexaminations could hurt the patent process as companies have greater opportunity to file oppositions for the purpose of wasting time and financial resources of their competitors reducing their ability to compete. A quick side note: ex partes examinations of a given patent are triggered by petition of a third party, the patent holder or the director of the USPTO, but once the examination begins only the holder and the assigned patent agent for the reexamination conduct the reexamination. Inter partes can be triggered similar to ex partes, but third parties are allowed to participate in the reexamination.

Finally one of the most important aspects of these new conditions is there is no change or hastening of the review process itself. While the legislation attempts to install a maximum time period of 18 months for disposition few actually believe the USPTO will be able to conduct an effective review in such a time period. Existing inter partes reviews typically take 34 to 53 months for non-reworked patents without appeals to be settled and five to eight years for appealed cases.6 The demanded “special dispatch” status of inter partes reexaminations is irrelevant because the USPTO is overworked and because the AIA expands inter partes to include discovery and a hearing in the Patent Trial and Appeal Board further increasing the take taken to resolve these types of reviews.4,6

In addition when infringement litigation and inter partes reviews are co-pending federal courts can grant a stay (the probability that a stay is granted depends largely on the court), which eliminates the ability for the patent owner to collect damages from the potential infringer. Thus smaller companies/individuals may be placed under great financial strain and have to declare bankruptcy before a ruling, thereby mitigating any value in eventually receiving redress from victory in the infringement litigation. Overall while some thought the AIA would be useful for battling NPEs most of the provisions in the AIA appear to be more detrimental than beneficial.

One proposed solution to addressing patent trolling litigation that has been floated is to invoke a mandatory patent reexamination for all contested patents that are the subject of litigation.4 In this proposal the plaintiffs bringing an infringement lawsuit will be responsible for all elements associated with the reexamination including the fee. Proponents of such an idea believe that the “extortion” effect of trial would be heavily mitigated by the specter of reexamination revoking the patent, thus reducing the probability that bad patent holders attempt to litigate. While this belief is true for bad patents there are a few concerns with such a strategy as well. First, the costs associated with a reexamination are not cheap, ex parte reexamination is $2,250, and an inter partes reexamination costs $8,800.4 Fortunately this cost is not a large issue for most patent suit plaintiffs.

Second, it will delay the ability of the patent holder to enforce his/her patents against infringing parties. As highlighted above both ex parte and inter parte reviews take years to complete, which could significantly handicap start-ups and small businesses against larger competitors. During this delay larger competitors with greater manufacturing, marketing and distribution capacity could completely sweep smaller competitors from the market after copying the patented technology and/or process crippling them to the point that even after reexamination and litigation are completed (5+ years later) the plaintiff company will be unable to recover. This scale effect is also why the elimination of process patents, championed by some, is foolish if one wants to create an environment where smaller companies have any chance to succeed against the “big boys”.

Some proponents have proposed additional safeguards including vacating the mandatory reexamination if a preliminary injunction could be obtained or an initial showing can be made that the patent is being asserted against a direct competitor or potential competitor.4 The one immediate concern is how the second voiding strategy is constructed because while most NPEs initially lack manufacturing capacity to compete with most of the companies they litigate against depending on how this provision is written they could “dummy” up some manufacturing to achieve this second condition, thus allowing any bad patents to skip the mandatory reexamination. Overall for the above suggestion the key question is how can this provision be attained by a small business or start-up that may not have any manufacturing yet, but plans to in the future versus restricting it from NPEs that have no future intention of manufacturing a product that utilizes information from the patent in question?

Third, there is a minor concern about court venue coming out from reexamination where the plaintiff may no longer have the ability to determine venue instead initiating a “race to the court house” mentality. Fortunately this “concern” is rectified in another suggestion later.

Fourth, reexaminations do not have the same level of stringency as court proceedings regarding the types of invalidity that can be applied. For example under 37 CFR 1.552 prior art rejections are only made due to prior art patents or printed publication not on prior use, sale or inventorship. Therefore, reexamination may miss certain issues of invalidity giving both the plaintiff and defendant the false impression that the patent is high quality entering into litigation.

Fifth, similar to the second concern, is that mandatory reexamination proposals will force more work on an already overtaxed USPTO. Some argue that because on average only about 2,500 patent infringement lawsuits are filed each year7 the additional work is minimal relative to the overall number of patent applications filed each year [500,000-600,000 (applications have increased significant in recent years)].8 Unfortunately the problem with this mindset is that the USPTO is already supersaturated in its workload thus even a small increase does not act as a linear increase, but an exponential increase in time allotment.

Some have argued that the USPTO can address these additional issues by increasing fees for these mandatory reexaminations. There are two concerns with such a strategy: first, again small businesses may have trouble paying the fee when enforcing their patents and unable to acquire a waiver. Second, the total additional funds from this increase is dynamic, thus there is no guarantee regarding revenue. What happens if revenue falls short on a given year, will various patent examiners become yo-yos hired and fired on a yearly basis? Overall a mandatory reexamination is an interesting idea, but there are some concerns chiefly how to manage the additional workload for the USPTO and how to differentiate between patents owned by start-ups and patents owned by NPEs with no economic manufacturing intent.

Clearly another means to address future bad patent litigation is to reform the USPTO itself so bad patents are not granted in the first place. While this suggestion is obvious the key to USPTO reform is simple funding. There is not enough money to hire or retain enough quality patent examiners, especially when considering the cost of living in Alexandria, Virginia or surrounding areas. The planned PTO “branch offices” are uncertain in their ability to alleviate patent backlog. Unfortunately U.S. Congress has not demonstrated any desire to increase USPTO funding; in fact as time passes Congress has become more likely to cut funding from the USPTO over increase it. In fact due to a lack of funding the USPTO invoked a hiring freeze in 2009 and has expanded that freeze in 2013 partially due to the Federal Government sequestration resulting in the USPTO facing an approximate 140 million dollar shortfall (requiring further cuts).9

If improving monetary availability is not practical then systematic changes within the USPTO can be administered to reduce the probability that bad patents are left to the court for termination. For example Congress can grant the USPTO the mandate to reject the use of broad/generic language in an application when disclosure only focuses on a very specific improvement to an existing art. The highly criticized “sealed crustless sandwich” patent would have been rejected during the initial examination due to this mandate instead of during reexamination. Also the office could reorganize so that two examiners need to sign off on an application in that one examiner would do all of the standard work and the second examiner would “edit” that work so to speak. A second perspective can see things that might have been missed or ask questions on the methodology of the first examiner. Such editing would be cursory, thus not adding significant time expenditure.

Expansion and reorganization of the USPTO search database would help both examiners and applicants regarding existing prior art and the probability that a patent will be/should be approved. Also the official declaration of specific terms for given subjects (think a glossary of sorts) should dramatically reduce the ability of certain patent holders to hide behind ambiguity to avoid prior art eliminations or expand their patent to cover more than it should.

Additionally Congress could convene various panels of industry experts to review all existing patents in their respective fields to make recommendations on whether or not the patent is legitimately proprietary and suggest whether or not a reexamination of the given patent should occur. Industry, with their mega-profits, could provide the funding for such panels if needed because industry is most affected by patent trolls. Such a process could clarify the legality of numerous patents greatly increasing potential patent litigation efficiency and limiting total patent trolling in those given subjects.

One misconception is that patent trolls prey on the large corporations looking for the big payoff, but because most patent trolls do not want to actually go through the process of litigation about 55% of the NPE defendants have a net worth of $10 million or less.10 The reason for this targeting is officially unknown, but it can be assumed that these smaller companies have less experience and financial resources to actually engage in litigation and are more likely to avoid litigation by signing a large licensing fee. The large costs associated with defending an infringement suit and the uncertainty of outcome are the chief problems with bad patents. For NPEs plaintiff litigation costs are minimized because the lack of manufacturing and business operations limits the necessary work hours associated with discovery and data mining. Counter-suits are not typically available to defendants further lowering costs. Also NPEs consistently employ lawyers who work on contingency versus hourly fees11 in these infringement suits as well as sue multiple defendants with the same patent infringement claim (while they can no longer sue multiple defendants in the same action, litigation “reach” has not changed).

While NPEs use the above strategies to reduce their costs, they also apply various legal strategies to increase the defendant costs. First, NPEs demand maximum discovery even if most of their request is irrelevant.11 Second, they frequently assert infringement against multiple patents, which places pressure on the defense increasing resource expenditure. Third, because the plaintiff controls the jurisdiction due to patent infringement being a federal procedure an inconvenient venue can be selected to increase transportation costs. However, this strategy is typically foregone for selecting the Eastern District of Texas officially because of its expertise in patent issues, but realistically because it tends to favor plaintiffs in patent-based litigation.

A survey by the American Intellectual Property Law Association determined that for smaller companies a claim that would net a most 1 million dollars generally cost $650,000 to defend, a $1 to $25 million dollar claim generally cost $2.5 million and a claim exceeding $25 million cost approximately $5 million.12 With these general benchmarks as expected litigation costs, it is not surprising that numerous defendants sign licensing fees at above market value to avoid these costs; even if the defendant is in the right, the costs of the patent litigation could cripple them.

One means to counter high defendant litigation costs is if the defendant is found not guilty of patent infringement and the plaintiff is found lacking cause to bring the infringement suit in the first place, the plaintiff will be obligated to pay the defendant one and half times his court costs. This idea has been floated before, but usually only the English system of redress is utilized where the loser pays the court costs of the winner. The concern with only limiting the reimbursement to “at cost” instead of some multiplier of cost is that a majority of the charged defendants would have to defend themselves and win for it to provide a negative motivation factor, which even with “loser pays” could still be risky due to the uncertainty of court decisions. Another concern is that recent suggested legislative action (i.e. SHIELD) would restrict “loser pays” to only corporations not individuals. Although difficult to speculate at this time, such a condition could completely mitigate any benefits of such a system in that NPEs could sell patents to individuals associated with the company and then that individual could file the infringement suit avoiding the “loser pays” aspect.

The federal government could also establish a specific loan for individuals/companies at 3% interest to cover court fees pertaining for patent litigation (clearly the loan would need to be evaluated for the bad patent potential). The projected interest related costs should not be significant concern for those defending against genuine patent trolls if there is some form of “loser pays” system because even if there is no multiplier the interest cost will typically be less than the licensing fee demanded by the plaintiff. Another possibility is that the federal government could provide lawyers on retainer (working for the federal government) to mitigate costs for needy individuals/companies (these lawyers would also receive a 3% commission from won cases). This lawyer pool could be an interesting idea because the vast majority of costs associated with patent litigation are lawyer fees.

As mentioned above litigation history has demonstrated that plaintiffs overwhelmingly prefer to select the United States District Court for the Eastern District of Texas largely because it tends to favor plaintiffs in patent-based litigation. Therefore, one means to discourage patent trolling is to allow for random selection from the venue pool eliminating the ability of the plaintiff or defendant to select the venue for future litigation. Removing the ability of the plaintiff to select what may be regarded as a “home court advantage” would inherently reduce the attractiveness of a frivolous patent lawsuit. Finally one means for the government to “strong-arm” a reduction in bad patent litigation is to force licensing arbitration between conflicting parties to limit the overall extortion and litigation costs. However, such a strategy would have to be carefully constructed because numerous groups would seek to manipulate it in some way if enacted.

The cost of patent trolls and their actions are a drain on society both from a creative and economic standing. However, one must be careful when dealing with patent trolls; while most patent trolls are NPEs, not all NPEs are patent trolls. NPEs can provide a useful service as a middleman to allow smaller companies a better opportunity to enforce their patents. Dealing with patent trolls demands dealing with bad patents. One critical element for addressing bad patents is to neutralize them as bad or obvious ideas before they become patents in the first place hence more vigilance at the USPTO and providing improved resources to allow for this vigilance. However, USPTO reform will not address existing bad patents. Mandatory reexaminations are one means of addressing currently existing bad patents, but the better way may be through litigation with some form of loser pays system and government loaned funds. Overall addressing patent trolls appears straightforward, society simply must be realistic about doing what needs to be done.

Citations –

1. Bessen, J and Meurer, M. “The direct costs from NPE disputes.” Boston Univ. School of Law, Law and Economics Research Paper No. 12-34 - Cornell Law Review. 2014. Vol:99. Forthcoming.

2. Goldman, D. “Patent troll: ‘I’m ethical and moral.’” CNN. July 2, 2013.

3. Wikipedia – “EBay Inc. v. MercExchange, L.L.C.” Accessed August 9th, 2013.

4. Bradford, B and Durkin, S. “A proposal for mandatory patent reexaminations.” The Intellectual Property Law Review. 2012. 52(2): 135-166.

5. Guest Post: Hot Topics in US Patent Reexamination. Patentlyo. http://www.patentlyo.com/patent/2009/03/guest-post-hot-topics-in-us-patent-reexamination. html?cid=6a00d8341c588553ef011168d0dd50970c

6. Reexamining Inter partes Reexam. Institute for Progress. http://www.iam-magazine.com/blog/IAMBlogInterPartesReexamWhitepaper.pdf

7. Lemley, M. “Where to file your patent case.” AIPLA. 2010. 401(38): 404.

8. U.S. Patent Statistics Chart Calendar Years 1963 – 2012. http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm

9. Welcome Back Fee Diversion: USPTO Likely to Begin Sending Collected Fees back to Treasury. Patentlyo. April 2013. http://www.patentlyo.com/patent/2013/04/welcome-back-fee-diversion-uspto-likely-to-begin-sending-collected-fees-back-to-treasury.html

10. Chien, C. “Patent Trolls by the Numbers.” Patentlyo. Mar. 14, 2013. http://www.patentlyo.com/patent/2013/03/chien-patent-trolls.html

11. Sudarshan, R. “Nuisance-value patent suits: an economic model and proposal.” Santa Clara Computer and High Tech L.J. 2008. 159(25):160.

12. American Intellectual Property Law Association. “Patent litigation costs: Report of the Economic Survey.” 2011. http://www.aipla.org/learningcenter/library/books/econsurvey/2011/Pages/default.aspx

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