White House Proposes Measures to Deter Frivolous U.S. Patent Troll Litigation and Improve Patent Quality

by Bennett Jones LLP
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On June 4, 2013, United States President Barack Obama announced in a White House press release, five executive actions and seven legislative recommendations aimed at deterring frivolous patent litigation and ensuring the "highest-quality patents in our system".

The White House announcement coincided with the release of a report by the National Economic Council and the Council of Economic Advisers, entitled Patent Assertion and U.S. Innovation, which detailed the need for legislative action.

While acknowledging the improvements to U.S. patent law achieved by the Leahy-Smith America Invents Act, the press release described the problems of continued challenges arising from patent assertion entities.

The America Invents Act

On September 16, 2011, the U.S. President signed into law historic patent reform legislation designed to help make the U.S. patent system more efficient and reliable.

The America Invents Act marked the first comprehensive reform to the U.S. Patent system in nearly 60 years and made some significant changes to the patent law impacting the way patents are obtained, enforced and defended against in the United States.

The America Invents Act includes provisions for changing to a first-to-file patent system, new mechanisms for post-grant review of patents and other reforms aimed at boosting patent quality and reducing patent litigation.

Nevertheless, challenges arising from patent assertion entities continue to increase. According to the NEC-CEA report, suits initiated by patent assertion entities in the U.S. had tripled in the last two years, rising from 29 percent of all infringement suits to 62 percent. Estimates suggest that such entities may have threatened over 100,000 companies with patent infringement last year alone.

Patent Assertion Entities or Patent Trolls

Firms that own patents but do not make products with them, can play an important role in the economy, such as connecting manufacturers with inventors. Patent assertion entities, commonly referred to as "patent trolls", instead focus primarily on aggressive litigation.

Patent trolls do not practice their patents, in that they do not do research or develop any technology or products related to their patents.  Instead, they acquire patents solely for the purpose of extracting payments from alleged infringers, often waiting until after irreversible investments have been made before asserting their claims. Common tactics of a patent troll include threatening to sue thousands of companies at once, without any specific evidence of infringement; creating shell companies that make it difficult for defendants to know who is suing them; and asserting that their patents cover inventions not even imagined at the time they were granted.

In the words of U.S. President Obama, patent trolls "don’t actually produce anything themselves,” but instead develop a business model “to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

In acknowledging the drain on the U.S. economy, the press release stated that swift legislative action was required to increase clarity and level the playing field for innovators.

Accordingly, the Administration recommended that Congress pursue legislative measures that would have immediate effect on some of the major problems faced by innovators, while announcing steps it was taking for bringing about greater transparency to the patent system.

Executive Actions

The Administration announced a number of steps aimed at bringing about greater transparency to the U.S. patent system and levelling the playing field for innovators. Those steps include:

  1. Making Real Party-in-Interest the New Default. Patent trolls often set up shell companies to hide their activities and enable their abusive litigation and extraction of settlements. This tactic prevents those facing litigation from knowing the full extent of the patents that their adversaries hold when negotiating settlements, or even knowing connections between multiple trolls. The U.S. Patent and Trademark Office (USPTO) will put rules in place that require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the USPTO, specifically designating the “ultimate parent entity” in control of the patent or application.
  2. Tightening Functional Claiming. The America Invents Act made important improvements to the examination process and overall patent quality, but stakeholders remain concerned about patents with overly broad claims—particularly in the context of software. The USPTO will provide new targeted training to its examiners on scrutiny of functional claims and will, over the next six months, develop strategies to improve claim clarity, such as by use of glossaries in patent specifications in order to assist examiners in the software field.
  3. Empowering Downstream Users. Patent trolls are increasingly targeting Main Street retailers, consumers and other end-users of products containing patented technology—for instance, for using point-of-sale software or a particular business method. End-users should not be subject to lawsuits for simply using a product as intended, and need an easier way to know their rights before entering into costly litigation or settlement. The USPTO will publish new education and outreach materials, including an accessible, plain-English web site offering answers to common questions by those facing demands from a possible troll.
  4. Expanding Dedicated Outreach and Study. Engagement with stakeholders—including patent holders, research institutions, consumer advocates, public interest groups, and the general public. The USPTO is announcing an expansion of its outreach efforts, including six months of high-profile events across the country to develop new ideas and consensus around updates to patent policies and laws. The USPTO is also announcing an expansion of the Edison Scholars Program, which will bring distinguished academic experts to the USPTO to develop, and make available to the public, more robust data and research on the issues bearing on abusive litigation.
  5. Strengthen Enforcement Process of Exclusion Orders. Once the U.S. International Trade Commission (ITC) finds a violation of Section 337 and issues an exclusion order barring the importation of infringing goods, Customs and Border Protection (CBP) and the ITC are responsible for determining whether imported articles fall within the scope of the exclusion order. Implementing these orders present unique challenges given these shared responsibilities and the complexity of making this determination, particularly in cases in which a technologically sophisticated product, such as a smartphone, has been successfully redesigned to not fall within the scope of the exclusion order. To address this concern, the U.S. Intellectual Property Enforcement Coordinator will launch an interagency review of existing procedures that CBP and the ITC use to evaluate the scope of exclusion orders and work to ensure the process and standards utilized during exclusion order enforcement activities are transparent, effective, and efficient.

Legislative Recommendations

The Administration also recommended that Congress pursue at least seven legislative measures which would:

  1. Require patentees and applicants to disclose the "Real Party-in-Interest". Such legislation would require any party sending demand letters, filing an infringement suit or seeking review of a patent by the USPTO to file updated ownership information, and enable the USPTO or district courts to impose sanctions for non-compliance.
  2. Permit more discretion in awarding fees to prevailing parties in patent cases. Such legislation would provide district courts with greater discretion in awarding attorney’s fees under 35 USC 285 as a sanction for abusive court filings, similar to the legal standard that applies in copyright infringement cases.
  3. Expand the USPTO’s transitional program for covered business method patents to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board (PTAB). Such legislation would allow a broader category of patents to be challenged and enable the USPTO to weed out bad covered business method patents absent litigation in district courts.
  4. Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use. Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer. As patent assertion entities or trolls have increasingly targeted consumers and end-users, such legislation is intended to enable more efficient resolution of patent litigation and better protect consumers and small businesses from abusive patent litigation.
  5. Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts. Such legislation is designed to make the standards applied at the ITC and the district courts consistent and reduce potential abuse of the ITC by patent trolls.
  6. Use demand letter transparency to help curb abusive suits, incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public. As presently there is no easily accessible and searchable repository of demand letters, such legislation is intended to allow a more coordinated defense and attack on the validity of suspect patents.
  7. Ensure the ITC has adequate flexibility in hiring qualified Administrative Law Judges. Such legislation is aimed at allowing the ITC more flexibility in hiring qualified Administrative Law Judges to fulfill increased demand for Section 337 Investigations.

Conclusion

The White House's initiatives are aimed at improving patent quality, increasing the transparency around the U.S. patent system, improving the processes at the International Trade Commission, expanding outreach and study, empowering and educating downstream users, and ultimately curbing litigation by patent assertion entities or patent trolls.

While the recent announcement is unlikely to have an immediate impact on present litigation, it should at the very least create more dialogue and attention regarding this issue and may ultimately emanate further legislative action in the United States.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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