“Patent Trolls” in the Crosshairs – But How Will Patent Reform Legislation Impact the Rest of Us

by McDonnell Boehnen Hulbert & Berghoff LLP
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Both Congress and the White House have been actively pursuing patent litigation reform in an attempt to combat the perceived “patent troll” problem.[1] Of course, any legislation will impact all patent holders, even though most will not consider themselves to be patent trolls. The disconnect occurs because so-called “trolls” are being equated with all non-practicing entities (“NPEs”)[2], even though this includes a large number of entities to which that derogatory term was never meant to apply. After all, an NPE is simply a patent holder that does not commercialize the claimed innovation. Therefore, entities such as universities, research institutions, start-up companies, and even sole inventors, can be considered NPEs. But rather than discourage such institutions from possessing intellectual property, the US patent system actually encourages it.

For example, under this system, the property rights associated with patents are readily transferrable without any working requirement, meaning that a patent holder does not need to actually practice the invention. This system helps to ensure that society benefits from the innovations because the original inventor is often not in the best position to commercialize the invention. Therefore, rather than “hindering” innovation, as the detractors decry, the current system is meant to encourage it.

The problem with the current legislative efforts is that Congress is setting out to curb “patent troll” activity without first deriving a workable definition. Instead, members of Congress use the old Justice Stewart line, “I know it when I see it.”[3] Rather than defining what a troll is, Congress has defined various traits or behaviors that trolls are thought to exhibit, seeking to minimize or eliminate the ability of patent holders to engage in these activities. However, it is often difficult to distinguish between abusive assertion tactics and the legitimate licensing efforts of patent holders. Indeed, the proposed legislation will impact all patent holders, not just the so-called “trolls.” The result is that most of the legislative proposals are not narrowly tailored, but rather are blunt instruments that will likely impact all patent holders. Accordingly, it is important that all patent holders pay attention to the proposed legislation and be aware of how to respond to any changes should they become law. This article will highlight some of the more significant proposals, how they might impact legitimate patent assertion, and what new actions might be required.

Bad-Faith Demand Letters

Interestingly, one of the first “traits” that “patent trolls” are thought to exhibit does not even necessarily implicate patent litigation. In fact, regulating the sending of bad-faith demand letters does not necessarily fall within the scope of the patent statute. As a result, reforms meant to address this behavior are coming not only from the Congressional Judiciary committees, which have jurisdiction over the patent system, but are coming from other sources as well.

For example, Sen. Claire McCaskill introduced a bill targeting abusive demand letters[4], and it was referred to the Senate Committee of Commerce, Science, and Transportation. Instead of changing the patent statute, this bill directs the Federal Trade Commission to promulgate rules to regulate the sending of demand letters.[5] Moreover, some states are contemplating similar bills aimed at curbing these practices as well, which will make abusive demand letters an unfair or deceptive business practice at the state level.[6] This follows the actions of some states’ Attorneys General that have been targeting “trolls” under existing consumer protection laws.

Because these various proposals impact pre-litigation activity, they may be the only deterrent against “patent trolls” who have no intention of ever filing suit. These provisions would provide relief against the “shake-down” of companies and individuals, which may result in quick settlements as a way to avoid costly litigation. The difficulty with any attempt to regulate the sending of demand letters, however, is that the First Amendment rights of patent holders need to be accounted for. The sending of such letters, without more, should not create a judicial cause of action. More importantly, legislators need to take care, because the sending of such demand letters is an essential part of our patent system, allowing patent holders to put alleged infringers on notice and, ideally, facilitating licensing activity between the parties.

Patent owners will therefore not only need to pay close attention to which version of demand-letter legislation is enacted by Congress, they will also need to be mindful of the requirements of the states in which they send such letters. In some cases, the penalty for an insufficient demand letter is limited to preventing an allegation of willfulness. However, it is possible that by not including certain information in the demand letter, such as the factual allegations related to any perceived infringement, the patent holder could be subject to state or federal consumer protection laws. As an extreme measure, it might become a prudent practice for a patent holder faced with such concerns to pre-emptively file an infringement complaint before sending a demand letter. Of course, the reason behind the demand letter would dictate whether filing the infringement complaint would be warranted, but such action could negate allegations from the accused infringer that the litigation threat was falsely made.

Transparency of Patent Ownership

Another characteristic trait of prototypic “patent trolls” is that that they are shell companies with little to no assets other than the asserted patent. Accused infringers complain because they do not know who the real party-in-interest is that stands to benefit. A potentially more significant problem, however, is that such shell companies will have minimal discovery burdens, and therefore reduced litigation costs, and they are not likely to be subject to infringement counterclaims from the accused infringer. Moreover, shell companies with no assets would essentially be judgment proof against any attorney fee-shifting if the accused infringer prevails at trial.

As a result, there has been strong interest in increasing the transparency of patent ownership. For example, the White House has proposed an initiative to ensure that patent ownership records are updated regularly.[7] The proposed rules promulgated by the US Patent and Trademark Office to enact this initiative would make the ultimate penalty for failing to comply the abandonment of the application.[8] The legislative proposals are less draconian. Remedies for non-compliance range from the inability to recover attorney fees or increased damages based on willfulness, to being responsible for the reasonable fees incurred by an alleged infringer to discover the ultimate parent entity. As a result, it would behoove any patent owner to confirm that all assignments have been properly recorded at the first sign of any potential infringing activity. Moreover, it would be prudent to conduct the proper due diligence related to assignment recordation before taking any interest in a patent, because the ability to recover fees for some period of time may already have been forfeited.

Changes to Patent Infringement Actions

Congress is also looking to mandate changes to how the judiciary handles patent lawsuits. Anti-“troll” advocates point to the relative ease with which a patent holder can file an infringement lawsuit, as well as the substantial costs associated with patent discovery, as reasons for the rise in “patent-troll” activity. For example, unscrupulous patent holders can make vague accusations at the initiation of a case and treat the subsequent litigation as a fishing expedition. Congress is considering amending or eliminating Form 18, which limits the requirements of a patent complaint to little more than notice pleading of the patent at issue, a statement of jurisdiction, and an identification of the alleged infringing product or activity. Congress would instead heighten the pleading requirements to require details often not provided until later during litigation. However, this could have the unfortunate consequence of encouraging accused infringers to challenge the sufficiency of the pleadings without ever addressing the merits of the case. This could side-track the proceedings with pre-litigation ancillary hearings that elevate form over substance. As a result, patent holders would be advised to conduct a more detailed pre-litigation analysis, and be prepared to include as much information as possible in the complaint (potentially including claim charts).

“Trolls” are also thought to request excessive amounts of discovery while having minimal discovery costs themselves. As a result, Congress is proposing limiting initial discovery to documents required for claim construction. In addition to interfering with the ability of the judiciary to manage their cases, this approach is likely to protract all patent litigation. Smaller entities already have difficulty absorbing litigation costs, so such a provision would certainly increase the incentive to settle.

Customer Stay

“Patent Trolls” have increasingly been thought to target end-user customers rather than the manufacturers of infringing devices. The conventional wisdom is that the end user is at a disadvantage because it does not have the requisite knowledge of the mechanics of infringement. Moreover, the end-user customers might not be as patent savvy, and therefore more willing to settle. As a result, Congress has proposed various “customer-stay” provisions to address this perceived behavior.

The ultimate problem with these pending provisions, however, is that it is not clear whether they will be useful. For example, they require that both the manufacturer and the customer be sued, that they both agree in writing to a stay, that the end user agrees to be bound by the manufacturer litigation, and that the request be filed early in litigation. Of course, as a patent holder, if you have a legitimate reason to target an end-user customer base, it would be prudent to delay suing the manufacturer, unless a customer stay would not be detrimental to your efforts.

Attorney Fee-Shifting

Finally, “patent trolls” are thought to have little disincentive to bring patent infringement lawsuits because the current fee-shifting statute makes it difficult for a falsely accused alleged infringer to shift its fees to the losing party. As a result, the economically rational course for an alleged infringer is to settle the case for a “nuisance-value” payment. Unfortunately, this is thought to encourage “trolls” to target multiple companies or individuals, even if the scope of the claims is stretched beyond their reasonable scope. The Supreme Court is presently considering the issue, and may make it much easier to seek attorney fees under the current statute. Notwithstanding that fact, fee-shifting has been at the forefront of most legislative agendas.

At this time, there are several fee-shifting proposals. For example, the provision in the Innovation Act changes the default to a loser-pays system, unless the actions of that party were reasonably justified. In any event, it is likely that any new provision will lower the barrier to obtain fees. As a result, this could have a “chilling effect” on the legitimate assertion of patents, especially for smaller entities that might rely more heavily on their intellectual property rights. In addition, the ability to obtain fees will likely not be limited to prevailing accused infringers. Therefore, this provision could backfire, as risk-adverse accused infringers faced with the (perhaps, unlikely) possibility of paying a “trolls” attorney’s fees might feel compelled to settle early. In any event, even if small companies have the promise of recouping fees at the conclusion of litigation, it is possible that many of them will not be able to survive until the conclusion of litigation.

What course of action should a patent holder or accused infringer take in view of these proposals? Most fee-shifting provisions being discussed have a “justification” component. As such, it might become prudent to seek “justification” opinions of counsel. Therefore, before embarking on a demand-letter campaign, or after receipt of such a demand letter, seeking an independent opinion on the merits of the case might become a best business practice.

Conclusion

It is very possible that we will see abusive-patent-litigation legislation sometime this year. And, regardless of what version passes, there will likely be unintended consequences for the legitimate assertion of patents. Nevertheless, by paying attention to the details, you can prevent these proposed patent reforms from seriously disrupting your patent practice.

[1] A companion piece was presented in an earlier edition of this newsletter (Andrew W. Williams, “Patent Trolls” Beware – Congress Tackles Vexatious Patent Litigation, 12 Snippets, Winter 2014, at pp. 4-5).

[2] See, e.g., Laura Sydell, Taking the Battle Against Patent Trolls to the Public, All Tech Considered (August 30, 2013), http://www.npr.org/blogs/alltechconsidered/2013/08/30/217272814/taking-the-battle-against-patent-trolls-to-the-public.

[3] See, e.g., Exec. Bus. Meeting of S. Comm. on the Judiciary, 113th Cong. (March 27, 2014), accessible at http://www.judiciary.senate.gov/meetings/executive-business-meeting-2014-03-27.

[4] Transparency in Assertion of Patents Act, S. 2049, 113th Cong. (2014).

[5] Id.

[6] See, e.g., S. 3405, 98th Gen. Assem., Reg. Sess. (Ill. 2014).

[7] See Press Release, The White House, FACT SHEET: White House Task Force on High-Tech Patent Issues (June 4, 2013), accessible at http://www.whitehouse.gov/the-press-office/2013/06/04/fact-sheet-white-house-task-force-high-tech-patent-issues.

[8] Changes to Require Identification of Attributable Owner 79 Fed. Reg. 4,105 at 4,112-13, 4,120.

 

 

 

 

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