Obama moves to curb patent trolls - but beware of unintended consequences

by DLA Piper

President Barack Obama has announced a new executive and legislative initiative aimed at curbing patent infringement suits by “patent trolls,” who generate revenue through extortionate litigation, not real innovation.

The proposed legislative agenda would:

1.  Increase transparency in patent litigation (and presumably settlement negotiations), by requiring any party sending demand letters, filing an infringement suit or seeking USPTO review of a patent to file updated ownership information and enabling the USPTO or district courts to impose sanctions for non-compliance.

2.  Give trial judges more discretion to award attorney’s fees to prevailing parties in patent cases as a sanction for abusive litigation (similar to the legal standard that applies in copyright infringement cases). 

3.  Expand the USPTO’s transitional program for 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.

4.  Protect off-the-shelf purchasers by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use.  Also, under the initiative, judicial proceedings against such consumers would be stayed when an infringement suit has also been brought against a vendor, retailer or manufacturer.

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 by the ITC and district courts.

6.  Incentivize public filing of demand letters in a way that makes them accessible and searchable to the public to help curb abusive suits.

7.  Ensure that the ITC has adequate flexibility in hiring qualified ALJs.

The executive actions cover the same subject areas, but focus on changing USPTO rules, public outreach and ITC and Customs enforcement.

Presidential attention to the costs imposed by infringement suits is important, and much of the enthusiasm for these proposals is well deserved.  But sauce for the goose is sauce for the gander, and some of the President’s proposals may have unintended consequences for both defendants and the ability of legitimate tech companies to enforce their patents:

Giving district courts more discretion to award attorney’s fees in patent cases

The President has proposed making 35 U.S.C. § 285 similar to 17 U.S.C. § 505, which governs the award of attorney’s fees in copyright cases.  Specifically, in copyright cases the court has the discretion to “award a reasonable attorney’s fee to the prevailing party as part of the costs,” without needing to find that the case is “exceptional.”

Expanding the availability of attorney’s fees in patent cases will probably deter patentees from filing marginal suits, but in the remaining cases the threat of a fee award may be a weapon patent trolls can wield more effectively than their victims.  Simply put, patent trolls are likely to be much less risk adverse than companies that actually make products; if nothing else, practicing entities have much more to lose in terms of reputation and assets.  Thus, increasing the availability of attorney’s fees may alter the settlement dynamic in a way that actually favors patent trolls.

Protecting downstream consumers and businesses

The President has called for protection for companies that purchase and use off-the-shelf products as intended (which is part of the proposed SHIELD Act).  Upstream manufacturers of accused goods are usually in a better position to defend their products than consumers or resellers, and damages awards against component manufacturers are less likely to reflect non-patented items than suits against manufacturers of consumer goods.

But in many cases the end user may be the only direct infringer.  In such cases, if the patentee must pursue its remedies up the chain of distribution, it will have to meet the high knowledge requirements necessary to prove indirect infringement.  This problem would not be limited to patent trolls.

In addition, many goods, especially electronics, are manufactured overseas by companies that may not be subject to suit in the United States (either because they are not subject to personal jurisdiction or because they do not engage in infringing acts in the United States).  Even for legitimate tech companies, domestic retailers and users may be the best (or only) bet for enforcing patent rights against overseas manufacturers.

Increasing transparency in identifying the real party-in-interest in a patent suit

According to the White House, patent trolls often set up shell companies that may hinder defendants’ ability to negotiate settlements that will truly buy peace from a particular troll.  Little is more frustrating to executives and general counsel than being subjected to successive suits by the same troll.  On the other hand, legitimate businesses routinely use IP holding companies for tax, liability and organizational reasons.  New reporting requirements would create another issue for in-house compliance counsel.  (Making the ultimate ownership of a patent part of discovery in an infringement suit would solve the transparency problem without these administrative burdens.)

The ultimate effect of these proposals depends on implementation.  But careful consideration of the President’s proposals is warranted by any company that may be the subject of a patent troll infringement suit or that has a sizeable patent portfolio of its own.


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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