What If Anything Should Be Done About Patent Assertion Entities?

by Ladas & Parry LLP

Since 2005 there has been increased concern about patent enforcement by parties that have variously been referred to as patent trolls, non-practicing entities, patent aggregators and, most recently, patent assertion entities. Typically such entities have acquired patents from the original patentees and do not operate under the patents in question. Initially, such enforcement was against large companies who were seen as lucrative targets. More recently, patent assertion entities have established a practice of contacting or filing lawsuits alleging patent infringement naming small firms and start-ups and in some cases even end-users of goods containing patented features as defendants as a way of obtaining nuisance settlements. These developments have caused concerns that such use of patents is not consistent with the Constitutional imperative to promote useful arts.

A number of bills have been introduced in Congress to address what are perceived as different aspects of the problem including:

H.R. 845: Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act which aims to permit a party prevailing in an assertion of invalidity or non-infringement of a patent to recover its litigation costs including reasonable attorney fees, unless the party asserting the patent is the inventor, a party using the patented invention or a university or technology transfer office.

S. 866: Patent Quality Improvement Act which aims to make improvements to the transitional program for covered business method patents adopted in the AIA.

S.1013: Patent Abuse Reduction Act which aims to require greater specificity in pleadings in patent infringement actions, limitations on discovery and make an award of reasonable litigation costs to the prevailing party the norm rather than something that occurs only in exceptional cases as at present.

H.R. 2024: End Anonymous Patents Act which aims to require disclosure of ownership and transfers of ownership of patents.

Meanwhile, Vermont has passed legislation that makes a bad faith assertion of patent infringement subject to the state’s Consumer Fraud Act. The Vermont law entitles victims of bad faith assertion of patents to both equitable relief and damages. It also permits action by the state’s attorney general to obtain similar relief. It is questioned whether this legislation is constitutional or pre-empted by federal patent law.

On June 4, 2013, President Obama announced a number of legislative recommendations and executive actions to address what has been seen as a problem in enforcement of patents by patent assertion entities, noting that the percentage of patent infringement cases brought by patent assertion entities had increased from 19% in 2006 to 62% in 2012.

The major proposals are:

Legislative recommendations:

1. Require patentees and applicants to disclose the “Real Party-in-Interest.” Any party sending demand letters, filing an infringement suit or seeking PTO review of a patent would be required to file updated ownership information, and the PTO or district courts could impose sanctions for non-compliance. This is seen as addressing a practice where patent trolls set up shell companies to hide their activities. This tactic is thought to prevent 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.

2. Permit judges to exercise more discretion in awarding fees to prevailing parties in patent cases and providing district courts with more discretion to award 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 PTO’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).

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, to stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer.

5. Change the International Trade Commission (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.

6. Use demand letter transparency to help curb abusive suits, such as incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public.

7. Ensure the ITC has adequate flexibility in hiring qualified Administrative Law Judges.

Executive Actions:

1. Rule making consistent with the first legislative recommendation (see above) to require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the PTO, including specifically designating the “ultimate parent entity” in control of the patent or application.

2. Tightening Functional Claiming to avoid overly broad claims. The PTO will provide new targeted training to its examiners on scrutiny of functional claims and develop strategies to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field.

3. Empowering Downstream Users by education such as providing a new set of outreach materials to be created by the PTO to help those threatened with patent infringement suits by patent trolls to understand their rights. The rationale given is that 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.

4. Strengthen Enforcement Process of Exclusion Orders. The U.S. Intellectual Property Enforcement Coordinator will launch an interagency review of existing procedures that the Customs authorities 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.

Our Comments:

The perception that patent infringement suits are being brought by the “undeserving” seems to be common, but such suits are to some extent a corollary of patents becoming traded commodities rather than being used in their traditional role in providing protection from competition to manufacturers and service providers to their investment in developing new products and services. If there is to be a market in patents as opposed to the underlying technology protected by those patents, as the newly opened Chicago Intellectual Property Exchange indicates exists, then lawsuits to extract value from the patents being bought and sold are inevitable. Nevertheless unjustified lawsuits which are brought just to extract nuisance settlements are a problem not just for the patent system but for the legal system in general.

It is difficult to predict whether any of the proposals noted above will come to pass. Attempts to define “patent trolls” are fraught with difficulty, as are attempts to protect particular classes of defendants such as end users and retailers. There are already provisions that permit award of attorney fees to a prevailing party in exceptional cases and Chief Judge Rader of the Federal Circuit has argued that district court judges should use the powers that they already have to apply these tools when a patent owner is seen to be bullying defendants into settlement by the threat of high litigation costs, noting that in a typical “troll” case the patent owner has much lower attorney costs than the defendant and is often able to arrange that these fees are payable only on a contingency basis. Possibly the solution therefore lies in more judicial activism than legislation. We shall see.

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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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