Last week, the White House released a list of legislative priorities and executive actions aimed at curbing litigation by so-called patent trolls.
- Require patentees and applicants to disclose the real party in interest.
- Permit more discretion in the awarding of fees to winners in patent cases.
- Expand the PTO’s transitional program for covered business method patents.
- Protect off-the-shelf use by consumers and businesses of products purchased and used for its intended purpose. This would include staying proceedings against consumers if the manufacturer, retailer, or vendor has also been sued.
- Change the ITC standard for issuing injunctions to match the judicial standard set forth in eBay v. MercExchange.
- Incentivize public filing of demand letters to make them searchable by the public.
- Permit the ITC to hire more qualified judges.
- PTO rulemaking will require patent owners and applicants to update regularly ownership information.
- Tighten functional claiming by training examiners to better examine such claims.
- The PTO will publish new education and outreach materials to help consumers who may be targeted by patent trolls.
- Continue and expand outreach and study by the PTO, FTC, and DOJ to reach consensus on updates to patent laws and policies.
- Strengthen ITC exclusion orders to make them more transparent, effective, and efficient.
New York Times Editorial
Perhaps more surprisingly, an editorial appeared in the New York Times last week “Make Patent Trolls Pay in Court.” The editorial was written by Chief Judge Randall Rader and Professors Colleen Chien of Santa Clara University and David Hricik of Mercer University.
The editorial attacks frivolous lawsuits by patent trolls. It suggests that patent trolls have a significant number of advantages over the entities they sue for infringement. First, they don’t need to fear a countersuit because they don’t make anything and therefore would not infringe any patent. They are also not worried about their reputations with the public like other companies are.
Second, patent trolls often hire attorneys on a contingent fee basis: they only pay their attorneys if they win the lawsuit. Conversely, defendants must typically pay their attorneys on an hourly basis. Thus, even if the defendant prevails in a lawsuit, it may have run up a large legal bill. This causes defendants to settle cases more quickly to avoid such costs, which in turn encourages more suits by the patent trolls. If the trolls lose, they don’t have large legal bills to pay.
The authors argue that patent trolls should pay for abusive litigation. Section 285 of the Patent Act and Rule 11 of the Federal Rules of Civil Procedure permit judges to shift the costs of litigation to the losers in the case of litigation abuse. The authors note that only such shifting occurred in only 20 out of 3,000 patent cases filed in 2011.
How does one decide if the litigation tactics are abusive? One sign, according to the authors, is where the patent troll sues a large number of end users of a patented invention rather than the manufacturer itself. Other signs include where demands for settlement are a fraction of the defense costs or where patent trolls continue to pursue settlements against product users even where courts have already ruled against the patent owner. Finally, abusive litigation tactics include where patent owners pursue litigation against defendants that already have a license to the patent or where they seek to enforce the patent vastly beyond its plain meaning and precedent.
The Obama Administration has now thrown its weight behind the anti-patent troll lobby. It is a bit late to the party, as most of its proposals are already pending in bills before Congress.
Of the legislative proposals, the real-party-in-interest requirement is contained in several congressional bills, as is the expansion of review of business method patents by the PTO. The hiring of qualified ITC judges should be a no-brainer. Qualified judges are always going to be an improvement over those appointed for political reasons.
Changes to ITC injunction standards have been discussed in the past. The problem with this proposal is that the ITC cannot award damages, which are the alternative to an injunctions at the district court. If a patent owner can’t get an injunction at the ITC–or if the chances for such an injunction are significantly reduced–that owner won’t file at the ITC. He will instead pursue his case in district court. Do we really want to shift more cases to court from the ITC?
There is nothing to prevent the recipient of a demand letter from making its existence and contents public. Most companies, however, choose not to do so. If there was an accessible and searchable database of such letters, it is very possible that patent owners would forego sending such letters and simply file infringement suits prior to seeking settlement.
I will discuss the end user and fee shifting proposals below with respect to the editorial.
On the executive front at the PTO, there are some good proposals. Further training of examiners is always a good idea. As anyone who has written a patent application knows, there are some inventions that are more easily claimed functionally, rather than structurally. There are some inventions that are best claimed both ways. Functional language can seem overly broad. If properly examined, however, the language can be limited to only cover the invention sought to be protected. Examiners need to understand this and properly reject overly broad claims, whether functional or structural in nature.
Further public education and outreach of the public with respect to patent infringement is a noble endeavor. Most people don’t know about or understand patents in any significant way. They merely hear about patents in the media where such stories are sensationalized and are not based on any solid understanding either. Continued to study and improvement of the patent system is also good, especially if it can result in changes that have a consensus among all interested parties. The problem is that, due to sequestration and fee diversion, the PTO does not have the money to continue its current reform efforts and to perform these public services. Congress needs to end fee diversion for good before this will work.
The New York Times editorial is a bit surprising. Chief Judge Rader has a reputation for being in favor of a strong patent system. This seems a bit out of character for him.
Where to start here . . .
Fee shifting is generally disfavored in the US system. We generally believe that each party should pay its own way in litigation. This will encourage suits by smaller companies or individuals, without the fear of being stuck with the legal bill of a large entity or corporation should it lose the suit.
That being said, the statutory and rule provisions cited in the editorial do exist. If a party brings a frivolous lawsuit or engages in abusive litigation tactics, whether in the patent field or in any civil litigation, it should be sanctioned by the court. Such sanctions should include payment of the other parties fees and expenses in responding to such a lawsuit or tactic. Courts should more commonly exercise their discretion in awarding such fees and costs.
Why don’t the courts currently award fees in such cases? One reason is the Federal Circuit. As long as reversal rates are at 40-50% in patent infringement cases, district court judges will have a difficult time determining a suit to be without merit. Who knows what the appellate court will decide on appeal? The Federal Circuit itself has provisions for awarding costs in its rules. Yet, it very rarely does so. Perhaps the Chief Judge should start with his own court on this issue.
Next comes the issue of suits against end users of products that infringe patents. The Patent Act currently makes “use” of a patented article to be an act of infringement. Yet, the Obama Administration wants courts to stay such suits if the manufacturer, retailer, or vendor are sued. And the authors of the editorial believe such such for “use” of a patented article are abusive. Do they propose to change the statute to eliminate “use” as an act of infringement? This is peculiar to say the least.
It’s time to address patent trolls in a bit more detail. A big question that arises is: where do they get the patents that they seek to enforce? I’m not sure anyone has actually done an analysis of this question.
The Patent Act does not require that an applicant actually make (reduce to practice) its invention to obtain a patent for the invention. Thus, it is possible that some of the so-called trolls actually employ inventors that come up with novel and non-obvious inventions that they don’t actually make. They file disclosures of these inventions, and provided they meet the requirements of the Patent Act, obtain patents for them. Is this a bad thing? Are none of the patents they obtain worthwhile? Then, why are companies infringing the patents?
In the US, we have historically sought to protect the “garage inventor” (at least until the AIA) or university inventors. We do this by offering reduced PTO filing fees and other incentives. Often, such small inventors come up with new inventions, but are not able to bring the invention to market. Many large companies are not willing to pay them for the inventions.
A potential source of funding for such inventors are the patent trolls. If the trolls are not able to enforce the patents after acquisition, it is unlikely that they will pay small inventors for the patents. In that case, many of these inventors would not be able to have the funding to do the inventing. Patent trolls are often a source of funding for small inventors.
Patent trolls often acquire the assets, or at least the patents, of companies when they go through bankruptcy proceedings. In this case, they provide the bankrupt estate with some funds to pay creditors. If they could not enforce the patents, they would not provide such funds for them.
While the term certainly carries a pejorative connotation, they are simply not all bad.
Don’t get me wrong, some patent trolls are absolutely engaged in abusive tactics by sending out unwarranted demand letters, filing frivolous suits, and seeking overly broad patent claim interpretations. But these tactics are not limited to patent trolls. Companies in other fields seek to do exactly the same thing.
Fee shifting for frivolous suits or abusive tactics is appropriate and should become more common . . . in all civil litigation.