Goodlatte Patent Bill Heads To House; Trolls Not So Bad, After All?

As a bill aimed at curbing patent “trolls” and frivolous patent lawsuits makes its way through the United States Congress and states fight their own troll battles in the name of consumer protection, some patent attorneys and stakeholder groups want lawmakers to slow down and take a breath.

The Innovation Act, H.R. 3309, sponsored by Rep. Bob Goodlatte, a Virginia Republican, passed the House Judiciary Committee on 20 November by a vote of 33-5.

Several amendments also passed, including those that:
• Add more clarity when determining when to require the losing party of a lawsuit to pay the winning party’s legal fees;
• Directs the Government Accountability Office (GAO) to study covered business method patents;
• Requires patent trolls to be more specific about their infringement accusations in the demand letters;
• Directs the US Patent and Trademark Office (USPTO) to devote “special consideration to the unique needs to small firms” run by minorities, women and disabled veterans
• Directs the USPTO to study how demand letters are used

Sen. Patrick Leahy, a Vermont Democrat and chair of the Senate Judiciary Committee, has introduced a similar bill in the Senate that has the support of the White House.

Many argue that the America Invents Act (AIA) – the legislation for which these bills are supposed to fill in holes – needs time to work (IPW, US Policy, 20 November 2013).

But others argue that the patent asserting entities (PAEs), also known as non-practicing entities (NPEs) or patent trolls, are a huge waste of resources and time, particularly for fledgling startups, and they clog up the courts.

PAE’s ‘Creating a Lot of Havoc’

There are varying forms of PAE business models. They range from legitimate patent licensing and portfolio companies to patent monetising entities (PMEs), which buy patents from others simply for the purpose of asserting them for profit.

It’s not unusual for start-ups, particularly for technology-related businesses, to receive PAE letters within the first round of venture funding, trying to assert patents on seemingly common practices or tools, such as emails to send shipment confirmations and downloading documents from the Cloud.

“There’s great technology for doing a lot of these things but that’s not what these patents are about,” Suzanne Michel, senior patent counsel for Google, told those attending an IP Summit at Fordham University Law School in New York this week. These bad cats are “creating a lot of havoc and that can’t be denied,” she added.

But PAEs say infringement needs to be dealt with and that they are not the horrible plague upon the legal system that they are made out to be.

“Infringement is a huge problem that nobody seems to be talking about fixing in Washington and unfortunately, sometimes, litigation is the only solution to the problem of patent infringement,” said Lonnie Rosenwald, vice president and chief counsel of technology creation and commercialization at Intellectual Ventures, a PAE.

Frivolous lawsuits only make up about 5 percent of all the patent cases in the courts, said Chief Judge Paul R. Michel [Ret.] of the US Court of Appeals for the Federal Circuit.

An August GAO report [pdf] showed that the number of patent infringement suits fluctuated from 2000-2011; most of the increase was from 2010-2011, likely due to the new AIA limit on the number of possible suit defendants. A sample of the lawsuits filed between 2007 and 2011 shows that operating companies and related entities brought about 68 percent of all lawsuits, while PMEs and likely PMEs brought 19 percent.

Moreover, the GAO concluded that although the infringement debate typically focuses on the increasing role of PAEs, regardless of the type of litigants, lawsuits involving software-related patents accounted for about 89 percent of the increase in defendants between 2007 and 2011.

“This suggests that the focus on the identity of the litigant – rather than the type of patent – may be misplaced,” the GAO said.

To better understand the scope of PAEs and their business model, the Federal Trade Commission (FTC) is seeking public comments on a proposal to gather information from about 25 companies considered PAEs on how they do business, so as to develop a better understanding of how they impact innovation and competition and to assist in policy formation.

Comments are due on 16 December.

“The agency wants to try to do something that’s as effective with the least amount of burden as possible,” said Lisa Kimmel, attorney advisor for FTC Chairwoman Edith Ramirez.

Meanwhile, some states are also taking the initiative against PAEs.

Vermont Attorney General Bill Sorrell became the first in the US to use his consumer protection authority against a company that sent letters threatening patent infringement litigation (“demand letters”) to Vermont businesses that the AG said contained false claims regarding the company’s intellectual property rights. Minnesota Attorney General Lori Swanson later reached the first settlement of these claims with the same company sued by Sorrell.

Although courts have said the federal government has mostly pre-empted states on patent law, state AGs argue that it’s their job to protect consumers and legitimate businesses. The National Association of Attorneys General is establishing a working group on patent trolls, as well.

The Buck Stops – and Starts – at the USPTO

But many agree that the PAE problem could more effectively be nipped in the bud at the USPTO.
Poor patent quality – a result of insufficient experience of patent examiners, not enough patent examiners, overworked and underpaid personnel – leads to murky waters when it comes to discerning what a patent may cover. With more congressional mandates in the pipeline, that will just exacerbate the problem, Judge Michel said.

If patent quality is truly the goal of patent reform legislation, said Stephen McErlain, Director of Realtime Data LLC, why not focus more on the patent-issuing process. “Fund the USPTO – let it keeps the money it makes,” and hire more examiners, he continued, “get them out of the 19th century with their search capabilities and their IT infrastructures.”

From 1992-2011, Congress has diverted more than $900 billion away from the USPTO; the AIA was supposed to ensure all USPTO fees stay there in a reserve fund.

A USPTO official said this week that patents revenue for FY2013 was $2.551 billion and the patents operating reserve level entering FY 2014 was $287 million. But that official told IPO http://www.ipo.org/ that $147.7 million in patent and trademark user fees was withheld during the sequester earlier this year.

The AIA was supposed to make the patent issuance process faster, cheaper, less disruptive and more reliable, but, Michel said: “On the resource side, we’re going exactly in the wrong direction and it’s robbing the potential of the AIA.”