by Rich Ehisen
For all intents and purposes, patent law reform is an issue that has long been the purview of the federal government and the court system. But with intense pressure building at all levels of government to combat so-called "patent trolls" — companies that exist primarily to sue other companies over often-questionable patent infringement claims — a growing number of states are now jumping into the fray. Officially known by the less pejorative terms "patent assertion entities" (PAEs) or "non-practicing entities" (NPEs), these companies rarely manufacture or create any real products of their own. Rather, as the Federal Trade Commission notes, they are "firms with a business model based primarily on purchasing patents and then attempting to generate revenue by asserting the intellectual property against persons who are already practicing the patented technologies." In other words, PAEs buy patents, often on the cheap, and then threaten to sue companies that may be using technology covered by those patents unless that businesses fork over significant amounts of money. The key word here is "may." Critics contend that too often the patent claim doesn't actually apply to the technology in question or the patent is too vague to even know if it does. But the cost of proving that in court can be prohibitive — into the millions of dollars in many cases. In fact, the more money is on the line the higher the legal fees can be for the company defending itself. And because most patent infringement attorneys work on a contingency fee basis, the patent holder has minimal or no upfront costs. Sufficiently lodged between a rock and a hard place, many companies threatened with such litigation simply roll over and write a check for the amount the PAE is asking for...which conveniently is often just a bit less than the cost of taking the case to court. Although tech giants like Google, AT&T, Verizon and Apple remain the top targets for such infringement claims, small businesses are fast getting into the crosshairs as well. A 2012 Boston University study showed that "small and medium-sized entities made up 90 percent of the companies sued, accounting for 59 percent of the defenses, and paid about 37 percent of the aggregate costs in 2011." Some of those came for acts as mundane as using ubiquitous technology like WiFi. One Texas-based PAE called MPHJ Technologies, which in 2012 purchased a series of patents for the total price of $1, has sent threatening letters to over 16,000 small businesses nationwide that have copying machines with the capability of scanning a document and sending it to someone via email with a single push of a button. Those letters demand the companies pay between $1,000 and $1,200 per employee to "license" the machines for use or face a lawsuit. None of the companies receiving the letter actually built the scanners in question, but MPHJ claims that isn't the issue anyway; they say the infringement happens when users connect the machines to the Internet. That drew the threat of a deceptive practices lawsuit from the FTC. But MPHJ was anything but cowed; in January the company beat the agency to the punch, filing a suit against the FTC claiming it was illegally preventing it from enforcing its patent holdings. None of this has occurred in a vacuum. Congress passed a moderate reform measure in 2011, the America Invents Act, which created a "first to file" system that gives patent ownership to the person who filed their application first regardless of whether someone else later claims they invented the product beforehand. The first major Congressional patent reform in over half a century, it also allows vendors — for example the maker of the copying machine — to wade into the legal fight on behalf of their customers. President Barack Obama followed that in 2013 with five executive orders that, among several things, push the U.S. Patent and Trademark Office to tighten up requirements for issuing patents in the first place. The U.S. House of Representatives took action as well, passing HB 3309, the Innovation Act of 2013, last December. That measure would force patent infringement litigants to name the product they say is being infringed upon by its specific name and patent number. It also would require disclosure of the entity that actually owns the patents and stands to gain financially from the litigation (MPHJ, for instance, has over 101 subsidiaries it uses to conduct its activities) and impose a fee-shifting element that would force a failed litigant to pay the winner's legal fees. A handful of bills are also pending in the U.S. Senate, though how closely whatever passes there will resemble the House version — which President Obama favors — remains to be seen. All this would naturally lead one to presume that anyone pursuing a patent infringement suit is a patent troll and that such suits have become epidemic. Neither assertion, however, is entirely correct. Many reform advocates again cite the Boston University study, which also claims that PAE suits make up about two thirds of all patent infringement cases. But that figure encompasses just suits filed by patent holders that aren't also a manufacturers of products, including universities, individual inventors and other research facilities. A 2013 report from the U.S. Government Accountability Office that excludes those entities places the figure at less than 20 percent of all those filed from 2007 to 2011. "There is a large debate right now over exactly how big of a problem this actually is," says Peter Lee, a law professor at the University of California, Davis who specializes in patent law. "It really depends on the definition we use. Are universities patent trolls? And what about large incumbent technology companies? They produce products, but many also have enormous patent portfolios that they use in a leveraged manner." "I would be skeptical of taking any particular figure at face value," he adds. Even so, states are now getting into the game as well. Last year, Vermont became the first state to pass legislation (HB 299 2013) that bars so-called "bad faith" infringement suits or threats. The law gives judges a variety of conditions and factors designed to help them determine what does and does not constitute a bad faith suit. The law also allows the infringement target to countersue someone found to be suing in bad faith and authorizes the attorney general to bring civil actions against that individual as well. Several states have followed suit this year, including Idaho, Oregon, and South Dakota. At least five more — Georgia, Virginia, Utah, Wisconsin and Alabama — have sent bills to the governor, with Maryland expected to do so any day now. Bills are still pending in at least 14 states, including Kentucky, Missouri and Hew Hampshire, where they have all cleared at least one chamber. "This is an indication of how broadly the pro-reform lobby is pushing its agenda," says Russ Merbeth, Chief Policy Counsel for Intellectual Ventures, Inc., a PAE that is often cited as a patent troll by reform advocates. "There are a lot of big tech companies that have found it to be much more cost effective to take their liability issues to Congress or state legislatures to deal with than to deal with them in the marketplace."
Merbeth also insists that without companies like his, many individual inventors and small businesses would not have the means to enforce valid patents they legally hold when a larger company infringes on those patents. He says most PAEs are fine with new rules that rid the playing field "of the bad actors out there," but called the current Congressional bills "omnibus, blunderbuss" proposals that would do more harm than good. How much state actions impact what happens in Congress remains to be seen. Law professor Lee says questions still remain over how much authority states have to police bad faith infringement cases, but he believes they will play a big role in whatever reforms eventually do come out of Congress. "This action at the state level could definitely spark more federal action," he says, noting that it also wouldn't necessarily be a bad thing if PAEs had to deal with varying state laws. "Not being certain of how bad faith is defined state to state could have a chilling effect on those that operate like trolls," he says. The United States Supreme Court is also a major player, having already heard oral arguments in multiple patent cases this year. One of those, Alice v. CLS, came just last Monday and seeks to define just how broadly a software application can be applied. Alice Corp., an Australian-owned company, claims CLS Bank illegally used Alice-patented software in some of its computer programming. CLS counters that the program in question is ubiquitous and not worthy of specific patent protection. The High Court's rulings are due in June. Some reformers believe a ruling in favor of CLS Bank would be a severe blow to PAEs, though nothing resembling a fatal one. And regardless of whatever reforms the states, the courts and Congress devise, they won't solve what Lee says is the underlying issue: too many patents already in the system. "About 40 percent of all the patents challenged in litigation should never have been granted in the first place," he says. "Even if we reduce now the number being issued, there are still tons out there that will be around for decades. So we're not really close to the end on this issue at all."
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