Practice Areas

Obama Misses the Mark on Patent Trolls

June 14, 2013
Stewart Pollock & Ara Jabagchourian
Daily Journal

In February, President Obama stated patent trolls “don’t actually produce anything themselves. They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”  On June 4, 2013, President Obama decided to throw Silicon Valley big business a bone just prior to his June 6, 2013 $32,500-a-plate fundraising visit to - where else - Silicon Valley.  The attack on patent trolls - those who have acquired patent rights and wait for others to unknowingly incorporate the troll’s patented technology into a product and then sue - has been building up for sometime.

In its effort to stomp out patent trolls, the White House issued a Fact Sheet with seven proposed legislative measures and five executive actions. The purpose of these measures is “to improve incentives for future innovation in high-tech patents.” In a statement released by the White House announced in conjunction with the Fact Sheet,that the proposed measures and recommendations are “designed to protect innovators from frivolous litigation and ensure the highest-quality patents in our system.”

Utilization of Patent Rights

Concerns about trolls and their methods appear to have finally bubbled over in Silicon Valley. The accusation is that patent trolls have hindered innovation because they are seeking settlements to enforce invalid patents, costing businesses money that could otherwise be used on research. Furthermore, the settlement demands are not based on the value of the infringement, but on the costs to defend.

The proposals set forth by the Administration focus on three issues: non-practicing entities, quality of patents (an issue that cannot be resolved simply or cheaply), and attorney’s fees. Non-Practicing entities (“NPEs”) are companies such as NTP, Inc. which have taken on a portfolio of patents and enforce these patents against companies who are actually seeking to implement technology and apply it in the stream of commerce.

The purpose of patent law is to provide a system that encourages innovation, but minimizes free-riding. To promote these two purposes, on a proper application, the United States government will grant a temporary monopoly on the patented innovation. This way, inventors are encouraged to invest time and money into research under the theory that once they obtain the patent, they will be protected in gaining the fruits of their labor in the market without others adopting the same innovation.

The White House claims that trolls stifle innovation because they “don’t actually produce anything themselves.” Perhaps the Administration has misidentified the problem and, as a result, created a solution that misses its mark. If the White House wants to discourage patent holders from merely sitting on those property rights and waiting to sue, then the focus should not be on who owns the right but what the owner does with it. The problem may not be patent ownership, but rather the notion of patent rights as a constitutionally protected property right. Statutory patent law allows for temporary monopolies to protect an invention or technology. The theory is that once a patent is obtained, the inventor will utilize that technology and bring it to market, so that monopoly profits can be incurred during the duration of the patent.

While patent law provides an incentive to develop and patent new technology. However, the law does not provide a disincentive in failing to utilize a patent. Going after “trolls” by targeting patent holders does not actually solve the problem it claims to and it creates new problems. Why should an inventor or business be penalized for enforcing a patent right it has not made efforts to implement when a larger company, although making products, has a portfolio of numerous blocking patents that are not, and never will be, utilized in any of its products? If the threat to innovation comes from unused patents, the response should be tailored to include blocking patents. Obama’s proposal catches small businesses and innovators, but fails to catch those who use patents defensively, with no intent to “produce anything” with that technology.

Issues of patent reform should not be divorced from the overall driver of innovation in our country, namely competition. Although conflicts exist, patent law and competition law share some of the same goals, namely encouraging innovation that will eventually benefit consumers.  Patent trolls are not the only ones stifling innovation based on a patent that is not utilized or adopted into a product. Large companies have routinely used patent rights as a defensive mechanism to stifle competition, even though that patent right has not been utilized into a product or applied technology. Unsurprisingly, these large companies will send threatening letters and send their team of lawyers to enforce those rights, just like the troll. Defensive patents, or blocking patents, have been common usage in the many high-tech fields by many large high-tech companies.

If the goal of patent right reform, from a societal standpoint, is to increase innovation and avoid unnecessary litigation, then the focus of reform should be on the use of patents, not their ownership. One solution to the properly reformulated problem could be a requirement on the part of a plaintiff in patent litigation to make an affirmative showing of utilization - a “use-it-or-lose-it” test. That is, a patent holder has five years after obtaining a patent to make a good faith effort to have the patent utilized and put into the market. If no good faith effort has been made, either through development of a product, use of a method or realistic efforts to license the technology, then one’s patent rights are forfeited at the end of five years and it goes into the realm of fair use. This good faith effort can have an upper limit of 10 years where the technology must be utilized either directly or through a licensee, or the patent rights are forfeited, good faith efforts made or not. This way, neither the troll with a vast patent portfolio designed for nothing more than shakedown licensing agreements nor Silicon Valley big business who implements a strategy of blocking patents to garner an unfair monopoly, can continue to stifle innovation in the marketplace. This solution better addresses patent use concerns by discouraging idle patent rights without stifling small innovators.

There should be an open dialogue to develop model legislation. Exceptions could be established based on the input of industry representatives. For instance, universities, who are granted patents based on their research, could be exempted from the “use-it-or-lose-it” rule.

The goal is to stop the abuse of the patent system. Patents are granted as a temporary monopoly to benefit society by rewarding innovation. If the holder of the patent fails to utilize the government grant, it should not prevent others from doing so and advancing the applied art or science of the innovation.

Attorney’s Fees

The Administration also intends to prevent “frivolous litigation.” This is the classic “tort reform” argument that “frivolous” lawsuits are taxing American jobs and businesses. In reality, that campaign prioritizes the interests of businesses over victims seeking compensation. One proposal made by the Administration is to provide courts more discretion to award attorney’s fees under 35 USC §285 as a sanction for abusive filings, which currently provides reasonable attorney’s fees to the prevailing party “in exceptional cases.”

The general rule in the United States is that each side pays for its own attorneys. This policy enables people to have their matters heard on the merits without the threat of having to pay attorney’s fees for both parties. Experience has shown us that when barriers are placed in front of the courthouse steps, individuals and small businesses are the only ones that are kept out.  Even with the proposed changes to attorney’s fee under the Administration’s proposal, seeking to
create an implied “loser pays” method of dealing with trolls, big business will still have no problem litigating their patent cases, frivolous or not (remember, they too submit patents to the same overtaxed Patent and Trademark Office). This proposal would have the drastic side-effect of disproportionately impacting independent inventors, small companies and start-up companies.  There are already functioning mechanisms for addressing frivolous claims, including Rule 11 sanctions, without the need to alter section 285

The Administration’s efforts to address the abuse of the patent system are admirable.  However, the Administration has misidentified the problem and concocted a solution that creates as many problems as it resolves.