Patent trolls already clog the court

A “patent troll” does not make money by manufacturing, innovating or transferring technology, but by holding patents and suing those who do. Patent trolls demand money to use products they did not create. Patent trolls are so notorious that they have been accused of “hijack[ing] someone else’s idea and see[ing] if they can extort some money.” And worse.

But demonizing patent “trolls” overlooks their compelling economics. Using economies of scale and contingent fee lawyers, patent assertion entities (PAEs) have dismantled traditional obstacles to suit. For years, patent holders couldn’t monetize their patents because it was too risky and large companies ignored their demands.

But things have changed. Instead of ignorance, enforcement is now the new normal. PAEs paved the way, by showing how powerful the threat of prolonged litigation can be in getting companies to pay settlements. Following their lead, large companies are monetizing and asserting their patents at a greater rate as well, e.g. through the smartphone wars. Those who aren’t are being pressed to think about making money off their patents by their CFOs, including by partnering with PAEs.

The freedom of PAEs to litigate has created serious issues for the patent system. Scads of entities that have nothing to do with the patent system – e.g. retailers, bakeries, funeral homes, advertising firms, and even politicians –are getting sued and receiving demand letters. While large tech companies capture most of the patent headlines, last year, more non-tech companies were sued. Companies that make $10M or less in revenue are the majority of unique defendants. Startups are particularly vulnerable. Although startups are a crucial source of new jobs, PAE demands have impacted their ability to hire and meet other milestones, caused them change their products, and shut down lines of business, according to a survey I conducted. 40% were targeted because of technology that they did not make, but implemented or used.

Yet the economics of patent assertion are so favorable that over 15 publicly traded companies now use the stock market to bankroll patent lawsuits. Intellectual-property funds generate annualized returns between 10% and 20%, reports Julie Steinberg in her Wall Street Journal article of earlier this year, “Stocks, Drugs, Rock 'n' Roll.” You can bet on individual patent litigation events. Foreign governments are getting into the game: Korea’s Intellectual Discovery Fund, France’s Brevets, and the Innovation Network Corp of Japan for example. It is only in this context that the filing of complaint by Swiss-investor backed PAE Beacon Navigation GmBH against US car companies that employ thousands an International Trade Commission (ITC), a venue designed to protect domestic industries, makes any sense.

As PAEs increase their footprint, they increase the burdens on our courts and the public: last year PAEs filed over 50% of patent cases in district courts, independent sources have found. Patent cases are complicated and time-consuming. They can be torturous for jurors. They clog our dockets. Yet, some of them are rightful vindications of patent rights. How can we streamline litigation to reduce the over incentive for enforcement but without limiting meritorious claims? In this testimony I provide three suggestions for consideration:

First, we should reduce duplication in our patent system by improving coordination between patent entities. It makes no sense to have more than one court simultaneously decide a patent’s validity or whether the same act constitutes infringement. Yet this is what we do now –more than 90% of patent litigations in the ITC last year were also filed in district court. Congress should reduce the overlap by making ITC jurisdiction exclusive of district court jurisdiction or reducing the incentives to file in both. Similarly, many administrative reviews in the PTO involve pending litigation at the district court. The PTO and courts should implement post-issuance administrative reviews in a coordinated fashion that eliminates the overlap. PAEs are now suing multiple users of goods, rather than the single supplier or manufacturer of the good. Congress should reduce the duplication that results, by immunizing or limiting liability for innocent end-users or implementers that use the invention as intended and notice the suppliers of the use.

Second, we should reduce waste in our patent system, following the example of the Federal Circuit Advisory Council’s model order initiative. Courts should focus the key issues, hold early, prediscovery claim construction, and consider early damages contentions. Courts should encourage dispositive motions, e.g., concerning standing, section 101 patentability, or whether the patentee’s rights have been exhausted via license, to be heard and ruled on early in the case, if they have merit. Congress should facilitate the benchmarking of courts trying these innovations in the Patent Pilot Program so that best practices for reducing waste can be observed and disseminated. Congress should also discourage lawsuits on weak claims by increased fee-shifting, and wasteful discovery by requiring parties to pay for it beyond core documents.

Third, we should reduce the government’s role in deciding patent disputes. The government should give members of the public, and in particular the public that is not patent-savvy or well-funded, information from which they can help themselves, rather than going to court or lawyer. Congress should require governmental data storehouses to provide data on patent litigations, reexaminations, ITC actions, and ownership information to third party providers who promise to consolidate and make information available to the public in an accessible form at no or low cost. The FTC or PTO should provide authoritative information about patents and options for responding to demand letters for the many companies that are receiving demand letters to rely upon. Congress should also authorize a study, to be taken by the government or a respected institution like the National Academy Sciences, to pave the way towards real-world determinations for establishing the value of patents, outside the theatre of patent litigation. Patentholders and licensees should be able to know ahead of time the range of a patent’s worth. And they should be able to reach determinations on their own rather than having to remain at the mercy of courts and juries.

The duplication, redundancies, and lack of access to information in our patent system invite abuse and forum shopping. They clog the docket and consume our precious judicial resources. They create lucrative opportunities for patent assertion that is attracting financing, and more suits. As a result, we are spending far too much time and money fighting about patents.