Regulatory response to patent trolls
September 2014 | 10QUESTIONS | INTELLECTUAL PROPERTY
financierworldwide.com
FW speaks with Robert H. Fischer, a partner at Fitzpatrick, Cella, Harper & Scinto, about the regulatory response to patent trolls.
FW: Could you outline the problem that so-called ‘patent trolls’ pose as patent holders? To what extent have patent trolls increased their activity in recent years?
Fischer: The concern is that patents asserted by entities not engaged, to any meaningful degree, in the production of goods or the rendering of services to the public extract an unwarranted toll on commercial activity by seeking and obtaining patent damages from marketplace businesses. In many instances, concepts and techniques can be patented for a minor fraction of the cost and effort of actually creating a commercial enterprise. Moreover, the accused infringement may be the product of independent development, unrelated to any copying of the patented techniques, and yet still be subject to patent infringement liability. It has therefore been voiced that in such cases, the result is to increase the costs borne by business owners, or to raise the prices experienced by consumers, without a clear indication of benefit to the common good, particularly where the patents themselves are of questionable validity. Although a concern with this characteristic of the patent system has long existed, its notoriety has definitely increased in recent years – hence the coinage of the term ‘patent troll’ within the last 15 or so years.
“The US Congress has passed legislation that seeks to limit some pro-plaintiff litigation practices and to remedy the issuance of patents that may be of doubtful validity, but which might be asserted nonetheless.”
FW: To date, the problem of abusive patent litigation has been primarily concentrated in the US. Why is this? What characteristics of the US patent system make it vulnerable to abuse by patent trolls?
Fischer: Particular concerns over patent litigation brought by patent owners that produce neither goods nor services, such as patent holding companies, occur in the US for at least the following reasons. First, for roughly two decades, the USPTO has issued patents for software and business methods. These are the fields in which non-marketplace patent holders often are found. Second, the patent owner has a right to a jury trial in the US. The use of lay jurors as the decider of factual issues is believed by some to favour the patent holder. Third, US patent litigation is extremely expensive, in part due to US pretrial discovery, and also because of the almost certain prospect of an appeal post-trial. Thus, getting to the point of actual trial can cost hundreds of thousands of dollars, or more, and after all that, there is no certainty of success, or even resolution. The near-certainty of these costs provides the basis for settlement demands that may have little relation to the prospect of ultimate success. Finally, the tools for early dispute resolution – particularly summary judgment – are used by some US courts reluctantly. Regardless of the reasons why, the net effect is that absent a settlement, there may be almost no choice but to go through the time and expense of a full trial, followed by appeal.
FW: In what ways are legislators, judges, the USPTO, the business community and other entities helping to fix the patent troll problem?
Fischer: The US Congress has passed legislation that seeks to limit some pro-plaintiff litigation practices and to remedy the issuance of patents that may be of doubtful validity, but which might be asserted nonetheless. This legislation has taken various forms, from limiting the ability to join multiple defendants in one lawsuit, to creating new administrative procedures in the USPTO for reviewing patents after their issuance, if their validity is subject to question. Given the impact of patent holding companies on their activities, certain sectors of the business community have also been active in seeking legislative changes. These sectors undoubtedly will continue to seek legislation to remedy their concerns, particularly should current remedies not work, or if new problems arise. Turning to the USPTO and its conduct of these newly enacted procedures, the consensus seems to be that the administrative bodies so far are not reluctant to invalidate patent claims that had previously been issued. The US Supreme Court’s recent patent decisions additionally promise to have a substantial impact on the ability to obtain and assert patents directed to business methods.
FW: The White House recently announced “major steps” to restrict the activities of patent trolls. What impact do you believe these proposed measures will have going forward?
Fischer: The White House’s major steps announced on 4 June 2014 may have only a limited effect on the problem. Under the US form of government, the power to change patent law and policy is largely in Congress’s hands, not the Executive, meaning the Presidency. Moreover, unlike some other administrative agencies that are part of the Executive branch of government, Congress has not delegated any substantive rulemaking power to the USPTO. Thus, many of the steps announced by the White House were simply legislative recommendations, and have no force without action by Congress. As to the executive actions that the White House announced, they are of varied effect. Perhaps the most interesting is that the USPTO will provide ‘targeted training’ to examiners to guard against patents, particularly software patents, being issued with overly broad claims. The USPTO is currently in the process of rolling out its examiner training program in response to this initiative, so it is premature to say whether it will have an effect.
“Take the litigation seriously. Do not let an initial ‘this is ridiculous’ reaction colour the appraisal, or govern the dealings with the plaintiff.”
FW: In Octane Fitness v. ICON, the court relaxed the standard for awarding attorney’s fees in patent cases. Do you expect the prospect of paying the fees of successful defendants will deter patent trolls?
Fischer: The prospect of paying the attorney fees of successful defendants in and of itself likely will not deter patent owners that are not marketplace participants. These patent holders may be a corporation or a limited liability company, whose assets are limited to the asserted patents. Thus, an attorney’s fee award against such a plaintiff may not expose the real stakeholders to meaningful liability beyond the loss of the patents themselves – which may be of limited value after the non-infringement or invalidity outcome that almost certainly is a predicate for an award of attorney fees.
FW: What practical steps can firms take to protect themselves against patent trolls?
Fischer: To best protect a business, the key guiding principle should be to avoid surprise. In the US, do not assume that patents are the concern only of industrial enterprises. Given the USPTO’s issuance of patents covering software and business methods, any business, whether a retail store chain, a stockbroker, even a law firm, may be targeted. So have a good knowledge of the patents relevant to your field, or gain it. Further, it is a good idea to track on a periodic basis what patent applications are published in your field, and what patents issue. Establish a process for identifying patent applications and patents that may give rise to a concern. Upon identifying them, the specific advice will vary greatly, depending upon the situation, but at least with knowledge of what patents and applications are out there, a business can be in a better position to assess and minimise risk, including by taking pre-emptive action, as appropriate.
FW: What advice can you offer to firms entering litigation as result of patent troll activity?
Fischer: Take the litigation seriously. Do not let an initial ‘this is ridiculous’ reaction colour the appraisal, or govern the dealings with the plaintiff. A US jury may have no knowledge or understanding of the relevant commercial field, and may not share the business’s perception. Plaintiff’s arguments to these jurors may seek to assure them that the ‘scientists’ and ‘experts’ in the Patent Office ‘awarded’ plaintiff its patent in recognition of its merit. That jury thus may react very negatively if they perceive that the patent infringement claim was not treated with respect. So make sure the business conducts, as early as possible, a candid appraisal of the possible exposure. At the same time, carefully assess whether product or service changes may reduce or eliminate ongoing exposure.
FW: What particular dangers do patent trolls pose to start-up companies? What measures can these entities take in their early days to protect the intellectual property they create?
Fischer: Charges of patent infringement are a particular problem for start-ups, because it is not uncommon for some patent holders to make themselves known at inopportune times, such as when the business seeks to make a public stock offering, or its initial product is announced. However unpleasant are charges of patent infringement for established enterprises, they can be all the more disruptive to newly-formed companies having limited financial resources and personnel. Here again, the best remedy is knowledge of the patent landscape before the occurrence of major business events – gaining and processing that knowledge should be an integral part of the business plan from the start. At the same time, insofar as reasonably possible the start-up should seek patent protection covering the products and services that will be significant to its financial success. Apart from giving the start-up a potential tool in fending off imitators, it may also serve the salutary purpose of further limiting the ability of later-filed patents from being asserted against the start-up beyond the prior use defence that the US law provides.
“While certainly of positive effect, it can be expected that non-marketplace patent holders will change their tactics in response to new regulation in an attempt to maintain their revenue stream.”
FW: Going forward, how effective do you expect recent developments will prove in the fight against patent trolls? Do you expect any further regulatory or legislative change to restrict their activity?
Fischer: In terms of recent developments, the new administrative procedures now available in the USPTO to review patents after issuance undoubtedly will impair the ability to assert successfully in litigation certain patents of questionable validity. This in turn could limit the ability to use the time and expense of litigation as a basis for a settlement demand. Changes in the patent law itself will also have an impact. The recent US Supreme Court decisions, such as the June 2014 decision in Alice Corp. Pty, Ltd. v. CLS Bank Int’l et al., which held that a particular computer-implemented financial method was patent ineligible, may cut back on a broad class of patents of the type asserted by non-marketplace participants. Indeed, the USPTO has issued preliminary examination guidelines in accordance with the Alice Corp. decision, and there is the perception by some that business method patent claims which previously would have been found patentable are now being rejected. Whether there will be further regulatory or legislative changes is hard to say. There were some efforts to get Congress to make further changes, but they may not go further for the time being. Also, there are a fair amount of recent changes that are still being digested, and it may take a little more time to weigh their effect.
FW: Based upon your own experience, what in your opinion could be done further to reduce the problem of patent trolls?
Fischer: First, let us examine the efficacy of regulation itself. While certainly of positive effect, it can be expected that non-marketplace patent holders will change their tactics in response to new regulation in an attempt to maintain their revenue stream. Under these circumstances, there should be some caution about whether regulation, by itself, will ever completely resolve concerns over some forms of patent assertion. A different approach from process regulation is to reduce the financial recovery available to certain patent holders, and distinguish more so than is done today between the recovery available to those who are bona fide producers of goods and services, and those who are not. This approach, however, would most likely require legislation, and passage of any such recovery-limiting legislation could be a long-term process. Lastly however, one should not minimise the impact of simply keeping the issue in the public eye, since that may impact the conduct and decision-making of the people involved in the patent system in important ways.
Robert H. Fischer is chairman of Fitzpatrick, Cella, Harper & Scinto’s Licensing and Transactions Practice Group. He has been practicing patent and other intellectual property litigation for more than 30 years in a wide variety of technological fields, including computers, semiconductors and biotechnology. He also has an extensive practice in licensing, opinion work and counselling, in complex interferences and in procuring patent protection in software, electronics and other fields. Mr Fischer has represented clients in connection with the intellectual property aspects of major corporate transactions, including joint venture formations, refinancings and sales of businesses. He can be contacted on +1 (212) 218 2254 or by email: rfischer@fchs.com.
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