The rise of patent litigation by non-practicing entities (“NPEs”), colloquially known as “patent trolls,” has resulted in a “chess game”: companies that rely on patents must employ an interdisciplinary defensive strategy involving litigation, regulatory and legislative fronts, according to Ray Kurz, partner in Hogan Lovells’s Washington, D.C. office, who spoke at the firm’s annual Winnik forum. As Hogan Lovells partner Trey Hanbury explained, this expensive defensive strategy disproportionately burdens companies in the technology, media, and telecoms industries, as they are the target in three out of every four patent lawsuits.
Joshua Lamel, Vice President of the Computer & Communications Industry Association, noted that all companies, not just technology companies, were vulnerable to patent trolls. Although technology companies have borne the initial brunt of such litigation, the increased implementation of technologies in the operations of non-technological companies has meant that the rest of the commercial world has faced a steadily increasing threat from patent troll litigation. For instance, traditional brick-and-mortar retailers introducing electronic scanning devices to permit customers to check out their own purchases, or retailers implementing online shopping carts to permit online purchases of their products can open up avenues for patent litigation. With respect to technology companies in particular, Lamel points out that the very nature of the products produced by such companies makes them vulnerable. For purposes of comparison, Lamel estimates that a typical smartphone contains components that may be covered by as many as 250,000 patents that could be targeted by a patent troll, while a pharmaceutical product may be covered by only one patent, greatly reducing the opportunity for a patent troll suit.
A surge in patent filings in the 1980s and 1990s combined with an understaffed Patent and Trademark Office that was charged with reviewing applications, created a “perfect storm” for patent litigation, observed Jud Cary, Vice President of Cable Labs. Patent portfolios could then be used as the primary asset for an NPE to launch suits against various companies. Financial decisionmakers encouraged this monetization of patents, which made sense from a financial perspective, but had the unintended consequence of providing more raw materials non-practicing entities to enter the patent suit business as well as creating a conceptual shift that placed a higher value on the litigation potential of patents rather than a patent’s ability to protect innovation.
Hanbury asked whether it was possible to clearly identify the various players as “black hats” and “white hats.” In other words, how difficult is it to identify a patent troll pursuing litigation for purely monetary purposes as opposed to a company interested in enforcing its patent to protect its own innovations? Dr. Martin Chakraborty, a partner in Hogan Lovells’s Dusseldorf office, noted that in the current environment, no stark “black and white” difference existed. For example, the practice of “privateering”, in which an innovating company licenses its patent to an NPE for the purpose of having the NPE enforce its patents on its behalf in exchange for a commission, blurs that line between black and white. Cary suggested that the line could be drawn between companies protecting their innovations and companies interested in obtaining a financial payout. Lamel agreed that not all privateering is nefarious, but a recent trend of licensing patents to “friendly” companies, while leaving competitors to be sued by the licensor’s privateer is troubling, particularly because the defendant company cannot use its own patents to countersue the privateer, which produces no products of its own under the contested patents.
What are the prospects for countering the efforts of patent trolls? The panelists identified a number of initiatives and possibilities:
- Cary identified the potential of patent-aggregating coalitions such as Rational Patent Exchange and Allied Security Trust, which acquire patents from distressed companies, to keep patents out of the hands of NPEs. Lamel noted that patent pooling entities have the potential to “deactivate” such loose patents like rogue nuclear weapons, but that there may be antitrust challenges to such activity. Chakraborty countered that there are concerns that such coalitions are too similar to privateer NPEs, however, and also noted that licensing “standard essential patents” under fair/reasonable/nondiscriminatory license terms to participants in standards setting processes may provide additional protections. Nevertheless, Chakraborty also conceded that entities that did not participate in such standards processes would not be affected.
- Hanbury noted that a number of legislative efforts seek combat patent troll suits. For example, the Saving High Tech Innovators from Egregious Legal Disputes Act of 2013 (the “SHIELD Act”), introduced by Rep. Peter DeFazio (D-OR) and Rep. Jason Chaffetz (R-Utah), would permit a patent litigant to recover the full costs of litigation in the event that the losing party failed to prove that it was the inventor or assignee of the patent, failed to provide documentation that it made a substantial investment in exploiting the patent through the production or sale of a product covered by the patent, or failed to identify itself as an institution of higher learning or an organization organized primarily to facilitate the commercialization of technology developed by institutions of higher learning. The aim of the SHIELD Act would be to reduce a major advantage held by patent trolls over operating companies: the lack of disincentive to file patent troll suits due to a troll’s immunity to patent counterclaims coupled with the inherent financial incentives to settle such suits. By way of illustration, there are estimates that the cost to defend a patent suit could range from $1.3-5 million, while the typical settlement amount is in the $200,000 range. An NPE, while still immune from patent counterclaims, would then risk responsibility for the litigation costs in the event of a failed suit.
- Another bill introduced by Sen. Charles Schumer (D-NY) would attempt to reform patent law by expanding the 2011 America Invents Act to permit businesses facing patent suits to request that the U.S. Patent and Tradmark Office (“PTO”) review patents enforced against them before the lawsuit can proceed in court. The proposed bill expands a current provision in the 2011 act that permits financial services companies to challenge business method patents enforced against such companies via a post-grant review. Sen. Schumer’s updated proposal would expand this program to include business outside the financial services industry.
- The panelists also identified the need for less ambiguous patents and improved review of patents. Cary noted that while the PTO has been understaffed in the past, the office currently enjoys much improved staff, funding, and expertise to review patent applications. Chakraborty noted that in Europe, the EPO recently undertook an initiative to make the patent registration process more strict, which has increased the quality of patents.
In closing, Kurz suggested that policymakers must go back to basics: national patent regimes should foster progress in science and the arts while working to curtail litigation that frustrates that fundamental purpose.
Raymond Kurz, Partner, Hogan Lovells, Washington, D.C.
Trey Hanbury, Partner, Hogan Lovells, Washington, D.C.
Jud Cary, Cable Labs
Joshua Lamel, Computer & Communications Industry Association
Dr. Martin Chakraborty, Partner, Hogan Lovells, Dusseldorf