The patent system was established hundreds of years ago to “promote the useful arts”. A patent confers to an inventor the ability to exclude others from practicing his or her invention for a finite period of time. In exchange, the inventor agrees to teach the world how to practice their invention.
However, many have argued that non-practicing entities (NPE) take advantage of the patent system to stifle innovation. NPEs are also referred to as patent assertion entities (PAE) or patent trolls. NPEs acquire the rights to a patent for the purpose of filing lawsuits against those who have allegedly infringed on the patent in order to pressure defendants into offering settlements to avoid litigation. Many NPEs have no intention of commercializing products covered by the acquired patents.
In 2011, the president signed into law the American Invents Act (AIA), the most significant change to the US patent system since 1952. The main purpose of the AIA was to harmonize US patent law with that of other countries, streamline the patent process, and make a small attempt at curtailing NPEs.
More than two years later, the problem of “patent trolls” remains a significant problem facing technology companies and the businesses that use their products. In December of 2013, the House of Representatives passed a bill aimed at addressing that problem. The bill, known as the Innovation Act, has yet to be taken up by the full Senate. But if it passes, the law will have far-reaching implications for both tech companies and their customers by making life much more difficult for NPEs.
The Problem of NPEs
Under Section 271(a) of the U.S. Patent Statute, “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States, or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.” In other words, an individual or business can be held liable for patent infringement just for using a product that infringes the patent. NPEs have relied on this provision to file suit against end users, such as hotels and cafes that provide WiFi services using devices that allegedly infringe patents held by the plaintiff.
A recent study conducted by a team of professors at Boston University School of Law concluded that patent trolls have cost the economy an estimated $80 billion annually in litigation costs alone. According to the study, 90% the companies sued by NPEs were small or medium-sized businesses.
The Innovation Act is aimed at making the use of abusive litigation tactics a less attractive option for NPEs.
More Transparency for Plaintiffs (NPEs)
Some of the highest profile NPEs in recent years have been shell companies with no identifiable individual owners. The Innovation Act would require plaintiffs to disclose the names of individuals holding a financial interest in the patent being litigated. This provision would discourage the common practice of anonymous trolling by requiring litigious NPEs to come out of the shadows and identify themselves.
The Innovation Act would also require increased specificity in patent lawsuits. One of the tricks commonly used by NPEs is to draft boilerplate complaints with minimal specificity to be filed with the courts and served on defendants. The new law would require plaintiffs in patent lawsuits to incorporate specific factual allegations into their complaints. This would eliminate NPEs’ ability to churn out multiple lawsuits without investigating and setting forth with specificity the factual basis for each complaint.
Fee and Cost Shifting
NPEs rely heavily on defendants’ fear of the high costs of litigation to extract hefty settlements from risk-averse defendants. The new law would require losing plaintiffs in patent lawsuits to pay the defendants’ legal fees and costs incurred in defending the lawsuit. This provision would make filing multiple frivolous lawsuits a much riskier prospect for NPEs, as they would be required to pay the defendant’s legal bills every time they lost a case in court.
Discovery, the process through which the parties to a lawsuit exchange information relevant to the case prior to the trial, can be a lengthy and expensive undertaking. In some cases, the discovery process can take several years and cost millions of dollars. The Innovation Act would delay discovery in patent cases until after the court has resolved questions of law relating to the patent at issue. This would relieve some of the pressure on defendants and would take away some of the leverage held by NPEs hoping to score a quick settlement from defendants who are skittish about the cost of discovery.
Protection of End Users
In many cases where an end user has been sued for using a product that allegedly infringes the plaintiff’s patent, the company that actually produced the technology has a legal interest in the case as well. The new law would allow these companies to “step into the shoes” of the end users for purposes of the lawsuit to defend against the plaintiff’s claims of infringement. In many cases, technology companies have substantially more resources available to defend against lawsuits than do the mom and pop businesses that use their products and are frequently sued by NPEs.
Outlook for the New Law
The Innovation Act passed the House with overwhelming bipartisan support. The corresponding Senate bill – known as the Patent Transparency and Improvements Act of 2013 – was taken up by the Judiciary Committee in December of 2013 but has not yet made its way to the Senate floor. The Senate bill has been widely characterized as a watered-down effort to contain the NPE problem. With NPEs fighting for their lives and litigation reform advocates clamoring for stronger protections from NPE tactics, the outlook for the Senate bill remains highly uncertain despite overwhelming support for reform in the House.