Congress Eyes Patent ‘Trolls’

The number of patent infringement lawsuits filed in the U.S. has increased in recent years. Some studies suggest that the growth is mostly caused by suits filed by patent-holding entities. Such companies do not make products or provide services but rather buy or license patents—often portfolios of dozens or hundreds—from other sources. The companies then use the rights they obtain to extract licensing fees from, or file infringement suits against, other businesses using the technology covered by the patents.

This practice often leads to what many consider to be frivolous lawsuits, the goal being to force a targeted company into costly out-of-court settlements or to obtain licensing fees. To curtail such abusive activities by patent-holding entities, which many label “trolls,” the House of Representatives passed the Innovation Act (H.R. 3309). The bill intends to weed out frivolous cases by setting higher hurdles for lawsuits, such as raising the pleading requirements for the initial complaint and shifting who pays resulting legal fees.

The legislation sailed through the House by a bipartisan vote of 325 to 91 early last month. It now goes to the Senate, where several related measures are pending before the Judiciary Committee.

Technology companies, such as Microsoft and Google, have been lobbying Congress to take action against patent trolls. But critics of the House-passed legislation, which include pharmaceutical and biotechnology companies and many universities, fear the measure would make it more difficult for inventors to protect their intellectual property. They say barriers that would be imposed by H.R. 3309 are cumbersome and could discourage the filing of legitimate infringement lawsuits.

“Despite some improvements made in the House legislation, we continue to have concerns that it would undermine the ability of patent holders to enforce their rights” through filing and litigating a patent infringement suit, says Matthew D. Bennett, senior vice president of the Pharmaceutical Research & Manufacturers of America (PhRMA), a trade group that represents brand-name drugmakers.

The legislation could impose “substantial burdens on the ability to enforce legitimate patents effectively and efficiently,” Bennett contends. It would potentially decrease the value of patents and weaken incentives for innovation, he explains.

“Everyone from independent inventors, to start-ups, to mid- and large-sized businesses faces this constant threat,” says Rep. Robert W. Goodlatte (R-Va.), chairman of the House Judiciary Committee and chief sponsor of H.R. 3009.

“The tens of billions of dollars spent on settlements and litigation expenses associated with abusive patent suits represent wasted capital,” Goodlatte says. “The patent system was never intended to be a playground for litigation extortion and frivolous claims.”

The House legislation would create new requirements that plaintiffs would have to meet when filing a suit that alleges patent infringement.

For example, patent owners would have to provide much more detail in a complaint than is currently required. So, under the House-passed bill, they would have to identify the claims they assert and explain in detail how the accused products and features allegedly infringe the patent. In addition, the losing party in an infringement case would be forced to pay the prevailing party’s legal fees and expenses.

Moving the bill through the House was a victory for technology lobbying groups as well as many retailers. They say they face a steadily increasing threat of patent litigation over things as varied as website design and wireless Internet access in their stores.

“Patent trolls have been running a legalized extortion racket shaking down American businesses for everything from using features on their copiers to running wireless networks in their offices,” says Consumer Electronics Association President Gary Shapiro. “The cost of hiring lawyers, devoting top executive and engineering time, and paying settlements is verging on catastrophic levels.”

Such litigation costs the U.S. economy $80 billion annually, according to a study by Boston University researchers. And RPX Corp., a San Francisco firm specializing in patent research and litigation, says patent assertion entities filed 62% of all infringement claims in 2012, up from just 19% in 2006.

The increase likely stems from an explosion of patents for tiny bits of information technology. For instance, a smartphone embodies thousands of patents distributed over a large number of patent holders.

“The more inventions that a single product includes, the greater the ‘gotcha’ risk that an unforeseen patent demand will pop up after the product has already been made,” says Colleen V. Chien, a senior adviser for intellectual property and innovation in the White House Office of Science & Technology Policy.

But companies that acquire and enforce patents through licensing deals or legal settlements reject the label of trolls. “The term patent troll gets thrown at anybody who you don’t like who’s a plaintiff in a patent case,” says Nathan Myhrvold, founder and chief executive officer of Intellectual Ventures, a Bellevue, Wash.-based company that holds more than 70,000 patent assets.

“Inventors like the idea that their invention won’t be ripped off and they’ll get paid something for it. It’s also natural for other people not to want to pay,” Myhrvold remarks. “And frankly, it’s cheaper for companies that know they have giant patent liability to come lobby in Washington, D.C., than it is for them to pay that liability.”

Unlike computer software and communications technology companies, the pharmaceutical and biotech industries have not been as vulnerable to infringement lawsuits. That’s because pharma and biotech patents are not as broad, and they require more time and expertise to develop, legal analysts say.

Hans Sauer, deputy general counsel for intellectual property for the Biotechnology Industry Organization (BIO), says he hasn’t heard many complaints from the trade association’s 1,100 member companies about patent trolling.

“One larger member, a drug company, was targeted for allegedly infringing a patent by using a certain computer program in benefits administration for their employees. But it had nothing to do with their pharmaceutical business,” he tells C&EN.

The pharma and biotech sector and a coalition of academic organizations say they support the goal of cracking down on abusive litigation tactics in patent infringement lawsuits. But they argue that H.R. 3309 is overly broad and would create unintended problems for innovators who rely on the patent system to fund and protect their inventions.

Essentially, they are concerned that the legislation does not sufficiently distinguish patent trolls from businesses seeking to protect their legitimate intellectual property. “The legislation would erect many barriers in the hope of stopping patent trolls. But everybody else will have to get over these barriers too,” Sauer says. “That’s the problem.”

Small start-ups, he explains, must be able to defend their businesses against patent infringement in a timely and cost-effective manner and without needless and numerous procedural hurdles or other obstacles.

“If you are a small biotech business, you want a law to protect you from unfair patent assertions,” Sauer observes. “But it must allow you to legitimately enforce your own patents if you have to. That’s the balance you want.”

Universities, which develop and license patents but do not commercialize products, worry that the bill would curtail their ability to make money from research. In a joint statement, the Association of American Universities and five other higher education groups say they will likely get caught up in the all-encompassing, fee-shifting provision and other sweeping language in the legislation.

The requirements would pose a “substantial disincentive for universities and start-ups to enforce patents on new technologies and innovations, which undermines the goal of the patent system,” the associations say.

In response to the criticism, Goodlatte says legitimate patent holders have nothing to fear from his bill because it would not prevent the assertion of valid patents. “The bill doesn’t devalue patent rights. It pushes for legal reform measures and strengthens the patent system,” he remarks. The term “patent troll,” he adds, refers to a behavior.

Lobbyists have now turned their attention to the Senate, where the debate over patent litigation reform is just beginning. PhRMA “looks forward to working with the Senate on targeted reforms to curb abusive patent litigation while maintaining incentives for biomedical innovation,” Bennett says.

At a Judiciary Committee hearing on Dec. 17, 2013, senators appeared to be far apart over the best approach to the issue. Several called for more study before voting on any bill. And eight of the 18 committee members are sponsoring or cosponsoring various bills aimed at curbing frivolous patent infringement lawsuits.

“I am wary of overkill,” said Sen. Richard Blumenthal (D-Conn.). “I’m wary of the unintended consequences of limiting patent rights without knowing what the end result will be. We have an important obligation that we first do no harm.”

Before taking any action, the committee should hold additional hearings to gain a better understanding of the patent litigation landscape, Sen. Dianne Feinstein (D-Calif.) said. “This is such a difficult, complicated arena.”