A troll by any other name: Patent reform from the top down

The state of the trolls is in flux, and many dominos must fall before there is clarity on the matter

“We are working on a bipartisan basis to craft legislation to address this problem of abusive practices and restore confidence in the American patent system.”

These bold words, from the pens of Democratic Sen. Patrick Leahy of Vermont and Republican Sen. Mike Lee of Utah, represent the strong—and bipartisan—stance that the federal government is taking on the issue of patent reform.

The cooperation between parties extends to the state level as well. “There are issues that break down along political lines,” explains Vermont Attorney General Bill Sorrell, “but the issue of patent trolls is not one that should be for red state or blue state attorneys general. It affects businesses in our states in a harmful way; consumers are paying more for goods or services.”

The attack against patent trolls goes all the way up to the Obama administration, which last June issued a series of executive actions and legislative recommendations designed to reform the patent system. The Federal Trade Commission (FTC) has also declared war on the rash of patent lawsuits that has sprung up in recent years.

In October, House Judiciary Chair Bob Goodlatte (R-Va.) introduced a bill co-sponsored by 10 fellow representatives, including three democrats. Goodlatte contends, “Abusive patent litigation is a drag on our economy. Everyone from independent inventors, to start-ups, to mid- and large-sized businesses face this constant threat. The tens of billions of dollars spent on settlements and litigation expenses associated with abusive patent suits represent truly wasted capital—wasted capital that could have been used to create new jobs, fund R&D, and create new innovations and technologies. The bipartisan Innovation Act is designed to eliminate the abuses of our patent system, discourage frivolous patent litigation and keep U.S. patent laws up to date. These important actions will help fuel the engine of American innovation and creativity, creating new jobs and growing our economy.”

State governments are also getting in on the action. Vermont recently passed a law, “Bad Faith Assertions of Patent Infringements,” aimed at patent trolls. And, in addition to Sorrell, other state attorneys general are taking note. “The Vermont statute was adopted this summer by a national conference of state government,” he says. The statute was viewed as a “model act” for other state legislatures, and he foresees many states taking up the Vermont law or some variation of it.

Though in the past much of this patent litigation has centered on hi-tech firms, it is clear that the impact of patent suits will be felt in any industry that uses technology. David Shlansky, managing partner at the Shlansky Law Group says that the list is almost limitless. “The way tech is permeating so many devices, it will affect transportation, automotive, aviation… anywhere where you have complex technological inputs,” he says. “Some of the infringement actions and license asks go to industries that have adopted tech that may be off the shelf that may not be self-evidently something they need a license for.” This, of course, can make matters extremely complicated for companies not well versed in these matters, which is one reason why IP is such a key topic for boards.

Differing views on AIA

One of the most important pieces of federal legislation in this area in decades is the Leahy-Smith America Invents Act (AIA), which was intended to serve as a sweeping reform for the patent system. But experts are sharply divided on its efficacy, citing certain sections of the law as more potent than others.

Mallun Yen, executive vice president of RPX Corporation and head of corporate development, served eight years as vice president of worldwide intellectual property and deputy general counsel at Cisco. She says that the AIA is not what the technology sector was looking for. “Tech companies are focused on litigation reform, but there is only one provision in that area,” she says, citing the joinder provision. Yen believes that it is helpful in some regards, but that there were some unintended consequences.

“In the past, companies were joined together in one suit, leading to conflicting arguments and forcing them to share time. Now, thanks to the joinder provision, I can’t just join anyone; there needs to be a connection.” But, she says, NPEs adapt. “Now, they are filing multiple cases and staggering them. It makes it harder for defendants to collaborate. It has not been a panacea; it’s made it almost more difficult for defendants to coordinate.”

But for other industries, the AIA has provided a boon. In the financial sector, for example, the new procedures that concern the post-grant review of a covered business method are significant. Claudia Wilson Frost, partner and co-chair, of patent litigation practice at DLA Piper, points to SAP Am., Inc. v. Versata Dev. Group, Inc. as a strong example of this policy stemming from the one-year-old law.

The decision represented the first substantive ruling concerning covered business methods, as outlined in AIA. The case is unique because it began well before the passage of AIA, and the court took the new law into consideration late in the process. After a jury found that SAP had infringed on a Versata patent, the software company appealed to the USPTO to consider the matter under the new law. The PTAB found that Versata’s patents were ineligible under Section 101 because they were not patentable. They merely recited abstract ideas and created processes that could have been completed with a paper and pen.

“It is a useful and powerful tool for any company that is faced with a patent that claims a financial service,” Frost explains. “The mechanisms appear to be working, and there are lots of decisions coming out soon. It helps financial services companies and the industry to get a handle on this matter. It’s not just applicable to NPEs, it’s applicable to any patentee with a patent that falls into this category.”

Trolling for trouble?

Finally, there are certain financial investors who use the M&A tactic as an investment strategy. This brings to mind the name that many parties use to describe these companies that amass IP and then threaten litigation: “patent trolls.”

Hedge funds, private equity firms and individual investors have found that amassing a stockpile of IP can be very profitable, even without building anything based on those patents. Companies that fit this mold are given many names: patent assertion entities, NPEs and, perhaps harshest of all, patent trolls.

But this term carries with it a host of negative connotations. There are many large corporations that engage in behavior that might be considered “troll-like.” It’s essential, then, to clarify at the board and to the C-level, just how companies are exploiting the value of patents.

David Shlansky says that “patent troll” is a disparaging term. “Many have strong opinions on ‘trolls,’ but these companies have IP rights; they are assignable and inalienable,” he says. “Troll is a disparaging term, but if companies are infringing, someone has the right to seek a licensing deal or other recourse.”

Other terms are tricky as well, Shlansky believes. “The term NPE (non-practicing entity) implies that they don’t use the patent; it’s like the argument that people have too much capital (or that you have so many homes that you don’t use one). They acquired the IP fairly. You don’t need to be practicing in order to contribute to society. You can use or not use your property, but you can enforce it for any reason. A lot of this is rhetoric and propaganda.” He says that PAE (patent assertion entity) is probably a fairer term, but there should not be a differentiation. “Saying they are not in the business of practicing is a distinction without a difference, endeavoring to strip entities of rights. It’s not legally material.”

Bernard Nash, partner and practice leader of the State Attorney General Practice at Dickstein Shapiro, says that the issue is complex, and assigning names to these groups is a way to simplify matters and make a point. “Those who see problems in this area characterize it as patent trolls, a pejorative term. One faction that state attorneys general are thinking about are properly called patent trolls, the lowest of the low. Ones that threaten and lie and cheat small business owners who are not sophisticated, who make things up and put it in threatening letters. If it were that simple, you would not need federal legislation. You’d go after crooks who abuse people, the scam artists.”

But alongside these trolls, says Nash, is what he refers to as “real” NPEs, which he distinguishes from trolls by their behavior. “Real NPEs spend a lot of money buying up portfolios and monetizing an investment—intellectual property,” he says, noting that these companies are interested in getting a return on their investments, usually through licensing. Nash, an expert in the strategies that state attorneys general have been using to combat trolls, states that attorneys general are not interested in getting involved with these types of NPEs, focusing instead on companies engaged in criminal behavior.

Vermont’s Sorrell echoes this differentiation between legitimate patent holders and so-called trolls. He emphasizes that he does not want the state to get involved in a legitimate fight between agencies over whether patents exist or what they cover. Rather, he asserts, “We are trying to get at the patent trolls, those companies that buy up patents for a song, take expansive views of what those patents cover, then threaten or bring litigation.” He states that this is a business problem, and he wanted to be able to go after these bad faith agencies with laws that would protect consumers.

No matter what you call the parties involved, these patent suits are a trend that should be on the radar of every board, and should be top of mind for general counsel as well. Though the government has pledged to reform the system even further, Yen feels it is unlikely to yield results in the short term.

“The government tried to reform the system 10 years ago. The patent system had not changed in 50 year,” she says. “As we look back now, the legislature is not designed for wholesale change all at once. Legislation is a small fix and case law is more meandering.”

On the other hand, states are carefully watching proposed federal legislation, as state attorneys general need to address the problem brewing in their own backyards while ensuring that federal law does not upend their ongoing efforts. “If there is a bill moving through Congress,” says Sorrell, “we want to ensure that states are not cut out of enforcement action in this arena. We have jurisdiction over violations of state statutes in the context of the patent arena.” In the end, he says, he is doing what he can to spread the word in Vermont and elsewhere that this behavior is unacceptable. In the meantime, he hopes the federal government will stand up and amend laws to make it more difficult for this business model to succeed.

Ultimately, the state of the trolls is in flux, and many dominos must fall before there is clarity on the matter. This means that this problem will continue for the time being, and in-house counsel need to address the issues now rather than later. After all, whether you call them trolls or not, companies are waiting to spot an potential patent infringement and take action, so businesses better be armed with something more than just the courage of their convictions.

Managing Editor

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Rich Steeves

Richard P. Steeves is Managing Editor of InsideCounsel magazine, where he covers the intellectual property and compliance arenas. Rich earned a B.A. in English Literature...

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