GCs and AGs join hands to tackle patent litigation

States and businesses work together to address the NPE problem

With patent litigation cases reaching an all-time high in 2013, exponential growth in the number of filings is on the radar for the heads of large companies, like Tom Sager, general counsel of chemical producer DuPont. Sager is among the ever-expanding roster of GCs that are galvanizing around the issue of non-practicing entities (NPEs), commonly referred to as “patent trolls,” and joining hands with state attorneys general from around the U.S. to diminish the power of NPEs.

In short, patent trolls are companies that buy broadly worded patents, sometimes from firms that go bankrupt, with the intent of suing other companies for illegally infringing on these patents—and they have nothing to lose when they sue others for infringement. While intellectual property is highly valuable to large companies, NPEs are moving away from targeting enterprises by moving downstream to prey on small businesses.

“IP is the life blood of our company so we come at IP with a radically different view than non-practicing entities or trolls. Unlike trolls, DuPont is focused upon addressing societal needs. In our case, we are attempting to help solve the challenges created by the mega trends…feeding the world, developing alternative fuels and protecting man and the environment,” explains Sager. “My concern is the tremendous stress these trolls are putting on the judicial system, primarily the federal system. I have heard first hand from several judges that these troll are taxing an already resource constrained system. With the ever growing backlog of cases within the judicial system, you can be sure that both corporations and private citizens alike will suffer if this trend continues.”

In response to the rise of these frivolous lawsuits, a handful of AGs began using state consumer laws to combat trolling, a strategy pioneered by Vermont Attorney General William Sorrell.

As state AGs are charged with protecting the public from fraud, misrepresentation and deceptive trade practices, a strong case can be made that certain patent trolls are engaging in highly questionable trade practices, according to Alan Schoenbaum, senior vice president and general counsel of Rackspace Hosting, Inc.

“For example, some patent trolls send out hundreds or thousands of demand letters that allege infringement without any real justification,” Schoenbaum says. “These frivolous, coercive demands are in the crosshairs of progressive AGs in several states.”

In addition to the impact patent trolls are having on state courts, these costly cases are weighing down the federal court systems as well. According to a recent American Intellectual Property Law Association (AIPLA) survey, the average cost of a U.S. patent litigation with more than $25 million at stake is $5.5 million.

“Trolls are simply about transferring wealth and not creating it. This is a problem that needs addressing both by the courts and the Congress. Their only purpose is to generate huge royalty payments through litigation,” says Sager. “It’s just a transfer of wealth and one that needs to be curtailed. But we don’t want to reform the system to the point where it undermines what the system was designed to achieve, which is to incentivize research and innovation through the patent system.”

A big tent group led by the Coalition for Patent Fairness includes companies and trade associations from different industries, including airlines, banks, Internet companies, broadcasters, retailers, software developers, restaurants, realtors, and several others, notes Schoenbaum.

“GCs all over the country are sick and tired of their ever-expanding patent troll dockets,” he says. “The GCs of these companies are leading the charge.”

The cost to society

The White House estimates that lawsuits from trolls have nearly tripled in the last two years, rising from 29 percent of all infringement suits to 62 percent. In a separate study, Boston University researchers estimated that in 2011, more than 2,100 companies were forced to mount 5,842 defenses in lawsuits from patent trolls, up from 1,401 in 2005, at a cost of $29 billion—a whopping $22 billion increase.

Addtionally, the indirect costs weighed in at approximately $80 billion, Schoenbaum points out, noting that direct costs include only amounts actually collected by the patent trolls and legal fees that the defendants had to pay.

“Our company has also suffered significant losses,” he explains. “Our legal fees have gone up considerably over the past five years, especially since we decided that we would not roll over for extortive settlements just to make the cases go away. We decided that it was better to make patent trolls prove it rather than just pay them off.”

“Greedy people have figured out how to take discarded patents and use them to extort quick settlements from legitimate, law abiding businesses,” Schoenbaum adds.

Often, the companies least able to afford the enormous cost of defending patent suits are getting hit the hardest.

“It is well documented that defending a patent suit through trial can cost upwards of $5 million. It is a financial impossibility for a $10 million revenue company to handle that kind of financial burden,” says Schoenbaum. “The result in virtually every case is an expensive settlement for less than expected defense costs. This is an access to justice issue if there ever was one.”

Legislative intervention

In December 2013, the House approved the Innovation Act spearheaded by House Judiciary Chairman Bob Goodlatte (R.-Va.). The bill would require patent holders who file lawsuits to disclose more information upfront on the patents involved and the nature of the alleged infringement.

If the Innovation Act fails in the Senate, other actions are underway to help control the ferocity of patent litigation, according to Todd Dickinson, executive director of the AIPLA.

“The House has passed [H.R.] 3309, so it looks like they are taking action. If they don’t, we’ll see other things come into play. The FTC has been commissioned to do a study; one of the commissioners gave an interesting speech, commenting on this whole issue. She asked Congress to slow down to give the FTC time to analyze this more carefully, we need to be more granular or surgical as we approach it.”

Dickinson says that as more state AGs and legislatures get involved in the patent troll problem, it also brings challenges.

“The Vermont legislation is drafted in such a way that it is burdensome, but be that as it may, the AGs are used to dealing with consumer fraud and deception all the time. It rings as Nigerian marriage proposals on the Internet; [state AGs] are used to dealing with that kind of fraud and we expect them to get more involved,” Dickinson explains. “There is an education part of the IP systems, the bar has an obligation to work with state AGs to understand what they do and what is important to us so we are not impacting each other; there is a great opportunity there.”

While the Innovation Act is considered a positive measure in the war against patent trolls, corporate GCs are likely to push state AGs to keep at their respective efforts to combat trolling.

“We will continue to urge the state AGs and state legislatures to stay focused on the issue, and do what they can to reduce the impact of patent trolls, to the extent legally possible,” Schoenbaum adds.

Meanwhile, DuPont’s Sager calls the legislative route “a slow boat to China.”

“I don’t see meaningful reform coming to fruition any time soon given the complexities and the potential impact that it will have upon the system,” he says. “Reform of this type takes time to sort out. And yes, I do think that the state attorneys general have a role to play. I think that if AGs are of a mind to regulate this activity, they will do just that.”

Join the Conversation

Advertisement. Closing in 15 seconds.