IT Companies Back Federal Plans to Battle Patent Trolls

Major information technology companies are hoping to seize the moment in an effort to restrain what they consider to be an abuse of intellectual property rights by so-called patent trolls. In a recent flurry of activity, lawmakers and the Obama administration have taken steps to support large IT companies seeking patent claim reforms.

The big IT companies claim that current law overwhelmingly favors the patent trolls, also known as “Patent Assertion Entities,” and that the trolls have been getting away with highway robbery.

“What they have been doing is nothing short of business terrorism,” said John Boswell, senior vice president and general counsel at SAS. The reformers are seeking to create a level playing field when it comes to both pursuing and defending patent claims.

Patent trolling involves acquiring patents from parties who hold IP licensing rights but who do not intend to ever produce a product or provide a service covered by a patent.

The trolls — who also have no intention of marketing the product or service — then find organizations that have engaged in activities covered by the patents and threaten those organizations with infringement lawsuits. Often the trolls will simply accept a settlement payment in lieu of a court decision — a practice many liken to extortion.

As a result, a large body of patents now exists resulting from geekosphere inventors who obtained patents for their ideas but who never intended to implement them. In addition, companies in dire financial straits that were never able to exploit their own ideas in a successful business often sell their dormant patents to trolls, who then follow the same claim-threatening strategy.

Trolls have been known to send out thousands of litigation threat notices to an array of parties that have had some connection to a given patent — but that strategy may be backfiring. Infringement law covers not only technology providers, but also the users of technology — such as retail firms using a customer relations software package.

Large chains, as well as mom-and-pop businesses, have been the targets of threat notices, and these businesses have complained to government officials — a factor that may have triggered bipartisan political support for reforms.

Court Reform Combat Plan

Defending against patent trolls can be costly.

“The troll seeks legal discovery of any and every electronic document that might touch upon the alleged claims by any person inside the defendant’s operations. This can run to hundreds of millions of documents and millions of dollars to produce,” Boswell told a House Judiciary Committee last March.

“Patent trolls bring these cases in jurisdictions that allow this type of expensive discovery. It is this cost to defend the litigation that is the hammer that drives settlement,” he said.

Major IT companies and trade groups have been active in developing a strategy to combat patent claim abuse, and their efforts appear to be paying off on several fronts:

Legislation: Rep. Bob Goodlatte, R-Va., chairman of the House Judiciary Committee, issued draft legislation on June 4 that would allocate the cost of litigation more fairly among the parties instead of putting almost the entire burden on the defendant. The bill would also require more transparency so that so-called shell companies filing patent infringement claims would be fully identified.

“Taken as a whole, the draft is designed to positively help reshape the current environment surrounding patent troll-type behavior and abusive patent litigation. Each of the sections work together to reduce the costs of frivolous litigation and increase patent certainty,” Goodlatte said.

Also, Sen. John Cornyn, R-Texas, introduced a bill in May that clearly establishes a “loser pay” process, so that trolls would have to consider the risk and cost of bringing a lawsuit. In addition, in early June the Obama administration proposed its own package of reforms, which mirrored those in the House and Senate.

“Cost-shifting of the legal process, especially for the expense of discovery, would go a long way to changing the legal paradigm. That kind of a change has teeth in both directions for the initiator and the defendant,” SAS’ Boswell told the E-Commerce Times.

To highlight broad congressional support for reforms, the Software & Information Industry Association sponsored a June 5 forum where Goodlatte outlined his views and a panel of experts from the House, Senate and IT industry discussed proposed reforms.

Executive Action: The Obama administration not only proposed legislative remedies, but also said it would implement several related actions. For example, the U.S Patent and Trademark Office will begin a rulemaking to require improved clarity about patent ownership.

The PTO also will improve staff training to reduce the issuance of overly broad patents that are exploited by trolls, and it will improve the availability of materials that “downstream” end users such as retail stores can use when confronted by a patent troll lawsuit.

Through forums conducted by the U.S. Department of Justice, the administration will intensify public information and outreach efforts on the issue.

Trade groups reacted favorably.

“Reforming the patent system to end frivolous lawsuits by bad actors will enhance the innovation ecosystem, and we appreciate the urgency the White House has put behind this initiative,” said Kevin Richards, TechAmerica’s senior vice president for federal government affairs.

Regulation: Major IT companies contend that the Federal Trade Commission’s authority should be used to control patent abuse. In early April, Google, Earthlink, RedHat and BlackBerry jointly petitioned the FTC to examine and fix the problem. The submission was just one of 70 comments received by the FTC and the DoJ in reaction to a workshop the two agencies conducted last December on patent abuse.

At a seminar sponsored by the Washington Legal Foundation in May, Lisa Kimmel, an advisor to the FTC, said that the commission was reviewing all comments and that the agency had expressed “skepticism” about whether or not practices conducted by patent trolls were economically productive.

In addition to industry comment, a bipartisan group of 18 members of the House notified the FTC in early June about their concerns related to patent trolls.

“We are most concerned about practices that target end-users who are downstream users of technology,” the group said.

Litigation Reform Needs Bolstering

An effective reform effort should go beyond the litigation process, according to Keith Kupferschmid, general counsel and senior vice president at SIIA.

“The goal ought to be twofold — to take away the inherent advantage that trolls have in the litigation process, and to make it more difficult for trolls to file abusive suits in the first place,” he told the E-Commerce Times.

“The fee shifting and heightened pleading standard go a long way to addressing the first goal but don’t go far enough to address the second. For this reason, it is our view that any legislation must include both litigation, and pre-litigation reforms,” he said. Heightened pleading refers to requiring more specific and clear assertions about products or features when trolls file their claims.

Not all experts agree with the reforms.

“In general the U.S. patent system works fairly well,” Graham Gerst, a partner with the Global IP Law Group, told the E-Commerce Times.

“Most of the proposed reforms deal with the court process, and the vast majority of cases never get that far,” he said. “Some caution is required here to ensure that innovators, especially small enterprises, are not intimidated in enforcing their legitimate patent rights. A new law with a one-size-fits all remedy is not really appropriate. I think judges have the ability under current law to deal with these issues.”

Gerst cited comments and proposals by Randall Rader, chief judge for the U.S Court of Appeals Federal Circuit, in which Rader affirmed that existing law allows judges to set fees on either party in patent cases. Rader has also promoted a model rule to curb the expenses of discovery by limiting the process to “core” documents.

Reformers may still prevail, however — in which case patent trolls could become an endangered species.