Guest Post: Stop Abusive Patent Litigation, For the Sake of our Economy

The patent troll debate has officially heated up and the nation’s businesses are paying close attention to the proceedings.  The FTC got things started on December 10, 2012 at the Patent Assertion Activities Workshop.  This meeting featured several of the country’s leading experts on PAEs, as well as representatives of PAE firms and their defendants, many of which have been sued multiple times by PAEs.  The public comments filed in connection with the workshop are like a patent troll encyclopedia, featuring scholarly articles by respected law professors, missives from PAEs, and even simple emails from small town citizens looking for relief from this serious problem.

FTC Chairman Jon Leibowitz deserves kudos for making the patent troll issue a priority. The public deserves no less than a full investigation of the problem, and apparently the FTC is seriously considering using its subpoena powers to gather information about PAEs and how their business model impacts commerce.  No matter what the FTC ultimately decides to do, Congress should use the workshop comments as a resource as they consider measures designed to reform patent litigation abuses.

The House Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet has held two Congressional hearings on the issue.  The first hearing held March 14, 2013, “Abusive Patent Litigation: The Impact on American Innovation & Jobs, and Potential Solutions” addressed the larger problem and how to solve it.  The second hearing held April 16, 2013, “Abusive Patent Litigation: The Issues Impacting American Competitiveness and Job Creation at the International Trade Commission and Beyond” was more narrowly focused on abuses by PAEs in seeking ITC Exclusion Orders, however much of the hearing dealt generally with patent troll litigation abuse and possible solutions.

The subcommittee members who participated in the hearings are searching for answers.  Because of the problem’s complexity, however, there is no silver bullet.  It will take a number of complementary reforms to balance the one-sided advantage that PAE’s currently enjoy.  Several ideas have been floated at the Congressional hearings, some of which are simple, viable, and would not hinder legitimate patent holders from enforcing their rights.

Here are some examples of legislative solutions that would help curb abusive patent litigation:

  • Immunize end users from patent suits.  PAEs sue end users, including very small businesses, because it is not cost effective for these defendants to hire lawyers.  Protecting end users from suit will limit the options for PAEs, forcing them to pursue the manufacturers or providers of common products or services, rather than their customers. This proposal will eliminate the scanner troll for good.
  • Fee shifting.  Several fee-shifting proposals are worth considering.  Here are three of the best:

1.  SHIELD Act.  Simply stated, the SHIELD Act would require PAEs to pay the defendant’s fees and expenses if the PAE loses.

2.  Offer of Judgment.  Under this approach, if a party makes a settlement offer, which is not accepted, and the party which doesn’t take the offer is awarded less than what is offered, the offering party can recover the legal fees incurred after the offer is made.  This would make PAEs think long and hard about not accepting a reasonable settlement offer at the early stages of litigation.

3.  Core discovery.  A party would be allowed certain core documents in discovery, but if it wants more it has to pay for it.  This would help defendants keep costs down while still giving plaintiffs adequate information.

Again, several complementary changes will be required to adequately address the problem.  There are many promising ideas that could make things better.  These are just a few of the many creative solutions that Congress could pass to solve the patent troll epidemic that is plaguing American businesses and hindering innovation, at great cost to our economy.

The cost is actually staggering.  According to a recent study out of Boston University School of Law, “The Direct Costs from NPE Disputes,” patent trolls cost the American economy $29 billion in 2011.  Further, a huge number of patent lawsuits were brought by PAEs against small businesses.  Patent law professor Colleen Chien of Santa Clara University noted in her FTC Workshop presentation that in the first 11 months of 2012, PAEs brought 61% of all patent litigation cases.  Further, in her paper “Startups and Patent Trolls” Professor Chien reported that “companies with less than $100M annual revenue represent at least 66% of unique defendants in troll suits and at least 55% of unique defendants in troll suits make $10M per year or less.”

These statistics demonstrate that a small number of professional litigants are targeting small businesses and taking unfair advantage of federal laws that were designed for resolving legitimate disputes.  The federal judicial system should not be a weapon that patent trolls get to use at taxpayer expense to bully legitimate businesses into paying settlements on dubious patent claims.

There will be more hearings and more debate, and the PAEs will make all kinds of arguments against change.  They and their lobbyists will tell Congress (1) that the courts need complete discretion, (2) that inventors need unfettered access to justice and protection from big corporations, and (3) that the Leahy-Smith America Invents Act needs more time to work.  These are hollow arguments.

First, Congress makes our country’s laws.  The courts interpret the laws.  This is a basic premise of the U.S. Constitution.  Congress has full power over laws governing patents, including how patents can be enforced.  The statutes and the Constitution limit the judiciary’s discretion, and the Constitution grants Congress the power to make, change or eliminate patent laws.  Patent reform legislation will help the judiciary interpret these complex laws, not reduce their discretion.

Second, nobody should be denied access to justice.  It so happens that small businesses are unable to defend themselves due to flaws in our legal system and the clever exploits of those flaws by the PAE industry.  Bottom line, PAEs have zero risk in litigation and startups and small business cannot afford to defend most patents suits, which are notoriously complex and expensive to combat.  The patent troll game relies on this asymmetrical model.  PAEs use contingent fee lawyers, and they have no discovery expenses.  The defendants who fight for their rights must pay millions, and they have virtually no ability to recover their legal fees.  Small businesses cannot spend themselves into ruin defending these cases, however vexatious they might be.  They are forced to settle to survive. That is a real and documented denial of access to justice.

Third, the AIA is a well-crafted law with important reforms, but it does not get to the root of the patent troll problem.  A twenty-year tail of low quality, inscrutable software and business method patents hangs over the heads of America’s businesses.  Patent trolls wield these patents every day, harassing and squeezing the small businesses that our economy relies on to innovate, create jobs and generate growth . America cannot afford to wait.  Congress needs to ride to the rescue now.

The advocates of patent reform are many.  We are a broad coalition.  We create economic activity in all fifty states.  We work at retail stores, Internet companies, hotels, coffee shops, restaurants, hospitals, airlines, trucking companies, car dealerships, and every other place you can think of.  We write the apps for your mobile devices.  We run the Internet.  We serve your breakfast, lunch and dinner.  We work at the store or office building down the street.  We create jobs every single day in the fastest growing industries in the country.

We are not advocating change just for the sake of change or to gain an advantage.  We are not looking for a tax break or a special government program.  We are advocating change for the sake of justice, our jobs and our future.  The law is broken.  We urge Congress to act.  Our economy depends on it.

Alan Schoenbaum is Senior Vice President and General Counsel at Rackspace Hosting, the open cloud company.

  • Anthony Youngman

    Bear in mind that most PAEs have no assets. So any award of attorney fees etc will simply lead to the troll declaring bankruptcy, and the small business is SOL as per today. So your options 1 and 2 are paper tigers.

    What you need is similar to the UK’s rules on director liability. If there is any evidence that the company is there merely to carry out the wishes of the directors or shareholders, and the purpose of the company is a sham to shield liability, then the corporate veil is torn.

    Many PAEs have deals with the entities that sold them the patents, that they will pass revenue back. Many PAEs are partly or mostly owned by the entities that sold them the patents. Make that prima facie evidence of a sham corporation.

    That way, when a PAE goes bust, the directors and shareholders will be left holding the bag, and the victim won’t walk away with nothing.

  • http://twitter.com/Rachael_IP Rachael Lamkin

    Alan,

    Thank you for this post and for your fight against trolls, on behalf of your company and on behalf of all companies that actually make stuff and are thereby targets for
    troll suits.

    I agree that financial asymmetries are a major problem in troll suits and that fee shifting provisions will help eliminate some suits, at least those with the least merit (contingency lawyers have no intention of working for free).

    But we also need to “fee shift” before and during suits with strategies such as these, to name a few: (1) aggressive motion practice (see link below), including counterclaims where at all possible, (2) attorneys willing to give back by staffing trolls suits leanly or with alternative fee arrangements that align outside counsel and their clients; (3) eDiscovery cost limiting tools such as the Federal Circuit’s Model eDiscovery Order; and (4) strategic and cooperative DJ strategies across entities. I don’t want to outline specific strategies in an open forum but here are a couple of links:

    http://www.iptoday.com/issues/2013/02/2012-year-change-for-e-discovery-in-patent-cases.asp

    http://www.patentlyo.com/patent/2011/07/reverse-bifurcation-1.html
    (This is about my Reverse Bifurcation motion but i am not bragging. On the contrary, I wish we had stayed in this litigation and played this idea out. Someone should.)

    http://www.groklaw.net/articlebasic.php?story=201108171318536

    Best of luck and success, let me know if I can be of assistance in any way.

    Rachael