Troll Economics: The White House Weighs In

Last week, the White House released its agenda of legislative priorities and executive actions on high-tech patent issues.  It was accompanied by a report, Patent Assertion and U.S. Innovation, that builds on recent research and makes the case for the agenda.  The agenda is attributed to the White House Task Force on High-Tech Patent Issues, while the report is a joint product of the Council of Economic Advisers (CEA), the National Economic Council (NEC), and the Office of Science & Technology Policy (OSTP).  Like the various proposals brewing in Congress, it is directed at patent assertion entities (PAEs), more commonly known as trolls.  But with seven legislative measures, five executive actions, and the report, the White House agenda is distinctly ambitious.

It is quite unusual for the White House to assume leadership on patent reform.  To my memory, the only comparable initiative was the President’s Commission on the Patent System of 1965-1966.  At President Johnson’s request, the Commission took a broad look at the patent system in a time of technological change and issued its report as “‘To Promote the Progress of …Useful Arts’ in an Era of Exploding Technology.”  The report made 35 thoughtful recommendations (including recommending against software patents) but got little political traction beyond the administration.  As noted by Commission member James Birkenstock (IBM):

The commission members were greatly pleased that the Johnson administration accepted all of its recommendations. Regrettably, only a few were enacted into law due to the highly influential Patent Law Bar that opposed most of the recommendations.

The Obama administration’s initiative is narrower, more targeted, and well-documented.  The report not only examines the troll problem in depth but links it to fundamental problems of functional claiming in software, uncertainty in the face of massive patenting, and the overshadowing of R&D by strategic patent acquisition and assertion.  The report recognizes that it is not just a problem of restraining and sanctioning a few bad actors.

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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.

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Is the Eastern District of Texas Becoming Less Patentee-Friendly?

On March 27, the usually patentee-friendly Eastern District of Texas threw out a patent infringement lawsuit against information technology hosting company Rackspace. It is unclear whether this decision indicates a shift from the court’s patentee-friendly persuasion, or if it is merely an anomalous result brought by a particularly frivolous patent. In either case, this is one of the first reported instances of the Eastern District of Texas dismissing a patent infringement lawsuit in an early stage, and going so far as to invalidate the claim asserted in doing so.

The patentee, Uniloc, alleged that Rackspace’s use of Red Hat’s Linux components infringed its patent, which purported to cover a method processing floating numbers in an arithmetic function. In plain English, the patent is for the method of rounding decimals before, rather than after, adding them together. In a surprising, but very smart decision, the court rightfully found a patent for something as basic as rounding numbers was invalid and dismissed Uniloc’s case.

Uniloc purports to be a developer of security software and technology. Uniloc has been described as a patent troll due to its reputation for very aggressive legal behavior surrounding alleged patent infringement. Most famously, it obtained a $388 million judgment against Microsoft in the 2006 case Uniloc v. Microsoft. This amount was later reduced and the parties settled for an undisclosed amount. Uniloc has sued 73 total defendants to date, including Sony, McAfee, Symantec and Electronic Arts, mostly on the same patent it asserted against Microsoft.

In the Rackspace case, Uniloc was using a different patent. If you want to read through the details of it, a link is here. The patent had only one claim, which is the method of rounding numbers before entering them into an arithmetic function, rather than entering the unrounded numbers and rounding the result. They alleged that Linux was violating their patent because it complies with Institute of Electrical and Electronics Engineers (IEEE) Standard 754 which defines various mathematical functions, arithmetic and otherwise, for processing floating point numbers in a computer processing unit (CPU). The Linux component that uses IEEE Standard 754, known as the Linux kernel, was the allegedly infringing technology.

To obtain a patent, the applicant’s contribution must be an invention, as opposed to a discovery of an abstract principle. Anything that is not invented by man—laws of nature, abstract ideas, and physical phenomena—is not. No matter how ingenious it may be, a mathematical formula is a law of nature, not an invention, and as such it cannot be patented.

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CCIA Files Comments to US Antitrust Regulators on Patent Troll Activity

(Cross-posted on DisCo)

Last Friday, CCIA filed its comments to the FTC/DOJ’s Public Workshop on Patent Assertion Entities (PAEs) (aka patent trolls).  Although antitrust authorities cannot fix all of the foundational problems in the patent system — such as the patent quality problem – they can certainly use their competition expertise and authority to help rein in some of the most egregious attempts to game the system to the detriment of both consumers and innovation.  Furthermore, the FTC and DOJ should continue their long tradition of excellent marketplace research that can be used as raw material to update competition law, as the patent system does not function in the stylized way that much of our patent law and antitrust jurisprudence contemplate.

Specifically, we stressed three particular areas that the FTC and DOJ should focus on in the short run.

  • FTC 6(b) Study – Much of patent troll activity occurs in the shadows, and it is often covered up by a maze of shell companies and non-disclosure agreements.  In order for antitrust regulators to figure out which business arrangements and relationships violate antitrust law, they need to have a more comprehensive picture of PAE relationships and practices.  Luckily, the FTC is armed with just the tool for this – a 6(b) study.  This allows the agencies to send out subpoena-like questionnaires to PAEs and their associates that they are compelled to respond to.

  • Ensure Commitments Travel With Patents – In order to provide marketplace certainty, technology companies make frequent commitments as to how they will or will not enforce their patents.  These commitments include the now infamous FRAND commitments, pledges not to “stack royalties,” pledges not to assert against open-source software, pledges to only use defensively, etc.  Companies make these pledges to induce the marketplace to adopt their technology.  If trolls acquire patents with previous commitments, and then revoke them, it amounts to an unfair method of competition (and antitrust violation if the market is “locked-in” to the technology in question).

  • Closely Monitor Patent Privateering – The relatively new phenomenon of patent privateering, where operating companies enlist trolls to attack their rivals for them, raises some potential antitrust questions.  The problems become even more acute when multiple competitors collaborate through a troll to bring lawsuits against mutual competitors.  The FTC and DOJ should closely monitor this activity and update their guidance — including the 1995 IP Licensing guidelines — with this behavior in mind.

For CCIA’s full comments click here and for a look at the entire FTC/DOJ public comments docket click here.

Suggestions for an FTC 6(b) Study on Patent Assertion Entities

The Department of Justice Antitrust Division and the Federal Trade Commission (FTC) jointly hosted a workshop to explore the issue of patent assertion entities (PAEs) on December 10, 2012.  Since then there has been a growing consensus that PAEs are a significant problem for the technology and software industries.  Representative Peter DeFazio from Oregon and Representative Jason Chaffetz from Utah introduced a second version of the SHIELD Act designed to implement a fee shifting regime for PAEs that litigate and lose.  The House Subcommittee on Courts, Intellectual Property, and the Internet hosted a hearing on March 14, entitled “Abusive Patent Litigation: The Impact on American Innovation & Jobs, and Potential Solutions.”  President Obama even weighed in on the issue a recent Google+ event in which he commented “[PAEs] don’t actually produce anything themselves.  They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

The next step is to devise a solution to this problem.  However, crafting a solution has proven difficult.  One of the main barriers is a lack of hard data on which to base reform. Academics like Colleen Chien are trying their best to collect and analyze such data, but they must rely on public records and survey companies.  When small companies try to negotiate with PAEs they are usually required to sign confidentiality agreements as a condition for settling.  PAEs often operate through shell companies, which makes it difficult to get a full picture of their operations.

As we have previously discussed, the task of collecting and analyzing the hard data necessary to craft an adequate solution lies with the FTC.  Under Section 6(b) of the FTC Act, the FTC has the power to use subpoenas to secure information from companies to conduct studies.  As the FTC Office of General Counsel explains, “Section 6(b) [of the FTC Act] empowers the Commission to require the filing of ‘annual or special * * * reports or answers in writing to specific questions’ for the purpose of obtaining information about ‘the organization, business, conduct, practices, management, and relation to other corporations, partnerships, and individuals.’” The FTC’s 6(b) power is an important and potent tool, and historically has been used as a launching point to draft legislation curbing industry abuse. A 6(b) study led to the Packers and Stockyards Act of 1921 and, more recently, to reform of the generic drug regulatory system in the Medicare Modernization Act of 2003.

Through a 6(b) study, the FTC can carefully analyze the purpose and impact of many of the practices of PAEs.   Indeed, much of the concern over PAEs in these comments and others focuses on the lack of transparency into their businesses.  The FTC can remedy lack of information with an independent, unbiased study.  A 6(b) study can focus on the following issues, among others:

  • Determining the full ownership interest of PAEs and a list of all subsidiaries and affiliates;
  • What are the type and scope of demand letters used by PAEs;
  • How often is litigation by PAEs successful; at what stage is litigation typically resolved;
  • How are patents acquired by PAEs and from whom;  what is the purpose of these transactions;  and
  • How does the PAE determine which patents to acquire.

We provide below some suggestions on questions the FTC might consider including in a 6(b) study on PAEs.  These questions are designed to provide answers that will move the analysis forward into a comprehensive understanding of the PAE business model and its impact on competition.  We have split our questions into three categories.  First, there are questions for stand-alone PAEs.  Second, there are additional questions for hybrid PAEs that have a relationship with established operating companies.  Finally, there are questions concerning procompetitive efficiencies claimed by PAEs.

These questions are designed to solicit information to provide statistical evidence for or against what are believed to be common business practices in the industry.  For example, many commentators portray PAEs as acquiring patents late in their life cycle; using a complex network of subsidiaries and shells to obscure patent ownership; and aggressively pursuing licenses from any conceivable infringer without performing due diligence on the technology in question or the likelihood of infringement.

The questions:

Information about PAE structure

  • List any current or former corporate parent.

  • List all entities in which Company has an ownership interest.  For each entity Company has an ownership interest in, provide the full name, address, state of incorporation (if applicable), and nature of ownership interest.  Ownership interest includes any business association, subsidiary, sole proprietorship, or shell organization.

  • List all entities in which Company has a financial interest and/or relationship.  Interest and/or relationship in an entity is defined as ownership, assignment interest, and any financial or commercial benefit stemming from a contractual arrangement relating to a patent.

  • If Company has a board of directors or similar governing body, list all other business associations (companies, subsidiaries, partnerships, etc) in which these individuals have a role with a fiduciary responsibility.

Information about interest in Company’s patents

  • List all patents in which Company has a current ownership interest, including options, or has had such an interest within the past five years.  For all patents listed describe the nature of acquisition (original patentee, assignment, purchase, etc).

  • List all patents Company has transferred to another entity within the last five years and indicate Company’s interest in or relationship to that entity.  State the nature of the interest and the responsibilities of each party.

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