Stop the Secondary Market for Patents From Running Wild

In this post, I want to address the notion that the secondary market for patents is too valuable to risk regulating. Patent trolls and their defenders often argue that a “vibrant” secondary market benefits inventors, which implies that any restrictions on patent transfers harms inventors. One recent op-ed in the Seattle Times caught my eye.  This argument has also been made by prominent patent assertion entities like Intellectual Ventures, patent lawyers, and groups representing PAEs.

Describing the secondary market for patents as somehow helping companies and inventors recoup their investments sounds perfectly legitimate. But that’s not what’s going on at all — as I’ve written before, the value of patents on the secondary market is typically determined by how likely it is that the patent can be used to extract money from various victims. An unregulated secondary market for patents inevitably leads to patent trolls, and we all pay that cost.

To illustrate, let me offer up a fictional example:

The town of Wackoville has come up with an idea to raise money. It will sell the right to enforce its regulations! The town will sell certificates that authorize the holder to enforce some specific rule or ordinance. The certificates sell well, and the town is flush with cash. Everyone assumes that there won’t be much abuse – the initial sales are all to Wackoville residents, so the rights are kept in the town.

You moved to Wackoville a few years ago. One day, you get a notice in the mail. The notice is threatening to sue you for violating a regulation about the appearance of your house. Apparently, there’s a rule against walkways from the driveway to the front door that have an angle less than 90 degrees. (The Acute Walkway Ordinance was pushed by a local eccentric group, the Society for the Obtuse.) Your walkway has a sharp turn in it, which might be less than 90 degrees, although you can’t be sure.

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The FTC Chairwoman Calls Out Patent Assertion Entities

Another day and another volley fired against patent assertion entities (PAEs). Today, it’s the FTC joining the fray.

At an event co-sponsored by CCIA, FTC Chairwoman Edith Ramirez announced that she would be asking the Commission to institute a Section 6(b) investigation of the patent troll business model. Senator Leahy also sent Chairwoman Ramirez a letter today, encouraging the FTC use its powers “to prevent unfair and deceptive trade practices in patent infringement allegations.”

This announcement is recognition by the FTC that patent trolls have become a serious problem for the U.S. economy. Typically, the FTC uses Section 6(b) studies to gather information about an industry or about particular industry practices, such as the accuracy of credit reports, whether voluntary guideline to reducing advertising alcoholic beverages to minors work, and the market for generic drugs.

A Section 6(b) study on the patent troll economic model, which CCIA proposed, has the potential to pull back the curtain (if you’ll pardon the cliché) on the entire patent troll industry. For years, patent trolls have hidden behind layers upon layers of shell companies and confidential agreements. Except for a few instances where details came out during litigation (such as Intellectual Ventures’ deal with patent troll Oasis Research), we still know very little about how trolls really operate.

While Chairwoman Ramirez did not give any details of the proposed study, her statements show that she gets the nature of the problem. Here are a few quotes from Chairwoman Ramirez’s keynote:

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Event Today Featuring FTC Chair Edith Ramirez

FTC Chairwoman Edith Ramirez

CCIA and The American Antitrust Institute are hosting a panel, Competition Law & Patent Assertion Entities: What Antitrust Enforcers Can Do. This is a big event at the National Press Club today at noon, with FTC Chair Edith Ramirez scheduled to speak. The NY Times reports that Chairwoman Ramirez may make some major announcements as well:

Ms. Ramirez is expected to discuss her recommendation [to address the patent troll problem] on Thursday at a patent law workshop sponsored by the American Antitrust Institute and the Computer & Communications Industry Association, a trade group. A spokesman for the F.T.C. declined to comment on the topic of her speech.

Hope to see you there! But even if you can’t join us in person, you can watch a livestream of the event. The hashtag for today’s event will be #PAEantitrust.

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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