PublishedAugust 30, 2023

Patent Office’s Proposed Restrictions on Validity Review Would Hurt Small- and Medium-sized Enterprises

New rules floated by the U.S. Patent and Trademark Office (USPTO) in its April Advance Notice of Proposed Rulemaking (ANPRM), followed by the PREVAIL Act’s introduction in Congress, have generated considerable discussion in recent months. Taken as a whole, the wide-ranging set of proposals included in both the ANPRM and PREVAIL Act would make it more difficult to access the agency’s inter partes review (IPR) process, which serves as an important check against waste and abuse in the patent system, and increase the damage that frivolous lawsuit campaigns inflict on small- and medium-sized enterprises (SMEs).

Retired members of Congress, former agency heads, patent law experts, and private sector business leaders have all correctly raised alarms that the ANPRM proposals go beyond the USPTO’s authority. While it is true that the agency isn’t authorized to create new policy that contradicts laws generated by Congress, as is the case here, the rules’ substance and potential economic impact should not be lost in the conversation, as similar provisions are also included in the recently-introduced PREVAIL Act. Particularly consequential are new restrictions on who can petition the USPTO to review likely-invalid patents, which would prevent certain third parties from challenging patents used in costly litigation campaigns. If the USPTO attempts to see through these new standing requirements, or Congress pursues similar changes, the losers will ultimately be the SMEs that are left more vulnerable to exploitative patent lawsuit schemes as a result. 

In 2011, Congress created IPR at the USPTO to help shield businesses from legal campaigns where shell companies called non-practicing entities (NPEs), i.e. patent trolls, use invalid patents to threaten patent infringement lawsuits and pressure businesses into settlements. Congress intended that IPR be a less costly alternative to litigation, where any member of the public could petition agency officials to review questionable patents and invalidate them, if appropriate. Though many present IPR as a new process, it was in fact a replacement to inter partes reexamination (IPX), which had largely been unused during the dramatic increase in patent litigation seen during the 2000s. IPR, like IPX, did not have a standing requirement to petition for review.

IPR was largely a successful reform. Respected economists have presented evidence that challenging bad patents helps the economy and preserves jobs which might otherwise be consumed with wasteful litigation. But while IPRs are less expensive than lawsuit defenses, they still require knowledge of the review system and financial investment that many SMEs are not equipped or can’t afford to take on. That’s where third parties come in.

Third-party generated IPR requests have helped minimize the damage inflicted by the worst patent trolls. These trolls send thousands of identical demand letters and initiate hundreds of lawsuits, oftentimes against SMEs least able to stand up against the threats. Third-party IPR challenges help break the vicious cycle of patent trolls enriching themselves off of settlements and reinvesting profits into further campaigns.

The USPTO’s proposals related to “limiting institution on filings by for-profit, non-competitive entities” and the similar standing requirements contained in the PREVAIL Act would prevent independent third parties interested in deterring patent trolls’ use of invalid patents from accessing IPR. In doing so, the changes would eliminate the protections for SMEs and positive contributions to patent quality that these organizations provide.

Here are just a few successful third-party challenges that would no longer be allowed:

  • Shipping and Transit (Shipping) – This patent troll sent thousands of demand letters based on invalid patents and filed lawsuits against nearly 200 companies, over half of which were SMEs, claiming their patents covered electronic package delivery notification. Shipping declared bankruptcy despite embarking on this multi-year, multi-million-dollar campaign, and valued its own 34-patent portfolio at less than $2.00. Unified Patents, a company I helped found to deter patent troll abuse, was the only party to ever challenge Shipping’s patents and after a successful resolution Shipping never initiated another suit.
  • Personal Audio – This patent troll sued many SME content creators over a patent it claimed covered essentially any podcast. Electronic Frontier Foundation (EFF), another third party, challenged the patent with an IPR, which led to the USPTO invalidating all challenged claims. This campaign would have continued against SMEs and large podcasters alike without EFF’s IPR.
  • Sportbrain Holdings LLC (Sportbrain) – This well named troll sued more than 130 companies, nearly 70 of which were SMEs, over a broad patent related to personal data capturing systems. Sportbrain initially was a fitness tracking technology company, which went out of business, and then transferred patents to a new entity called Sportbrain Holdings to monetize its patents. Unified’s IPR invalidated the entire patent and Sportbrain never sued again. 
  • IP Edge – One of the most notorious patent trolls in history, IP Edge and its network of shell subsidiaries have sued thousands of companies. IP Edge’s business model is predicated on strategic targeting and demand amounts, which incentivize defendants to settle so it almost never goes to trial, sometimes dropping lawsuits days before trial to avoid expensive and risky court proceedings. Roughly 70% of IP Edge cases terminate within 180 days of filing and reported settlement amounts are usually less than the cost of an IPR. This is exactly the type of scenario where third parties are uniquely positioned to challenge bad patents, which Unified Patents has successfully done on numerous occasions. Shielding SMEs from these invalid assertions allows them to invest more time and money in new innovations and hiring.

When invalid patents are being used in lawsuits, the USPTO and Congress should be less concerned with dictating who can or can’t file a petition and more concerned with ensuring the patents get the review they require.

If the USPTO’s proposals or the PREVAIL Act are enacted, the worst asserters of frivolous patent infringement litigation will be unshackled and allowed again to prey unopposed on the businesses that are least able to defend themselves. Patent trolls will be more aggressive, more profitable, and more rampant, imposing what amounts to a legal tax on economic growth and innovation. The USPTO and Congress must not allow themselves to be complicit in these legal tactics by imposing new standing requirements on the groups keeping patent trolls in check.

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Shawn Ambwani

COO, Unified Patents

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