Obama administration comes out swinging against patent trolls
Extraordinary report suggests fee-shifting and protections for end users.
by Joe Mullin
Ars Technica
June 4 2013, 4:25pm CST
http://arstechnica.com/tech-policy/2013/06/obama-administration-comes-out-swinging-against-patent-trolls/
The signs are clear that so-called "patent trolls," companies that do
nothing but threaten and litigate over patents, are doing serious damage
to the economy. After more than a decade in which patent abuse has shot
up to new heights, the problem has finally reached the attention of
President Obama himself.
Today, the White House released a memo detailing seven legislative
actions it wants Congress to take; several of them could have a real
impact on patent trolls. The administration is also going to take
immediate executive actions, including "empowering downstream users" by
having the US Patent and Trademark Office (PTO) create a website to tell
patent troll victims about their rights.
The memo outlines changes to bring much more transparency to patent
disputes, including new PTO rules that will require patent owners to
keep their ownership information updated. It asks Congress to impose
similar transparency rules on courts. If that happens in an effective
way, it could stop patent trolls from hiding their owners in the shadows
behind networks of shell companies.
The letter's tone sends its own message. It unapologetically uses the
tech-colloquial term "patent trolls," noting that they are "increasingly
targeting Main Street retailers, consumers, and other end-users of
products." The executive actions section promises to "tighten functional
claiming," saying that overly broad claims "particularly in the context
of software," are a serious problem.
A permanent solution to patent trolling is going to require action by
Congress. Even if all of the Obama Administration's suggested reforms
were enacted—hard to imagine considering the level of Congressional
gridlock in the past few years—it won't totally wipe out the problem.
But there's little question that these ideas—especially fee-shifting,
transparency, and protection for end users—would make a major dent.
Losing plaintiffs should pay up, and users should be protected
Some highlights from the report include:
Transparency: parties should disclose the "real-party-in-interest" in
both lawsuits and patent demand letters. And the demand letters should
be public.
The true owners of patents often hide behind a "shell" company, often an
oddly named LLC set up just to hold the profits from patent settlements.
A change like this wouldn't necessarily reveal the names of who's
getting the money in some "troll" situations. For example, the recent
wave of scanner-troll letters that went out demanding $1,000 per worker
don't identify who owns the patent-trolling company, which is named MPHJ
Technology Investments. US corporate secrecy laws won't change any time
soon, so the owner of MPHJ will continue collecting his or her checks in
secret.
But increased transparency could make a huge difference, especially in
identifying the kinds of large patent-holding companies that cut deals
with different inventors and shell companies. Intellectual Ventures, for
example, often "divests" itself of patents that are then used in
litigation. But it isn't clear—and Intellectual Ventures won't
disclose—how much profit it reaps from those lawsuits.
It would also help point out which corporations are engaged in the kind
of corporate "profiteering" that has increasingly becoming the norm.
(British Telecom's privateering against Google caused the search company
to eventually punch back, but that's just one example of many.)
And in the "good news for tech law reporters" section, the White House
wants patent demand letters to be made public. "Incentiv[ize] public
filing of demand letters in a way that makes them accessible and
searchable to the public," states the memo. As someone who has received
and published redacted demand letters from very scared defendants, this
would make a big difference in catching the real stories of patent abuse
that are out there.
Protect end users using "off-the-shelf" products.
In recent years, widespread patent demands have been made against small
businesses just for using everyday technology products as they were
intended. Innovatio sued coffee shops and small hotels for offering
Wi-Fi to their customers, and the above-mentioned scanner trolls at MPHJ
have been called out by reformers on Capitol Hill.
The president's proposal says users should get "better legal protection
against liability," but it isn't too specific about how to do that. It
does say a suit against an end user should be stayed when a manufacturer
or retailer is already fighting the case. Conceptually, this point seems
to take to heart the idea that patent trolls should think about
"pick[ing] on someone your own size," a point made by the Electronic
Frontier Foundation (EFF) a few weeks ago. "The law should not allow
trolls to prey on end users," wrote EFF lawyer Julie Samuels. "Period."
Make it easier for defendant companies that win patent suits to get
attorneys' fees.
Without adding much detail, the memo suggests patent cases should be
more like copyright cases, where it's much easier for defendants to get
attorneys' fees paid when they defeat an infringement allegation.
Other suggestions in the memo include expanding the ability to challenge
business method patents at the Patent Office and tightening up when the
International Trade Commission (ITC) can issue injunctions.
Executive actions: Small but immediate
This year seems ripe for passing some of those reforms. Many of them
echo already-introduced bills; indeed, 2013 has seen an extraordinary
wave of five bills related to fighting patent trolls. For instance, the
transparency point has been made by Sen. Ted Deutch (D-FL) in his bill,
and Sen. Chuck Schumer (D-NY) has already called for new ways to fight
patents at the PTO.
There are also five areas where President Obama is making changes
immediately by taking executive actions. Most extraordinarily, he's
asking the US Patent and Trademark Office—the very office that has
become so easy to manipulate that it hands out hundreds of patents (at
least) to bona fide trolls every year—to publish an FAQ for businesses
attacked by trolls. The memo states:
End-users should not be subject to lawsuits for simply using a product
as intended and need an easier way to know their rights before entering
into costly litigation or settlement. The PTO will publish new education
and outreach materials, including an accessible, plain-English web site
offering answers to common questions by those facing demands from a
possible troll.
Other areas of executive action include training PTO examiners to limit
the "functional claiming" that's common in software, requiring the PTO
to immediately start making rules about disclosing
"real-party-in-interest," limiting ITC exclusion orders, and creating
more outreach and study.
A report that gets it
The more extensive 15-page report hits a number of key points that
technology companies have been complaining about for years. It cites
recent research from reform-minded academics whose work has also been
noted at Ars Technica, including Colleen Chien, James Bessen and Michael
Meurer. It cites two Ars Technica stories investigating patent trolls
that attacked big retailers and small businesses.
Overall, the report shows that (at long last) the highest levels of
government have become aware of the patent problem. The report opens by
mentioning characteristics of the "patent assertion entity" (PAE)
business model, using straightforward language that evinces real
understanding of the problem:
They [patent assertion entities] do not “practice” their patents; that
is, they do not do research or develop any technology or products
related to their patents;
They do not help with “technology transfer” (the process of translating
the patent language into a usable product or process);
They often wait until after industry participants have made irreversible
investments before asserting their claims;
They acquire patents solely for the purpose of extracting payments from
alleged infringers;
Their strategies for litigation take advantage of their non-practicing
status, which makes them invulnerable to counter-claims of patent
infringement;
They acquire patents whose claim boundaries are unclear, and then (with
little specific evidence of infringement) ask many companies at once for
moderate license fees, assuming that some will settle instead of risking
a costly and uncertain trial;
They may hide their identity by creating numerous shell companies and
requiring those who settle to sign non-disclosure agreements, making it
difficult for defendants to form common defensive strategies (for
example, by sharing legal fees rather than settling individually).
The report offers the widely cited figure that patent trolls have cost
$29 billion in direct annual costs, with less than 25 percent of that
money going "back to innovation." It notes that PAEs now account for 60
percent of all patent lawsuits (a number derived from Colleen Chien's
research, which uses a conservative definition of "troll.")
It will be interesting to see what kind of pushback comes from this
report. The President responded to a question about patent trolls in a
recent Google+ hangout and said that their "extortion" is a real
problem. But now we know it's not just an offhanded remark—he's devoting
staff and attention to this $29 billion problem.
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