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Oh, the story of a troll kind of fits ’cause the whole Billy Goats Gruff thing, it’s someone lying under a bridge they didn’t build, demanding payment from anyone who passed. I said, ‘How about a patent troll? ” Peter Destine Counsel for Intel It’s a story every child knows: The poor three Billy Goats Gruff that Just want to cross the bridge. The evil troll that blocks their way and demands a stiff toll before letting them pass. The final Justice that prevails when the biggest and oldest Billy Goat Gruff pushes the troll off the bridge.
But aside from childhood bedtime stories, do these evil “trolls” really exist in today’s world, impacting the financial wellbeing of our society? The term “patent troll” was coined in the late asses by Peter Destine, counsel for Intel. Intel had been hit by a series of lawsuits from companies that did not build anything, yet held patents for products used in manufacturing by Intel (such as semiconductors). In turn, they demanded Intel pay up for using their patents. In a particularly frustrating lawsuit, Destine called the lawyer filing it a ‘patent extortionist,’ which caused that lawyer to sue for libel and Destine to search for a better name.
As Destine explains: “So I had a contest inside Intel. The contest itself was named “The Terrorist”… We got a lot of suggestions but none really fit. But… [my daughter] liked playing with those troll dolls… [l] said, ‘Oh, the story of a troll kind of fits ’cause the whole Billy Goats Gruff thing, it’s someone lying under a bridge they didn’t build, demanding payment from anyone who passed. I said, ‘How about a patent troll? ” 1 The name stuck and the problem grew. As illustrated in the graph below from Potentiometer. M, from 2004 to 2013 the number of patent infringement lawsuits has grown drastically, especially in the later years. 2 According to RPR statistics, patent trolls (also known as Napes – non-practicing entities) filed over 3,600 suits in 2013 alone, up 19% from 2012. Of the patent suits filed in 2012, over 67% of them were NAPE-related. 3 For many titans of industry – especially the tech industry – these suits are more than Just distraction. Patent trolls sued wireless carrier AT&T over 54 times in 2013 – more than once a week! As the recent Fortune magazine article entitled RPR: Taking on the patent trolls explains, “AT is o anomaly.
Google was hit with 43 NAPE suits last year; Verizon, 42; Apple, 41; Samsung and Amazon, 39 each; Dell and Sony, 34 each; Hawaii, 32; BlackBerry, 31 . Every brand on this unenviable top 10 list was sued by an NAPE at least once every 12 days. “4 But how did this phenomenon come about? And, even more importantly, how has it been able to flourish in today’s society? To answer these questions, we first examine what a patent troll is. A “patent troll” is new name for an old – albeit, arguably escalating – problem. Historically, as long as patents have existed in the United States they have been fraught with controversy.
Virtually every American inventor who pioneered a major innovation has had to deal with litigation or controversy surrounding his (or her) patent. The inventor of the telegraph, Samuel FEB. Morse, bitterly complained about “patent pirates” and the hours he had to spend in court proving he was the inventor. The Wright brothers refused to license their airplane patents (until forced to by the US government), and were publicly vilified for it. Henry Ford had to defend himself in court from a group of financiers claiming they held a patent (purchased from another inventor) that covered gas-powered automobiles.
Just what is a patent anyway;ay? According to the United States Patent and Trademark Office (SPOT), a patent is an intellectual property right granted by the US Government to an inventor “to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States for a limited time in exchange for public disclosure of the invention when the patent is granted. “5 There are three types of patents: utility, design and plant patents.
Utility patents (also known as nonprofessional utility patents) cover “new and useful” recesses, machines, articles of manufacture, compositions of matter, and “any new and useful improvement thereof. ” (There is a special classification under utility patents called provisional patents to help inventors protect new ideas and inventions that have not been fully developed yet. However, provisional patent protection only lasts for twelve months, and afterward an inventor must file for a nonprofessional utility patent to continue to receive protection. ) Design patents cover “new, original and ornamental design for an article of manufacture. Whereas a utility patent is signed to protect a new invention or a functional improvement on an existing invention, a design patent is used when the basic product already exists but is being improved upon in style. Plant patents cover the invention or discovery of any “distinct and new variety of plant. ” In addition, SPOT requires the invention must be novel, invidious, adequately described or enabled, and claimed by the inventor in clear and definite terms in order for a patent to be issued. Classes of patents include chemical patents, biological patents, business method patents, and software patents.
Business method patents have become increasingly common since the State Street Bank v. Signature Financial case of 1998, which established precedent for algorithm- based business methods to be patentable. ) The process to actually obtain a patent is lengthy and complex, as illustrated by this patent approval process chart from SPOT. 6 Oftentimes it is necessary for the inventor to engage the help of a registered patent attorney or agent to complete the complicated patent application and describe the invention in the precise technical terms required by the SPOT.
The application is almost always rejected upon first submission – the SPOT rejects about 95% of them for reasons based on claims of prior art or lack of specificity. If the SPOT denies a patent application, the inventor has the right to appeal to the SPOT Board of Appeals. Once granted, utility and plant patent protection usually are valid for twenty years (from the date of filing the application), while design patent protection is valid for fourteen years (from the date of issuance of the patent).
Utility and plant patents require payments of maintenance fees at scheduled times to maintain legal retention. During this time period, the patent holder has the exclusive right to use the invention. This means a holder can prohibit others from using it (or any product that is “substantially the same”), license it to other parties for a fee, or sue for legal remedies (for an injunction and/or to recover damages) from other parties using it without permission.
It is important to note that in the United States, patents are governed by federal law and generally only enforceable through civil lawsuits. Ultimately, the purpose of a patent is to protect the rights of an inventor because of he fact that it is unlikely he would be paid fairly for the cost to produce his invention in a free market. Yet another important aspect of US patents worthy of note is that they are “territorial” – meaning they do not confer any protection rights outside of the United States.
If an inventor wants international protection, at the very least he needs to go through an international patents process – for many countries governed by the Patent Cooperation Treaty (PACT) under the World Intellectual Property Organization (WIPE) of the United Nations. To be fully protected for the exclusive rights to make, use, and ell and his invention, the investor must get a country-specific patents in every single country he wants to operate in by filing a separate application in each.
US Patent Governmental Regulations The foundation for patent law in the United States is under Article One, Section 8 of the US Constitution, which states: “The Congress shall have power To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries… ” On April 10, 1790, Congress passed the first Patent Act, titled “An Act to promote the progress f useful Arts. ” This was passed to grant inventors “sole and exclusive right and liberty of making, constructing, using and vending to others to be used” their inventions.
The act was intended to grant patents for “useful Arts” only, for inventions under the aegis of artisans and skilled workers. It also established the Patent Board (consisting of the Attorney General, the Secretary of State, and the Secretary of War) to examine patent applications, and – for inventions found to be of use and importance – issue patents. What was the first US patent to be issued, you may ask? It was granted to Samuel Hopkins for his invention “Making Pot and Pearl Ashes,” better known as potash (an industrial chemical used in a variety of products, including soap-making and gunpowder).
Clearly patent law has evolved. In today’s day and age, it is highly doubtful he would succeed patenting his “Pot and Pearl Ashes” as it was neither novel nor invidious! The first modification to US patent law came in 1793, when Secretary of State Thomas Jefferson clarified the definition (and outlined wording for the statue similar to the wording still used today), stating that for an invention to be patented it must be “any ewe and useful art, machine, manufacture or composition of matter. An important nuance in both the Patent Act of 1790 and 1793 was that the subject of a patent application “not [be] known or used before the application. ” This established a basis for defense in infringement actions, where the defendant can quote: “the thing, thus secured by patent, was not originally discovered by the patentee, but had been in use .. ” – in other words, the patent is not valid because it covers an invention that was known about prior or in prior use before that particular patent was issued, commonly offered to as “prior art. However, it was not until the 1952 Act that patent law started to truly reflect how we know it today, with an amendment introducing the “non-obvious” criteria and clarification of a patent holder’s right as one that excludes others from using, making, or selling the invention. In more recent years, patent legislation has come to the forefront again, with the failed Patent Reform Acts of 2007 and 2009, and the successful America Invents Act (AI) of 2011.
The AI was signed into law on September 16, 2011 and “represents the most significant change to the US patent system since 1952. 7 The most significant aspect of the Act is its change of the United States from a “first to invent” system to a “first-inventor-to-file” (FIT) system. In essence, this means that a patent is awarded to the inventor who is first to file the patent application, where previously a patent was awarded to the inventor who could prove s/he invented it first (regardless of who filed).
The AI is perceived to have both negative and positive implications for patent trolls. AI section 299, commonly referred to as the “Jointer” clause, limits the number of accusers in a single patent infringement suit, thus hampering the traditional taxation strategies used by many patent trolls. On the flip side, the AI opens a potential new strategy for patent trolls as well. Section 102(a)(2), which became effective as of March 16, 2013, states: person shall be entitled to a patent unless… The claimed invention was described in a patent issued… R in an application published… In which the patent or application… Names another inventor and was effectively filed before the effective filing date of the claimed invention. ” It also contains a disclosure exception in section 102(b)(2) which states: “A disclosure shall to be prior art to a claimed invention under subsection (a)(2) if… The subject matter disclosed and the claimed invention, not later than the effective filing date of the claimed invention, were owned by the same person or subject to an obligation of assignment to the same person. 8 The article Patent trolls and the AI – a Potential non-Litigation Business Strategy best explains section 102 by the picture below: 9 This means the date “On or after March 16, 2013 an issued patent or pending patent application that would be prior art to a new application has potential value to the applicant for a new patent. Thus, the date of March 16 can be a ‘bridge’ between the troll’s patent or application having no value to target A and a value that may be large… 10 While this may seem like a stretch, if the Jointer clause of AI section 299 is successful in thwarting patent trolls’ current litigation strategy, this may be the one of the only options left for them. The March 16, 2013, date has come and gone (almost exactly a year ago), but conclusive evidence on whether this is an effective strategy for patent trolls remains to be seen. While the US Constitution authorizes Congress to grant patents, it is Title 35 of the United States Code that governs all aspects of patent law in the United States.
Title 35 has four parts: Part I establishes the SPOT and outlines its responsibilities. Part II outlines the criteria for potentiality that an invention must meet to be eligible for a patent. Part Ill concerns patent protection rights, while Part IV concerns the Patent Cooperation Treaty (PACT) for international patent matters. Within US patent litigation, District Courts litigate patent infringement suits and the Court of Appeals for the Federal Circuit (CAFÉ) reviews decisions of the both the SPOT and the District Courts.
Cases can be appealed again in the Supreme Court. The Rise of NAPES Because a patent holder can enter in to a licensing agreement with a licensee to grant the right to sell, use, make and/or import the invention (usually in return for a fee or royalty), it has given rise to a new type of company – the non-practicing entity or NAPE. Depending on the context, these companies can also be referred to as patent holding companies or patent assertion entities (Pass). What distinguishes a NAPE is its “non-practice,” meaning that it does not sell any products or services of its own.
Its sole purpose is obtain patents (usually through purchasing them on the open market or through business acquisitions) and then use them to bring suit against companies that sell products or services that may infringe against their acquired patents. In a nutshell, Napes do not practice the technology covered by their patents. While the extreme statistics from the beginning of this paper illustrate the rapid rise of Napes, there is an additional, more serious, implication.
Oftentimes patent trolls do not need to even file suit; the threat of litigation alone is enough to force businesses to settle tit large payments out of court. Although Napes filed over 3,000 suits in 2012, more than 100,000 NAPE-related suits were threatened – over 33 times the number brought! 11 The cost patent trolls have on industry cannot be understated. The below table from the Boston University School of Law entitled The Direct Costs from NAPE Disputes, published in 2012 and revised in 2013, shows that the payments from companies to Napes and inventors exceed one billion dollars annually.
In the aggregate, over the past 20 years NAPE-related suits have cost the economy over half a trillion dollars – ever $300 billion of that in the past five years alone. 12 Oftentimes companies are forced into settling with Napes to avoid the costs of litigation. Another table from the study shows that while the mean total non-litigation cost is $29. 75 million, the comparable cost of litigation would be almost twice as high at $58. 38 million. 3 Companies, especially in the tech sector, often cite these costs as a “tax on innovation” that hinders business practices and increases prices for consumers. 14 The rise of Napes in recent years can (at least partially) be attributed to the bursting of the dot. Mom bubble in 2000, where the accumulated patents proliferated by dot- comes as a sort of venture-capital collateral were suddenly worthless. These patents were then sold by bankruptcy courts at bargain-basement prices into the eagerly awaiting hands of “entrepreneurial lawyers and limited partnerships. 1 5 The real problem with Napes is that by virtue of their “non-practicing” status, the companies who are being sued often are left without any bargaining power. Prior to the age of Napes, companies could use their patents as leverage; “Patents once were a defense mechanism by big companies that used their massive IP portfolios to reach Ross-licensing deals as a means of insuring against litigation from competitors. “16 But as more patents fall into the hands of Napes and Pass, that business model becomes a thing of the past, especially in the technology industry.
Adding furthermore to the problem is the proliferation of vague (usually business method) patents. “Tech companies eager to stake a claim on a snippet of code or bit of technology game the system by blithely filing thousands of patent applications, often for technology that’s already in widespread use, or for code or methods that are so obvious that they can’t pass the no-brainier test. Most often these applications cite no prior art that is, they claim that nothing on earth resembles what the patent would protect… 17 Given the overworked SPOT can often be browbeaten into eventually approving an application, these patents have the potential to be successfully issued (and thus turn in to an Nape’s bread and butter, as the next case so aptly shows). Recent Case Law Two landmark cases occurred in the asses regarding patent trolls, the first Research in Motion v. NTP, Inc. (also known as the “Blackberry’ case) beginning in 2000, and the second the eBay Inc v. Merchandise LLC case beginning in 2006.
The RIM v NTP case began when NTP, a Virginia-based NAPE holding multiple patents for electronic mail transmissions and components – or, as described in the BIG case study referenced above, a company “founded by a failed wireless e-mail innovator named Company and his patent attorney’18 – sent notice of their wireless email patents to multiple companies (including RIM) offering to license their patents to them. None of these companies (including RIM) paid notice or took a license. NTP then brought an infringement suit against RIM in District Court.
The Jury found the NTP patents valid and RIM was found to have infringed them. In addition to $33 million for damages, the Judge ordered RIM to pay an additional $20 million in punitive damages (since their infringement was “willful”) and issued an injunction that would have shut down the entire US BlackBerry system. Further litigation ensued, and eventually RIM was forced to settle with NTP to the tune of $612. 5 million. At the crux of the issue was the patent criterion of “prior art;” even though RIM had no notion of Sampan’s inventions and patents until after they had developed the
Blackberry technology, NTP had obtained such vaguely worded patents that they could be deemed to cover parts of software used in the Blackberry device. Furthermore, although too late to help Blackberry, it was discovered that “a few months after the November, 2002 ruling, during a reexamination of the NTP patents, the SPOT found that there existed prior art not considered in the earlier trial… “19 The moral of the Blackberry story? Although a “patently absurd” tale, Nntp ultimate success and huge payoff paved the way for throngs of patent infringement suits to come.
The importance of the case eBay Inc v. Merchandise LLC to patent holding companies centered on their ability to successfully gain (or at least have real power to threaten) injunctions against the companies they were suing. The Supreme Court heard an appeal by eBay’s appeal of an injunction granted to Merchandise by the CAFÉ. The background on this case began when eBay sought to license the patent for an electronic exchange from Merchants, who owned the patent, and was refused. Merchandise sued eBay for infringement, and won damages in District Court of $35 million.
However, following the Jury verdict, Merchandise had motion for a permanent injunction denied. The CAB then reversed that rule stating that courts will issue permanent injunctions against patent infringe “general rule. ” Central to the case was the threat of injunction – “An eBay win at the high co would curb the courts’ ability to grant injunctions, thereby ‘lessening the hajji effect’ of patent trolls. “20 Ultimately, the Supreme Court set aside the CAFÉ which prevented a curbing of the courts’ ability to grant injunctions. The rear Supreme Court did so?
Both the District Court and CAFÉ departed from the f actor test for equitable injunctive relief (irreparable injury; whether remedy as money damages are adequate; the balance of hardships between patent and infringer; and whether a permanent injunction would dissever the public interest) by coming to the conclusion: “a ‘plaintiffs willingness to license its and ‘its lack of commercial activity in practicing the patents’ would be suffice establish that the patent holder would not suffer irreparable harm if an injure did not issue. “21 The Supreme Court rejected this conclusion, as nothing in t Patent Act warranted such a departure. Although the District applied the of est., its holding would have excluded from the injunctive relief remedy ‘a BRB swath of cases’… [In a victory for] patent holding companies, the Supreme C rejected the notion that either not practicing the patented invention or grand license under the patent would automatically disqualify a patent owner fro a permanent injunction… One can anticipate that, like copyright cases, most cases will result in a permanent injunction, once infringement is established The Supreme Court has another two cases remaining in its docket for 2014 r patent trolls: Swami Technologies v.
Limelight Networks which centers on the f “divided infringement,” and Nautilus v. Bios Instruments, another prime for “vague patents. “23 While their outcomes are “patently’ uncertain – an CEQ only the SPOT could love – the decisions are certain to add more fuel to the blazing fire of NAPE-related controversy. Keeping the Troll Under the Bridge Whether deserved or not, the tide of public opinion is definitively against pa trolls. Over the past few years, government officials have been quick to attack them President Obama terming them “hijackers” and “extortionists” in 2012, induce spate of anti-troll bills to hit the House and Senate.
Currently there are five NAPE-related bills pending in congress, from the Patent Litigation and Innovate (HRS 2639), to the Transparency in Assertion of Patents Act, to the Patent Equal Improvement Act. The act getting the most press – the Innovation Act (which passed the House December, 2013 and will be debated the Senate this year) – was spearheaded by House Judiciary Chairman Robert Goodliest, and is intended to “raise the bar” for those filing patent litigation alleging infringement.
It includes “several transparency provisions for plaintiffs, while giving Judges greater discretion to limit discovery and ward legal fees to the victorious party… [and] would expand a program at the U. S. Patent and Trademark Office that allows plaintiffs to challenge the validity of certain software patents related to the financial services industry for a much lower cost… “24 Ironically, while on the forefront of the Innovation Act the issue of fee-shifting in patent cases has also been heard in Supreme Court, with the cases Octane Fitness v.
Icon Health and Highchair v. Allocate Management argued at the end of February, 2014. Both cases “involve defendants who prevailed over patent-holders but didn’t et what they wanted from the [CAFÉ]…. In Octane Fitness, the defendant didn’t get a fee award; the company is arguing that the Federal Circuit’s standard for such awards is an impossible one to meet and must be changed. In Highchair… [the Judge] described Allocate as displaying the sort of conduct that gives the term ‘patent troll’ a negative connotation. Despite Leaser’s bad behavior, the award was mostly overturned by the US Court of Appeals for the Federal Circuit. Now Highchair is arguing that the Federal Circuit should give more deference to trial court Judges in taters of fee awards. “25 The issue of patent trolls is pervasive in the current political environment; within the past two years entities ranging from the Federal Trade Commission, to the US Justice Department, to a White House task force have all launched independent studies of the NAPE problem.
In November 2013, the Energy and Commerce Committee held a hearing titled “The Impact of Patent Assertion Entities on Innovation and the Economy,” aimed at “investigating recent trends in patent assertion practices to gain a better understanding on their impact on businesses. “26 Speakers included executive officers from the Texas Hotel & Lodging Association, Engage, and White Castle. On March 7, 2014, South by Southwest (SSW – an annual interactive arts and music festival held in Austin, Texas) held a session entitled “Clubbing the Patent Trolls: How We can Fight Back” with panelists including Congress member Goodliest and Mark Cuban. 7 In Defense of the Troll Patent trolls have their fair share of defenders as well. In the article Not all patent trolls are demons in CNN Opinion, Timothy Holbrook claims what patent trolls do – paying inventors – is “laudable. ” Instead of blaming eaten trolls, he blames the problem on the SPOT issuing improper and invalid patents, and the extreme costs of discovery in trying to defend against infringement lawsuits. As he explains, “these are not troll problems; they are litigation and patent quality issues.
Scapegoat trolls risks disrupting the useful compensatory purpose they serve and may cause unintended consequences in non-troll litigation. “28 Avis Roy, guest contributor for Forbes Opinion, entitled his recent piece Thank Heavens For Those Patent Trolls, opining “l weep for the patent trolls as the lynch mobs gather… Hey serve a genuine need in the marketplace. Patent trolls are often the buyer of last resort for an inventor who cannot afford to develop his or her invention into a product. 29 Alexander Poltroon, a Russian-born American author and scholar, as well as the founder of the American Innovators for Patent Reform (PAIR – founded to oppose the Patent Reform Act of 2007) is an advocate for the rights of Napes to sue for injunctive relief, arguing “to be a troll one needs to (a) buy a patent, (b) not practice the patented invention, and (c) assert the acquired patent… This definition is patently absurd… Element (a) -? buying a patent -? is unfounded because it is common knowledge that a patent is personal property, which may be bought, sold, mortgaged, or otherwise monitored…
Element (c) -? asserting a patent -? is even more absurd because what else can you do with a patent besides assert it? Whether a patentee licenses a patent or asserts it in litigation, both are really assertions. A ‘carrot license’ is nothing but a ‘stick license’ in disguise, because a patent is an exclusionary right and the only thing a patent owner can do with the patent is to assert it to exclude others! To summarize, the so-called ‘patent trolls’ are stuff of myths and legends, not of sound reason. The arguments to take an injunctive relief away from ‘patent trolls,’ ii, non-practicing inventors, are based on fuzzy logic.
Let us hope that reason and sound logic prevail. “30 And clearly patent trolls are advocates for themselves. As Potentiometer states, “To even the rhetorical score, defenders of Napes have begun to paint large technology companies as ‘serial infringer’ that deserve the onslaught of patent infringement litigation they currently face. “31 The poster child of patent trolls is Nathan Morally f Intellectual Ventures (V), a company that has spawned thousands more shell companies to pursue patent infringement lawsuits.
IV recently announced their plan to start a political action committee to lobby for patent trolls, given the increased exposure and multiple NAPE/APE-related bills circulating in Congress right now. As Jeff Roberts of Gizmo reports, “It’s a good bet… The [PACE] will target Congressional freshman with messages about ‘protecting property and ‘supporting innovation. “32 Paying the Toll… Depending on the historical context, patents have been seen as evil tools to protect monopolies to invaluable and necessary protection for the inventor.