August 27, 2013 Articles

New Legislation Helps in the Fight Against Patent Trolls

By Hilda C. Galvan

“They’re just trying to . . . hijack somebody else’s idea and see if they can extort some money out of them.” “Hijack” and “extort” are rather strong words to use to describe any situation, but they seem particularly strong words for President Obama to have used to describe the activities of Patent Assertion Entities (PAEs).

These strong words, however, reflect the growing frustration felt by companies—high-tech and low-tech, small, medium, and large—that are regularly sued for patent infringement by PAEs. They reflect the growing frustration felt by consumers, who indirectly bear the cost of these lawsuits. And they reflect the frustration felt by members of the executive, legislative, and judicial branches, who have been unable to find a solution to the growing number of patent-infringement lawsuits filed by PAEs and the staggering costs associated with these lawsuits.

A landmark piece of legislation that passed in September 2011—the Leahy-Smith America Invents Act (AIA)—was supposed to be a solution to this problem. But, according to President Obama, this effort “at patent reform only went about halfway to where we need to go.” Even if this effort only went halfway, it has given accused infringers a new set of tools with which to fight back against PAEs.

A PAE, also referred to as a non-practicing entity (NPE)—or a patent troll—has been defined in a variety of ways. President Obama defined a PAE as “an entity that engages in a variety of aggressive litigation tactics, such as threatening to sue large numbers of companies at once and hiding its identity through shell corporations.” The more frequently used definition of a PAE is “an entity with a business model focused primarily on purchasing and asserting patents, typically against operating companies with products currently on the market.” PAEs filed more than 60 percent of all patent suits in 2012, as compared with 29 percent in 2010. Chien, Colleen V., “Patent Assertion Entities, Presentation to the DOJ/FTC Hearing on PAEs,” Dec. 20, 2012. Half of these lawsuits are against companies outside of the high-tech sector that merely use software or Internet-related technology, such as retailers who do business online, restaurants with websites, and financial service companies. Two Boston University researchers, James Bessen and Michael J. Meurer, published a study called “The Direct Costs from NPE Disputes.” According to their study, “[T]he direct costs of patent assertions by non-practicing entities” were $29 billion in 2011, including legal fees paid to outside lawyers and settlement amounts paid to PAEs.

Congress designed the AIA to give accused infringers new tools to fight back against PAEs. Most patents asserted by PAEs are software patents, which often include broad functional claims, and whose validity is often questionable. The AIA created new review proceedings that accused infringers can use to contest the validity of issued patents and to prevent pending patent applications from issuing. Under these new proceedings, the validity of a patent is determined by technical and legal experts, rather than by jurors and judges who have little, if any, technical knowledge. For issued patents, proceedings are conducted before the newly created Patent Trial and Appeal Board (PTAB), comprised of Administrative Patent Judges who typically have engineering and law degrees, as well as 10–15 years of patent experience. In addition to the benefits of having a patent’s validity reviewed by patent experts, the burden of proof to invalidate a patent is also lower at the PTAB than in litigation: “preponderance of the evidence” rather than “clear and convincing evidence.” Finally, because the PTAB is required to complete its review within one year of initiation (plus an extra six months for cause) and discovery is very limited, an accused infringer has to spend significantly less time and resources to invalidate a patent in a PTAB proceeding than it would spend defending against an infringement allegation in litigation.

The three new types of PTAB proceedings for reviewing issued patents are inter partes review (IPR), post-grant review (PGR), and covered business method review (CBM). Of the three review proceedings, IPRs are currently the most commonly used. An IPR can be filed against any patent, but it must be filed within a year of the accused infringer’s having been served with a complaint. PGRs, on the other hand, can be filed only against patents with filing dates on or after March 16, 2013, and they must be filed within nine months after the patent is granted. There is no time limit on the filing of CBMs, but there must already be a “charge of infringement” involving a patent for a “covered business method” (i.e., “data processing or other operations used in the practice, administration, or management of a financial product or service,” excluding patents for technological inventions). One example is a method of determining the cost of automobile insurance based upon data representative of driving characteristics. Another patent subject to CBM review claimed a method for determining prices for various products offered to various organizations.

After one of the new review proceedings is initiated, pending litigation involving the patent may be stayed, further reducing the expense of litigation and limiting the defendant’s potential exposure. The AIA specifically sets forth the factors a district court may consider in deciding a motion to stay when a CBM review has begun, and it also provides immediate interlocutory appeal of the district court’s decision on a stay. To date, all motions to stay based on CBM review have been granted. And although no similar stay provision applies to PGR or IPR reviews, most motions to stay in connection with IPR reviews have been granted. (There have been no PGRs filed as yet.) Indeed, courts have granted 24 out of 35 such motions, denying a stay without prejudice to refile in five cases because the IPR had been filed but not initiated by the PTAB.

In addition to adding new review proceedings for issued patents, the AIA created Third-Party Preissuance Submission, a tool that can prevent a patent from issuing—or at least narrow the scope of the patent before issuance. A third party may make an ex parte submission to the Patent and Trademark Office (PTO) that identifies a patent or printed publication that would invalidate a pending patent application and describes how it would do so. After considering the submission, the PTO may reject the pending patent application, may require the patent applicant to narrow its claimed invention, or may take no action. Since September 2012, there have been 778 preissuance submissions, with the number steadily increasing each month.

The final tool created by the AIA to assist in the fight against PAEs is found in Section 19, which limits a plaintiff’s ability to join multiple defendants in an infringement lawsuit. Before this section was enacted, it was a common practice for PAEs to file one lawsuit against multiple, unrelated defendants, alleging that all of them infringed the asserted patent. Defendants were herded together in remote venues, or ones considered friendly to plaintiffs. It was difficult to transfer such a case to a different venue because no venue would be more convenient for the whole group of joined defendants. This practice also increased the cost of defending a patent-infringement case because each defendant had to spend significant amounts of time coordinating with the others to develop common positions and use common experts as “strongly encouraged” by some courts. On the other hand, it lowered the cost of litigation for PAEs, as they effectively had to deal only with one “common” defendant, rather than the actual number of defendants that the PAE had sued. Even more detrimental to defendants was the requirement of some courts that defendants share the limited amount of time allotted for trial. For example, if a court allotted 20 hours for each side to present its case, the defense side would then have to allocate the 20 hours between 10 defendants. Section 19 no longer permits joinder simply on the basis that defendants allegedly infringe the same patent. Rather, joinder is allowed “only if” there is an allegation of joint and several liability, or the alleged infringement arises out of the same transaction or occurrence and common questions of fact. In PAE litigation, this new restriction on joinder has had an impact on which defendants are sued—and where they are sued.

While the new AIA review proceedings and the AIA’s joinder provision have helped the fight against PAEs, in the opinion of many the AIA did not do enough to counteract the growing number of PAE-filed lawsuits. As a result, there is now widespread support in Washington for additional patent legislation aimed at PAEs. Congress has introduced or proposed several pieces of legislation aimed at PAEs this year. In June, President Barack Obama unveiled his own proposals. Also in June, the Federal Trade Commission announced that it will use its Section 6(b) authority to collect more comprehensive information on the different PAE business models and their activities and use this information to contribute to the efforts to develop a broad policy response to PAEs. Whether these efforts will be successful may best be measured by whether we continue to hear words such as “hijack” and “extort” when we discuss our patent system.

Keywords: woman advocate, litigation, patent, infringement, PAE, AIA