Evolving Public Policy Discussion of Patent Troll Litigation

The problematic dynamics of patent troll litigation, and in particular the front-loaded costs of discovery that defendants typically had to incur before they could raise most viable substantive defenses, are widely diagnosed as a problem by policymakers.

What Are Policymakers Saying About the Issues and Potential Solutions?

Key features of patent troll litigation that policymakers have identified as public policy problems in need of resolution and that govern the dynamics of this litigation include the following:

  • Patents, often with broad, vaguely defined claims, are asserted after relevant technology has been adopted into commercially successful products and services, resulting in the threat of large potential damages awards.
  • Litigation cost dynamics, including front-loading of discovery, expert, and claim construction costs before invalidity or noninfringement defenses can be decided greatly increase the cost to defend patent litigation, creating an incentive for defendants to settle even non-meritorious claims for close to the cost of defense.
  • Broad litigation strategies targeting broad industry groups, often seeking relatively small payments from a large number of targets, limiting the incentive of each individual target to bear the cost of litigating potential noninfringement or invalidity defenses.
    For example, the Federal Trade Commission (FTC) issued a report in 2011 entitled The Evolving IP Marketplace highlighting increasing use of new and complex business models where “patents are bought, sold and licensed as assets whose value is based on their ability to extract rents from manufacturers already using the patented technology,” particularly in the information technology industry, where complex electronic products “are often surrounded by ‘patent thickets’ -- densely overlapping patent rights held by multiple patent owners.”  As the Congressional Research Service (CRS) observed in its 2013 report “An Overview of the ‘Patent Trolls’ Debate,” patent trolls differ from other, potentially beneficial market intermediaries in that they do not “transfer technologies that they or their clients invented and developed so that licensees can benefit from not having to develop them in-house.”  Instead, patent trolls “transfer nothing but a legal right not to be sued for  using a technology that the licensee may have already invested in developing on its own , without help” from the patent troll or its patents.
    The FTC’s 2011 on Evolving IP Marketplace report (see Chapter 2) also identified a series of developments contributing to these trends, including:
  • “[D]ramatic” increases in the number of patent infringement lawsuits filed and the number of patents offered for sale in the information technology industry, both largely attributable to non-practicing patent assertion entities
  • Development of specialized patent enforcement and licensing companies as a business model focused on acquisition of patent portfolios, initially from failed startups and independent inventors, but increasingly from larger companies seeking to monetize their defensive patent portfolio’s.
  • The appearance of litigation finance firms to raise money from institutional investors used to fund patent litigation by patent assertion entities in exchange for a financial interest in a patent portfolio and resulting licensing revenue.
  • The arrival of an infrastructure of intermediaries specializing in organized transactions in patents, including agents, brokers, consultants, and auction houses.
  • The development of “defensive buying funds” or “defensive aggregators” seeking to pool funds from potential targets of patent troll litigation to take patents off the market (or at least acquire group licenses to them before reselling them) in an effort to reduce patent troll litigation against their members.

In a 2013 report on Patent Assertion and U.S. Innovation,  the White House similarly recognized the continuing growth and prevalence of patent troll litigation and argued that such litigation was reducing innovation and economic competitiveness.

In particular, the White House report concluded that patent trolls, which in 2013 were filing 60% of all patent lawsuits in the United States, “abuse the U.S. intellectual property system’s strong protection by using tactics that create outsize cots to defendants and innovators at little risk to themselves” in a “business model . . . based on the presumption that in many cases, targeted firms will settle out of court rather than take the risky, time-consuming course of allowing a court to decide if infringement has occurred.” [1]  The White House report also suggests that forcing patents to better identify what they do and do not cover, in addition to potentially changing the litigation cost dynamics, could address the patent troll problem. 

What Has Congress Done About It To Date? (The America Invents Act)

Provisions intended to address the perceived wave of patent troll litigation were included in the 2011 patent reform bill, passed as the Leahy/Smith America Invents Act (“AIA”). In particular, these included changes to rules for when multiple parties can be “joined” as defendants in the same case that are specific to patent litigation.  The new AIA rules generally require that each unrelated party be sued separately, eliminating a common strategy before 2013 where patent trolls joined large numbers of defendants, often across entire industries, in a single, omnibus patent infringement suit.

Perhaps even more significant was the imposition of new administrative review proceedings designed to allow challenges to patent validity outside the federal courts, in hopes of offering a more streamlined, less expensive alternative to patent litigation for potential patent infringement defendants.  These included the new Inter Partes Review (IPR) procedure that replaced inter partes reexamination, and Covered Business Method patent reviews (CBM) applicable to certain patents directed to methods of practicing, administering, or managing a financial product or service.  All of these administrative review proceedings have had significant and ongoing effects on patent troll litigation.

Congress continues to consider additional proposals to address patent troll litigation, but to date has not enacted additional significant changes to address patent troll litigation since the AIA.

[1] The White House Report (pp. 12-14) also compares the current surge in patent troll litigation to two earlier period of intense and abusive patent litigation during the mid- and late-1800’s, when so called patent “sharks” engaged in similarly abusive tactics focusing on first the agricultural equipment and then railroad equipment industry.  Those past bouts of patent “shark” litigation faded away over time as a result of changes in substantive patent law, as well as changes in litigation strategy by patent “shark” targets.

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