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Challenges of Defining a Patent Troll

Monday, July 29, 2013

By Brian W. Hannon and Margaret M. Welsh, Sughrue Mion PLLC

In recent months there have been several legislative proposals to curb abusive patent litigation brought by patent trolls. Abusive litigation tactics engaged in by these entities include, for example, assertion of patents only after the patented inventions have become widely used in the industry, demanding broad discovery requests to drive up litigation costs for their opponents, and remaining unexposed to counterclaims of patent infringement because they do not produce or sell a product.

Patent trolls have been known to claim ownership of “basic ideas, such as sending a photocopy to email, podcasting aggregated news articles, offering free Wi-Fi in your shop, or using a shopping cart on your Web site.”1 Often, these patent trolls assert their patents against small companies which cannot afford a lengthy litigation and the costs associated with a broad discovery. In fact, many companies settle out of court to avoid the estimated $2-8 million in litigation costs. Concern has grown in recent years as the frequency of these lawsuits has continued to rise.

As the discussion on abusive patent litigation has heated up, the terms non-practicing entity, patent assertion entity, and patent troll are often used interchangeably. As illustrated by the proposed Saving High-Tech Innovators from Egregious Legal Disputes Act (the SHIELD Act, H.R. 845) (40 PTD, 2/28/13), defining these terms for use in legislation, or settling on a widely acceptable definition, in a manner that clearly identifies an entity that engages in abusive litigation proves to be a challenging task. The line between these three terms becomes muddled and the discussion becomes cloudy.

Generally, a non-practicing entity is recognized as a broad term referring to a company that owns patents but does not design or manufacture a product or process. By that definition, non-practicing entities may include universities, startups, technology transfer offices, and research institutions.

Within the realm of non-practicing entities there is a subset of entities referred to as patent assertion entities. Although there are many ways to define patent assertion entities, recent debates have found this term to be synonymous with “patent trolls.” Thus, patent assertion entity is often the term used to describe an entity that engages in abusive lawsuits.

Scholars have postulated one definition of a patent assertion entity as an entity that obtains patents not as a basis for producing and selling goods, but instead primarily for obtaining licensing fees.2 Yet another definition claims that a patent assertion entity is “an entity that uses patents primarily to obtain license fees rather than to support the development or transfer of technology.”3

While these definitions provide a sound theoretical starting point, using them in practice proves challenging. During a congressional hearing in March on abusive patent litigation, one main concern regarding the proposed SHIELD Act, introduced in the House of Representatives on Feb. 27, 2013, was that the act targeted certain actors, specifically “patent assertion entities,” instead of specific actions. The SHIELD Act, as proposed, would identify undesirable parties early in litigation, require those parties to post a bond, and then if an opposing party is successful on a patent invalidity or non-infringement claim, command the identified party to pay the prevailing party's attorney fees. Thus, the SHIELD Act aims to disincentivize non-meritorious lawsuits from these undesirable parties with a fee-shifting requirement.

To identify these undesirable parties, the SHIELD Act carves out a definition by exempting certain parties from the act's fee-shifting requirements. Specifically, the act states that “the Court shall award the recovery of full costs to any prevailing party asserting invalidity or noninfringement, including reasonable attorneys' fees … if the court determines that the adverse party” was not (1) the original inventor, (2) an exploiter of the patent through sale of an item covered by the patent, or (3) a university or technology transfer organization, “unless the court finds that exceptional circumstances make an award unjust.” Thus, the well-intentioned act defines the undesirable parties—as does the scholar's definition above—as entities that obtain patents, enforce their patents mainly for licensing fees, and do not produce a product.

During the congressional hearing in March, as others have said in the past, a concern emerged that not all patent assertion entities as defined by the SHIELD Act should be targeted because some of these other entities engage in activities that might spur innovation. For example, C. Graham Gerst, a partner at Global IP Law Group L.L.C., stated in his written testimony that “Thomas Edison was one of the original [Non-Practicing Entities] [a]nd they serve an important role in the patent ecosystem.”

Further, Philip S. Johnson, chief intellectual property counsel at Johnson & Johnson, also expressed concerns, noting that “some of our best and most productive inventors do not manufacture or market their own inventions.” Thus, it was argued that the act would disincentivize litigation from certain patent owners even if their arguments had merit or were justified. That is, the bright line rule proposed in the act may unfairly burden some entities that do not engage in abusive conduct.

This sentiment was echoed in a recent White House study that concluded that some entities do not produce or manufacturer a product, yet still contribute to innovation.4 For example, some entities act in an intermediary role by connecting inventors with manufacturers that they might not have found on their own. In other words, the usefulness of an inventor's patent in another's patent portfolio may not be readily apparent to an inventor.5 While these seemingly less harmful non-practicing entities still generate most of their revenue from licensing fees and do not produce a product, they pose less of a threat to the economy and may even provide an added benefit of managing risks for small inventors.6

So, should these less harmful non-practicing entities be labeled as patent assertion entities, or even worse patent trolls, and disincentivized from asserting their patents just because they raise most of their revenue from licensing fees rather than selling a product?

While the benefit of these non-practicing entities in society remains controversial, some suggest either way that these entities still have a right to protect their property by asserting a patent even if they do not produce a product.7 Further, many would argue that these entities should not be unfairly labeled or unduly burdened if they are not engaging in abusive litigation practices. There is a dividing line between abusive patent assertion entities and seemingly less harmful non-practicing entities. Drafting a definition to disincentivize litigation for the former while not unfairly targeting the latter is a challenging task.

Taking on this challenge, the White House study distinguished non-practicing entities engaging in productive behavior from “patent assertion entities” that engage in abusive litigation tactics. To draw this distinction, the White House study used seven criteria that identified both harmful entities as well as harmful actions. In the study, patent assertion entities included entities that: do not practice their patents, do not help with technology transfer, wait until after industry participants have made irreversible investments before asserting their patents, acquire patents solely for the purpose of extracting payments from alleged infringers, take advantage of their non-practicing entity status during litigation, acquire patents with broad or unclear claims, and hide behind numerous shell companies.8

The definition used in the White House study goes further than the SHIELD Act by including the party as well as the party's action. However, use of this definition must also be done with caution as it may not be completely inclusive.

As the White House study notes, even some practicing firms are beginning to use abusive litigation practices as well.9 Practicing firms, unlike non-practicing entities, are firms that use their patents to design or manufacture a product or process. If some practicing entities are using abusive litigation tactics as well, can any meaningful line be drawn by distinguishing between practicing entities that engage in abusive legislative and non-practicing entities that engage in abusive legislation?10

The line is blurred even further by entities that engage in both practicing and non-practicing behavior, such that an entity may practice one patent, but assert a patent which it does not practice.11

Most would agree that patent holders should be disincentivized from engaging in certain litigation tactics, such as a patent holder that sues thousands of end users of a technology (e.g., a user of Wi-Fi at a coffee shop) as opposed to the manufacturer of the allegedly infringing product. Other examples of abusive litigation tactics abound, such as a patent holder that sends hundreds of companies an infringement warning letter without conducting research on the companies individually or a patent holder that asserts its patent claim far beyond any reasonable construction.

It may be hard to make an argument that these abusive litigation practices are beneficial to society. Yet it is a daunting task to draft legislation that successfully disincentivizes these abusive tactics while preserving the incentives to innovate.

After the SHIELD Act's introduction in the House of Representatives, there have been a few additional proposals aimed at disincentivizing abusive patent litigation by requiring courts to award attorneys' fees to a prevailing party involved in a patent lawsuit. One of these proposals, the Patent Abuse Reduction Act, moves away from defining undesirable actors and defines unreasonably or unjustified actions.

The Patent Abuse Reduction Act (S. 1013), introduced in the Senate on May 22, 2013 (105 PTD, 5/31/13), would require the court to award attorneys' fees to any party, plaintiff, or defendant unless the position and conduct of the non-prevailing party was objectively reasonable or substantially justified, or exceptional circumstances make the award unjust. Thus, this act seeks to curb abusive litigation practices that are neither reasonable nor justified, instead of focusing on the entity bringing the action.12

Yet even this legislation has raised concern, albeit for quite different reasons than the SHIELD Act. By requiring the courts to award attorneys' fees to either party, litigants bringing frivolous lawsuits may be deterred from engaging in abusive litigation since some clearly abusive actions, such as those noted above, may be deemed unreasonable. However, the exceptions of “objectively reasonably and substantially justified” leave a lot of room for the court's interpretation. A factual inquiry would determine what positions were objectively reasonable or substantially justified, but with the judicial system's reluctance for fee shifting it is hard to say for certain whether the tools will be successfully implemented.

Ensuring that the gravity of the potential sanctions is felt by the parties while leaving the courts discretion may prove challenging. To disincentivize abusive litigation practices, the threat of having to pay the other party's attorneys' fees, especially after the plaintiff has buried the defendant in discovery, has to be strong enough for the entities not to engage in such abusive practices.

Currently, 35 U.S.C. §285 states that, “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.”13 However, as recently stated by Chief Judge Randall R. Rader of the U.S. Court of Appeals for the Federal Circuit, judges do not award attorneys' fees very often. He suggests that fee-shifting occurred in approximately 20 of the 3,000 patent cases filed in 2011.14 This number seems low when compared to reports that indicate patent assertion entities brought around 45 percent of all patent suits in 2011. Even if it were assumed that several hundred of these cases were brought by less harmful non-practicing entities, the number still seems low.

Along similar lines to the Patent Abuse Reduction Act, another legislative effort, a bicameral discussion draftcirculated on May 23, proposes granting the courts wider discretion in awarding attorneys' fees. This draft proposes removing the term “exceptional” from Section 285. In contrast to the Patent Abuse Reduction Act, which requires courts to award attorneys' fees as justified, this proposal gives courts wider discretion to award attorneys' fees as reasonable. While this provision may discourage meritless claims, it is hard to say for certain what impact this amendment would have on the status quo and if the courts will change their behavior and create an actual threat to abusive litigation tactics.

While the courts have been reluctant to sanction abusive litigation tactics in the past, placing this burden on the courts may be a better strategy than drafting a bright line definition for actors that engage in harmful activities.

Brian W. Hannon is a partner and Margaret M. Welsh is an associate at Sughrue Mion's Washington, D.C., office. Their current practice is devoted to patent prosecution, strategic counseling on patent procurement and litigation, opinion preparation on matters relating to infringement, and validity and infringement litigation. The authors thank Patrick O'Rear, a summer associate at Sughrue, for his assistance.

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