Congress Aims to Rein in Patent Trolls

WASHINGTON – Lawmakers are planning to step up their effort to crack down on patent trolls – entities that generally buy patents with the sole purpose of bringing lawsuits against companies and extracting a payout.

Rep. Bob Goodlatte (R-Va.), chairman of the House Committee on the Judiciary, introduced a bill recently to stop abusive patent litigation. Speaking at the American Enterprise Institute, Goodlatte noted that Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) and the White House also agree something needs to be done to prevent abusive patent litigation.

The practice, called “patent trolling,” has grown in recent years, Goodlatte explained. An entity will use a patent not to build or improve an invention, but to threaten businesses with infringement lawsuits to extort a settlement as an alternative to expensive litigation.

The legislation is co-sponsored by Rep. Zoe Lofgren (D-Calif.), Rep. Howard Coble (R-N.C.), and Rep. Peter DeFazio (D-Ore.).

"Everyone from independent inventors, to start-ups, to mid and large sized businesses face this constant threat," Goodlatte said. "The tens of billions of dollars spent on settlements and litigation expenses associated with abusive patent suits represent truly wasted capital – wasted capital that could have been used to create new jobs, fund R&D, and create new innovations and technologies."

While commending Goodlatte’s introduction of the bill, Leahy announced he is working on similar patent legislation in the Senate with Sen. Mike Lee (R-Utah).

“Chairman Goodlatte and I are committed to working in a bicameral and bipartisan way to counter patent trolling,” Leahy said.

“The Innovation Act takes meaningful steps to address the abusive practices that have damaged our patent system and resulted in significant economic harm to our nation,” Goodlatte said.

The bill would target the parts of the legal system most abused by patent trolls: the cost for parties of defending against a suit, and the liability and transparency of the party alleging infringement.

First, the bill requires the loser in a patent case to pay attorney’s fees and costs, making it more economical for a defendant threatened with a frivolous patent suit to fight in court and win. In the U.S., each party pays its own courtroom costs. This discourages anyone from suing another person unless he or she has a reasonable level of confidence in his or her case, or that the defendant will pay a settlement to avoid the suit altogether. Even if the defendant wins the legal battle, this party can still owe hundreds of thousands of dollars in legal fees.

Second, the Innovation Act would delay discovery until after the court concludes the “claim-construction” phase of the trial. Discovery is the process in which each party can obtain evidence from the opposing party when it is relevant to the case. The party accused of infringement is usually the one that receives the bulk of discovery requests, which can involve thousands – if not millions – of documents being held by a defendant company. The discovery process is a huge cost driver in litigation and by delaying it, the bill would prevent patent holders from running up defendants’ costs.

The bill also requires the plaintiff to specifically identify which parts of a patent have been violated. The party alleging infringement would have to reveal the parties that actually benefit from the litigation to the U.S. Patent Trademark Office, the court, and the opposing party. Patent trolls often hide their ownership structure to hide the scope of their operations and shield their parent companies from bad publicity. This portion of the bill would put an end to that.

Over half of patent litigation is now from patent trolls. The number of patent lawsuits has increased six-fold since the 1980s and the number of lawsuits per patent has tripled since the same period.

Boston University scholar Jim Bessen said patent trolls have cost the U.S. economy $320 billion over the last four years. That number reached 80 billion in 2011 alone, with companies making $29 billion in direct payouts, according to Michael Beckerman, president and CEO of the Internet Association, an advocacy group that includes eBay, Amazon, and numerous other Web companies.

"Where a few years ago it was mostly tech companies that cared about patents, today it's grocery stores, it's restaurants, it’s retail shops, it's also hospitals and banks -- virtually every kind of business you think about throughout our economy has been impacted by this, and they're all interested in it," Beckerman said.

Eighty-two percent of businesses targeted have annual revenues of less than $100 million. In 2012, patent trolls filed 62 percent of patent cases, increasing from 20 percent in 2006.

“This has become a very lucrative business where you can extract very large settlements before you even get to the litigation process,” he added.

When these cases make it to court, patent trolls lose 85 percent of the time because these patents are generally too broad, Beckerman said.

Tech industry depends on patents of its devices and business methods, so tech companies including Google and Apple have been staunch supporters of solutions to curb patent trolls.

Business method patents are litigated nine times more often than any other. These patents protect methods of doing business that commonly happen in the brick-and-mortar sector that someone has patented the idea of doing online.

For example, a shipment confirmation email, not a novel or original idea, is an actual patent that has been used to target many retailers, airlines, and even public transportation agencies. Another lawsuit allowing customers to reserve seats on airplanes and buses is targeting airlines and other transportation companies. Other patent lawsuits target restaurants that show their nutritional information or offer meal-planning options online.

Under the America Invents Act of 2011, companies facing patent infringement lawsuits can challenge the validity of their opponents’ claims if those patents are related to financial products. The Innovation Act would expand the review process to business method patents.

Various industries seeking relief from such practice have touted the bill, even as some tech companies and trade groups have raised red flags about key provisions.

The National Retail Federation, the Application Developers Alliance, and the Credit Union National Association have all praised the bill.

Nonetheless, raising the stakes against the party alleging infringement could make it more difficult for inventors and tech startups to defend their innovations against large competitors, such as Google and Apple, which purchase hundreds of patents or patent tech concepts every year.

Brian Pomper, head of the Innovation Alliance, warned that some of the bill’s provisions could “significantly shift the balance of patent ownership and licensing power from small companies and inventors to larger, better financed incumbent companies.”

President Obama issued several executive orders earlier this year to address the “risks to small businesses” from frivolous litigation by patent trolls. The Obama administration has hailed Goodlatte’s bill, saying it supports measures that increase transparency and accountability in the patent litigation system.