Patent Troll Attacks on the Increase
In 2012 an astonishing 62% of all patent lawsuits in the United States were filed by Patent Assertion Entities (PAEs) or “patent trolls”. According to a survey of 116 in-house United States lawyers by Santa Clara University[i], 82% of companies surveyed said their customers had received PAE demands for using or implementing their products. The White House estimates that last year over 100,000 demand letters were sent out by PAEs[ii]. Trolling is a lucrative business: in 2011 an estimated $29bn was paid out to PAEs in the United States[iii].
Patent lawsuits have traditionally been filed against large tech companies, and these litigations still tend to attract the largest settlements. However, PAEs are increasingly targeting small, inventor driven companies and end users. The settlements may be smaller but assertion tends to be lower cost and lower risk, and the large number of targets mean this strategy can be profitable over all.
PAEs have had a significant operational impact on the companies they target. 96% of respondents to the Santa Clara University survey reported a financial impact, while 95% reported that PAEs distract them from their core business. 38.1% had made changes to their products and 25% had lost customers/revenue due to PAEs[iv]. Nor is PAE impact limited to individual companies: one study has found that the financial reward achieved by winning PAEs amounted to less than 10% of the share value lost by defendant firms, suggesting that the suits were resulting in considerable lost value to the United States economy[v].
President Obama has described PAEs as companies that “essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.” [vi] The White House has announced a series of legislative recommendations and executive actions that are intended to tackle PAEs perceived abuse of the patent system[vii], which include recommendations that the courts be permitted more discretion in awarding fees to winning parties in patent litigation and that consumers and businesses be provided with better legal protection against liability for using a product off-the-shelf and for its intended purpose[viii]. The White House has also announced an action to tighten functional claiming at the United States Patent Office by providing new targeted training to examiners on the scrutiny of functional claims[ix].
Bringing down the cost of litigation and speeding up the judicial process could also help shift the balance of power in litigation away from PAEs. The Federal Circuit Advisory Council’s development of a model order to limit and streamline discovery was felt by 77% of those surveyed by Santa Clara University to have been somewhat or very effective. However, there are still perceived to be abuses: 57% believed that greater sanctions or fee-shifting for discovery abuse would be very effective. Respondents had found damages reform, which requires sound evidence and reasoning to determine damages, to be somewhat effective 41% of the time and to be very effective 12% of the time. However, there was a feeling that while there are a lot of good ideas in the case law, the practical implications were difficult for parties to work out. Overall, there was a consensus that reforms that target the beginning stages of litigation – such as early disposition or stays – are more likely to be effective than reforms that target the end of litigation, such as fee-shifting or damages reform[x].
For the time being at least it appears that PAEs are here to stay. The White House, while recognising that the practices of PAEs “significantly retard innovation in the United States and result in economic ‘dead weight loss’” have concluded that the best approach is not to ban firms that specialise in patent assertion. Their hope is that PAE activity will die away naturally if improvements are achieved in three main areas: clearer patents with a high standard of novelty and non-obviousness; reduced disparity of litigation costs between patent owners and technology users; and greater adaptability of the innovation system to challenges posed by new technologies and business models[xi].
[i] http://www.slideshare.net/slideshow/embed_code/20486191
[ii] http://www.whitehouse.gov/blog/2013/06/04/taking-patent-trolls-protect-american-innovation
[iii] http://www.whitehouse.gov/blog/2013/06/04/taking-patent-trolls-protect-american-innovation
[iv] http://www.slideshare.net/slideshow/embed_code/20486191
[v] http://www.whitehouse.gov/sites/default/files/docs/patent_report.pdf
[vi] http://www.youtube.com/watch?feature=player_embedded&v=VQ4Zo0XyNsw#!
[vii] http://www.whitehouse.gov/the-press-office/2013/06/04/fact-sheet-white-house-task-force-high-tech-patent-issues
[viii] http://www.whitehouse.gov/the-press-office/2013/06/04/fact-sheet-white-house-task-force-high-tech-patent-issues
[ix] http://www.whitehouse.gov/the-press-office/2013/06/04/fact-sheet-white-house-task-force-high-tech-patent-issues
[x] http://www.slideshare.net/slideshow/embed_code/20486191 [xi]http://www.whitehouse.gov/sites/default/files/docs/patent_report.pdf
