Patent Trolls Under the Patent Reform Act

On September 16th, 2011, President Obama signed the (Leahy-Smith) America Invents Act.  The official White House Press Release and countless blogs describe the Act as “the most significant reform of the Patent Act since 1952.”  One of the stated objectives of the Act is to let American companies and inventors focus on innovation and job creation rather than costly, and sometimes unnecessary, litigation.  The Act attempts to achieve this goal through several changes to the patent system, most notably including a transition from a first-to-invent to a first-to-file patent regime.

There is much debate as to whether the various components of the Act will accomplish this goal.  One way to approach this question is by examining the impact it will have on patent troll behavior.  Some conceive of patent trolling as a “tax on innovation” through the brandishing of invalid patents.  A Boston University study claims patent trolls “have cost innovators $500 billion in lost wealth from 1990 through 2010.”  Many assert that the new Act does nothing to hinder patent troll litigation; however, that remains unclear.  A deeper analysis of this question will also elucidate some of the salient features of the Act.

What is a patent troll?

Commentators have struggled to settle on a definition of a “patent troll,” but many view patent trolls as a type of “non-practicing entity” (“NPE”).  A non-practicing entity is an entity that does not produce any sort of products.  So, while a host of actors could be NPEs (like universities, failed businesses, think tanks, and independent inventors), not all NPEs would be considered trolls.  A troll, as the name evokes, is an entity that waits for others to cross the bridge of innovation it claims and attempts to extract a toll for the alleged infringement of its patent.  As Professor Michael Risch states more concisely, “trolls are trolls when they overreach.”

Though there are many myths about patent trolls, trolls share several common characteristics.  Trolls, like all NPEs, cannot be countersued for infringement and are not interested in bargaining for cross licensing agreements as they do not make any products.  Given the high costs of litigation and a lack of bargaining power for those being sued, patent troll lawsuits can result in high settlements for the trolls (even when the patented  claims are not valid).  Moreover, patent trolls have been able to sue multiple defendants at once, increasing the likelihood of a favorable cash-out.

Prior to the passage of the Reform Act, Professor Colleen V. Chien proposed that other companies should take note of these strategies to “turn the table” on patent trolls.  She also commented that patent law needed to be reformed to find “a balance between adequately producing innovation while reducing the payday for those pursuing litigation over patents held on small advances in complex technologies.”  In particular, patent trolls’ ability to target start up enterprises is a huge roadblock to innovation.  Now that the Patent Act has been reformed, it is worth considering whether Professor Chien’s proposed balance has been reached.

America Invents: First-to-File

The reform receiving the most attention is the transition from a system of first-to-invent to a system of first-to-file (slated to go into affect on March 16th, 2013).  This distinction refers to the basis on which patents are awarded, particularly when there is conflict over ownership. Such conflict occurs more than one might think.  For instance, Liebniz and Newton independently invented calculus contemporaneously and Elisha Gray and Alexander Graham Bell independently filled a patent for the telephone on the exact same day!

Under the former patent regime, the dispute between Bell and Gray would have centered on who invented the telephone first—a question that would likely result in costly litigation if it occurred today.  One major criticism of the old regime was that it allowed inventors to sit back and then hinder the forward momentum of a second party that had taken proactive steps to file their patent.  If the second party did not have enough resources to engage in a costly legal battle, they could be forced to settle privately or to license the idea.  Under the new patent regime, the dispute between Bell and Gray would center on who submitted (filed) a patent application to the PTO first. Such a system creates a “race to file,” and since filing is costly, one hope is that the new system will stimulate innovation as patentees seek to offset filing costs by commercializing their inventions.  However, since trolls generate revenue exclusively through patent enforcement, their only incentive would be to file quickly. Additionally, as described below, trolls will likely win the “race to file” against most innovators. Consequently, trolls threaten the potential for a “first to file” system to stimulate innovation.

Concerns

The capacity of trolls to file patents quickly is most observable in the case of so-called patent mills.  A patent mill is an entity that simply churns out patents, like Intellectual Ventures or Walker Digital Labs.  Intellectual Ventures is a company run by Nathan Myhrvold that basically assembles intelligent people across several disciplines in a room and has them brainstorm ideas.  In addition to hiring intelligent experts across a range of fields, Intellectual Ventures also employs many patent lawyers.  With these two groups working together, Intellectual Ventures secures roughly 500 patents every year.  Without accusing Intellectual Ventures of being an entity that overreaches, it is easy to imagine that in a “race to file,” such an entity would be that much quicker and better equipped to file a patent than a start up enterprise.

Indeed, one of the concerns about the transition to a first-to-file system is that start up enterprises will be adversely affected since the process of filing a patent costs money and takes time/expertise. This problem is magnified by the recent 15% increase in many patent fees, which went into effect on September 26th, 2011.  Some empirical research actually suggests that a similar transition in the Canadian system correlates with a drop in the percentage of patents granted to small inventors.  Gary Lauder thinks that this outcome will be a direct result of an inequitable distribution of resources, because smaller companies tend to finance their innovations by pitching ideas to angel investors and venture capitalists, which necessarily involves sharing those ideas.

Under the previous system, as long as one could demonstrate that they were the first to come up with the invention, one could initiate an interference proceeding against any individual/entity that was trying to file the same patent.  With the transition to first-to-file and the elimination of interference proceedings, the concern is that the new system might incentivize the theft of ideas in the race to file.  As such, the modified act could open the door to greater exploitation by patent trolls who have the resources to scavenge ideas and file them expediently. This, in turn, hinders innovation, as those who would commercialize the product must pay hefty licensing fees to the trolls.

Hedging

On the other hand, the elimination of interference proceedings could help expedite the innovation process for entities that might otherwise be caught up at the proverbial troll toll bridge.  It is not a stretch to think that this was partially the intent of Congress. Other features of the Act hedge against the aforementioned concerns as well.

One feature of the Reform Act that address the issue of inequitable resources in the “race to file” is the creation of a 75% reduction in fees for entities that classify as “micro entities.”  A micro entity (as defined in  35 U.S.C. § 123) is a small entity that does not have four previously filed patents in the United States and does not have a gross income for the preceding calendar year that is more than three times the median household income for that year.  Furthermore, the small entity must not have conveyed or made a contract to convey, in any way, an ownership interest in the patent application to an entity that has a gross income for the preceding calendar year that is more than three times the median household income for that year.  Although this classification comes with its restrictions, it levels the playing field for innovators that might not otherwise afford to procure a patent.

Furthermore, innovators can take advantage of a one-year grace period for patent filers that have “disclosed” their invention.  In other words, if an inventor discloses his or her invention within one year of filing and before anyone else, that disclosure will serve as prior art (invalidating any patent claim) for anyone other than the innovator.  Most importantly, subsequent disclosures by third parties will not invalidate the original inventors claim to the patent, thus allowing the inventor both to stake his claim, and to ensure that it will not be taken from him.  There are still concerns about the fact that “disclosure” is narrowly defined to not include sale and use of the innovation (which may affect opportunities for capitalization).  But, at the very least, this grace period offers inventors a way to stake their claim quickly and at a low-cost, even if this may simply change the “race to file” into a “race to disclose.”  Unfortunately, this option will be problematic for inventions that would benefit from secrecy or for inventions that hope to have protection outside of the United States (where the grace period would not apply).

Joinder of Parties:

Even though the previous remarks still leave considerable ambiguity about the effect the new Act will have on the practices of patent trolls, one procedural modification seems to explicitly target such practices.  A common practice of trolls has been the joinder of multiple targeted defendants into one case.  This tactic not only allows trolls to hit many birds with one stone (reducing the trolls costs), but also ensures that the venue will be inconvenient for most of the defendants.

The new Act, however, prohibits the joinder of defendants simply on the basis that they have all allegedly infringed the same patent.  The hope is that a “one defendant-one lawsuit” will place a prohibitive financial burden on patent trolls while jeopardizing the validity of their patent in every case.  Additionally, a court would be similarly barred from consolidating cases without receiving waivers from the defendants.  While the possibility still remains for multiple defendants to be joined provided a plaintiff is able to demonstrate additional bases, this modification should severely limit the scope of patent troll litigation.

Under the new system, the only way that trolls can join multiple defendants is if the right to relief against the parties arises out of the same transaction or is based on common questions of fact.  In most of these cases, where there is likely no collusion between the defendants, the Act will create a significant restriction on joining defendants.  Thus, with this restriction, patent trolls would be less likely to capitalize on economies of scale.  Even though patent trolls might still be able to force individual entities with few resources to settle, the amount of entities that trolls can target should decrease as it becomes less cost-effective.  This cost-benefit will be further impacted by the fact that the validity of a troll’s patent is at risk in every case that is fully litigated. This may make the troll business model untenable in the long-term.

Conclusion:

The transition to first-to-file might favor patent trolls on account of resource and expertise inequity.  However, the dis-joinder provision of the Reform Act should strongly impair their practices and while it may not level the playing field in individual cases, it should have a positive effect in the aggregate.  It seems that patent trolls sense that the net effect of the Act will be negative for their practices.  After all, the day before the Act was signed, 54 complaints accusing 800 entities of infringement were filed, an all-time high.  Over time, it will be worthwhile to pay attention to these trends.

Cite as: Karan Dhadialla, Patent Trolls Under the Patent Reform Act, Berkeley Tech. L.J. Bolt (October 15, 2011), http://btlj.org/?p=1444.
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