IP law professors support proposed anti-troll legislation in the US

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As reported in the past months (see here and here, as well as PatLit posts here, here and here), the US Congress is currently examining several legislative proposals addressing 'patent trolling'. Patent assertion entities (PAEs) do not make or sell products, nor engage in R&D activities. Rather, they are created with the primary aim of enforcing a portfolio of patents acquired from (or assigned by) other companies. According to several studies, PAEs filed between 40% (here) and 61% (here) of all the patent lawsuits initiated in the United States in 2012. Essentially, the debate focuses on the risk that the prospect of high litigation costs might force any third party sued by PAEs for infringement to settle the lawsuit, even if the accused infringer believes that the asserted patents are invalid or the infringement allegations unfounded.

Among the legislative proposals which purport to address the issue, Congressman Goodlatte's 'Innovation Act' provides a comprehensive stack of measures, aimed at increasing transparency, limiting discovery costs, shifting fees, and protecting end users strategically targeted by PAEs in lieu of the manufacturer. The House Judiciary Committee, on 20 November, approved the bill, which thus advanced to the House floor. Other proposals include the Patent Transparency and Improvements Act, Patent Quality Improvement Act, Patent Abuse Reduction Act, Patent Litigation Integrity Act, Patent Litigation and Innovation Act, SHIELD Act, STOP Act. The recently introduced Demand Letter Transparency Act would subject PAE's demand letters to strict requisites, creating a publicly accessible database; any violation of the Act would be treated as an unfair or deceptive practice under sec. 18(a)(1)(B) of the Federal Trade Commission Act.

On Monday, 60 professors of IP law from 26 states wrote to the US Congress, supporting the ongoing efforts to pass legislation addressing patent trolling. The scholars highlighted that defendants in patent infringement actions face high and rising costs, which are primarily related to the discovery phase of litigation. A study by the American Intellectual Property Law Association, cited in the letter, estimated that the median cost of litigating a moderately-sized patent suit increased over 70% in the past decade, reaching $ 2.6 million, while the expense of defending even a low-stake patent suit is normally in excess of $ 600,000. According to the signatories, '[t]he magnitude and front-loaded nature of patent litigation expenses creates an opportunity for abuse', as '[p]atentholders can file suit and quickly impose large discovery costs on their opponents regardless of the validity of their patent rights and the merits of their infringement allegations'. As outlined above, this situation creates a strong incentive to settle, even when the accused infringer believes that the claims are meritless.

The professors observed that, in suits between product-producing technology companies, counterclaims serve as a way to correct the issues arising from high litigation costs, as counterclaims render them symmetrical. When a PAE is involved in patent litigation, instead, the accused infringer cannot rely on a counterclaim for infringement to impose an equal amount of discovery costs on the plaintiff. Thus, defendants are caught in the situation described above, where high litigation costs primarily borne by a single party act as a powerful incentive to settle.

Patent assertion entities appear to favor targeting small businesses (earning less than $ 10 million in annual revenues) downstream in the supply chain. This strategy, according to the scholars, allows PAEs to sue a large number of sellers or users of an allegedly infringing product, increasing litigation costs 'to induce a larger total settlement amount'. At the same time, smaller companies are generally less familiar with patent law, and less likely to engage in costly litigation outside of their areas of expertise. In this perspective, the vague prospect of a lawsuit may be sufficient to persuade these companies to settle, even before an actual lawsuit is filed.

Finally, the signatories underlined how the lack of reliable information about patent rights fuels patent trolling phenomena. Example of lawsuits which exploit the lack of transparency include cases where the plaintiff asserts patents it does not own, or where it seeks double recovery by suing sellers or users of a product for which the manufacturer already obtained a license to the asserted patent.

The scholars proposed six reforms which would help reduce the cost of patent litigation and reach a fair balance between the need of exposing abusive practices and that of protecting genuine and valuable innovations:

1. To discourage weak claims of patent infringement brought at least in part for nuisance value, we recommend an increase in the frequency of attorneys’ fee awards to accused patent infringers who choose to fight, rather than settle, and ultimately defeat the infringement allegations levelled against them.

2. To reduce the size and front-loaded nature of patent litigation costs, we recommend limitations on the scope of discovery in patent cases prior to the issuance of a claim construction order, particularly with respect to the discovery of electronic materials like software source code, emails, and other electronic communications.

3. To further protect innocent retailers and end-users that are particularly vulnerable to litigation cost hold-up, we recommend that courts begin to stay suits filed against parties that simply sell or use allegedly infringing technology until after the conclusion of parallel litigation between the patentee and the technology’s manufacturer.

4. To facilitate the early adjudication of patent infringement suits, we recommend that patentees be required to plead their infringement allegations with greater specificity. 

And finally, to increase transparency and confidence in the market for patent licensing, we recommend:

5. that patentees be required to disclose and keep up-to-date the identity of parties with an ownership stake or other direct financial interest in their patent rights, and

6. that Congress consider additional legislation designed to deter fraudulent, misleading, or otherwise abusive patent licensing demands made outside of court.

The most recent version of the Innovation Act appears to address each of these elements. Goodlatte's proposal also includes provisions requiring specific studies on patent transactions, quality and examination, as well as on the effects of the rules and procedures adopted to reduce discovery costs.