Point of View

The costly patent troll problem in the US

December 2, 2013 

This week, the U.S. House of Representatives will take up HR 3309 – known as the “Innovation Act” – which is an important step toward addressing abusive patent litigation by Patent Assertion Entities (PAEs) – sometimes called patent trolls.

PAEs are companies that acquire patents and then use them to sue other companies for alleged infringement. A PAE doesn’t actually make anything. Its sole purpose is to use patents, which are often vague and potentially invalid, to extract payments from others. PAEs understand that defending a single patent lawsuit can cost millions of dollars and that they can make money offering settlements that cost less.

PAEs have become a big business. Since 2005, the number of defendants sued by PAEs has quadrupled. Last year, they sued almost 7,000 defendants and sent thousands more threat letters. PAEs filed more than half of all patent lawsuits in 2012.

This activity costs the U.S. economy more than $80 billion annually, and companies spend $29 billion on PAE litigation, often because it is easier to do that than litigate. This hurts American innovation and job creations. PAEs are not just suing large tech corporations. Small and medium-sized businesses of all types, including start-ups, are now the most frequent targets.

As a result, a wide range of interests – newspaper and magazine publishers, retailers, hospitals, restaurants, transit authorities, hotels, banks and credit unions and telecommunication companies – have joined consumer groups, the motion picture industry, automobile manufactures and grocers to seek comprehensive legislation to limit meritless patent litigation.

Their unified voice joins the software industry and much of the high-technology sector to reflect a growing consensus that now is the time to address this issue, and this bill is one important piece of that strategy.

The bill has bipartisan support. The House Judiciary Committee approved it by an overwhelming vote of 33-5. It was great to see U.S. Rep. George Holding (NC-13) and U.S. Rep. Howard Coble (NC-6), both Republican members of the House Judiciary Committee, as co-sponsors of HR 3309.

What does the bill do? First, it targets abusive patent litigation behavior with the goal of preventing individuals from taking advantage of the current system to engage in litigation extortion. It does not attempt to eliminate valid patent litigation.

It also includes heightened pleading standards and increases the transparency of who owns a patent. Patent litigation can be enormously expensive. It makes common sense to require parties to do a bit of due diligence up front before filing an infringement suit.

HR 3309 also modernizes the out-of-balance economics associated with patent litigation. As it stands now, a PAE has little to lose by filing a suit, but a job-creating company that gets sued has to spend enormous funds to defend itself. The bill provides for cost and fee shifting that is fairer and clearer.

The bill includes numerous other steps that help streamline discovery and case management, as well as provides for small business education and outreach by the U.S. Patent and Trademark Office.

Earlier this year, Edith Ramirez, the chairwoman of the Federal Trade Commission, observed that there is a growing consensus that “flaws in the patent system are likely fueling much of the real costs associated with PAE activities. ... Effective monetization of low quality patents imposes a de facto tax on productive economic activity with little or no offsetting benefit for consumers.”

There is much work to be done to address this burden on innovation and job creation. HR 3309 is one important step in that effort.

Michael Cunningham is executive vice president and general counsel at Red Hat, Inc.

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