A Pair of Patent Reform Bills Seek to Deter Patent Trolls

Illustration by David Saracino/New York Observer

On October 23, 2013, Representative and chairman of the House Judiciary Committee Bob Goodlatte (R-Va.) introduced a patent reform bill to the House of Representatives. The legislation is known as the Innovation Act and is co-sponsored by Democrats and Republicans alike. The bill seeks to curb abusive patent litigation most commonly associated with patent trolls. A patent troll (also known as a non-practicing entity or a patent assertion entity) refers to a patentee that does not make products or practice its own inventions and instead files suit against infringers to recoup royalties. A patent troll acquires patents solely for the purpose of extracting payments from alleged infringers and its entire business model centers on patent litigation. These non-practicing entities use the high cost of patent litigation as a threat to demand quick settlements. According to a May 2013 press release by New York Senator Charles Schumer:

In 2011 alone, patent trolls cost operating companies $29 billion. Under current law, a company hit with a patent suit only has two options – pay to defend the suit or pay a licensing fee or settlement agreement to make the suit go away. Both options are highly costly – the average troll settlement costs a small or medium company $1.33 million, while an in-court defense would cost the same company an average of $1.75 million per case.
Specifically, this has been an enormous problem among technology start-up companies: 62% of patents asserted by trolls from 1990-2010 were software patents; 75% were in computer and communications technology. And this is a particular problem for small businesses: 82% of companies targeted by trolls of annual revenues less than $100 million.

Furthermore, according to the Electronic Frontier Foundation, patent trolls only win 9.2% of the cases that are brought to judgment.

To stymie patent trolls from filing frivolous suits the Innovation Act has several key provisions pertaining to patent litigation. One such provision seeks to implement fee shifting in patent cases. Under current patent laws, each party to a patent litigation pays its own legal fees, regardless of the case’s outcome. However, the Innovation Act will allow courts to order the losing party to pay the victor’s legal fees. This would encourage defending companies with little money to take on the patent-assertion entities in court.

The Innovation Act will also allow manufacturers to defend their customers in patent litigation. This is in direct response to a familiar tactic employed by patent-assertion entities: instead of filing suit against a major manufacturer with the funds and ability to respond to the patent trolls in court, a patent troll will file suit against the manufacturer’s less wealthy customers. By allowing a manufacturer to defend their customers in patent litigation, the extent of financial resources available to the original defendant becomes a non-factor.

In addition, the Act requires a patent holder filing a lawsuit to disclose the names of everyone who has a financial interest in the affected patents. Often, a patent assertion entity is a shell corporation that is part of a much larger entity. These larger entities use these shell corporations to shield themselves from bad publicity. Requiring full disclosure of all those who have a financial interest in the affected patents will promote transparency and may discourage companies from filing frivolous lawsuits.

Furthermore, the Patent Litigation Integrity Act, brought before the Senate on October 30, 2013 by Senator Orrin Hatch (R-Utah) seeks to place even higher financial burdens on patent-assertion entities. The main provision of the Patent Litigation Integrity Act takes the fee-shifting provision of the Innovation Act one step further. Under the Patent Litigation Integrity Act, the company being sued could ask the court to require the company bringing the suit to post a bond for the cost of the defendant’s legal fees.

The full text of the Innovation Act can be found here.

The full text of the Patent Litigation Integrity Act can be found here.

(Blog entry written by Alex Diamond, IBLT/Carter DeLuca Entrepreneurship Support Fellow for the Fall 2013 semester)