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FTC to Hold Final Hearing on Patent Law


Written by Gene Quinn
President & Founder of IPWatchdog, Inc.
Patent Attorney, Reg. No. 44,294
Zies, Widerman & Malek
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Posted: April 13, 2009 @ 6:34 am
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The Federal Trade Commission announced last week that it would hold the fifth and final hearing in a series exploring the evolving market for intellectual property on May 4-5, 2009.  This fifth and final hearing will take place on the campus of the University of California at Berkeley, in cooperation with the Berkeley Center for Law and Technology and the Berkeley Competition Policy Center. It will explore how markets for patents and technology operate in different industries, whether those markets operate efficiently, and how patent policy might be adjusted to respond to problems in those markets in order to better promote innovation and competition.  To be perfectly honest, it seems that the Federal Trade Commission is coming quite late to the party.  The Patent Office has embarked upon wide-ranging changes over the last several years, and in the wake of the Federal Circuit decision in Tafas v. Dudas it seems likely that the Patent Office will implement far-reaching rules changes that will alter the foundation of patent prosecution.  Additionally, Congress is nearing completion of legislative patent reform, with the Senate Judiciary Committee finally reporting out patent reform legislation to the full Senate.  What the FTC hopes to accomplish at this late date is puzzling, but maybe they just didn’t want to be seen as asleep at the switch while revolutionary change is sweeping the patent industry.

In any event, the hearings were part of an ongoing evaluation of patent law and patent-related business models, which is aimed at learning about the operation of new markets for patents, innovation and technology.  This series was prompted by the believe that the marketplace has changed quite significantly since the October 2003 Commission report on the patent system, “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy.”  Had the FTC really wanted to play a role in bringing change to the patent system the agency should have embarked upon this process well over a year ago, but better late than never I suppose.

I just wonder what it means when the FTC is asking about whether the market for patent assets is operating efficiently.  I also question what the motivation is when the FTC explains that one significant change prompting this investigation relates to how patents are sold.  The FTC has specifically explained:

Some of the most significant recent changes in markets for intellectual property have occurred through the emergence of new business models involving the buying, selling and licensing of patents.

Of course the market for patents is operating efficiently.  The fact that the FTC is uncomfortable with patent trolls, or non-practicing entities as is now the accepted term, does not mean that the government should launch an investigation to help those tech-giants who can’t figure out how to combat trolling.  First, we need to keep in mind that whatever rule is created to apply to the so-called non-practicing entities, will also apply to universities, federal laboratories and research & development companies.  So we can use the politically correct term — non-practicing entities — or we can use the term “patent trolls.”  I for one want to keep using patent trolls because it will make it far harder for the government to make changes to the law if they are forced to state in public that universities, federal laboratories and R&D companies are patent trolls.  Calling them patent trolls is nonsense, and that is exactly why those mega-infringers want to complain about non-practicing entities.  Let us not forget they are infringers!  They are tortfeasors who have been found to infringe, or believe they infringe and pay off those who own valid patent rights.

All of this really sickens me because there is a solution to the patent troll problem, assuming it really is a problem at all and not just a fiction created by those who would love nothing more than to weaken patent rights of independent inventors, entrepreneurs and start-up companies.  There is tremendous support in the high-tech community for expansive new post-grant review procedures, presumably so they can make it more difficult for innovators to obtain patents.  The only trouble is that the current reexamination procedures are hardly utilized despite the fact that there is an overwhelming success rate for those who challenge patents.  As I explained in Reexamination Would Stop Patent Trolls, ex parte reexamination requests result in all claims being canceled 9.2% of the time and in 59% of the cases a certificate is issued with at least some claims being changed. Even more astounding are the statistics relating to inter partes reexamination.  For inter partes reexamination 74% of requests result in all claims being canceled and 14% of the time certificates issue with at least some claims being changed.  With this level of success you would anticipate those who complain about patent trolls would race to the Patent Office and file reexamination requests.  Notwithstanding, they don’t.  I know this for a fact because we have had meetings and provided proposals for filing multiple reexaminations to change the calculus for patent trolls, but tech is not interested.  Kind of makes you wonder why they complain about a problem when there is an obvious solution they are ignoring.  Rather, they would prefer to participate in building defensive patent portfolios, which simply won’t work because patent trolls do not make, use or import anything, so having a defensive patent portfolio is ineffective against patent trolls.

You might not like the outcome of patents being sold to those who value the rights, but the reality is that the government recognizes rights and others either acquire or license those rights as they see fit and based upon free market rules.  For example, Ocean Tomo has made a successful business out of auctioning off patents.  According to the Ocean Tomo website:

Ocean Tomo’s model of a multi-lot, live auction for intellectual property was created to introduce the marketplace to a forum for facilitating the open and public exchange of Intellectual Property (“IP”).  The auction was designed to bring a sense of urgency and closure to IP transactions, create a center for IP liquidity, and effectuate transparency for a market in which none had historically existed.

The auction brings numerous benefits to both a seller and buyer.  From a seller perspective, the auction is the first forum for transacting intellectual property in which the burden of purchasing is actually shifted to the buyer.  The auction structure and format enable a seller to offer a pre-set terms and conditions including a minimum price, “the reserve”. Many auction participants and followers in the marketplace now recognize the value of the auction format.

Admittedly, the Ocean Tomo Spring 2009 auction held a few weeks ago was disappointing, but that seems to be due to the weak economy, not the fact that the market for patent assets is inefficient.

I suppose soon enough we will find out what all these hearings are about and what the FTC plans to do.  Interested parties can submit comments to the FTC for consideration by May 15, 2009, so at some point thereafter we will likely get a new report from the FTC will all kinds of suggestions.  I wonder whether those suggestions will favor big-tech or the independent inventors, entrepreneurs and start-ups that are the ones who will make the technologies and create the jobs that will get us out of this recession.

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Posted in: Federal Trade Commission, Gene Quinn, IP News, IPWatchdog.com Articles, Patent Trolls, Patents

About the Author

is a Patent Attorney and the founder of the popular blog IPWatchdog.com, which has for three of the last four years (i.e., 2010, 2012 and 2103) been recognized as the top intellectual property blog by the American Bar Association. He is also a principal lecturer in the PLI Patent Bar Review Course. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.

 

14 comments
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  1. Gene,

    I like your idea about reexamination but…

    How do you handle the troll who sues before ever making contact with the defendant in a jurisdiction which refuses to stay pending reexamination?

  2. Alan-

    Are there really jurisdictions that refuse to stay pending reexamination? I find that hard to believe, but would love to hear from someone with some hard data (or even anecdotal evidence). I know there have been some high profile situations where litigation was not stayed pending reexamination (i.e., NTP v. RIM), but those that I know about are cases where the reexamination was filed extremely late in the process. I would not have stayed the NTP/RIM matter had I been a district court judge because it looked like stall tactics war of attrition style. If you really think you have good prior art then don’t wait until the case has been pending for years. My belief is that if reexamination is requested early on in the process most district court judges would stay the litigation. They would be foolish not to order a stay. Let the PTO and then the Federal Circuit decide before wasting years of pre-trial, weeks or more of trial and the real chance you get reversed and have to start over.

    Also, are there really patent trolls that sue before ever making contact? From what I hear many, if not most, try to get licensing royalties first. Alternatively, they beat up on small players to make their war-chest full. Are there any situations where a company wouldn’t know or couldn’t have known that a troll was coming?

    Would love to hear your thoughts on this Alan. Do you have any suggestions?

    _Gene

  3. I was a (one of many) defendant in one of a series of suits filed by Solia Technology regarding programmable logic controllers where the first we ever heard of Solia was the complaint. Google Solia Technology amd Rockwell to see the history of these suits.

    Right after filing we got a discovery request that, to comply, would have cost more than the settlement offer. That’s how they built the “war chest”.

    In these cases, the large corporate users were the “small players” who could not afford to litigate while Solia tried everything in the book to keep Rockwell, the manufacturer, out of the suits. Once Rockwell finally forced its way in, the patent died in summary judgment.

    While I do little litigation, I seem to remember that the ED Virginia (yes, where NTP was tried) has a set of rocket docket rules that basically eliminate stays. Not sure, but ED Texas may do the same (another reason trolls love to file there?).

  4. Alan-

    Point taken about the Rocket Docket. I think the ED Texas will fall apart as a venue for patent litigation post TS Tech. We shall see.

    Early on in my career I was at a general litigation firm. The way that auto insurance companies dealt with the 80s was by forcing everything to trial. The insurance industry took the position that if it was cheaper to settle they would settle, which lead to many attorneys taking all kinds of crap cases they never should have taken knowing they would get at least some quick settlement. Many became rich doing that, and finally the insurance industry got wise and decided to settle nothing. They actually didn’t settle nothing, I know for a fact they settled, but they were very selective and finally edged out the “file anything” attorneys. What I have been telling companies complaining of trolls is that this is a part of what they need to do in order to get rid of trolls. The trolls are not making anything, so the rules are different for them. You need to change the calculus. Right now it is an excellent business plan to become a troll because of settlements and the prospect of winning lottery like winnings. Until a systemic plan is put in place that will not change.

    By the way, if anyone is interested, I have developed a plan of attack to go after trolls and change the calculus. Unfortunately, those who claim to be held up by trolls would rather pay settlements and write huge checks to litigators rather than spend a fraction to end the problem.

    -Gene

  5. Gene,

    Here’s why reexamination doesn’t work. Judges won’t grant the stays necessary as follows:

    “Plaintiff (“RGB”) filed suit on September 19, 2007 alleging infringement of patents relating to motion control methods and systems that include software for communicating with and controlling different motion control devices. A year after litigation commenced, multiple inter-partes reexamination requests were granted in the PTO. Defendants moved to stay the litigation.

    In denying the motion, Judge Folsom stated

    In the past, this Court has noted the findings of the Institute for Progress, an independent organization that has analyzed the inter partes reexamination process. See ESN, LLC v. Cisco Systems, Inc., No. 5:08-CV-20-DF (E.D. Tex. Nov. 20, 2008). On average, inter partes reexaminations in which a patentee defends its rights may take anywhere from thirty-four to fifty-three months without an appeal. Id. at 4. If the PTO’s finding is appealed the process may take between five to eight years. Id. Because Defendants’ reexamination requests were filed a little over six months ago, a stay in this case would, at a likely minimum, last another twenty-eight months.
    * * *
    The Court is not convinced that reexamination will simplify the issues for trial in this case. It is difficult to gauge, at this early stage in the reexamination process, how likely it is that any of RGB’s patent claims will be cancelled or modified through amendment. Furthermore, it is this Court’s experience that the reexamination process may actually complicate a case by creating additional prosecution history estoppel and disavowal arguments that must be addressed during claim construction. To convince this Court that a stay will actually simplify a case, the requesting party must do more than merely proffer oft-cited reexamination statistics and generic judicial efficiency arguments. This Defendants have not done. Accordingly, this factor weighs against granting the stay.”

    So what you wind up with is parallel actions and the liklihood of a finding of infringement of the “presumed valid” patent in court followed by the PTO invalidating the same claims later in reexamination.

  6. Alan-

    It is hard to argue with the logic used by Judge Folsom. Do you see any alternatives? What if there was a requirement that the district court order a stay if a reexamination request were filed prior to the Answer being filed? What if there was the filing at the time of the answer some document called “Notice of Intent to Reexamine.” If that document were filed prior to the Answer being due then the defendant would have 3 months to file a reexamination request and a stay would be ordered. In exchange, and so as to not allow for gaming of the system, I suspect that such a stay should require the posting of a bond and/or maybe even be a factor in favor of ordering a preliminary injunction to maintain some status quo and recognize that a patent is a wasting asset.

    Not sure about all of this, just thinking out loud and looking for some thoughts to work it through.

    -Gene

  7. Based on the time it takes to get through a reexam, I’m doubting that many judges would order a stay in the future.

  8. Alan-

    I suspect you are right, but don’t give up. I am determined to come up with solutions that work, even if that means revising the entire workflow of the USPTO, which we all know is required. Not that I will get a chance to do that, but putting forth workable solutions, policies and procedures needs to be the focus.

    -Gene

  9. “…even if that means revising the entire workflow of the USPTO, which we all know is required.”

    Gene, you hit the nail on the head. David Boundy would put it much more eloquently with a discussion of the presidential order that requires agencies to review their own workings PRIOR to advancing changes to the law (and which I still fail to see the cabel of Professors opining at Patently-O discuss – C’mon Mark Lemley, Arti Rai, David Hricik, Howard Skaist, Josh Sarnoff and Tom Field, let’s leave the esoteric discussion of legal change and focus on the pragmatics of administration). While there is no doubt that bad patents exist (in more than one art area), challenging the presumption of validity is simply NOT the answer. We would be accomplishing what the Coalition for Patent Destruction, um, “Fairness” desires – the drastic weakening of the power of the patent.

    Alan, I feel for your pain, but you are still intent on burning down the house to obtain a piece of toast. Put it this way, if examiner 6 likes the Gold-plated patent scheme, do you really want to associate with that logical miscreant?

    As for putting forth workable solutions, policies and procedures, a noble focus and definitely worthwhile, but also definitely meaningless if the top (mis)management of the Office continually and blatantly pursue their agenda. They have shown what they think of outside and unfortunately inside views, as Gene’s postings of examiners views such as Old Examiner, EE Examiner and Nohj Edo show. It is good to know that professionals that care and potential allies exist at the Office.

    Entrenched Power breeds its own followers. Even a rational and professional examiner like Nohj evidences the indoctrination – his quote
    “…But for the case of argument, if you were the management of a government agency, wouldn’t you stand behind any policy you implemented without flinching, regardless of any else’s opinion, and regardless of how effective the policy truly was?”
    This clearly shows a suspension of logical thought rampant at the Office, one bent on its own agenda, “regardless of how effective the policy truly was”.

    Witness the recent minor toning down of 6’s rhetoric, but be not fooled by it. This is an ideological war. The economic ramifications of “reject-reject-reject” have not truly changed the ideology of those running the Office and their indoctrinated minions. “Quality” definitions may shift, but “quality” is still NOT understood, and is still not the aim of the Office.

  10. ” I wonder whether those suggestions will favor big-tech or the independent inventors, entrepreneurs and start-ups that are the ones who will make the technologies and create the jobs that will get us out of this recession.”

    amen, brother. good work, Gene.

  11. Gene,

    I told you courts would start refusing stays for reexam. Here’s what’s going on:

    http://271patent.blogspot.com/2009/04/inter-partes-reexams-deflating-in-ed.html

  12. Alan-

    I just read that post at 271, which incidentally is one of the patent blogs I do read regularly. If those numbers are correct and it takes over 6 years to reach a resolution, it is no wonder that district courts won’t issue stays. I am going to do some writing on this today directed toward those in Congress who are considering patent reform. If they think post grant review is going to solve this problem then they are all crazy!

    Thanks.

    -Gene

  13. So, we’re back where we started. A presumption of validity in the courts and no reasonable way to rebut except a scorched earth courtroom defense raising anything with a remote chance of success.

    As I’ve said before, I’d gladly trade elimination of inequitable conduct for elimination of the presumption. In fact, I’m now willing to trade it for requiring judges and the PTO to allow testimony from the examiner and expert testimony on what really happens in the PTO.

  14. Gene,

    Great article. I am a person who strongly believes in fighting the patent trolls and sending them back to hell. I am one of several defendants in a suit saying we infringe in a patent, but the patent is our business model, in fact, there are over 1,000 other companies in the same industry, and these guys are cherry picking a group of defendants one at a time and getting large settlements.

    I myself don’t have the money to settle with a large settlement and I am all for taking this to court – no matter how many years fighting this, though this doesn’t make sense on a money value, it does so on a moral value. At this time, I am trying to group up with other defendants in the same suit, but I would very much like to hear your comments on your statement April 13, 2009:

    “By the way, if anyone is interested, I have developed a plan of attack to go after trolls and change the calculus. Unfortunately, those who claim to be held up by trolls would rather pay settlements and write huge checks to litigators rather than spend a fraction to end the problem.”

    If you can’t post it, to please email me, I am very interested in your comments.

    Thanks
    – Patent Troll Exterminator (Apprentice)