That business involves the enforcement of weak or invalid patent claims against initial and downstream users of devices that are remotely related to the patent claims for the sole purpose of extracting settlements in amounts much lower than the cost of litigating the rights. The witnesses at the hearing agreed that, when confronted PAE demand letters on frivolous claims, settlements by and large are economically unavoidable.
Committee Members Are Cautious
The Subcommittee had before it a particular bill (H.R. 845; the Shield Act) to create a limited loser-pays system. It would award full costs to the prevailing party unless the plaintiff is (1) the inventor, (2) the original assignee, (3) one who produced or sold items covered by the patent, or (4) a university or technology transfer organization.
Subcommittee Chairman Howard Coble (R-NC) observed that PAEs game the system with frivolous allegations based on weak, invalid, or overstated patent claims. A variety of solutions have been suggested, including a loser-pays system such as presented in the Shield Act, controls over the cost of discovery, and limits on relief from the International Trade Commission (ITC).
Ranking Minority Member Mel Watt (D-NC) noted that this issue was before the Judiciary Committee in 2006 at a hearing entitled “Patent Trolls: Fact or Fiction,” and that the difficulty of defining the issue is the reason the problem has yet to be solved. There seems to be agreement that the PAE phenomenon is a drain on the economy, he said, and noted that the U.S. Patent and Trademark Office is considering improvements to transparency by requiring recordation of real-party-in-interest ownership and assignments. However, he also pointed out that Kodak’s recent sale of its patent portfolio probably saved a great many jobs and immunized the buyer from liability under those patents. He agreed with those who advised caution on imposing remedy limits for poorly defined entities because it could produce overly broad barriers to enforcement and devalue patents.
Judiciary Committee Chairman Bob Goodlatte (R-Va) noted the measures of the Leahy-Smith America Invents Act (AIA) that address this type of litigation abuse, including the availability of post-grant review for business method patents. He said Congress needs to take the next step of addressing the problem of frivolous patent claims that are used in a business model that extracts settlements by taking advantage of the high cost litigation.
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Witnesses Urge Various Legislative Fixes
Mark Chandler, of Cisco Systems Inc., said that his company spends millions on litigation brought by PAEs, none of which make products covered by the patents they assert. He contended that manufacturers urgently need legislative relief, including a loser-pays system of attorneys’ fees, revision of the estoppel provision for post-grant review, and limitations on the relief available before the ITC. Such changes, he said, could disrupt the incentives that fuel the PAE business model.
Janet L. Dhillon, of J.C. Penny, Inc., told the Subcommittee that retailers and end users are favorite targets of PAEs whose law suits have nothing to do with the products they sell. Typically the patents involved are from the 1980s and are asserted far beyond the legitimate scope of their claims. The expense of proving noninfringement or invalidity far exceeds the cost of settlement, according to Dhillon.
John G. Boswell, of SAS Institute, Inc., complained that PAE suits are difficult to fight because of the overwhelming discovery costs they can create, noting that it cost his company $8 million to prevail with a summary judgment. Boswell said he does not favor limiting the enforcement by legitimate inventors, but insisted that PAEs are suing on patents that never should have issued. He noted that discovery costs could be controlled if judges were required to consider motions to transfer before discovery begins, and he proposed that the requesting party be required to pay for additional discovery.
C. Graham Gerst, of Global IP Law Group, LLC, cautioned against measures that produce unintended consequences. He said Rule 11 sanctions already provide a mechanisms for dealing with frivolous claims, and constraints on patent enforcement could inhibit legitimate claims, devalue patents, and endanger future innovation. Gerst also pointed out that the ability to buy and sell patents can be essential for companies that need to negotiate their assets in times of trouble. He observed that revenue from such sales advances the interests of small business and job creation by recirculating capital to investors. On the other hand, Gerst acknowledged the value of limited changes in the law, such as curtailing relief before the ITC or creating a small claims procedure for patent owners who have been priced out enforcing their rights. He said Congress should leave the regulation of claimants and discovery costs to the courts and should walk away from the Shield Act.
Philip S. Johnson, of Johnson & Johnson, pointed out that the case law and the AIA made substantial improvements to the quality and enforcement of patents. Specious claims and defenses have always been a part of the litigation process, and the courts have the ability to address the problem. He acknowledged, however, that the PAE problem could be mitigated with limited steps, such as measures to adjust fee-shifting provisions of the law and controlling retailer suits.
Dana Rao, of Adobe Systems, Inc., acknowledged that many PAE demands involve computer technology, but he cautioned against measures that could restrict the patentability of software. He agreed with other witnesses that it is more expensive to win a suit brought by a PAE than it is to lose. His suggestion for a fee shifting adjustment was a legislative clarification of the term “exceptional case” in the attorneys’ fee provision of the Patent Act. Courts determining whether a case is exceptional should be able to take into account plaintiff behavior typically associated with patent trolls, according to Rao.
To review the witness statements presented to the Subcommittee, click here.