If Patent Reform Is Meant to Starve Patent Trolls, Why Is It Feeding Them Instead?

By Michael Gulliford
September 8, 2014

goblins_049Not a week passes without commentators extolling the need to remedy a “broken” patent system — a system where patent trolls (also referred to an “non practicing entities” or “NPEs”) that don’t manufacture anything can garner extensive licensing fees from companies, both big and small, which do. And as the debates surrounding NPEs rage on, so too do the calls for patent reform. But if the reform to date has had the unintended effect of creating more opportunity for NPEs, while making it substantially more difficult for innovators without millions of dollars in the bank to protect their intellectual property, shouldn’t we be wary of the harm future reform may cause?

Already, Congress has passed sweeping patent reform known as the American Invents Act (“AIA”). Implemented over a multi-year period, the AIA contains several provisions designed to disrupt NPE advantages and to make it easier for defendants in patent litigation to gain the upper hand. Whereas, for instance, NPEs could previously sue as many defendants as they liked, in one case and with one filing fee, the AIA changed that, requiring the filing of multiple cases and as many filing fees. But much more significantly, the AIA created a slew of game changing, “post grant” proceedings, run very much like mini-trials, which defendants facing NPE district court litigation can file in the patent office and yield to their significant advantage.

In addition to the AIA, Congress continues to put forth new bills designed to disrupt the business model of NPEs. In fact, the alleged need for patent reform is one of the rare issues that both Republicans and Democrat appear to agree on. Although recently declared dead in the Senate, revised patent reform bills and proposals will no doubt continue to propagate.

On the surface, the AIA and pending legislation would seem to be welcome developments. But the reality is not nearly as clear. In fact, if the patent reform that has already passed should teach Congress anything, it is the need to tread very delicately in the patent arena. The risks of severe, unintended consequences — particularly with respect to companies that are not even the target of patent reform — are just too great.

Indeed, the American Invents Act is perhaps Exhibit A of the phenomenon of unintended consequences. Although many of its provisions are no doubt designed to disrupt the NPE business model, the AIA has ironically made NPEs more in demand than ever. Even worse, it has done so at the expense of the lifeblood of great innovation: smaller innovative companies without million-dollar patent war chests. To understand why, we must explore the patent market from a pre-AIA and post-AIA perspective.

Before the passage of the American Invents Act, innovators with patents being used in an unauthorized manner — often times by much larger companies — had a very important option: reputable law firms willing to handle their cases on full contingency. Given the costs of patent litigation, which can easily surmount $5 million dollars, such contingency representation is often the only way smaller companies can enforce their patents in court.

The AIA, however, changed the situation dramatically by introducing a slew of post-grant proceedings, particularly the proceeding known as Inter Partes Review. Now, a defendant sued for patent infringement can file an Inter Partes Review at the patent office to challenge the patent’s validity. This mini-trial-like proceeding is a game changer. Defending an Inter Partes Review places tremendous costs on the shoulder of a plaintiff, because while not as expensive as litigation, an Inter Partes Review still often costs hundreds of thousands of dollars. And even more importantly, these proceedings have become patent killers. Statistics show that a patent subject to an Inter Partes Review has a significant likelihood of being invalidated. And like the slew of recent Supreme Court decisions making it easier to invalidate a patent, the Inter Partes Review tilted the scales considerably in favor of defendants to a patent suit.

Thus, in the post-AIA world, patent litigation — although often necessary to enforce patent rights in light of the growing corporate practice of refusing to negotiate patent issues unless litigation has been filed —has become an expensive and very risky proposition for law firms. And as a result, with great frequency, such firms are refusing contingency cases or requiring plaintiffs to at least cover the “hard costs” of litigation. But these costs, which include expert, court and travel expenses, themselves often total in the millions and are simply out of reach for many patent holders.

The end result is undoubtedly one of the great ironies in patent reform thus far. With reform gradually making it impossible for all but the wealthiest patent holders to enforce their intellectual property rights, many patent holders must instead turn to NPEs.

Indeed, NPEs, with their deep pockets and litigation focused business models, are often now the only game in town. And in a world where many technology companies refuse to consider licensing negotiations unless sued — suits that all but the wealthiest patent holders can’t possibly finance — NPEs are extremely well positioned.  Because not only has reform made deep-pocketed NPEs in significant demand, it has provided them the opportunity to command significant premiums for their services. After all, the increased risk resulting from the AIA and slew of recent patent-unfriendly court decisions justifies NPES asking for better terms in their dealings with patent holders.

So in the end, the lesson most easily be gleamed from the patent reform passed to date is one of caution. Surely it was not Congress’s intention to create a patent regime that favors only the richest of technology companies, at the expense of the 99%, but that is the environment we are now faced with. And with Congress considering provisions that would require losing plaintiffs in a patent case to pay the defendants’ costs and fees, the situation is primed to deteriorate even further. Because requiring innovators to risk financial ruin as a prerequisite to enforcing their intellectual property rights is not much different than requiring them to give up on intellectual property protection altogether. And that would be the definition of a “broken” patent system.

 

The Author

Michael Gulliford

Michael Gulliford is the Founder and a Managing Principal of Soryn IP Group, a patent advisory and litigation finance firm headquartered in New York City. In addition to its robust advisory client roster, Soryn manages one of the largest funds in the U.S. dedicated to patent litigation finance via its Soryn Capital affiliate. Michael has repeatedly been named to the list of the Leading IP Strategists in the World, and is regularly asked to speak and publish on the latest patent developments. Prior to founding Soryn, Michael was a partner in the patent litigation group at Kirkland & Ellis LLP.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 14 Comments comments.

  1. Anon September 8, 2014 10:49 am

    Michael,

    Thought provoking material indeed – but (unfortunately) gaming the system and capturing the legal mechanism is not a new tactic.

    “Reason” is lost – push that accelerator pedal all the way to the floor and let’s plan for after the inevitable crash.

  2. Curious September 8, 2014 10:51 am

    “Surely it was not Congress’s intention to create a patent regime that favors only the richest of technology companies, at the expense of the 99%, but that is the environment we are now faced with.”
    I’ve long said that patents is the sport of kings … and every “reform” makes it even more so. This is because the big companies don’t like to get sued, so they lobby Congress to make it much more difficult for smaller companies to sue under the guise of the “troll” problem.

    Unfortunately, it is what it is.

  3. Anonymous September 8, 2014 12:22 pm

    “And as a result, with great frequency, such firms are refusing contingency cases or requiring plaintiffs to at least cover the “hard costs” of litigation. But these costs, which include expert, court and travel expenses, themselves often total in the millions and are simply out of reach for many patent holders.”

    This is 100% right. Unless you can cover, or get an NPE to cover, the out of pockets, finding litigation counsel is almost impossible. As Niro pointed out a few weeks ago, the small guys are screwed.

  4. Gary Dell September 8, 2014 12:37 pm

    Spot on analysis. Even some of the top tier patent lit boutique firms are not taking full contingency cases any longer as the client must have some skin in the game. Many patent holders don’t have the financing, so what do they do? Of course they turn to the NPEs.

    As a result of the AIA, Alice 101 case and the Octane fee-shifting case, less suits will be filed as there will be a major shift toward premium cases only. Defense counsel will then see less work and will probably push their clients to fight longer to make costs up. This is a lose-lose for the industry. The only winners here are the major tech companies.

  5. Simon Elliott September 8, 2014 12:50 pm

    Michael:
    You raise a very good point. When you make gaining and defending a patent harder, you raise transaction costs and favor established players with a bigger pool of capital directed to overcoming regulatory burdens. This is the classic story of problematic regulations.

    One niggly point. When you say NPEs, I think you mean patent enforcement entities. NPEs, per se, encompass universities and many small research companies, for example. Part of the problem with the patent debate is overly lax terminology that fails to understand the distinctions between different types of NPEs, and the legitimate reasons for each.

  6. EG September 8, 2014 1:06 pm

    “Congress has passed sweeping patent reform known as the American Invents Act (“AIA”)”

    Mike,

    I don’t ever refer to the AIA (Abominable Inane Act) as “patent reform”; it’s no such thing.

  7. Steve September 8, 2014 10:09 pm

    Good points I hadn’t thought of Michael. Thank you.

    For accuracy — and many do the same thing — of course it’s not the patents themselves which have been invalidated, but the asserted / challenged claims of such patents which have been.

    While having to say, “Some of / (all) the (asserted / challenged) claims were invalidated!” doesn’t make for as compelling a narrative as saying, “The patent was invalidated!,” the distinction is an important one.

  8. Anonymous September 9, 2014 12:48 am

    Mike,

    You said: ” Before the passage of the American Invents Act, innovators with patents being used in an unauthorized manner — often times by much larger companies — had a very important option: reputable law firms willing to handle their cases on full contingency.”

    What world were you living in? Even before the AIA, there were only half a dozen or so law firms willing to handle patent litigation on full contingency, and only about half of those firms were considered “reputable.”

    The AIA is just the latest in nail in the coffin for any sort of patent rights for small companies and individual inventors. Now with Alice essentially invalidating 90% of all software and business method patents, patent law is going to be pretty much an exclusive club for big corporate America. It should take another year or two more, but I predict that half of the patent litigation lawyers in this country will soon be practicing in other fields or leaving the practice of law entirely. Our patent prosecution friends should be able to hang on for a few more years, but word will soon trickle down to in-house counsel that worthless patents are not worth spending any time or resources to apply for. Happy job hunting to you all.

  9. Gene Quinn September 9, 2014 12:23 pm

    Everyone-

    FYI. I believe I have rectified the comment problem and see why all comments were being sent to spam. Comments should be appearing immediately except in rare cases where they are being held due to the spam filter capturing them.

    -Gene

  10. Randy Landreneau September 9, 2014 2:02 pm

    Michael,

    Earlier this year, data showed that in cases where attempts were made to use the new Post Issuance Procedures (from AIA) to invalidate patents, 76% of the patents so attacked were invalidated.Something like 80 percent of patents attacked were pulled into one of these procedures, and once there, about 95% were invalidated.

    Some of us fought hard to stop the America Invents Act. We failed miserably. The Innovation Act (or whatever the Senate decided to call it) was a different story. It was sailing through the Senate in January. Paul Morinville and I personally met with the key individuals in 60 Senator’s offices, in addition to doing a few other things, like royally upsetting a propaganda luncheon put on by the lobbyists. Paul gets full credit for that one, and it was a significant turning point. We weren’t the only ones fighting for inventors – as time passed, we noticed other individuals and groups getting involved. In the end, enough Senators had doubts that the bill was taken off the calendar.

    Regardless of how bad it looks, something can be done. We proved it. I just takes individuals making a real effort. And such an effort will be needed again soon. Everyone reading this needs to decide to help stop whatever is coming. If you go to my website, sign the petition, and opt-in for information, I will make sure you are updated on what is happening. Thank you for your help.

    Best,
    Randy Landreneau
    Independent Inventor

  11. Bob Zeidman September 13, 2014 6:16 pm

    Excellent analysis!

  12. Ash September 14, 2014 5:02 pm

    I wonder if part of the problem with US patent trolls is the fact US doesn’t have a broad compulsory license law.

    Most other countries have compulsory license in their patent law to ensure companies can access technology held by NPE’s.

    It may be something that’s been overlooked by the US lawmakers but which may be able to simultaneously tackle the NPE litigation issue while ensuring small companies/inventors (who are producing) can still afford to pursue larger infringers?

  13. Richard Vitek September 15, 2014 3:16 pm

    During my now near 30 years of litigating patent cases there was constant discussion of how we were on the verge of going to a first to file system in the next year or so ( in the mid- 80’s I was informed I was wasting my time practicing interferences as it would be a dead art by the end of the decade). At all times prior to the AIA the concern was always the same, the little guy would be frozen out. It has come to pass as predicted.

    As for NPE ‘s , whether you are an American treasure or a patent terrorist depends on whether you are on the top or bottom of the caption. Remember that the CAFC was constituted to promote “uniformity” to the implementation of the patent laws and it was primarily that court that fueled the wild rocket ride of patent law since as its interpretations gave great legal leverage to one side or the other (generally the patent holder). Occasionally it recognized the havoc it wrought and tried to swing the pendulum backward (e.g. Markman). It wasn’t until just a few years ago in Dana that the court finally admitted it had interpreted its mandate as one of strengthening patents. The NPE and its problems are a direct result of the CAFC drive to strengthen patents. Changing the patent statutes is a very blunt instrument to achieve a fine tuning of a system where every case is a balancing of competing economic and societal interests. Such a blunt instrument will always invoke the law of unintended consequences ( just as patent trolls were an unintended consequence of the authorization of the CAFC). The real problem lies in the court system. Federal district court judges are by far hardworking jurists who try to get it right. But when the judge invests considerable time and energy in a Markman determination yet appeals of Markman decisions approach a 50% reversal/modification rate, the court system is broken. Further statutes that try to pre-define the winner won’t fix it.

  14. Anon September 17, 2014 8:46 am

    Richard,

    Interesting view but one that does not reach all of the pertinent history, as you appear to leave the problem at the doorstep of those wanting to strengthen patents, and miss the point that other courts were out to weaken them prior to the path of restoring the strength of the patent.

    There are indeed often unintended consequences – on both sides of the pitched battle as to strong/weak patents (and the mechanisms for enforcing those patents). But let’s not get the starting point wrong – there is a natural “bias” if you want to call it that for strong patents, with words like “any” and “exclusive” the initial choices for a strong patent system are abundantly clear.