Yesterday the United States District Court for the District of Nebraska entered an order in Activision TV, Inc. v. Bruning (Civil Action No. 8:13-cv-00215), ordering outgoing Nebraska Attorney General Jon Bruning to pay $325,000 for attorneys fees and costs to ActiveLight, Inc. (formerly Activision and referred to as “plaintiff”) and to pay another $400,000 in attorneys fees and costs to MPHJ Technology Investments, who had intervened in the matter. Making this sanction even more painful is the fact that the grand total of $725,000 amounts to almost 10% of the 2014 budget for the Attorney General’s Office.
Bruning had demanded that the attorneys for ActiveLight and MPHJ stop engaging in patent enforcement activities in the State of Nebraska, a gross overreach of his authority as a State Attorney General and done with little or no investigation that would suggest any violation of State law. The order signed by United States District Judge Joseph F. Bataillon approved a Joint Motion for Entry of Judgment Awarding Attorneys Fees filed by MPHJ, ActiveLight and the State of Nebraska.
The genesis of the dispute is grounded in what otherwise should have been a patent infringement matter where the State of Nebraska, like all States, has no authority to act. The grievance that lead to ActiveLight and MPHJ suing the Nebraska Attorney General relates to Bruning’s issuance of a cease and desist order against counsel for ActiveLight (then Activision) preventing the law firm of Farney Daniels from engaging in any patent enforcement activity within the State of Nebraska on behalf of clients of the firm. Because counsel for ActiveLight also represent MPHJ Technologies the cease and desist order that barred ActiveLight’s attorneys from engaging in any patent enforcement activity in Nebraska also significantly impacted MPHJ Technologies.
Nero and the burning of Rome by M. de Lipman, circa 1897.
Adam Carolla, one of the most popular podcasters in the U.S., is sued by a patent troll. The story goes viral. Across the country, state Attorneys General are using consumer protection laws to guard their small businesses from the predacious patent trolls. And here’s something previously unthinkable: the President of the United States, in the 2014 State of the Union address (“It’s the country’s most valuable political real estate,” noted one D.C. veteran), urged Congress to “pass a patent reform bill that allows our businesses to stay focused on innovation, not costly and needless litigation.”
The greatest long-term threat to the U.S. patent system does not come from its professional opponents – those large businesses and their political allies who stand to profit from enfeebled patent rights. A deeper harm is caused by unscrupulous patent trolls who use extortionist “demand letters” to victimize small businesses. This practice, we believe, is wrecking public confidence in the U.S. patent system – and by extension, profoundly weakening the heretofore bedrock belief in the great economic benefits conferred by patent-protected inventions.
Yet even as damage caused by demand letters spreads, most legitimate patent licensors whose businesses depend upon continued legislative and public trust stand idly by, doing little or nothing to address it. Well-insulated within the patent industry’s cozy professional bubble, we are, in effect, fiddling like a modern-day Nero while innovation’s Rome burns.
A recently published survey by The Atlantic asked a panel of 50 Silicon Valley insiders a variety of questions ranging from what is the most exciting tech start-up at the moment to which tech company is most overvalued. One question in particular was quite intriguing: What is the biggest barrier to innovation in the United States? You might be surprised by the answer.
According to this poll the biggest barriers to innovation in the United States are, in order:
Government regulation/bureaucracy 20%
Immigration policies 16%
Talent shortage 10%
Lack of diversity among tech executives 10%
The need for patent reform 8%
Lack of investment 6%
This survey shows what those in the industry have long known — patent trolls and the need for patent reform are NOT the biggest problems facing the high tech industry in the United States. In fact, 92% of respondents feel that there are other things that are more concerning and a bigger barrier to innovation. But how can this be? The public has been consistently fed the line that patents stifle innovation. How can something that stifles innovation not be the biggest concern, particularly when so many of the tech giants from Silicon Valley have for years blamed the patent system for all their woes? The simple answer is that patents do NOT stifle innovation, but rather patents foster innovation. Those who are intimately familiar with the industry know patents promote innovation regardless of the lies promoted to advance patent reform, vilify innovators and lay the blame for everything at the feet of patent trolls. See also Promoting Innovation: The Economics of Incentives.
One of the real problems with the debate over patent litigation abuse is that it hasn’t focused on litigation abuse at all. Instead, the debate has focused on attempts to characterize patent owners with pejorative labels, such as calling anyone who has the audacity to seek to enforce their rights a “patent troll.” Unfortunately, the term “patent troll” has evolved to mean “anyone who sues me alleging patent infringement.” This has lead the media, the public and Members of Congress to incorrectly believe that there is a “patent troll problem,” which has influenced decision-makers all the way from Capitol Hill to the United States Supreme Court, who increasingly seems to be deciding patent cases with one eye firmly on what is a completely non-existent problem.
You have probably heard the narrative start something like this: there is an explosion of patent litigation. The objective reality, however, is that there has not been an explosion of patent litigation. The Government Accountability Office, after an exhaustive review of patent litigation, concluded that there was no patent litigation crisis. The same GAO report also found that 80% of the patent lawsuits filed are brought by operating companies suing other operating companies. Thus, those who profess there to be rampant problems associated with patent trolls and non-practicing entities suing for patent infringement are simply telling a tale that the factual data doesn’t support.
More recently Lex Machina has come forward with some eye opening statistics as well. A recent report from Lex Machina concludes: “Plaintiffs filed 329 new federal patent cases in September 2014, a 40% decrease from the 549 cases filed in September 2013.” Indeed, if you dive deeper into the 2013 and 2014 statistics you see that through the first nine months of 2013 there were 4,548 patent infringement lawsuits filed, but during the first nine months of 2014 there were only 3,887 patent infringement lawsuits filed, which represents a 15% reduction in patent litigation in 2014 compared with 2013. Furthermore, in 7 of the 9 months during 2014 there have been fewer patent infringement lawsuits filed during 2014 than during 2013. The statistics and independent GAO report just do not support a narrative that proclaims there to be a run away problem with patent litigation run amok.
Phil Shaer (right) with law school friend Mervyn Valadares, who was also in attendance at AIPF annual meeting in Washington, DC.
Conversant IP is a patent owner that licenses their portfolio to others. They were the first such licensing company to take on the issue of ethical patent licensing. In fact, in November 2013, Conversant IP issued a groundbreaking set of guidelines for ethical patent licensing practices, in an attempt to initiate a discussion within the industry and to distinguish the many licensing entities that are not abusers of the patent or litigation systems. Then in July 2014, the company became the first licensing entities to launch a public awareness campaign.
“Sending ill-founded patent demand letters may be legal, but it’s just plain wrong,” said John Lindgren, President and CEO of Conversant said in July 2014. “This practice is hurting small business owners financially. It’s giving legitimate patent licensing a bad name. And it’s seriously undermining the public’s belief in the U.S. patent system and the value of patents as stimulants to innovation and economic growth.”
What brings this issue back to the pages of IPWatchdog is a recent presentation by Phil Shaer, Senior Vice-President and Chief Licensing Officer of Conversant IP, which occurred on Monday, September 29, 2014. Shaer was a featured speaker at the annual meeting of the Association of Intellectual Property Firms (AIPF), which was held at the Washington Plaza Hotel in downtown Washington, D.C. During his presentation he explained that Conversant IP is wading into the patent troll debate because it is necessary for them, and other licensing companies, to “stand up to the bad practices that are damaging the industry.”
Not 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.
Several weeks ago I had the opportunity to speak with Jane Muir, who now serves as President of the Association of University Technology Managers (AUTM). At the time of our conversation there had been a number of so-called “news reports” that were characterizing universities as trolls. That, of course, is utter nonsense. The role of the university is to push technologies into the marketplace and work with those who license university innovation, which is the antithesis of what a patent troll does. Still, some in the popular press who obviously have their own agenda see it otherwise, which is both curious and sad.
In this segment of the interview we talk about concerns over patent trolls and Muir explains exactly how and why universities are NOT patent trolls. To begin reading from the beginning please see Exclusive Interview with AUTM President Jane Muir.
QUINN: There’s this belief that innovation just happens. And that if you do come up with a great invention it’s 1, 2, 3 and you’re done and there’s going to be checks starting to arrive. And you’re going to be laying on a beach somewhere living a life of luxury. And that’s just not true. It’s not true for the individual, it’s not true for the startup, and it’s not true for the university.
MUIR: That’s absolutely correct. When you talk to an entrepreneur as an investor and the entrepreneur shows their plan with how long it’s going to take or how much money it’s going to require, you always take that and multiply by two or three, right?
QUINN: Exactly, because things are going to go wrong. Estimates are going to be wrong. I remember the first business I ever started. And this is, you know, many, many, many years ago. It was a shock to me that the electricity cost more when it was being sold to a business. Just silly things like that, you know, that if you’ve never started a business you don’t really understand that on every level, no matter how insignificant, it seems there’s a hurdle.
Trolls of lore were ugly creatures who lived under bridges. They charged travelers to safely cross the raging waters and threatened harm to those who refused to pay. Trolls and their kindred spirits have haunted the nightmares of our children for generations.
But Peter Detkin, a co-founder of Intellectual Ventures, repurposed the term to represent the activities of non-practicing entities (NPEs) or patent assertion entities (PAEs). Perhaps our collective subconscious childhood fears of the trolls of old make it too easy for the media, our elected leaders and even some savvy CEOs to vilify modern trolls for everything they represent. I bet Mr. Detkin now wishes he used a more attractive term to describe the activities of his company.
What defines a troll? Most would agree that a company that does not make products, but buys up patents to assert against others, would be in the category. However, there seem to be as many permutations to this basic formulation as there are companies. What about large manufacturing companies with divisions that purchase patent portfolios for the purpose of assertion? What about companies that spin-off their unused patent portfolio to wholly or partially owned subsidiaries that assert those patents? What about companies that buy up portfolios for defensive purposes, compelling membership by companies that join for protection? What about universities? They don’t make products. Most would say that universities don’t fit into the category of trolls, because they license to companies that make the products covered by their patents. But what if the university sells its patents to a patent assertion entity with an agreement to share in the profits?
The March 17, 2014 issue of Fortune magazine contained an unusual article, RPX: Taking on the Trolls. This biased PR piece with few actual facts was written by Mr. Roger Parloff, Senior Editor for Legal Affairs who fell hook, line, and sinker for the spin that RPX is putting out, aided by large corporations and those in academia who wish to weaken if not eliminate the U.S. patent system. He is not to be completely blamed for being duped by the same stories that large corporations have been promoting to politicians, reporters, and the public about the terrible “patent trolls” as these corporations attempt to dominate markets, put individual inventors and small companies out of business, and sue each other into oblivion while crying into their bank accounts.
First, what is a “patent troll”? No one really knows, and the anti-patent people do not want it defined too precisely because if it were defined, it would include not only the companies that send demand letters for $1,000 to mom-and-pop coffee shops and hardware stores for using “patented” fax machines and copiers, but it would also include all major U.S. universities (that manufacture no products), most individual inventors (who have not yet gotten their inventions funded), most startup companies (that have not yet gone to market), and most bankrupt companies (that are trying to find value for their shareholders). In fact, it also includes companies that create a great invention but have trouble competing for shelf space at Walmart or Target against larger, infringing competitors. These companies do produce products, but when they sue their huge competitors, the press is encouraged to call them trolls.
The necessary legislative effort to curb bad actors in the patent industry has been “hijacked” by a small handful of very powerful global technology companies intent on forcing broader changes in the patent system to make it better serve their business interests.
Under the banner of “patent reform,” these giant firms have spent tens of millions of dollars on lobbyists and media relations to promulgate a series of dramatic but false claims about America’s supposedly-“broken” patent system — claims that are now almost universally accepted as true by the media, Congress, and the public at large.
In Part 1 of this series, we examined the false claim that an “explosion of patent litigation greater than any in history” is imposing an unwarranted burden on industry and diverting resources better spent on innovation. In fact, today’s patent litigation rate is less than half what it was during the golden age of American innovation in the 19th century Industrial Revolution — a revolution which thrust the U.S. into the top ranks of industrial nations.
Congress is on the cusp of passing legislation that is said to be designed to control the so-called “patent troll.” Of course, as belatedly recognized by the person who came up with the moniker “troll” in 1993, Peter Detkin (former Assistant General Counsel at Intel at the time), the word “troll” is often in the eye of the beholder. Indeed nearly every litigator will tell you that term “troll” is commonly used against any opponent in a patent litigation suit, much as Arthur R. Miller asserted that “a frivolous lawsuit is any case brought against your client, and litigation abuse is anything the opposing lawyer is doing.” Miller, Simplified Pleading, Meaningful Days in Court and Trial on the Merits: Reflections on the Deformation of Federal Practice, 88 NYU Law Rev. 286, 302 (2013).
Overstock.com, Inc. (NASDAQ: OSTK) recently announced that plaintiffs in two patent infringement lawsuits dismissed their cases against the company without any settlement or any money paid.
“They just walked away,” said Patrick M. Byrne, Overstock.com chairman and CEO. “Patent trolls find us unappetizing. While we have the highest respect for intellectual property rights, we don’t settle abusive patent suits—we fight.” Byrne added, “You can’t fork over your lunch money today, and expect a bully to leave you alone tomorrow. Patent trolls understand a bloody nose and in the long run, it’s the asymmetrical response that pays off. It is only right that we take this opportunity to make explicit this litigation strategy. As Dr. Strangelove says, ‘What’s the point of having a Doomsday Device if you don’t tell anyone about it?'”