Last week the United States Court of Appeals for the Federal Circuit issued a decision in State of Vermont v. MPHJ Technology Investments, LLC. The decision, which was really not much of a decision because the Federal Circuit concluded they lacked jurisdiction, is interesting for at least several reasons.
While Vermont’s actions are undoubtably laudable, despite what some conclude I suspect that when challenged the legislation will fall because it pre-empts patent law, which is federal. For example, one of the factors that would suggest a bad faith patent enforcement under the Vermont statute is if there has previously been a lawsuit or threatened lawsuit based on the same or similar claim of patent infringement.
Patent licensing company Conversant Intellectual Property Management today launched an educational campaign against the use of extortionist demand letters that are victimizing thousands of small and medium-sized businesses. The goal of Conversant’s Stand Up to the Demand campaign is to help small businesses spot unscrupulous demand letters sent by patent trolls. Conversant’s Stand Up to the Demand campaign follows the company’s November 2013 release of a set of ethical patent licensing principles, which built upon the belief that patent licensing companies should take the lead in curbing patent abuses within their own industry.
Bad demand letters are a big problem for U.S. small businesses, costing them millions of dollars in settlement fees and legal costs annually. Patent trolls often operate through shell companies and these bad acting companies send form demand letters to hundreds or even thousands of small businesses at a time, claiming with little or no evidence that they are infringing on patents. These mass demand letters are often misleading and sometimes outright false. This type of activity has been characterized as “extortion-like” by the federal courts, and gives hard working innovators a bad name. See also Extortion Patent Style.
Earlier this year New York Attorney General Eric T. Schneiderman announced a groundbreaking settlement that sanctioned a patent troll that was engaged in abusive pre-litigation tactics by sending letters with the intent to deceive those receiving the demand letters, scaring them into settling. Additionally, recognizing the stakes involved, a dozen U.S. states have already enacted laws to curb extortionist demand letters, and 14 other states are actively considering such laws.
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.
“The Commission shares this Subcommittee’s goal of stopping deceptive patent demand letters while respecting the rights of patent holders to assert legitimate claims, and recognizes that achieving this goal is not easy,” the testimony states.
Earlier today the Federal Trade Commission issued a second Federal Register Notice containing the revised information requests for its study on patent assertion entities (PAEs). The Commission vote approving the second Federal Register Notice was 5-0. The Notice is styled as a submission to the Office of Management and Budget (OMB) because under federal law federal agencies must obtain approval from OMB for each collection of information they conduct or sponsor.
The second Notice also calls for additional public comments. As explained more fully in the Notice, the FTC proposes to collect information about Patent Assertion Entity (“PAE”) organization, structure, economic relationships, and activity, including acquisition, assertion, litigation, and licensing practices.
The study is designed to develop a better understanding of how PAEs may impact innovation and competition. PAEs are firms with a business model based primarily on buying patents and then attempting to generate revenue by asserting them against businesses that are already practicing the patented technologies. The FTC says it is conducting the study in order to further one of the agency’s key missions, which is to examine cutting-edge competition and consumer protection topics that may have a significant effect on the U.S. economy.
Critics of the patent system, and specifically the critics of software patents, would have the United States forfeit the future in favor of something that has never worked. Curtailing patent rights has never worked to produce more innovation anywhere it has been tried. So why would we try such an experiment in the United States when it hasn’t ever worked anywhere ever? Unfortunately, it seems that many of our leaders in Washington, DC, are listening to those who have fanned the flames and worked exceptionally hard to create an unhealthy anti-patent climate.
Newsflash — innovators are not evil. The fact that this even needs to be said shows just how far we have come and how pervasive the anti-patent climate has become. Rather than celebrate innovation day after day like the drone of a metronome we hear how patents are evil and how they stifle innovation. But if you actually look through the rhetoric you notice that those claims are made with zero supporting evidence, but that is because all of the available objective evidence directly contradicts the growing orthodoxy.
Once upon a time the United States celebrated innovators, and gave them a meaningful opportunity to reap the deserved reward from their hard work and ingenuity. Today, we vilify innovators as evil all because there are a handful of bad actors that engage in abusive patent litigation tactics. Of course, these tactics have nothing to do with patents substantively and everything to do with the fact that these bad actors are allowed to manipulate the judicial process and exploit inefficiencies in the litigation system that are wholly unrelated to the substance of a patent.
Dr. Rocco Leonard Martino, inventor of the CyberFone, the first Smart Phone.
A major car company is running commercials about companies that started in a garage. Amazon, Apple, Disney, Hewlett Packard and the Wright Brothers all started in a garage. The advertisement extols innovation, and the modest roots of great discovery and great companies. By implication, it hopes to align the public image of its cars coming out of a garage with these very successful companies. But the car company ad is wrong. It is highly unlikely these companies would ever get started in today’s hostile environment for the small innovator or company.
Let me tell you why. This is a first hand account of my experiences with inventing the Smart Phone.
It became obvious to me in 1994 that the voice transmission over traditional telephone systems could be done using computers linked to telephone, cellular or internet networks. That was the origin of the concept of a smart phone utilizing the computer in support of multimedia traffic. I called it the CyberFone, filed for patents in 1995, and built models during that same period to demonstrate to interested parties, including the patent office. I expected accolades for coming up with a useful idea, and proving it could be done, but that never happened. Some thought the screen was too small, others thought the concept of touch would never catch on, or that no one would want to make phone calls using a computer. One great business genius told me it was a software world and that no one was interested in hardware. That was a ridiculous statement. How could software run without a machine? Apple became the most valued corporation in the world by combining hardware and software.
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.