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.
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.