Licensing standards and best practices separate good behavior from bad

What appears below is part 2 of my interview with Phil Hartstein, the President and CEO of Finjan Holdings, Inc. (NASDAQ: FNJN). In part 1 of our interview, which published yesterday, we discussed how demonizing patent monetizers undermines the patent system, and that additional patent reform in 2015 seems likely. Below we pick up our discussion on patent reform.

If you are interested in this topic please also join us for a free webinar on Thursday, February 5, 2015, at 12pm ET. I will be joined by Phil Hartstein and Scott Burt (Conversant) for a discussion on ethical licensing, which will address standards, best practices and what separates bad actors from innovative companies seeking reasonable compensation for the technology contributions they have made.

Without further ado, the finale of my interview with Phil Hartstein.

QUINN: When you’re an engineer you solve problems. You don’t go looking for problems to solve, there are always plenty of problems that will find you. If something is working you don’t go and change it. You don’t fix it. You don’t throw it away. With all these changes over the past several years we really run the risk of having just completely thrown away the old patent system that was working and replaced it for one that we have no idea whether it’s going to work or not. Now is not the right time to make additional changes.

HARTSTEIN: I think that’s right. And I may not be technically precise in my response here but I would say since the beginning of time there has been on the order of five, maybe six reforms or overhauls of the patent system. With the most recent of those being only two or three years behind us. I think we don’t know enough about that trajectory of the present changes to make an informed decision about whether or not they will be effective. And therefore I would suggest and I would emphasize that I think what we’re talking about here is identifying a way in which you could observe behaviors that are abusing the system. And move away from trying to define or to characterize a system that is itself being broken.

What I am suggesting is a sort of shift in thinking. If you’re willing to look at behaviors I think you can then isolate a great deal if not the vast majority of the abuses that we’re seeing within the industry and that would cover everything from the demand letter abuses to what goes on in large multi-defendant cases, to those maybe that actually were filed with nothing more than an intent to seek less than nuisance values in settlement, right, without actually trying to build a credible claim based on merit.

I think by focusing on the behaviors of patent owners, you can identify the good ones and you can actually build more credibility into the industry. And I say that, Gene, because I fundamentally believe that intellectual property is the foundation for the modern economy. And I think we have a couple of hundred years of showing that the United States has continued to innovate, that companies have continued to be profitable, and I think that if we blindly go into a cycle of just perpetually modifying a 200 year old plus system and any changes that we make retroactively applying those I think it has a greater potential impact on the economy as a whole and that’s what worries me.

QUINN: Yeah. It worries me too. People in the industry know how to define the bad behavior. The problem comes when you’re trying to do it in a way that guarantees that you touch everybody. I describe it a lot of times like that experience from 3rd grade where there was one person in the class who was talking or wisecracking and the entire class lost recess. That seems to me to be what we’re experiencing now in the patent system. There are a small number of bad actors and rather than trying to do things that will shine the light on those bad actors all of us are being taken to the woodshed.

You know when you get one of these complaints you can just look at them and tell whether it is a garbage complaint that is ultimately just going to wind up being somebody trying to extort you and doesn’t care whether you’re infringing. The only thing they care about is getting paid. You can look at the demand letters and you know when you’re getting shook down. And rather than doing these little things that really will matter what I think we see is Congress trying to do these big broad sweeping things so it looks like they are really working hard to improve a system. But making sweeping changes doesn’t always equate with making improvements. Many times the fine tuning and the tweaks are what is necessary. I mean the thing that kills me is is if somebody were to file a complaint that mimics the complaint form in the Federal Rules of Civil Procedure the defendant doesn’t even need to respond. If the defendant chose not to respond the district court judge could not even issue a default judgment because there’s not enough information present to support a default judgment.

[Interview-1]

HARTSTEIN: I agree. We actually recently filed a case and went beyond what the Civil Rules of Procedure require, which is something that the trial bar lost sight of a long time ago. And that is at the very end of a complaint what’s now often listed is seeking a value to be determined by a jury of my peers and/or as determined by a Judge. Okay. Well, is that because you’re holding out for potentially windfall of potential revenue from a judgment? Or is that because you actually haven’t gone through a thoughtful analysis of how to quantify the value of your damages in your case? We recently filed a case where we actually listed the dollar amount that we were seeking in the prayer for relief. And my point here is that I have an analysis that walks me through all the standard considerations that damage experts at some point down the road are going to get hired to think about, but we take that into account and work through the considerations up front. Once you do the analysis, once you do your work to understand your technical positon, your legal position, your financial ask it sets the course for an entirely different discussion with perspective licensees and defendants.

QUINN: It really does. And it strikes me that we can accomplish this, it can be accomplished in a way that the entire industry can support and which will actually make the system better. That’s a big problem that I have with all these changes, we’re just changing for the sake of changing and not making the system better. Examinations have not been improved. The backlog is still enormously long. There are some examiners that simply will not issue patents regardless of what they’re being told to do. None of those things have been addressed. Likewise not being addressed is the real bad action. I’m not saying there are no bad actors out there and I don’t think you’re saying it. It’s just we need to identify who the person is that caused us to lose recess and punish them and not the whole class. And that, I think, requires some fine tuning around the corners and giving district courts more ability to issue sanctions to those people who are abusing the process. But to think that the bad actors are going to go away if we fix, or kill, the patent system is ridiculous. These abusers will just move on to the next thing and they’re going to abuse that. That’s what they do. Abusers abuse. So we have a litigation abuse problem not a patent abuse problem.

HARTSTEIN: We actually refer to that as the litigation arbitrage.

QUINN: Exactly.

HARTSTEIN: That’s exactly what it is. One party is smart enough to recognize that there is a value, albeit something less than the full value and they capitalize on the expertise gap as they can manage all of the complexities involved with gaming the process while staying within the rules. It’s unfortunate because again we have a long history of intellectual property and technology licensing adding very credible value to the economy and now unfortunately it lives in the shadows behind that litigation arbitrage. And that’s really disappointing.

QUINN: It really is.

HARTSTEIN: I had another comment from an earlier discussion point. If you go back maybe 24 months, given that the pendulum was swinging away from patent owners, my feeling is someone in the industry who considers themselves a licensing professional and now a public company guy, with an entirely different set of standards and transparency by which we operate as a public company, there was an overwhelming feeling of helplessness. I think our discussion today reinforces that, that you could spend your days trying to chase the bad actors in the industry. You could spend your days trying to go through all the litigations that are filed and trying to reconcile ownership and title records never recognizing a single aggregator or a consortium may be behind that the enforcement. But you’re never going to be successful in those one off pursuits.

In trying to figure out where to spend the balance of our time trying to identify where we could make the most impact we actually set out on a different course which was to identify a minimum standard decorum by which we would interact with all perspective licensees and in some instances, defendants in cases. We also know there are looming questions of credibility in any licensing discussion. You might say, gee, you’re a big Co X. Great, this is probably a credible intent to license the patents and you might give one response versus another, lesser well know company seeking a similar license. So what we did and initiated last year was to say absent an ingrained credibility, we had to earn it as a non-practicing entity.

As a public licensing company, as a former technology company, a company with a history of licensing its patents, we needed to define a way to establish our credibility with perspective licensees and defendants earlier in the process. That initiative is not just unique to Finjan, there are other companies that have established best practices or at least uniform practices or codes of conduct in how they approach perspective licensees but it’s actually now moving forward into a more formalized process.

You asked how we reach a uniform standard across all companies, all patent owners, universities, research organizations, institutions, inventors, etc. It’s hard. There’s a program right now that’s ongoing with the Licensing Executives Society (LES) where there are three pilot programs underway to do just that. Identify whether or not we can work together, as an industry, to establish a unified set of best practices for licensing, for transactions, and for managing intellectual property throughout the supply chain. When I say standards and accreditation I don’t use those terms lightly. These pilot programs with LES are gaining momentum and we are now working with ANSI who will be the governing body for standards resulting from each pilot program. So here, in a short period of time, we have created an opportunity as an industry to once again rebuild credibility and establish a constructive dialog about the value of patents being held by anybody who owns them and moving forward into trying to solve that problem that you defined. So we’re very excited about that.

QUINN: I think for a very long time many people in the industry have just not gotten involved on many different levels whether it be a filing amicus briefs or even writing Congress or trying to explain why the patent system is important to them and what it means for innovation, or in what you’re describing here now as the industry standing up and regulating itself, really. And I know Finjan has taken a lead in that to put out and pledge to follow ethical licensing practices. I know Conversant has done something similarly, but there needs to be more companies involved in this and more inventors need to get involved and everybody needs to stand up and realize that the patent system is not held in the same regard as it once was and if we don’t get involved there’s a real risk that this downward cycle is going to continue. And I don’t know what to do to try and get people to understand that. I think people are finally starting to clue in. But I really hope that they’re believing that.

HARTSTEIN: Well, that is exactly the intent of what LES is working on with the pilot programs. Instead of trying to find a unified platform by which we can all agree on proposed revisions or reforms, fixing perceived issues within the patent office, LES is focused on licensing standards, which will also define best practices to separate patent owners with good behavior from bad behaviors. The committees also contemplate establishing template documents for transactions. The overall idea is that these standards, best practices, and template documents will become the foundation for an accreditation process. And so, yes, we absolutely encourage anyone to join the discussion as it’s being framed now but all participants need to recognize that to meet the standards and accreditation requirements you are going to be accountable yourself to the standards that are defined by these programs. This is something different.

I think when you see an industry trade group pop up that says, hey, our focus is redefining the definition or the term “non-practicing entity,” and you get five or six really great companies that maybe they’re former operating or former technology companies, or maybe they’re startups that have a shift having great intellectual property all of a sudden because there’s no obligation to actually do something or commit yourself to something then every patent owner gloms on. And then that often includes the very folks who actually, in some cases, are the abusers of the system who sent those one page badly photocopies demand letters, who file the two page complaints, who actually file massive amounts of lawsuits across the country to purely seeking nuisance value. At this point, the onus is on patent owners to stand up for the value of patents while building credibility and efficiency into the licensing process, that’s what LES is trying to change.

QUINN: I think that will be really helpful if they do. And maybe that’s one of the ways that you and others who are going to be talking to Congress this winter and into the spring can get the message across. “Whoa, stand back, you’ve done an awful lot in a very short period of time, and you’re not the only ones doing this, the Patent Office is regulating and the courts are deciding these issues.” I also think industry self regulation is a message that could resonate. I think particularly in the Senate if the industry is stepping up to try and fix any perceived problems a lot of times Senators are willing to take a backseat and watch what develops before they step in. We’ve seen that with a number of different issues. The one that the public sector has probably seen the most over the last handful of years deals with NFL and Major League Baseball and performance enhancing drugs and concussions. There has always been this threat of Congress stepping in and then as the leagues start to work that never comes through to fruition. Maybe if they really see that happening they will take that step backwards and watch.

HARTSTEIN: A couple of things. You know, a lot of people are watching what’s going on in the public market. So Finjan for example is a NASDAQ traded stock and we have shareholders just like any other public company. Aside from our best practices and licensing we firmly believe that the transparency obligations as required to be a public company, let alone the heightened standards to be a NASDAQ or New York Stock Exchange listed company, actually give us that opportunity to be a stronger voice for credibility within the industry. I would say that is number one. Number two, specifically with what it’s been like in a public licensing company, you know, and granted we have a long history as a technology company as well, but the vast majority of the revenues into the company recently are from successfully licensing our intellectual property. I would tell you that if you had an expectation that just committing yourself to best practices and licensing just using the words was going to make a difference you’d be grossly mistaken.

I also think that if you were to rely on the industry’s attempt to self regulate as a substitute for participating in active discussions and dialog in Washington D.C., and I mean face-to-face, walk the halls, get lost in the corridors, eat the local goodies out of the baskets in each Congressman’s office, until you’ve actually done that and had the discussions where you’re able to say, listen, we as an industry recognize there’s a credibility issue and we are diligently working amongst ourselves to self-regulate. However, that’s not a substitute for us having this discussion. I am; however, hopeful that over time this self-regulation initiative in one form or another will be successful. But it certainly is no substitute for being an active participate in the discussion that’s happening in real time. I would love nothing more than any one of these programs to define best practices or standards and licensing or even to establish just a code of ethics within the industry and for them to be pointed to by any member on either side of the debate or in any house of Congress to say, “And look at this shiny example.” Yes, that’s the goal. But we’re not just trying to get any outcome, we want it to be right outcome. We want everybody to participate, we want to do the right thing. While we wait for that happen, I think we all need to be active participants in the reform discussion as well as trying to promote industry efforts to adopt self-regulation.

QUINN: Yeah, I agree. I think this is an all hands on deck, all of the above kind of moment. Well, I really appreciate your taking the time to chat with me today. And maybe in another six months or so we can follow up and see where things have gone and how successful things have been and whether we’re looking at another round of patent reform going to be effective.

HARTSTEIN: That would be great, Gene. I would look forward to that. Thanks very much.