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Opinion: Op-Eds

MANHATTAN MOMENT: Congress rightly takes aim at patent trolls

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Congress,Op-Eds,Trial Lawyers

Only two years after passage of the America Invents Act — then hailed the most significant reform to the patent system since the 1950s— the United States Congress is once again tackling abusive patent litigation.

In response to an avalanche of calls for legislative action, including a public campaign on the issue by President Obama, House Judiciary Chairman Bob Goodlatte has introduced the Innovation Act.

Goodlatte's proposal seeks to curb abusive legal maneuvering by Patent Assertion Entities (PAEs) — commonly referred to as patent trolls — which produce no goods or services but acquire and seek to enforce patent rights.

Many legislators are convinced that the patent system is being gamed by rent-seeking trolls, both because the costs of such litigation have exploded (from $7 billion in 2005 to $29 billion in 2011, according to one study), and because PAEs have begun aggressively targeting small business end-users of everyday products.

Last year, a patent troll named MPHJ Technology Investments, LLC, acquired a previously unutilized patent that covered scanners employing a one-button scan and send-to-e-mail function, which is a standard technology on most scanners and copiers today.

MPHJ mailed demand letters to hundreds of small and medium-size U.S. businesses that were end-users of printers and scanners — seeking roughly $1,000 per worker in licensing royalties.

Another patent troll, Innovatio IP Ventures, LLC, acquired a portfolio of 31 patents related to WiFi technology in 2011.

Instead of suing manufacturers employing WiFi technologies that allegedly infringed on the patents, Innovatio mailed more than 8,000 letters seeking $2,500 to $3,000 each from retail businesses — including hotels, coffee shops, and restaurants — that offered customers WiFi services.

The Innovation Act goes after this PAE business model by forcing losing plaintiffs in patent lawsuits to reimburse defendants’ expenses unless the plaintiff can prove that their infringement claim “was substantially justified or that special circumstances make an award unjust.”

The bill would also deter patent trolls’ small business shakedown game by delaying litigation against users of an allegedly infringing product until litigation is resolved between the plaintiff and the product’s manufacturer.

While these provisions and others make for a strong bill to fix the patent system, there are some additional reforms that Congress should consider as the law is debated.

As described in the examples mentioned earlier, the weapon-of-choice for PAEs is the demand letter, sent to thousands of small businesses in the hopes that the owners—fearing the cost of defending a patent claim in court ($650,000 or more)—will quickly settle.

Though the fee-shifting and litigation-delay provisions of the Innovation Act would help informed business owners fight back, Congress should also consider incorporating some of the White House’s suggested reforms on this point, such as requiring that any party sending demand letters file updated ownership information and file such letters publicly.

Additionally, the shake-down suits by patent trolls tend to be filed in selected “favorable” jurisdictions, most notably the Eastern District of Texas.

The Innovation Act would benefit from forum-shopping provisions to prevent plaintiffs’ lawyers from filing meritless suits in the most permissive venues.

Addressing the injunction powers of the International Trade Commission, which can unilaterally keep allegedly infringing products from being imported into the country, should also be considered.

Though it doesn’t go far enough, the Injunction Act would go a long way in achieving much-needed patent litigation reform.

The major challenge is to attack the predatory business model adopted by PAEs aggressively with a scalpel without stifling legitimate claims, in keeping with the purpose of the patent system to protect inventors.

With bipartisan support and the encouragement of the president, the prospects of robust and effective reform are promising.

Isaac Gorodetski is the deputy director of the Center for Legal Policy at the Manhattan Institute, which in August released a report, "Trial Lawyers Inc.: Patent Trolls."

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