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Bar News - June 21, 2013

Intellectual Property Law: Lawmakers Shine Bright Spotlight on ‘Patent Trolls’


Patent trolls have become the target of federal legislation and a new law in Vermont, which allows that state’s attorney general to bring suit against patentees that assert infringement claims in bad faith.

The overly aggressive bullying tactics of so-called patent trolls have backfired, resulting in the legislative spotlight that is now shining squarely on them, while they would much rather remain in dark places.

The Patent Act was introduced to assist in bringing new technologies to the public and advance technology in the United States. Patent holders enjoy the right to stop others from making, using, selling, and importing protected technology into the U.S. Traditionally, patent holders held patents associated with a technology or service provided by the company owning the patent. Over time, this has changed, resulting in patents being owned by non-practicing entities (NPEs). Due to the overly aggressive, pro-litigation approach threatened by many NPEs to acquire early settlement and NPEs not bringing new technology into the United States, NPEs have acquired a poor reputation, resulting in the nickname “patent trolls.”

The Saving High-tech Innovators from Egregious Legal Disputes (SHIELD) Act was reintroduced in February 2013, with the intent to protect American technology companies from frivolous patent lawsuits initiated by patent trolls. Supporters of the SHIELD Act say it is intended to place the financial burden on patent trolls that purchase patents only for purposes of using the judicial system to “extort” a quick patent litigation settlement, due to a patent infringement defense often costing in excess of $1 million dollars in attorney fees. Such settlements typically include either a large cash settlement or a license requiring a long-term royalty.

If adopted, the SHIELD Act would allow “a party asserting invalidity or non-infringement” in “an action involving the validity or infringement of a patent” to file a motion with the court asking for a determination regarding whether the adverse party either: a) is an inventor or original assignee of the patent; b) has made “substantial investment… in the exploitation of the patent through production or sale of an item covered by the patent;” or c) is a university or university-associated tech transfer organization.

If the adverse party does not satisfy at least one of these conditions, the Act mandates that the court “shall award the recovery of full costs to any prevailing party asserting invalidity or non-infringement” upon entry of final judgment, unless “exceptional circumstances made an award unjust.” The aggressive terms of the Act are argued to be strong enough to deter frivolous lawsuits from being filed by patent trolls.

The Cost of Fighting Trolls

It should be noted, however, that the SHIELD Act also presents a number of potential concerns. As drafted, the bill not only declaws the patent troll, but also may devalue patents and patent portfolios of more “legitimate” patent holders and NPEs. The bill effectively lumps many patentees who use patents as a commodity, in with patent trolls.

Unlike in certain countries, there is no affirmative requirement to exploit a patented invention in the United States. In fact, under current U.S. patent law, it is not considered patent misuse to enforce rights to a patent, in good faith, irrespective of any use or non-use by the owner. However, the Act may make it impossible for some patentees who do not exploit their inventions to protect their patents.

Many countries have compulsory licensing, where a non-exploiting patentee must license the invention to parties who will exploit the invention. In the United States, however, there is no such requirement for a patentee to practice the invention. Indeed, a patent holder may choose to benefit from the invention either by practicing or not practicing the invention.

Under the Act, for example, a company could not protect its market position by purchasing patents for a related and competing technology to suppress the competition. While this is not a common patent strategy, it is an example of how the Act might negatively impact business strategies of legitimate patentees.

While the expressed purpose of the bill is to reduce litigation by NPEs, if enacted as worded, the SHIELD Act may also negatively impact many inventors actively trying to commercially exploit their inventions. There are several classes of non-troll NPEs that may be harmed by the Act, such as patent holding companies, non-original assignees (for example, owners of patent portfolios acquired through corporate acquisitions), solo inventors who choose to assign inventions rather than developing them, R&D organizations that license their technology instead of developing in-house, and the inheritor of a patent.

This exemplifies the difficulty in effectively defining a patent troll in a piece of legislation. If the net is cast wide enough to capture all patent trolls, many other patentees may be inadvertently burdened. If the net is cast too narrowly, many patent trolls can continue using patents to extort cash settlements and license fees from organizations that choose not to litigate a frivolous charge of patent infringement. The core of the difficulty is that a troll cannot easily be identified by the manner in which he obtained the patent, or whether he exploits the patent or not. If not properly addressed in the wording of the Act, the “value” of patent portfolios for thousands of legitimate patentees may suffer.

Trolls in the Headlines

Regardless of the current language in the Act, its reintroduction shows that the bullying tactics used by patent trolls have clearly backfired.

Not only have patent trolls become the target of federal legislation, but just in May 2013, the Governor of Vermont signed state legislation amending the state’s consumer protection laws to allow Vermont’s attorney general to bring suit against patentees that assert patent infringement claims against a Vermont business or resident in bad faith.

This is the first time that a state has taken a stand on this kind of issue, the rationale being that the frivolous law suits aggressively pursued against Vermont small businesses were resulting in the small businesses having to pay large settlement amounts, or even close their doors, due to an inability to afford defending a frivolous patent litigation claim.

Patent trolls are even in the spotlight of the White House. On June 4, the Obama Administration announced that executive actions and legislative recommendations were being proposed, targeting non-operating entities that invest in patents.

The hope is that this legislative backlash against patent trolls is not over-encompassing, resulting in a detrimental effect on other patentees. In either case, it seems to be a little late for patent trolls to escape the legislative spotlight.

Peter Nieves is a shareholder and Jonathan Whitcomb is an associate with Sheehan Phinney Bass + Green PA. Both practice within the Patent Law, and Intellectual Property and Technology groups of Sheehan.

NHLAP: A confidential Independent Resource

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