Patent trolls: A menace to business?
The controversy over “patent trolls,” which has been simmering for years, has finally heated up and caught the attention of state and federal legislators, attorneys general, and even President Obama. Patent trolls, or “patent assertion entities (PAEs),” are companies formed to purchase patents and then, without using them to produce any products, enforce the patents through licensing programs or litigation. PAEs are a type of non-practicing entity (NPE). The latter also can include universities or solo inventors that hold patents but do not produce or sell any products or services using their patented inventions.
Many of the patents that PAEs are asserting are software or business-method and process patents. So, for example, one PAE is asserting a business-process patent relating to scanning and emailing documents. In another example, financial institutions are being inundated with suits brought by PAEs covering software for mobile banking.
The more negative moniker, “patent troll,” no doubt arose from the PAEs’ tactics of alleging infringement and making a license demand without providing any real analysis of whether its target was actually infringing the claims of the patent or even disclosing the actual identity of its owners. The recent PAE tactic of blanketing small to medium-sized companies with cease-and-desist letters on a range of business-method and software patents has piqued the interest of the federal and state legislative and executive branches as the PAEs have brought their tactics and lawsuits to Main Street.
Recent articles from two Boston University professors estimate that direct costs incurred by defendants in patent suits brought by NPEs amounted to $29 billion in 2011. The same authors concluded that NPE lawsuits caused $500 billion of lost wealth to the targeted businesses from 1990 to 2010.
The other perspective advanced by some economists and the PAEs is that the increase in lawsuits reflects a legitimate activity of facilitating markets for technology. Those touting the benefits of PAE activities often point to the sole inventor who lacks the financial wherewithal and business expertise to exploit the invention he or she has developed or enforce his or her patents. In the view of some, PAEs provide a service to the economy by acting as market intermediaries that provide liquidity to inventors and increased efficiency to patent markets.
The fundamental public policy issue is whether the proliferation of PAE patent litigation is stifling innovation or is providing market efficiency in an economy where markets are king. The furor caused by some PAEs’ recent strategies of demanding payment and threatening suits against end users who simply use the technologies sold to them by others (e.g., software products to run their business or architecture for their e-commerce sites) has attracted the attention of federal and state governments. Even President Obama weighed in by issuing five executive orders and offering seven legislative recommendations to Congress to help curb the challenges from PAEs. Several bills are pending in Congress to try to curtail some of the NPEs’ more abusive practices.
In addition to these federal legislative efforts, several state attorneys general have responded to the outcry from small and medium-sized businesses, which are often the targets of PAEs. These attorneys general know that these businesses cannot afford the millions of dollars that a litigation defense costs. The Vermont legislature also passed a bill permitting the recipient of a “bad faith” infringement claim to sue the PAE in state court.
The ability to protect software through patent protection emerged in the late 1970s, and patent protection for business methods and processes soon followed. Many argue that the patent office became too lax in applying the standards for patentability to the many patent applications that were filed with the arrival of the e-commerce economy. Hence, software and business-method patents of dubious quality were awarded, contributing to the growing problem of “patent trolls.” The U.S. Supreme Court has recently agreed to hear a case (Alice Corp. Pty. Ltd. v. CLS Bank International, et al.) relating to the patentability of software innovations, and this may tighten the standards.
The America Invents Act of 2011 tweaked the system in an effort to slow down the trolls, but bolder actions are needed. Perhaps Congress should try to close the Pandora’s box opened by the courts more than two decades ago when protection for software and business methods was broadened. Raising the bar for obtaining such patents, shortening their terms, and further simplifying post-grant review of these patents would improve the U.S. patent system and, at the same time, throw some obstacles in the path of the “patent trolls.”
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