Who Are Patent Trolls and What Will H.R. 9 Do About Them?

In the world of patents a lot has happened since 1787, when the Founders included in the new U. S. Constitution a clause authorizing Congress to grant patents for “limited times … “to promote the Progress of … the useful Arts.”  Another significant event for U.S. patent law may happen this summer when the House Judicary Committee marks up a new law, The Innovation Act (HR 9) that has many implications for intellectual property owners – from universities to pharma companies.

The mechanical age and the industrial revolution have given way to the electronic age and to revolutions in biological, pharmaceutical, microchip, and communications technology.  The rather sedate and scholarly practice of civil law, including patent law, has become an industry in which profits per partner, not legal brilliance or even level of service, is the metric of success.  And patents, in part, have morphed from legal protections for inventors into legalized assault weapons for hold-up artists.

With origins in grants by monarchs of monopolies to favored or trusted artisans, U. S. patents were foreseen as useful devices for spurring competition in the long run by incentivizing new inventions and discoveries with limited monopolies in the short run.  Since their inception, U. S. patents have indeed encouraged innovation but have also given rise to perceived opportunism in the form of “patent trolls.”

Like the proverbial troll who waits under the bridge to collect a toll from unwary passers-by, a “patent troll” is, by definition, any person or entity that owns a patent but does not produce the patented product or practice the patented method.  Instead, the so-called “troll” exacts a toll, in the form of a license fee, from other persons or entities the “troll” believes infringes (or do infringe) the patent. 

The “trolls’” enforcement mechanism typically begins with either a demand letter or a lawsuit addressed to or naming the accused infringers.  Sometimes that may mean a single patent and a single user; more stereotypically, it involves a portfolio of patents and as much as an entire industry.  The latter cases usually involve so-called “method” (or “process”) patents, such as a method for reading bar-codes with optical scanners or a method for processing wireless communications or financial transactions. 

Demand letters are often deliberately vague in order to avoid drawing so-called “declaratory judgment lawsuits.”  Such declaratory judgment suits assert that a genuine controversy exists because the plaintiff has been credibly threatened with suit for allegedly violating a specific patent.  Beyond proper judicial jurisdiction and venue, a complaint for patent infringement need currently allege only ownership of a particular patent and that it has been infringed. 

A successful “troll” with the right portfolio of patents can therefore sometimes extract license fees for the length of the patents even after the inventor is dead by setting up a “foundation” to hold the patents and to continue the inventors’ collection of fees until the patents expire.

That is the perceived problem that Congress currently purports to address under similar proposed “anti-troll” legislation that has gone by various names including the “Innovation Act” and the “Patent Transparency and Improvements Act.”  

Under such proposals, if enacted, Congress would generally require more particularity in demand letters and lawsuits, shift both parties’ litigation fees to the losing side, limit often expensive and time-consuming discovery, require disclosure of all beneficial owners of asserted patents, and protect users and purchasers of alleged infringing products from suit unless the manufacturer had first been sued or if the manufacturer agreed to assume defense of the suit. 

Such proposals would generally make sense if all patent “trolls” were like their mythical counterparts:    greedy villains and dishonest folks simply waving pieces of paper in lieu of products they never made and never actually “invented.”  But if defined as anyone and everyone who owns a patent and doesn’t make a product, “trolls” include university research departments that discover processes with wide commercial application that can be monetized only through licensing to others, as well as garage-type inventors whose inventions may be stolen if they approach large manufacturers even with good patents in hand. 

Treating all such non-practicing entities the same would discourage innovation and reward moneyed interests over entrepreneurship when exactly the opposite is needed to revive a still-struggling American economy.   A Senate version of the bill therefore exempts institutions of higher education, but that carve-out itself may be too broad because some universities license patents to other non-practicing entities that then bring suits. 

Good arguments exist on all sides of this debate but, as always, the devil is in the details.  Congress should not be lobbied into overarching action simply to prove that it can pass a bill that the President will sign.  The last century of American history is littered with presumably well-intentioned legislation that has proved disastrous in its implementation, exacerbating rather than ameliorating the problems it was designed to solve. 

It may be true, as Rep. Darrell Issa (R-Calif.) says that “a troll is impossible to define unless you’ve been mugged by one,” but it would be a shame to see a Constitutional provision designed to encourage innovation achieve exactly the opposite. 

House Judiciary Chairman Bob Goodlatte (R-Va) reintroduced his proposed Innovation Act earlier this year. The act would require:

 - Plaintiffs to disclose who the owner of a patent is before litigation, so that it is clear who the real parties behind the litigation are. Goodlatte says this will ensure that patent trolls cannot hide behind a web of shell companies to avoid accountability for bringing frivolous litigation;

 - Plaintiffs to actually explain why they are suing a company in their court pleadings;

- Courts to make decisions about whether a patent is valid or invalid early in the litigation process so that patent trolls cannot drag patent cases on for years based on invalid claims.  This prevents invalid patents from being used to extort money from retailers and end users;

 - The U.S. Judicial Conference to make rules to reduce the costs of discovery in patent litigation so that patent trolls cannot use the high costs of discovery to extort money from small businesses and entrepreneurs. Goodlate, to his credit, has delayed mark-up of the bill, original scheduled for the first week of June. He’s taking written testimony from an array of interested parties, including the Medical Device Manufacturers Association (MDMA), the National Venture Capital Association (NVCA) and the Alliance of U.S. Startups and Inventors for Jobs (USIJ).  

“It is clear that H.R. 9 needs substantial work to prevent it from substantially damaging the innovation ecosystem,” the group said in a statement.

–David Applegate is an intellectual property (IP) lawyer in Chicago, a legal policy advisor to The Heartland Institute, a columnist for The Chicago Daily Law Bulletin and a contributor to EconoSTATS. He writes and speaks frequently on matters of public policy interest. Heartland editorial intern Danni Ondraskova contributed to this report.

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