Patent Trolls

A patent troll (or "non-practicing entity" as the white house has coined it) is an entity that buys up ambiguous, vague or broad patents (typically patents that are not otherwise being used) and then tries to make money off of them by threatening to sue (i.e. demanding a license fee from) anyone who could arguably be said to be using them without permission ("infringing them"). "Trolls" typically operate as shell companies and file hundreds of lawsuits against everyone who could potentially be infringing. Because many of these alleged infringers cannot afford the lengthy litigation that would be necessary to establish that they are not infringing or to prove that the patent at issue is invalid (because it is too broad or too vague), they just agree to pay the "troll" a license fee.

The average cost of defending against a patent infringement suit, as of 2015, “is $650,000 for lawsuits of $1 million or less and $2.5 million for those of $1 million to $25 million.” (AIPLA).

Because of the high cost of legal fees and the unpredictability of the outcome of jury trials, defendants patent-users may settle even what they consider to be groundless lawsuits for several hundred thousand dollars. However, in most cases, “because patent trolls know that many small companies lack the resources required to fight over intellectual property, they often ask for relatively small sums of money – in the tens of thousands of dollars. The difference between the trolls’ demand for compensation and the cost of defending an infringement charge gives small business owners a strong incentive to pay up rather than fight.” (Entrepreneur).

America Invents Act

In 2011, President Obama signed the Leahy-Smith America Invents Act (“AIA”), “a landmark piece of legislation designed to help make the patent system more efficient and reliable.  As technology evolves more rapidly than ever, we must ensure our patent system keeps pace.” (White House).

The AIA put in place new mechanisms for post-grant review of patents and other reforms to boost patent quality.  Meanwhile, court decisions clarifying the scope of patentability and guidelines implementing these decisions diminish the opportunity to game the patent and litigation systems.  Nevertheless, innovators continue to face challenges patent trolls, companies that, in the President’s words “don’t actually produce anything themselves,” and instead develop a business model “to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”  (White House).

Patent Reform by the Obama Administration

In 2013, following the passage of the AIA, President Obama said that U.S. “efforts at patent reform only went about halfway to where we need to go.” The next needed step was to pull together stakeholders and find consensus on “smarter patent laws.” Asu such, the White House directed the United States Patent and Trademark Office (“USPTO”) to take new action in order to help stem the increasing number of patent-related lawsuits tying up the court system. In particular, President Obama issued five executive actions and seven legislative recommendations designed to protect innovators from frivolous litigation and ensure the highest-quality patents in our system. 

Legislative Recommendations

The Administration recommends that Congress pursue at least seven legislative measures that would have immediate effect on some major problems innovators face.  These measures would:

1. Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking PTO review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance.

2. Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases).

3. Expand the PTO’s transitional program for covered business method patents to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board (PTAB).

4. Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use.  Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer.

5. Change the United States International Trade Commission (“ITC”)’s standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts.

6. Use demand letter transparency to help curb abusive suits, incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public.

7. Ensure the ITC has adequate flexibility in hiring qualified Administrative Law Judges.

Executive Actions

The Administration also announced a number of steps it is taking to help bring about greater transparency to the patent system and level the playing field for innovators.  Those steps include:

1. Requiring patent applicants and owners to regularly update information about who really controls a patent;

2. New training to USPTO examiners on improving clarity of claims, especially in the software field;

3. A website to help educate end-users facing demands from a possible trolls;

4. Expanded outreach efforts and more data and research regarding patent policies and abusive litigation; and

5. An interagency review of procedures of Customs and Border Protection and the ITC to ensure transparency and effectiveness in exclusion orders barring importation of infringing goods.

Proposed Legislation

The Targeting Rogue and Opaque Letters (TROL) Act H.R. 2045), which aims to curb the troll problem, was introduced to the 2013-2014 Congress by Nebraska Republican Lee Terry. The bill was passed by the House Subcommittee on Commerce, Manufacturing and Trade and was sent to the Committee on Energy and Commerce in July 2015. (Entrepreneur).

The TROL Act “would establish as an unfair or deceptive act sending letters to companies and individuals claiming infringement of a patent when those letters include certain statements, as outlined in the bill, that are known by the sender to be false or misleading. Similarly, the bill would establish as an unfair or deceptive act sending such letters if, in bad faith, the sender fails to include certain other information also outlined in the bill. H.R. 2045 would authorize the Federal Trade Commission to seek civil penalties for violations of the new prohibitions.” (CBO).