Guest Contributor Doug Kim is an intellectual property (IP) attorney and head of the IP practice of McNair Law Firm. He concentrates on counseling companies concerning the protection and enforcement of IP rights.
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The patent system is as old as the U.S. itself. In fact, patent protection actually existed in the Colonies prior to the signing of the Constitution. In 1784, South Carolina became the first state to pass a general patent law, which was entitled “An Act for the Encouragement of Arts and Sciences.” In 1787, the U.S. Constitution was enacted, stating that “The Congress shall have Power … To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” This led to the first federal patent act of 1790.
It is this policy of “Encouragement of Arts and Sciences” and “To promote the Progress of Science” that is at odds with the modern day “patent troll.” A patent troll is an entity that focuses on aggressive litigation and threats, without specific evidence of infringement, in an attempt to extort money from target defendants. Typically, shell companies are used to make it difficult for the target to know who is actually suing it. Patent trolls do not produce goods, nor do they assist inventors. Instead, they use patents to collect license fees to line their pockets, rather than to invest in further technologies or inventions.
According to a 2013 study by the White House, litigation instigated by patent trolls tripled between 2011 and 2013 (rising from 29 percent of all patent lawsuits to 62 percent). Estimates suggest that patent trolls threatened over 100,000 companies in 2012 alone. Patent troll litigation is clearly on the rise. Personally, I have seen patent trolls operate within well-known companies in the Carolinas.
One study discovered that defendants paid $29 million in 2011 to patent trolls – an increase of 400 percent from 2005. This same study estimated that less than 25 percent of dollars flowed back into innovation, research and development. Patent trolls run a for-profit business with no regard for the well-being of the defendant or the economy. From 2000 to 2010, 14 publicly traded patent troll companies collectively had $7.6 billion in revenue. Further, the defendants’ share value typically dropped due, in no small part, to the uncertainty of expensive and lengthy patent litigation. The effect is very real.
In order to combat patent trolls, the U.S. House of Representatives passed the Innovation Act to discourage frivolous patent lawsuits brought by “patent holders with large portfolios” [read “patent trolls”]. This bill would require:
- plaintiffs to disclose more information about each patent allegedly violated, to try to reduce uncertainty in the patent holder’s claim;
- disclosure of the true owners of the patent troll;
- awarding the prevailing party with attorney fees if the patent troll claim is not justified;
- limiting discovery, one of the most expensive parts of patent litigation.
The bill is now in the Senate.
An early indicator that we may be curbing the damage caused by patent trolls is the case of Soverain Software vs. Newegg, in which Newegg is accused of infringing three patents, known as the “shopping cart patents,” that describe a way to buy and pay for products online. Soverain won the trial in Texas but had the win overturned by the U.S. Court of Appeals for the Federal Circuit, the appeals court for patent cases. After losing, Soverain appealed to the U.S. Supreme Court. On Jan. 13, 2014, the Supreme Court said that it would not hear Soverain’s appeal, effectively solidifying Newegg’s win.
Newegg’s chief legal officer is quoted as saying, “The witch is dead, hurray… We are very, very pleased that the Supreme Court has recognized … these patents should never have been granted in the first place. … Fighting back works.”
With the current efforts from both the federal government and judicial system along with proactive protectionist measures by companies, we can hopefully get back to the patent system that is exclusively dedicated to promoting “the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries” and not a “patent lottery” for those that do not contribute to science and innovation, essentially doing more damage than good.
