Congress Is Poised to Send Patent Trolls Back to Their Caves

Momentum is building in Washington to reform America's patent system

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Gary Cameron / REUTERS

U.S. lawmakers are preparing to act on a pair of bills that aim to crack down on so-called “patent trolls,” which are firms or investment funds that don’t actually build anything, but whose main objective is to extract licensing fees or legal judgments from other companies. The action in Congress follows a recent proposal by the White House designed to “protect innovators from frivolous litigation and ensure the highest-quality patents in our system.”

On Tuesday, a broad coalition of groups led by the Electronic Frontier Foundation, a San Francisco digital rights group, is launching a new digital tool as part of its “Trolling Effects” campaign to pressure Congress to crack down on patent trolls, or “patent assertion entities,” as they’re sometimes called. The coalition includes the public interest groups Public Knowledge and the Open Technology InstituteEngine Advocacy, a non-profit group that advocates for tech startups; and two major industry trade groups, the Consumer Electronics Association (CEA) and the Computer & Communications Industry Association (CCIA).

Perhaps the most well-known “patent assertion entity” is Bellevue, Wash.-based Intellectual Ventures, which is run by former Microsoft chief technology officer Nathan Myhrvold and has garnered attention not for what it builds but for the patents it owns. Intellectual Ventures has amassed an estimated 70,000 patents since it was founded in 2000, which it uses to extract value — some $3 billion to date — through licensing and lawsuits. Stung by criticism, Intellectual Ventures has embarked on a campaign to change its image from patent troll to “innovation hub,” according to the Puget Sound Business Journal.

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Recently, a new breed of patent troll has emerged, targeting small businesses that use common, everyday technology products, in a development that has raised alarm in states across the country and prompted the latest calls for patent reform. The most notable example is a firm called MPHJ Technologies, which has used a series of shell companies to demand that hundreds of small businesses that use office document scanners — like the type sold at Best Buy — pay $1,000 per employee.

“What we’ve got here is run-of-the-mill extortion,” says Julie Samuels, a Senior Staff Attorney at the Electronic Frontier Foundation, where she holds the Mark Cuban Chair to Eliminate Stupid Patents. “These are entities that use the patent system to shake down small businesses, startups, and ‘Mom and Pop’ shops for using the kind of off-the-shelf technology that we get from Best Buy or purchase on the Internet. Because they rely on patent law to do this, they are turning a system that is supposed to incentivize innovation on its head.”

Patent troll lawsuits have tripled in the last two years, rising from 29% of all infringement suits to 62% of all infringement suits, according to a recent study by the National Economic Council and the Council of Economic Advisers, which cited estimates that patent trolls may have threatened over 100,000 companies with patent infringement last year alone. The American Intellectual Property Law Association estimates that the median cost of litigating a moderately sized patent suit is now $2.6 million, an amount that has increased by more than 70% since 2001.

In the House of Representatives, Rep. Bob Goodlatte, the Virginia Republican, has introduced the Innovation Act, which is designed to “combat the ever-increasing problem of abusive patent litigation.” Last month, the Judiciary Committee voted 33-5 to send to the bill to the full House for a vote. “Abusive patent litigation is having a significant impact on American innovation, needlessly costing small and large businesses alike tens of billions of dollars every year – resources that could have been used to create innovative new products and services,” Goodlatte said in a statement.

In the Senate, Judiciary Committee Chairman Patrick Leahy, the Vermont Democrat, and Sen. Mike Lee, the Utah Republican, have introduced the Patent Transparency and Improvements Act of 2013. The bill would increase transparency in patent ownership, allow patent infringement cases to be stayed while the suits are litigated, and crack down on frivolous demand letters. “America’s patent system is the envy of the world, but unfortunately some bad actors are misusing the system to sue unsuspecting consumers or extort monetary settlements by making misleading demands,” Leahy said in a statement.

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Experts say that rampant and abusive patent litigation impedes innovation by delaying research and development, and also makes new tech products more expensive for consumers. The only winners in the system are patent attorneys, who reap fees every time one of these lawsuits is issued, or even threatened. Some 60 law professors recently sent a letter to Congress urging passage of the legislation cracking down on patent trolls.

“Brazen patent owners have been known to assert patents they actually do not own or, conversely, to go to great lengths to hide the fact that they actually do own patents being used in abusive ways,” the law professors wrote. “High litigation costs and a widespread lack of transparency in the patent system together make abusive patent enforcement a common occurrence both in and outside the technology sector. Billions of dollars that might otherwise be used to hire and retain employees, to improve existing products, and to launch new products are, instead, diverted to socially wasteful litigation.”

As with any highly contentious legislation where there are billions of dollars at stake, there is also opposition, in this case led by a group called the Innovation Alliance, whose members include Qualcomm, the mobile technology giant, and Cantor Fitzgerald, the financial services company. The Innovation Alliance opposes the Innovation Act, writing in a letter to Congress that “many of the provisions will unfairly advantage large incumbent companies which incorporate patented technology in their products and services over the interests of innovators.”

Patent reform is an issue that has been percolating for years, but there appears to be real momentum now that both houses of Congress are preparing to act on bills designed to crack down on abusive patent practices. And with the White House strongly supporting reform, the U.S. patent system could be on the verge of the most sweeping changes in recent memory. In the House of Representatives, the Innovation Act could be voted on as early as Wednesday. In the Senate, the Patent Transparency and Improvements Act of 2013 will be debated later this month, and could reach the floor for a vote by the end of the year.