White House Declares War on Patent Trolls Through Patent Reform

On June 4, 2013, President Obama proposed a two-part action plan to address the ever increasing issue of so-called “patent trolls” (or companies who employ litigation tactics as a business model to exploit U.S. patents). The first part is a request for Congress to pass specific legislation to combat the trolls (also referred to by the White House as Patent Assertion Entities (“PAEs”) and commonly known as non-practicing entities, or “NPEs”). The second part is the directing of various U.S. agencies to improve existing practices, regulations and standards relating to the issuance and enforcement of U.S. patents.

Along with the President’s recommendations and executive actions, the White House released a report on the impact of PAEs. The report concludes that PAEs have harmful and wide ranging effects on the U.S. patent system and the U.S. economy. Among other things, PAEs fail to provide any research, development or technology to companies that are forced to license asserted patents. To the contrary, the White House acknowledged that patent trolls acquire patents solely for the purpose of extracting payments from an alleged infringer under the threat of extensive and expensive litigation. To make matters worse, patent trolls often will strategically assert patent infringement after companies have made significant investments in their own independently developed products or processes.

Patent trolls typically exploit the U.S. legal system using, among other things, their non-practicing status, to build leverage over their targets with minimal risk and costs. In addition, they target large groups of potential infringers that include, for example, the manufacturer, distributors and ultimate users of the technology at issue – which drive the target’s litigation costs even higher. As a practical matter, the patents asserted often have unclear language that is difficult to interpret, which the patent trolls rely on to expand the scope of potential infringers and increase the uncertainty of predicting a final result. In another attempt to increase cost and cloud the real party of interest, patent trolls routinely create multiple shell companies and require non-disclosure agreements as part of a settlement, which makes it difficult to form common defense groups and to share costs.

The White House report acknowledges the increasing prevalence of patent trolling in recent years. According to the report, patent trolls accounted for 29% of all patent infringement claims in 2010. In 2011, patent infringement claims by patent trolls grew to 45%. Last year, 62% of all patent infringement claims were asserted by patent trolls.

To stem the growing problem with patent trolls, the President released a plan, including five executive actions and seven legislative recommendations, to improve patent quality and to provide protection from frivolous patent litigation. While the five executive actions can be put into action unilaterally by the President, the seven legislative recommendations likely will not have any immediate effect, as they first must be approved by Congress.

However, Congress has its own initiatives for dealing with the patent troll issue. For example, Congressman Peter DeFazio has introduced the Saving High-tech Innovators from Egregious Legal Disputes (“SHIELD”) Act. Senators Chuck Schumer, John Cornyn, and Representative Ted Deutch have also introduced bills targeting patent trolls. Other bills are on the horizon.

Below is a list of the executive actions and legislative recommendations in the President’s proposal.

Five Executive Actions: 

1. The U.S. Patent and Trademark Office (“USPTO”) will be directed to begin a rulemaking process requiring patent applicants and owners to regularly update ownership of the patent or patent application. This would require applicants and owners to specifically designate the “ultimate parent entity” in control of the patent or patent application when it is involved in proceedings before the USPTO.
2. The USPTO will be directed to improve the patent application examination process and overall patent quality. Specifically, the plan calls for the development of strategies to improve claim clarity and provides targeted training to patent examiners on analyzing functional claims. (Functional claims are regarded as patent claims that cover a general function, rather than a specific solution to a function.)
3. The USPTO will be charged with providing educational materials for individuals and companies that are facing patent infringement actions from a patent troll.
4. The White House will be expanding its research and outreach efforts to develop new ideas and consensus around updates to patent policies or laws.
5. Finally, the U.S. Intellectual Property Enforcement Coordinator will be directed to review the existing procedures of U.S. Customs and Border Protection and the U.S. International Trade Commission (“USITC”) to ensure that the process and standards utilized during the enforcement of exclusion orders are transparent, effective and efficient.

Seven Legislative Recommendations: 

1. Requiring that any party sending demand letters, filing an infringement suit or seeking USPTO review of a patent file updated ownership information, and enabling the USPTO or district courts to impose sanctions for non-compliance.
2. Allowing district courts to have more discretion to award attorney’s fees as sanctions for abusive filings.
3. Expanding the USPTO’s transitional program for covered business method patents to include computer-enabled patents. This would allow a broader range of patents to be challenged at the USPTO rather than in court.
4. Preventing patent infringement liability for consumers and businesses that are using off-the-shelf products for their intended use.
5. Modifying the USITC standard for obtaining an injunction to the eBay v. MercExchange test, which would provide consistency in the standards applied by district courts and the USITC.
6. Incentivizing public filing of demand letters to make them accessible and searchable.
7. Ensuring that the USITC has adequate flexibility in hiring Administrative Law Judges.

While both the White House and Congress regard patent trolls as a serious threat to the U.S. economy, there is clearly no government consensus for dealing with the issue.