Stumping Patent Trolls Is The Path To Innovation

At a time when gridlock in Washington has been at an all-time high, there is one high-profile issue where Democrats and Republicans are quickly coming together: defeating "patent trolling," which is a growing area of litigation abuse vexing America's high-tech economy. In these lawsuits, shell businesses called Patent Assertion Entities (PAEs) game the patent litigation system. They purchase dormant patents, wait for others to independently develop comparable technology, and assert patent infringement suits which is a strict liability tort. As the President explained earlier this year, PAEs "don't actually produce anything themselves." They "see if they can extort some money" by claiming they own technology that others developed.

The software, consumer electronics, retail and other companies on the receiving end of these lawsuits have nicknamed many PAEs "patent trolls." They are reminiscent of the mythical trolls that hid under bridges they did not build, but required people to pay them a toll to cross. Patent trolling is highly lucrative. An oft-cited economic study pegged the impact of PAEs in terms of "lost wealth" at $83 billion per year, with legal costs alone amounting in 2011 to $29 billion, up from $7 billion in 2005.

The recent success in patent trolling is due to what I call the "Three P's of Patent Trolling": (1) "Plenty of Opportunity" created by the explosion of new, complex and overlapping patented technologies in the past two decades; (2) growing "Patent Uncertainty" over the scope, strength and validity of many new patents, meaning that many inventors cannot know if their technology infringes on someone else's patent until the dispute is resolved in litigation; and (3) the "Plaintiffs' Litigation Advantage" that allows PAEs to manipulate the costs of litigation, which are high and disproportionately borne by defendants.

Here is the PAE business model: buy old patents for old technology, many of which were never commercialized, that can arguably be connected to modern products. Then, allege that everyone who makes or uses that new product is infringing on the old patents. This will require companies to choose between spending millions of dollars to litigate the case or a fraction of that amount to settle the claim. Many rational companies settle because it is much cheaper to pay the trolls and continue with their regular business operations than to spend years trying to prove that they are not infringing on the old patents. This litigation play has become so successful that PAE litigation has mushroomed to 60 percent of patent cases filed in the U.S.

The Federal Trade Commission and Congress have held hearings on the toll that patent trolling is taking on the American economy. Barnes & Noble, for example, testified about the impact on retailers, who are purchasers of software and other technology. In one case, a PAE sued many retailers claiming it owned the technology used on websites, such as BN.com, for returning search results that do not exactly match the terms a customer enters into the search field. As each suit failed, the PAE kept suing more companies.

Among innovator companies, Microsoft said it typically has 60 pending PAE claims, and Google, Blackberry, Earthlink and Red Hat remarked that their patent litigation defense costs collectively have gone up 400 percent since 2005. Newegg said one PAE "was so blunt as to explain . . . it was pricing its settlement offer ‘well below the pain level'-i.e., below the price where it may be worthwhile for Newegg to defend instead of settle."

The response in Washington, D.C. to this type of litigation prospecting has been bi-partisan and overwhelming. This year, the President implemented executive orders to control some aspects of patent trolling. Senator Leahy, the Democratic chair of the Senate Judiciary Committee, and Rep. Goodlatte, the Republican chair of the House Judiciary Committee, have worked together on comprehensive legislation. They have wisely built on proposals that other Members of Congress from both parties have advocated over the past couple of years.

Last week, Congressman Goodlatte introduced his version of the bill. It offers a loser pays system for patent litigation to level out the economic risk of filing highly speculative cases. This idea originated in the bi-partisan SHIELD Act. Provisions to cut down on abusive litigation tactics, such as over-broad discovery requests, were based on bills from Democratic Rep. Jeffries and Republican Senator Cornyn. As Members of Congress from both parties have appreciated, the trick here is to balance the need to curb trolling while not harming the ability of small inventors and other legitimate patent holders to rightfully assert their patents.

Patent troll reform has a strong chance to succeed even in today's bitter political climate. Democrats and Republicans both understand that patent trolling is a pure money play. It does not serve justice or inventors. The American people want their government to work again and leaders of both parties can begin that process by passing patent troll reforms that support innovation, both as an American ideal and as a way to create jobs for the American people.