Thursday, May 2, 2013

An Alternative to Patent Troll Litigation: A Better Program for Challenging Troll Patents in the PTO


Patent Troll Companies Make Money By Purchasing Broad Patents & Suing Legitimate Tech Companies With Similar Products

Schumer Introduces Legislation to Improve Patent Prosecution System; Bill Would Allow These Claims to Be Reviewed by Patent & Trademark Office—Will Avoid Costly Litigation Fees for Defending Businesses

U.S. Senator Charles E. Schumer today announced he would be introducing legislation that would crack down on “patent trolls” - companies that prey on technology companies. Patent trolls are companies that don’t produce or manufacture products, but instead hold often low-quality patents solely for the purpose of suing legitimate businesses who use technologies similar to those in the patents. Patent trolls cost operating companies $29 billion in suits in 2011. Schumer today highlighted the growing problem and introduced legislation that will improve the patent system by allowing these claims to be reviewed administratively by experts at the U.S. Patent and Trademark Office (PTO).

“Patent trolls are bullying New York’s technology companies and dragging down growth. It’s time we address this growing problem,” said Schumer. “This legislation will provide small technology start-ups with the opportunity to address these claims outside of the legal system, saving billions of dollars in litigation fees. The Patent and Trademark Office is already reviewing twenty patent cases in a temporary patent review program and I am confident that extending this program will be beneficial to New York’s economy.”

Patent trolls are companies whose sole purpose is to take advantage of other companies by taking them to court. Patent trolls buy low-quality patents which often use broad language. Patent trolls do not produce the products in which they have a patent. Instead, they wait until another company develops a similar product and sues them in court.

In 2011 alone, patent trolls cost operating companies $29 billion. Under current law, a company hit with a patent suit only has two options – pay to defend the suit or pay a licensing fee or settlement agreement to make the suit go away. Both options are highly costly – the average troll settlement costs a small or medium company $1.33 million, while an in-court defense would cost the same company an average of $1.75 million per case.

Specifically, this has been an enormous problem among technology start-up companies: 62% of patents asserted by trolls from 1990-2010 were software patents; 75% were in computer and communications technology. And this is a particular problem for small businesses: 82% of companies targeted by trolls of annual revenues less than $100 million. 

According to Patent Freedom, the number of companies sued by patent trolls in New York rose 75% to 288 between 2006 and 2012. Specifically, the New York based company, Etsy, has been sued for infringing on patents involving storing delivering and managing messages. 

In September of 2011, the America Invents Act (AIA) updated the way patents are issued and prosecuted, and included the Schumer-Kyl program for business method patents related to financial products and services. The Schumer-Kyl provision is a temporary program that established a post grant review by experts at the PTO of covered business method patents and allows a petitioner to request that the PTO review a covered patent; if they find it more likely than not to be invalid, the PTO can take a second look and return a decision promptly. Since the provision began, approximately twenty patents have been challenged through the PTO.

Schumer today introduced legislation that would expand the Schumer-Kyl provision to include more businesses, specifically among technology start-up companies. The legislation would also remove the provision’s temporary status. Schumer explained that a PTO prosecution system will provide patent holders and accused infringers with an alternative to court, which can be extremely costly. This will not only help resolve existing suits in a low-cost way, it will also deter trolls from filing suits in the future because it provides a cost-effective option to knock out bad patents.

● A better program for challenging the validity of troll patents in the PTO is needed to serve as an alternative to expensive litigation, especially for small companies that cannot afford to fight in court and are otherwise forced to pay extortion settlements based on the prospect of huge litigation costs. Expanding the Covered Business Method (CBM) Program of the American Invents Act (AIA) would fill this need.

The Patent Troll Litigation Explosion

● Patent trolls place a real drag on innovation and job creation. These are entities that buy patents and launch lawsuits, but create nothing. Troll suits cost the U.S. economy $80 billion in 2011, and productive companies made $29 billion in direct payouts.

● The number of troll suits and the costs they impose are increasing at an alarming rate. Patent troll suits against productive companies have increased by 400% since 2005. A majority of patent litigation is now brought by patent trolls.

● Small and medium companies are the most frequent troll targets, and they cannot afford to fight back. Stories of nuisance suits against coffee shops that use wifi or local businesses that use scanners are becoming more common.

● 75% of troll patents relate to computer and communications technology. In general, internet and software patents are eight times more likely to be litigated. 

● Many of the asserted patents are abstract and overbroad, claiming ownership of a general concept or method, like the interactive web or on-line shopping carts. When the targets fight back, they win over 75% of the time, but only at great cost.

● Patent litigation is notoriously expensive. The average cost of a single case is well over $5 million. Even for small and medium sized companies, the average cost of fighting through trial reaches $1.75 million.  

An Alternative to Litigation

● We need a cheaper alternative to patent troll litigation, especially for those companies that cannot afford to litigate but who want to fight extortive settlement demands based on litigation costs and not merits.

● Existing programs for challenging patent validity in the PTO (such as the The Inter Partes Review program) have serious shortcomings for challenging troll patents. It is not possible to challenge the vagueness, overbreadth or abstractness (under sections 101 and 112 of the Patent Act) of patents under this program. But these are some of the biggest problems with the patents so frequently asserted by trolls. 

● The AIA created a much more useful program for challenging troll patents in the PTO called the Covered Business Method (CBM) program. Challengers can bring all validity arguments to the PTO under this program, not just a select few.

● The CBM program also serves as a better alternative to litigation because the statute encourages courts to stay litigation while the PTO considers validity. This conserves judicial resources and spares the parties from unnecessary litigation.

● But the CBM program is limited to patents related to “financial products or services,” which represent but one portion of patent trolls’ patent arsenals.

● Expanding the CBM Program to allow challenges to all business method patents would provide a low cost alternative to litigation for weeding out invalid patents. Lessening the drain that patent trolls place on productive companies through the assertion of invalid patents would further the patent system’s goal of promoting innovation.

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