Economy / Technology

The Balancing Act of Patent Reform

Patent legislation is a balancing act the protection of legitimate patent holders and non-infringing operators while stopping malicious attacks from so-called “patent trolls.” Unfortunately, finding that balance is proving a herculean task; the current debate is controversial for good reason.

The Problem

Proponents of patent reform target their ire at patent trolls. These perfidious firms own patents that may be vague or otherwise of low quality. They then assert that small businesses, or others without large legal defense budgets, are infringing upon their patent and force them to pay a license fee or settlement lest they face an unaffordable lawsuit. The actual merits of the case are often irrelevant when even an innocent party cannot afford to prove it in court. A number of reforms have been proposed to combat trolls, and many have broad support. There are three issues, however, that are the main sources of contention.

1.       Who Are the Trolls?

Reform advocates are adamant that patent trolls are a huge problem raining fear and ruin on hardworking Americans. Others, however, question both the prevalence of actual trolls and the character of entities which are targeted as trolls. Common definitions of trolls call them non-practicing entities (NPEs) or patent assertion entities (PAEs) meaning that they hold patents but do not actually “practice” them (by producing the invention covered by the patent); instead, they merely “assert” their patents against others. But some have concerns over such a broad definition because not all NPEs or PAEs fit the description of a malicious troll. Several examples:

  • Some small inventors are technically skilled but don’t want to go into business to market their invention. They may choose to license the patented invention to others and live off the license fees.
  • Some patent holders may start out producing their invention, but the company may fail. The firm would still hold the patent, however, and can license it out to make the best of the situation. Other companies may buy the patents of failed companies in order to license and assert them. These businesses may provide incentives for innovation by ensuring that inventors have a market for their patent even if their business fails.
  • Universities are a third group that sometimes end up lumped in with trolls. Universities often invest in the creation of many new inventions, but they are not often engaged in producing them. Instead, they license the inventions to firms that will produce them.

The above examples would all be considered trolls, under many definitions, if they assert their patents against potential infringers. But all of them have reasonable claims to innocence from malicious litigation practices if they choose to sue.

2.      Fee Shifting

One of the most contentious proposed reforms is fee shifting. Some advocate a mandatory “loser pays” rule which would require entities judged to be trolls to pay the legal fees of their opponents if they lose their suit. The thinking is that since many trolls don’t really have a legitimate infringement case (or even a legitimate patent), they will not risk going to trial if they would have to pay the defendant’s legal fees when they lose. The measure would also make it more difficult for trolls to bully small businesses into a settlement because the alleged infringer, who knows he is in the right, can take the case to trial and then recover his legal fees.

Opponents are concerned, however, that fee shifting would discourage legitimate patent holders from enforcing their patents and might make them vulnerable to bullying from large, well equipped infringers. If a firm with a highly staffed and funded legal team infringes on a patent held by a smaller company or individual, the large firm will be able sit back and say “Go ahead and sue us. We will beat you and ruin your business by making you pay our fees.” So while mandatory fee shifting will discourage trolls, it will also discourage some responsible patent holders.

3.      AIA Reforms

Another interesting facet to the patent reform debate is that there was already significant reform just a few years ago. The American Invents Act (AIA) of 2011 was aimed at improving patent quality by allowing anyone to challenge any patent in what was meant to be a relatively quick and cheap proceeding before the newly created Patent Trial Appeals Board (PTAB) within the Patent Office itself. Here again, there are reasonable arguments from both sides.

Some point to the extremely high rate at which patents are invalidated in AIA proceedings as evidence that the system is overzealous and vulnerable to abuse. If a firm knows it has a good chance of invalidating a competitor’s patent, it can file for review of that patent to gain an advantage. Supporters of the AIA, however, hold that the high rate of invalidation by the PTAB early in its life only indicates that the lowest quality patents are being challenged first and the system is working.

Critics also assert that AIA proceedings provide an incentive to sell short on another company and then file for review of their patents knowing that the high success rate of such a challenge is sure to make the patent holder’s stock fall. Supporters respond by saying that such manipulation is already illegal under existing laws.

Another problem alleged by critics is the weakness of estoppel provisions. These are rules that prevent suits from being brought again and again with the same evidence. One of the AIA proceedings, covered business method review, has extremely weak estoppel rules. Petitioners are only estopped from using evidence actually presented at a previous trial.

This fact allows for abuses of the system by withholding evidence and filing again and again even if the PTAB finds the patent valid. Furthermore, the proceedings can be stacked so that patent that survives a standard reexamination can be challenged again under inter partes review. The result is a system vulnerable to abuse which could keep patents tied up in litigation even if they have previously been judged to be valid.

Patent reform is a balancing act with no easy answers. The unfortunate reality is that there are bad actors along with the good actors on both sides of the patent system; any tool that shifts the balance in one direction or the other empowers both the good and bad actors on that side. Eventual legislation on patent reform should exercise caution and humility in regulating such a complex and delicate arena.


Image: Balancing Act by Colin Harris is licensed under CC BY-NC-ND 2.0