'Patent Trolls' Face Rising Tide of Federal Scrutiny

By Wayne Rash  |  Posted 2013-06-27

'Patent Trolls' Face Rising Tide of Federal Scrutiny

By now you've probably heard plenty of stories about the excesses of patent trolls, or Patent Assertion Entities as they're politely referred to in legal circles.

There's been a lot of talk about reining in those trolls in Washington, and there's been some action that might at least make it harder for them to coerce large amounts of money from companies that aren’t doing anything beyond trying to conduct their businesses. Over the course of the past few days the U.S. government has taken steps to limit the worst of the abuses.

On June 20 the new chairwoman of the Federal Trade Commission, Edith Ramirez, announced that the FTC would be launching what's called a Section 6(b) study of the patent troll business model. This is a necessary first step toward regulating how these entities operate.

The study is intended to reveal who these patent trolls are and how they work. The study should also reveal the complex workings of intertwined shell companies that patent trolls use to avoid anyone finding out who they really are.

Ramirez said that the patent troll business model is "focused on purchasing and asserting patents typically against operating companies with products currently on the market." She said that usually these patents are extremely broad—so broad in fact that they cover activities that these companies were already performing before the patent was issued. She noted that such patent trolls are already filing the majority of patent infringement lawsuits in the United States.

These entities have come to be called "patent trolls" in the media and by their victims because they are like the mean, ugly trolls in fairy tales who hide under bridges and leap out to confront unsuspecting travelers with threats of mayhem if the travelers don't pay their "tolls."

Ramirez, speaking at a conference organized by the Computer and Communications Industry Association and the American Antitrust Institute at the National Press Club in Washington, said that a significant number of these infringement lawsuits are aimed at small businesses, hotels, restaurants or financial institutions. The alleged infringements include activities such as using a scanner purchased from an office superstore, displaying calories counts on a restaurant Website or accepting hotel bookings online.

Unfortunately, the FTC study is just the first step in what will be a very long process. But there are other steps that are also working to get a handle on the situation. On June 24 the International Trade Commission said that it will require companies complaining of patent infringement to prove that they have a significant presence in the U.S. before any other action is taken.

'Patent Trolls' Face Rising Tide of Federal Scrutiny

Such a presence could include manufacturing a product, performing research relating to the patent or licensing the patent to companies that are using it.

"The reason behind that is patent trolls may have a tough time meeting that requirement," said Matt Levy, a patent counsel for the Computer and Communications Industry Association.

In the past this proof came at the end of the case and companies that were defending against infringement suits had already spent vast quantities of money when the complainant may not have had standing to sue in the first place.

Meanwhile, the FTC is taking action to get some control over the ravages of patent tolls as they attack businesses, especially small businesses that can't afford to defend themselves. Ramirez said that the FTC was on the lookout for trolls who make false claims for license fees when there's no ownership or standing, or where the only patent that exists has expired.

She said that the Patent and Trademark Office will now allow third parties to submit prior art in patent litigation (meaning they can show the patent did not actually have a valid claim of invention), making it harder to prove nonobvious claims. The PTO is taking steps to improve the quality of software patents, the FTC chairwoman added.

Ramirez also noted that many of the problems with patent trolls are because the PTO isn't as effective as it should have been in detecting patents that shouldn't be allowed. "Trolls are a symptom of a patent system that issues too many patents that are interpreted too broadly and a remedy system that all too frequently issues excessive damages," said Ed Black, CCIA's president, in a prepared statement provided to eWEEK.

One of the important parts of the ITC action is to put an end to the issuing of injunctions that keep products from being imported to or sold in the United States. Until this pilot program started, getting an injunction through the ITC was significantly easier than through a federal court. Levy said that federal courts have recently shown a reluctance to issue any injunctions at all in regards to patents.

Part of the problem in dealing with patent trolls is the complexity. In addition not all Patent Assertion Entities are bad, and not all are patent trolls. Some PAEs actually help with innovation. "PAEs can help by lowering the barriers for small companies," Ramirez said. "Large companies are slow to respond to demand letters. PAEs can level the playing field. PAEs can also improve liquidity, which can drive funding to startups."

But Ramirez also said that PAEs that help small inventors are in the minority—the patent trolls are winning, at least until some agencies clean up their act, when legislation catches up with practice, and when the courts and the PTO clarify their rules.

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