Taking a Stand: How Companies and Government Are Pushing Back against Patent Trolls

From the LexisNexis® “This is real law” editorial team

Thomas Edison was an astute businessman. He is repeatedly credited for things he did not actually invent, which by itself attests to his capacity for improving on the impractical or undeveloped ideas of others and reaping the benefits of patenting his innovations. He also purchased inventions solely to secure access to their patents, and he was not above licensing his own work rather than commercializing it directly. He was a resounding success as a result.

For all that, Edison has a surprisingly mixed legacy today. On the one hand, “the Wizard of Menlo Park” (named after his laboratory in New Jersey) is arguably the United States’ most famous inventor and a testimonial to American ingenuity—a giant who propelled the country and even the world into the 20th century and beyond.

But there is another, more complex side to his personality. Even in his day, Edison was sometimes involved in controversy over his inventions, due in no small measure to his patent interests. Moreover, with 1,093 patents in his name when he died in 1931, Edison was at times criticized for the sheer volume of his holdings, not all of which he exercised or promoted.

It’s a logical fallacy—an appeal to authority or a Texas sharpshooter argument—but such criticisms explain why Edison invariably gets dragged into the current debate about the state of the U.S. patent system.

Edison is invoked not to tarnish the great man’s image, but rather for the sake of borrowed legitimacy—an attempt to equate some of the inventor’s less significant practices or foibles with those of a small but worrying group of contemporary patent holders.

Cause for Concern

At issue is a growing unease over how some patent holders aggressively enforce their purported rights against alleged infringers, often with seemingly spurious claims and no apparent purpose other than monetary gain. Such entities are pejoratively referred to as “patent trolls,” a term that first gained traction with the 1994 release of a video that was sold to corporations, universities and government agencies to warn against the emerging practice.

To be fair, trolls—especially when they are referred to more politely as “patent assertion entities”—have their defenders, and there is criticism of how the term is sometimes applied (which is how Edison ends up embroiled in the controversy). Simply holding a large number of patents does not qualify, for example. In fact, companies frequently gather patents to fend off litigation from rivals—a kind of “mutual assured destruction” strategy based on perceived “patent parity”—and with no genuine intent to spur further innovation directly related to such holdings.

If it’s true that misunderstandings frequently result from poor definitions, it’s best to be clear: patent trolls are distinguishable by the boldness and ultimate aim of their tactics, which typically rely on the broad assertion of dubious rights against a large number of defendants and often with the hope of settling out of court. And just like their counterparts in ancient Norse mythology, they are scaring a whole lot of people.

Infographic: Patent Assertion Entities in Numbers (click thumbnail to view larger version)

A Call to Arms

Indeed, whether you call them patent assertion entities (PAEs), trolls or any other name, their actions are shaking the country’s legal system. In 2012, for example, PAEs initiated 62% of patent litigation in the United States, up from 19% in 2006. They also targeted an increased number of “non-tech” companies, such as funeral homes, advertising agencies and traditional brick-and-mortar retailers, according to one authoritative source. Business has been booming for them as a result.

In response, Gary Shapiro, president of the Consumer Electronics Association, didn’t mince words in an April 16, 2013, editorial published in The Washington Times. Shapiro declared that businesses need protection from trolls, which he compared to “legal leeches.” He added with equal exclamatory weight: “Academics estimate that businesses paid out $29 billion to trolls in 2011, double the amount paid in 2009.”

Shapiro’s editorial was notable for another point. Increasingly, companies are starting to indicate that they have had enough and are prepared to fight back against unscrupulous patent assertions.

Tales from the Corporate Counteroffensive

One company Shapiro cited in his editorial was online retailer Newegg Inc. In 2007, Soverain Software LLC, a Chicago-based patent holding company, brazenly tried to stake a $34 million claim against Newegg for alleged ownership of common online retail shopping features. Soverain had already extracted large settlements from a long list of retailers, including Amazon.com, Gap, Nordstrom, Macy’s, Home Depot, Radio Shack and Kohl’s.

But Newegg did the unexpected. It pushed back—and eventually won. “It wasn’t easy or cheap, but it was the right thing to do for our customers and as a good corporate citizen,” said Newegg Chief Legal Officer Lee Cheng.

Alan Schoenbaum, Senior Vice President, General Counsel and Secretary for Rackspace, the Texas-based IT hosting company, shares that combative spirit. “Today we drove a stake into the ground in our dogged fight against patent trolls—we sued one of the most notorious patent trolls in America,” he wrote on April 4, 2013, in The Rackspace Blog! & Newsroom. He was referring to a suit filed by Rackspace in federal court in San Antonio, against a PAE in response to infringement litigation. Among other things, Rackspace is seeking damages and a declaratory judgment that the company did not infringe any patents.

Like the fictional news anchor Howard Beale in the 1976 satirical film Network, such company executives seem to be shouting that they’re “as mad as hell and not going to take it anymore,” in an effort to galvanize others into taking similar stances against trolls.

Government’s Response

Lawmakers, too, are showing an increased determination to deal with the problem. The America Invents Act, which was passed by Congress and signed into law by President Obama in September 2011, brought significant change to the U.S. patent system, but it did not completely address the patent troll dilemma. Politicians are now clamoring to fashion legislation to fix that.

One solution is the Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act, revised from an earlier version and reintroduced in the House on February 27, 2013, by Reps. Peter DeFazio (D-OR) and Jason Chaffetz (R-UT). The proposed law would impose reforms to curb suits by patent trolls. A linchpin of the legislation is the “loser pays” concept, which proponents argue would dampen enthusiasm for a lawsuit by the prospect of having to foot the bill if the plaintiff does not prevail.

For his part, President Obama recently announced a slate of executive actions and legislative recommendations to deter “frivolous patent litigation.” The announcement in a White House press release acknowledged that innovators are struggling to cope with costly challenges from PAEs.

Meanwhile, on the agency side, the Federal Trade Commission (FTC) is said to be considering a so-called 6(b) investigation into whether PAEs are stifling competition. That would allow the FTC to use its subpoena powers to collect information about PAEs that is otherwise unavailable to third parties.

At the state level, Vermont recently enacted the nation’s first anti-trolling law. It remains uncertain whether the state has the legal authority to regulate patent activities, but nonetheless Vermont’s efforts are another part of the growing legislative crackdown on patent trolls.

All that corporate, government and executive attention is receiving widespread media coverage and making life more uncomfortable for the trolls. Their future may be in doubt.

As usual, those in the legal profession will be watching closely as the drama unfolds.

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