White House Takes on ‘Patent Trolls’

Corporate Counsel

June 5, 2013

Intellectual property attorneys were buzzing Tuesday after the White House announced it was actively taking on the problem of patent assertion entities, or “patent trolls,” both through legislative proposals and executive action.

“Patent trolls have become a major problem for many of America’s top technology companies, draining resources and executive attention that could be devoted to innovation,” said James Batchelder, a partner who specializes in intellectual property litigation at the Silicon Valley office of Ropes & Gray. “People are heartened that this troll problem is being acknowledged by the White House and getting attention from the highest levels of government.”

Frustration has been mounting over the problems presented by these non-practicing entities (NPEs)—companies that exist solely to acquire and license patents but do not produce anything. Several bills have been introduced in Congress over the past few months to combat NPEs’ increased activity, which is disruptive and costs the U.S. economy millions of dollars, according to academic studies. Technology companies in particular have been lobbying hard for the Obama administration and Congress to take some action.

President Barack Obama’s announcement includes seven legislative proposals—some of which include parts of bills already pending in Congress. He also announced five executive actions that the White House will take. These include:

The tightening of functional claiming: Patent applicants will be required to explain their inventions better and limit those inventions to a specific way of accomplishing a task, as opposed to all ways of accomplishing a task. This is intended to stem the tide of overbroad software patents and increase patent quality.
Fixing transparency: Patent owners will be required to regularly update patent ownership information at the Patent and Trademark Office, designating the “ultimate parent entity” in control of the patent or application. This is intended to stop NPEs from setting up shell companies to hide their activities and to prevent their targets from knowing the full extent of the patents they hold when negotiating settlements.
Empowering downstream users: The PTO will provide outreach materials and clearly explain on a website what companies can do when facing demands from a possible patent troll. This is a reaction to an increasingly common practice in which NPEs target small businesses, startups, and individual end-users, threatening them with lawsuits and licensing demands for simply using everyday products. “End-users should not be subject to lawsuits for simply using a product as intended,” the White House said.
Expanding dedicated outreach and study: The White House will work with patent stakeholders, research institutions, consumer advocates, public interest groups, and the general public, and will expand outreach efforts—including six months of high-profile events across the country—to develop new ideas and consensus around updates to patent policies and laws. It will also increase scholarly programs at the PTO to help develop more data and research on issues affecting patent quality.
Strengthening enforcement of exclusion orders: The Administration will launch an interagency review of procedures that U.S. Customs and Border Protection and the International Trade Commission use to evaluate the scope of exclusion orders issued by the ITC on imported goods found to infringe, and ensure the process and standards utilized in enforcement of those exclusion orders are transparent, effective, and efficient.

The seven legislative proposals include:

Increasing demand letter transparency: Demand letters would be made accessible and searchable to the public. This will give those targeted by NPEs increased ability to fight back.
Fixing transparency: Any party sending demand letters, filing an infringement suit, or seeking PTO review of a patent would have to file updated ownership information and the PTO or district courts could impose sanctions for non-compliance.
Expanding the PTO’s transitional program for covered business method patents: Similar to a bill proposed by Senator Charles Schumer (D-NY), this would allow a broader category of patents and wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board.
Protecting end users: By giving end users legal tools to slow down or stay litigation, NPEs would find it more difficult to target small businesses and individuals for using products the NPE claims infringe its patents.
Changing the ITC standard for obtaining an injunction: This proposal would align the standard that must be met in the federal courts before an injunction can be issued with the standard that must be met at the ITC before an exclusion order can be issued. Currently the federal court’s four-factor test does not apply at the ITC.
Permitting more discretion in awarding fees to prevailing parties in patent cases: This would make it easier for district courts to make losers pay when they bring frivolous lawsuits and apply a standard similar to one used in copyright infringement cases.
Changing ALJ rules: This would ensure the ITC has flexibility in hiring qualified Administrative Law Judges.

While reaction from patent litigators to the White House’s actions and proposals was generally positive, some attorneys said they did not go far enough. “Some of these actions will be helpful when fighting trolls, but they won’t do much to prevent lawsuits,” said Fabio Marino, a partner in the Silicon Valley office of McDermott Will & Emery.

The legislative proposals go further, he said, but noted that the last round of patent reform took more than 10 years to pass, and overall Congress is not known for its speed. “Until I see these proposals pass through committee, I will remain somewhat skeptical that they’ll go anywhere”

Batchelder, too, noted that some of the proposals fell short of what is needed. The tightening of functional claiming, for example, is extremely important to patent litigators, “but the remedy is tepid and doesn’t get to the heart of the problem,” he said.

Ognian Shentov, a patent litigator and partner at Jones Day in New York and vice chairman of the U.S. Patent Law Committee of the Intellectual Property Owners Association, said while many patent holders are pleased to see increased attention being paid to the patent system, they are unsure about some of the proposals. “There are fears that some of these actions and proposals could have unintended consequences,” he said.

There is some concern about the proposal to align the ITC’s exclusion order requirement with the federal court’s test for injunctive relief, for example. Some attorneys noted that complainants at the ITC must meet a domestic industry requirement in order to earn an exclusion order, and most cannot do so. Aligning the ITC standard with the federal court test is therefore unnecessary, they said.

Still, attorneys were pleased by the attention coming from the White House. “This is very significant,” said Sharis Pozen, a partner at Skadden, Arps, Slate, Meagher & Flom who specializes in antitrust issues. “This is a comprehensive set of legislative proposals and executive actions from the highest levels of government, and that’s a big deal.”