Real Patent Reform (Part II): Eliminate The Easy Path To The Courthouse

Recently I was asked by someone I respect and consider on the “other side” of the patent debate about why it was that I did not support the patent “reform” bill that recently was tabled. Its very simple: it is not intended to “reform” anything – it is a transparent attempt to weaken small inventor rights at the expense of big companies. Furthermore, it ignores the main culprits responsible for the mess they purport exists right now.

Real patent reform would balance the interests of both sides in the IP debate, instead of being a blatant property-grab by large corporate infringers. Moreover anyone with an ounce of sense and history in this business knows the proposals are ineffective and do not address the real problem – namely that the current system (designed almost exclusively by patent infringers mind you) makes litigation not a weapon of last resort, but, rather, the first volley in any discussion of IP rights.

Yet all of this could be fixed rather easily as I explain below. It will just require that the politicians of this country stop kow-towing to the interests of large entrenched law firms sucking down huge fees in patent disputes.

 

WHAT IS THE REAL PROBLEM?

Consider the main theme being trumpeted by the anti-patent crowd:

  1. there are too many patent lawsuits
  2. lawsuits are expensive
  3. even the “threat” of lawsuits presented in demand letters hurts small businesses

Ergo, their conclusion is, we need to make it much harder for patent owners to enforce their patents and bring lawsuits. The problem with this logic is that it only looks at half the problem, namely, the behavior of patent owners, and ignores the role of patent infringers.

For the moment, let’s assume all these statements are correct (although objective data shows that #1 is not a valid assumption). Let’s look at them in reverse order:

For #3: I have already proposed a solution, here, that would neuter any threat to small businesses.   A moratorium on enforcement against small businesses that opt in to an open patent licensing system would shelter these entities from potential harm.

For #2: patent lawsuits are expensive, but 90% of that “cost” is driven by what can only be reasonably described as “marginal to crazy” defense counsel tactics in litigation. Big defense litigators love patent cases, because the number of defenses and procedural tactics available to infringers is huge compared to other causes of action, and many companies have embraced the “scorched earth” policy of patent litigation because they think it will “send a message” to patent owners not to go after them. Try reading an Answer to a patent complaint sometime, and you will see what I mean.

EMC Answer

There are *11* separate defenses argued, without any clue about whether any of them make any sense or not.

And this doesn’t cover the gamut of procedural nonsense one sees even before one sees an Answer on the merits from a patent infringer. In one typical case there were dozens of papers filed (and likely more than $100k of dollars spent) by defense attorneys over the course of several months all on the frivolous and slim hope that the defendants would *somehow* prove the plaintiff did not have the rights to enforce the patent. This was argued, despite the fact that there was a clear agreement to transfer all rights to the patent for exactly such purpose. Needless to say, the Judge took all of 6-7 pages to summarily dispose of this nonsensical defense.

Judge Davis ruling

Again, none of these procedural games have anything to do with the merits of the case. They are simply scorched earth tactics by large firms trying to intimidate and overwhelm smaller opponents.

In conclusion the problem of patent litigation being “expensive” is mostly a self-fulfilling prophecy, because companies can’t resist the urge to try one more time at a “homerun” to kill a case. Defense counsel encourage the practice, as it keeps them “in practice.”

HOW DID WE GET INTO THIS MESS?

Which brings me now to point #1: too much patent litigation. This complaint is raised all the time by patent infringers, but the reality is that the litigation “explosion” they complain about is almost entirely ….their own doing.   Yet despite their own involvement which brought about the current chaos, there is a relatively easy “fix” to cut down substantially on excess patent lawsuits which I will explain below that is fair and does not prejudice either side (except perhaps for …litigation defense counsel who will have less work).

Consider the patent licensing – enforcement world in 2007. It was …unusual for a patent owner to sue an infringer out of the blue, with no warning. Rather, the patent owner and infringer engaged in a meaningful, productive out-of-court dialogue through an exchange of detailed informative letters and face to face meetings to understand the scope of the patents, the accused products, etc. This was true whether the company practiced the patent, or was simply an NPE (non-practicing entity).

In fact that was one of my many main functions as an IP attorney for a number of large firms, helping out dozens of companies over the course of more than 25 years in these types of dialogues.  Sometimes I was on the side of the patent owner, and sometimes on the side of the accused patent infringer, so I am well experienced in both ideologies and interests.  

In this environment, companies traded information back and forth, and typically had a long, ongoing dialog until a license was taken, or ONLY in the worst case scenario, a lawsuit ensued because of a complete impasse. This latter occurrence was rare, however, because over time each side had an opportunity to absorb and understand the other side’s perspective and a compromise was reached.  That’s not to say that there weren’t unreasonable patent owners and unreasonable infringers that didn’t clog up the system – just that there were far fewer of them because there was a robust and well established mechanism OUTSIDE the courts that allowed them to have a peaceful dialogue.

The whole process typically involved patent licensing attorneys, inhouse counsel and some business folks. Litigation counsel and their expensive rates rarely entered the picture.

Why has this practice changed you may ask?

Very simply, the current mess is a direct result of another poorly thought out SCOTUS decision known in our industry as Medimmune. In this decision the SCOTUS reversed 25 years of prior patent precedent that imposed a requirement that the party being asked to license first establish a “reasonable apprehension” of being sued by the patent owner before barreling into Court and demanding that a Judge get involved. In other words, pre-2007 patent infringers knew that they could not start a lawsuit and clog up the Courts just because a patent owner sent them a letter asking them (usually politely) to take a license.

All of that changed though in the Medimmune decision, and the subsequent Sandisk ruling that followed immediately after. In response to the SCOTUS opinion, the CAFC appellate court imposed a new, very liberal standard that pretty much made it possible to start a lawsuit ….any time a patent owner mentioned any particular patent to covering any particular product to any particular defendant.

As one commentator presciently noted:

“….Further, and as noted by the concurring opinion in SanDisk, the new rule expanding a suspected infringer’s litigation rights will undoubtedly place the patent holder in an unenviable position of choosing between enforcing its patent or being sued. That is, there is no reason to believe that a suspected infringer cannot turn the new SanDisk rule to its advantage by asking a patentee if it believes that the patent covers the suspect’s conduct. Once this question is asked, the patentee is between a rock and a hard place. If the patentee answers no, then this response is an admission against its own interest that can be used against it by the suspected infringer if the patentee ever elects to sue in the future. If the patentee answers yes, then the suspect’s right to sue immediately is likely triggered.

As such, SanDisk effectively invites any potential infringer of a patented invention to pick a fight with the patentee.

The results were of this were inevitable, and included several dramatically counterproductive effects:

  1. It now became open season for patent litigation because the standards for initiating cases dropped dramatically, thus making the Courts the forum of first choice, rather than last resort;
  2. all civilized and productive dialogue that used to occur pre-filing between rational people was extinguished, as there was no point in talking when one side could go running off to Court at the drop of a hat;
  3. patent owners stopped sending friendly license invitation letters to infringers, and instead adopted a “sue first, negotiate later” business model to avoid being sued themselves in some faraway obscure jurisdiction;
  4. patent “licensing” dialogue now occurs only in sporadic court-enforced mediation procedures that are extremely expensive and too limited for meaningful dialogue.

Needless to say, patent litigation defense counsel everywhere rejoiced, because now they were no longer marginalized in the patent “enforcement” business. Patent licensing – enforcement went from being a broad based multidisciplinary engagement to a 1-dimensional litigation centric model, where the large law firms sucked up more and more of this lucrative “expensive” business. The problem now is, the large firms were so successful in destroying the prior ecosystem that their clients face TOO MUCH litigation, because that is the only habitat – option available for small patent owners to get fair compensation for their inventions.

The other side effects of this destruction of the prior model took a bit longer to develop, but they are certainly there, and one of the main losers are companies that both sell products and have patents.   This has not been addressed by the media or the well paid corporate pundits, because it does not fit their anti-patent agenda. These hybrid patent/product entities were significantly impacted by the change in the law, because now they knew that sending a licensing letter to a competitor almost invariably meant a counter lawsuit. No inhouse counsel on the planet wants the blame for an expensive lawsuit brought on the company because of a careless request for licensing letter. As a practical matter this means that the current climate has the perverse effect of penalizing these companies. Their IP assets are far less useful because there is no domain where they can be monetized effectively outside the litigation arena.

In contrast, NPEs have no product line to protect, so they are not impeded by the same considerations. This is another significant reason why the “mix” of patent cases – or the ratio of practicing/non-practicing entity enforcers is steadily decreasing. The current environment distorts the available models to the point where litigation is mostly attractive for NPEs, and few others.

The other casualty in all of this is… transparency. In days past it was known who owned want, and what products/services were being targeted, because there were notice letters sent to companies providing them this information.   This information was freely exchanged between companies. This practice is rare nowadays, precisely because of the Medimmune/Sandisk rulings: no patent owner is going to give “notice” anymore and put themselves at a disadvantage.

This fact too demonstrates why the current state capital efforts to stop “abusive patent troll” letters is even more fool hardy and short sighted. There is already too little information on patents as it is because of the current climate, and these further attempts to criminalize sending notice letters will simply make it vanish altogether. We will then have a perfectly information-free patent environment by which companies only become aware of patents for the first time when they are sued.

It is clear that the people in charge of writing these laws have no concept of what they are doing, or the potential ramifications.

WHAT CAN BE DONE?

It is easy to see, therefore, how all of this could be remedied very simply by Congress, IF they truly are interested in patent “reform,” for all, and not just for the purpose of protecting big companies.  The prior standard requiring a “reasonable apprehension of a lawsuit” could be revisited, tweaked and codified as part of 28 USC §2201 – 2202 to specifically cover patent suits. This would remove the current incentives on both sides to file unnecessary lawsuits, would un-clog the courts, reestablish more transparent markets for patents, and reduce the costs of litigation.

By no means am I saying the prior scheme was perfect, but it enabled an environment, market and model by which disputes were mostly heard outside of the Court. Returning some sanity to the DJ standard would also immediately start the return of the patent universe back to what it was before, a rational market where information was exchanged freely about patents.

Of course the expensive highly paid patent litigation counsel may be unhappy, because there would be a lot fewer lawsuits.   Plaintiff contingency counsel would see fewer $$ as well. But if the Republicans and Democrats of this country want to prove that they are good custodians and protectors of ownership rights, and not beholden to “trial counsel” interests, perhaps they will give this proposal a serious look.

IAM

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