Real Patent Reform (Part I): Moratoriums and Amnesties To Stop Enforcements vs Small Biz
Let me preface this discussion by giving some background: I have been involved in the patent business for almost 30 years since I first worked for Don Mon, an outstanding practitioner (rest his soul) in Pasadena, California. After college (BS, Caltech 1983) I was a practicing engineer and did stints at startups, IBM, and then as a computer consultant before going to law school. In my 25 year legal career I have seen and done every “patent” related thing imaginable, from inventing, prosecuting, advising, licensing, enforcing, litigating in multiple venues, selling… you name it.
There was a time when patents were rarely treated so poorly, or “patent owners” demonized as evil or worse… “trolls” as they are today. The reasons for this recent change are complex, and worthy of a whole separate discussion, but for now we have to look at circumstances as they are and figure out how to improve them – for ALL participants.
After listening to and reading the ever-growing din of complaints in this arena, I decided to try and use some of experience, insights and talents to try and design a vehicle that tries to reduce the friction points in the current hostilities. For what its worth, what I set out below is my initial conception of what I characterize loosely as a Patent Enforcement Moratorium-Amnesty Escrow Brokering System. Please appreciate that while I have been thinking about this problem for a long time, the discussion you see below is very recent and just my initial incarnation as I have been able to render it onto human useable form. It is not intended to be the final word but just a starting point for a more complete dialog.
My system has a few basic goals:
- Reduce litigation against small technology companies;
- Provide a cost free but public mechanism to recognize IP rights contributions by inventors
- Reduce uncertainty for small companies in future IP rights markets;
I suggest these goals are worthwhile given the horror stories, mess and other myths perpetuated about patent “trolls” today, which, even if not remotely accurate, have the effect of depressing and impeding dialogue between both small companies and small inventors. There may be other benefits of this proposal but for now this seems like a reasonable start.
In my opinion the public debate about patents has been hijacked by large anti-patent interests, who try to demonize every patent owner as the boogeyman out to destroy their business or worse, eat small children. Their main propaganda has been screaming headlines about how many “small businesses” have been threatened or destroyed by so-called patent trolls. Aside from the fact that this isn’t true, I have a better solution to the problem:
LET’S TAKE SMALL BUSINESSES OFF THE PATENT ENFORCEMENT TABLE
That’s right, I know it sounds insane, and most patent owners would refuse to consider this as an option, but I submit it makes a whole lot of sense because even if no $$ is exchanged for a license, the “cost” is minimal if non-existent for most owners. As those in the business know, most patent owners have no intention or interest in trying to monetize these opportunities in the first place.
Conversely, the benefits are huge because now it reduces public “noise” about trolls and focuses the battle on the larger patent squatters.
HOW DOES IT WORK?
I envision something I refer to as a “Small Entity Patent Alliance” or SEPA if you like acronyms. In this plan a kind of third party intermediary operates something that can be loosely called an IP Rights “Brokering” platform. The participants include the intermediary broker (IB), the Patent Rights Holders (PRH) (including NPEs) Patent Rights Users (PRU – small businesses) and other Third Parties (3P – public, Courts, etc.). Note that if some creative government legislative assistant wants to REALLY enact patent “reform” perhaps there is some role in all of this for our good Government to play – such as the Intermediary for example.
To make it easier to follow I color-coded the expected areas of contribution or processing by the respective entities. So the light grey materials are objects contributed by or interacted with by PRH, dark grey by PRU, and light green denotes processing or contributions by the IB. External data/queries are noted in orange/coral.
In this SEPA system PRHs contribute “rights” in the form of limited contractual covenants. These rights are voluntary but binding restrictions not to sue certain entities (PRU) who meet the qualification criteria for a “small business,” for a specific designated set of assets. The definition, scope, etc. of what constitutes a “small business” can be modeled and tailored after similar allowances that already exist in a number of domains. To avoid confusion, arguments, etc., this definition would be the same in every binding commitment between PRH and PRU. Note that to further the goals of the program, an entity seeking protection under this limited umbrella of rights would have to certify also that have (will) not file an action against the PRH for infringement, file a post-grant challenge with the PTO, etc.
I also propose two or more different tiers of “free” IP rights contributed by PRH ranging from mandatory to optional.
At the first most basic level every IP patent holder must contractually agree to a moratorium; not to enforce their patent (either by action or demand letter) against products/services of any entities that meet the program “small biz” definition. Note that this is not a full license, just a contingent commitment to not sue certain entities who similarly agree to some reciprocal conditions. This contractual right for a moratorium would attach to any PRU who qualifies for enrollment and submits the certification. Again, to avoid confusion, argument, debates, the form of this moratorium commitment would be uniform for all participants.
After enrolling and certifying their status (as a rep/warranty that we see all the time in contracts) the small business entity would get a digital/paper rights certificate confirming their participation. In some instances the IB may insist that as part of the participation and free rights given, the entity must publicize their participation in the program (a badge or the like on their website: “MEMBER OF SEPA” or words that effect).
Note that I acknowledge the discussion of how far the PRU amnesty/moratorium protection extends – i.e. is it personal to the PRU or does it exend to “downstream rights” for customers of the PRU who incorporate the product/service into something else, or “have made” rights – vendors for the PRU who provide the latter with components – is complex, but can be worked out. It is done all the time in real world patent licensing, and can be done here as well. It is conceivable that because each industry is somewhat different, this additional protection may be the subject of some customization by the PRH. Again the object of the plan should be to reduce litigation, disputes, etc., while making the program broad enough to increase participation. A plan that only protects the PRU and does not give shelter to the PRU’s customers would be unworkable business-wise and unlikely to gain traction.
In the event a dispute has already occurred with the PRU or someone already has been sued, the small biz PRU could enroll and obtain retroactive protection, so long as they did so within some limited grace period. SEPA could monitor litigations, any demand letter “repository” (as such are now implemented and/or may be implemented some day) and notify prospective PRH and/or PRU of the program and available rights plans to increase participation.
Upon enrollment, every PRU would also be granted amnesty for any prior infringements for the times that they would have otherwise qualified for participation. To avoid scaring participants away, enrollment would not constitute notice under §287 for purposes of damages, or be useable in any shape or form to argue wilful infringement later on.
The IB or SEPA keeps track of all the moratorium, amnesty rights committed by PRH, and all the enrollments/certifications by the PRU. It can respond to third party queries as to participants, rights, etc. from all parties.
The IB also implements matching or qualification logic to make sure that the enrollments/certifications comply with the program requirements, and maintains a database of PRH/PRU that may or may not be available for inspection by members, third parties, the public, etc.
To make the program as lightweight as possible from an administrative perspective, I think that renewals of the certifications would be done at most once a year. In fact PRU could opt for automatic renewals, subject to the proviso that if turned out their certification was no longer applicable, it would not benefit them for the out-of-compliance periods. But no further penalties would be incurred because again the goal is ease of compliance, not onerous restrictions.
In my humble opinion this is a pretty good darn start.
But it could be better – it is expected of course that the PRU’s business may grow, or they may acquire or be acquired by another company. The system should have some allowance for that as well, to make it more practical and grow with the business. For this reason I submit that PRH would also be required (asked?) to submit a second tier of broader patent rights in which they define, at the time of participation, what a real license compensation scheme would look like for practice of the inventions beyond the initial limited “small biz” thresholds.
So imagine that a small business is defined as “less than $1m in sales of the products covered by the patents.” The PRH may include an addendum over and above their main, mandatory commitment that agrees that if PRU X outgrows the certification, they can (optionally) “license” any excess sales above such threshold at a rate of Y%. There is NO obligation by PRU X to accept this secondary commitment; in fact, they have a limited “opt-in” election period during which they can elect to expand their protection and take this additional license, or just not take it all. Disputes about what products are or are not covered can be covered by arbitration, as is SOP again in many patent licensing agreements.
Irrespective of whether the small company takes the additional protection or not, the parties can be bound to use arbitration again if there is a continuing dispute post-participation. Thus if PRU X outgrows the original grant, but does not want to take the proffered license, the PRH is limited to an arbitration action. This commitment is reciprocal though, so if the PRU disagrees, they are limited this way as well.
You might think “what’s to stop PRH from setting the royalty rate too high”? That is a definite possibility, yes, but they would only be hurting themselves in terms of later license adoptions: no licensee will accept unreasonable terms. Also, because the commitment is made by PRH at the initial participation, and is binding for certain period (say 1-3 years) the PRUs can all decide for themselves over time if the demand is reasonable or not. Expectations are set, and no games are possible later about how the rate should be calculated. In some instances the PRH may be required to give notice that the rates are changing (for better or for worse; reductions might be possible without “approval” or notice). The Broker platform can allow this as well, based on changed circumstances and a legitimate interest in seeing that licenses are adopted.
I know one big objection from PRH folks will be that they don’t want to have these open ended commitments come back to bite them in a real litigation against a big infringer. The last thing they want is mega company arguing that they should get .01% because PRH offered that rate in a prospective deal … 5 years ago. This is a legitimate concern, and perhaps the platform gets “birthed” without this feature until it is better ironed out. But, again, I think it is something that can be managed with creative contract construction and frameworks. If the future rate is only available for a certain time, and for a small number of products, market, etc., the PRH can argue it is not relevant to an infringement damages award. Most judges are looking at these issues carefully, and IMO are unlikely to penalize the NPE for having been a good citizen. Brighter minds than mine can no doubt think of better and more creative solutions as well, and I do not perceive this a gating issue that should bar the initial birth of SEPA with more limited parameters.
Due to their extensive holdings, it may be impossible for a PRH to make the commitment for each bundle of assets they currently own. Nonetheless they could enroll a substantial number of their IP assets this way, and parameters of the plans would guide their decision making later as well in terms of purchase rights value.
I have not decided yet if conceptually the broker platform should operate with a “blind” or “double blind” policy as well, meaning, privacy restrictions could be imposed so the PRH are not even made aware of the identify of the PRU entities. This would go a long ways to increase participation in SEPA, I’m sure, on that side of the equation. In a double blind situation the PRU would also not know which PRH had contributed rights to the program. The benefits of this are less apparent to me, other than reciprocity, because the PRU don’t know why they should participate. Some information on SEPA membership is useful to inform consent and attract participation; what small entity would not want a full basket of free IP rights if a big player like IBM was involved?
Under a system that runs with a “blind” policy, the identity of a participant is revealed only in the event of a dispute. So, for example, the system generates a “Rights Certificate” that can be produced by a small entity in response to a challenge or demand by a PRH. The PRH, if they participated in the plan, would have to abide by the certification unless it was stale, outdated, etc.
All of the functions, modules and requirements noted above could be easily implemented by an online service.
I have other specific ideas and suggestions for implementation, but for now I think this is enough to get the idea out there and rolling for consideration. I suspect there is plenty to borrow from other IP sharing models out there as well that can be incorporated and re-purposed. If anyone out there has thoughts, inputs or suggestions, please feel free to leave a comment here or by Twitter at https://twitter.com/JNGross so others in the community can see as well.
CONCLUSION: WHY NOT?
I submit that if this plan were in place and widely used then all the fog of war is dissipated and the anti-patent crowd has far fewer emotional talking points. The patent owners, in turn, would eliminate the ridiculous “bully” label, gain substantial public credibility and admiration for being responsible citizens, and reclaim the moral high ground in the battle.
Why do I think this will work? After almost 30 years of being on both sides of the patent table, I think I understand the interests and requirements of both sides quite well. More importantly I believe the incentives are there for all stakeholders to participate and make it work.
What are the costs? For IP holders minimal, because the real cost of enforcement in today’s environment is substantial, and there are bigger game in the forest worth pursuing. I used to tell clients: “why bother with this target? No one with any sense who values their time and cost of bullets tries to make a meal of squirrels” (unless you’re an owl and not a hunter of course).
For small companies the cost is almost…. zero. Once they enroll in SEPA, all that is needed after is yearly re-certification. If they outgrow their status, they can elect to take a license, and only then for something that they’ve agreed in advance is a fair price for use of the technology – and only on the excess over the threshold. They have to reciprocate the non-enforcement standstill by not suing or trying to destroy the patent owner’s asset, but surely that’s not an issue
That’s about it.
I don’t doubt that it will take some time before the IP holders believe this model helps them, because at first glance it looks like they are giving away …too much. Maybe they are, but I think the larger benefits will prove out over time. If two or three of the larger NPE enforcers (IPNAV? Acacia?) or large companies (IBM, MSFT, APL) embraced this plan I think the peer pressure would be on the smaller IP owners and they’d have no choice. The first question a Judge would ask in any infringement case: are you NOT part of the Small Entity Patent Alliance? Why not?
SEPA is based on self-imposed restrictions and policing by IP holders. Should a small business wants to avail itself of the benefits, all it has to do is sign up and certify. With enough education I think they can be persuaded and made comfortable with this.
I don’t doubt that this proposal has holes, weaknesses, etc. and I’m sure I will get a torrent of emails from legal colleagues and hostile strangers attacking this proposal. I can just read it now:
WHAT HAPPENS IF SOMEONE MAKES A MISTAKE IN THEIR CERTIFICATION?
WHAT HAPPENS IF SOMEONE LIES IN THEIR CERTIFICATION?
WHAT HAPPENS IF THE PATENT OWNER SELLS THE PATENT TO SOMEONE ELSE?
and so on
There is no model in the world that can prevent all disputes. But I am convinced beyond any doubt that the larger framework is valuable, workable, etc., and that the corner cases could all be addressed with some creative thinking and persistence. Do I think it will solve every possible scenario? Of course not. But even if it solved some significant fraction, would that not be a plus? What is the downside of being wrong? Why let the potential inapplicability to some small fraction of cases impede adoption for the bulk of cases where it is useful.
In closing, I relate one of my favorite personal episodes many years ago as a customer of a large bank that went something like the following:
Me: I’d like to do X
Banker: We can’t do that
Me: Ok, how about Y
Banker: Sorry, we can’t do that either
And so on, for 5 minutes, at which point in the end I scream “For G*ds sake please tell me SOMETHING you CAN do”
This is the same way I feel about typical “legal” criticisms of these kinds of larger but simpler solutions to common problems. I’ve never met a lawyer who could not creatively “find” a problem with a proposal; but most fall very short of conceiving creative proposals. It is in the nature of most legal work that one gets paid to tell clients what NOT to do, and there is a huge CYA – malpractice paranoia that imbues almost every thought, and every decision. As some partners used to relate, few lawyers ever got in trouble by telling the client NOT to do something; it was only when they “blessed” some venture that went sour that the client came back in anger.
But let’s not let them or other naysayers dictate policy, or kill a great model (whether its something like the above, or some other) just because they can raise 1000 objections to a few minor points.
Again if you have comments, suggestions, inputs, etc., I encourage you to comment or send me a note via Twitter: https://twitter.com/JNGross.
I also encourage you to alert one or more of the other groups purporting to be advancing patent “reform” about this concept if it makes sense to you, and see if we can make some real progress on these vitally important issues for our vilified patent system.
Thanks for reading!