Antitrust Law Daily Wrap Up, ANTITRUST NEWS: FTC, Justice Urged to Take on Patent Trolls, (Apr 9, 2013)

By Lynn Stanton, TRDaily

Telecom carriers and providers of mobile device operating systems were among those urging the Federal Trade Commission and Department of Justice to take action to reduce litigation by patent assertion entities (PAEs), often called patent trolls, who critics say acquire patents for the purpose of suing for alleged infringement, rather than for the purpose of using them or licensing them.

Parties were responding to a request for comments by the FTC and Justice, in connection with a workshop last fall on PAEs and the impact of their activities on innovation and competition, and the implications for antitrust enforcement

In joint comments, Verizon Communications, Inc., and the U.S. Telecom Association said that Justice and the FTC "should encourage courts to prevent subsequent acquirers" of standard-essential patents that are the subject of patent-holder commitments to offer them on reasonable and nondiscriminatory (RAND) terms "from extracting the hold-up value of those patents." The hold-up value is the additional value created by being essential to a standard. "Allowing the transfer of title or assignment of rights to free a patent of its RAND encumbrance recreates all of the problems that RAND requirements are meant to address," they said.

Verizon and USTelecom also called on Justice and the FTC to "urge courts to take action to reduce the costs of patent litigation in order to foster the public good of private challenges to questionable patents." For example, addressing patent validity issues, case-dispositive issues, and the scope of relief early in the judicial process "reduce the costs of litigation and make it more likely that an accused infringer will litigate." They added, "Courts should also be persuaded to make clear that litigation practices that intentionally and unnecessarily drive up costs warrant the imposition of fees under §285" of Title 35 of the U.S. Code.

The Software & Information Industry Association said that the "secrecy" regarding connections among PAEs and their corporate parents "makes it very difficult to determine what patents a PAE owns, to know whether a patent is owned by a party from which the prospective licensee has already been granted a license, and to determine the ultimate economic beneficiary of any monies obtained through infringed claims demands or suits. … This dynamic, in conjunction with there being no requirement that patent transfers be recorded with the U.S. Patent and Trademark Office or elsewhere, creates an environment that is ripe for abuse and gamesmanship."

SIIA added, "Another relatively new PAE tactic that attempts to take advantage of the asymmetry in discovery costs is the practice of suing a high-tech company’s customers, as opposed to the company itself. … Because the operating company must indemnify its customers under the terms of their agreement, the upshot of these tactics is that the operating company is unable to challenge the patent and ends up paying as much in total damages as if were a defendant in the case, while at the same time likely straining its relationship with its customers."

As for solutions, SIIA said, "Addressing the problems resulting from the litigation cost imbalance is not a silver bullet solution. There are steps that the high-tech community and the federal government should take to fight back against the abusive practices of PAEs. Joint conduct and enforcement actions by high-tech companies could reduce costs associated with litigating PAE suits. Examples of joint conduct that may benefit consumers and overcome [the] collective action problem, include mutual agreements to disarm PAEs, joint efforts to purchase patents to keep them away from PAEs, and joint agreements among operating companies to negotiate with PAEs through defensive patent aggregators."

However, SIIA said that joint action is also not enough, and that the federal government needs to take action, in the form of better quality program metrics at USPTO; FTC advocacy for reforms to address "oversized patent damage awards, asymmetry in patent litigation costs, flaws in the patent assignment system and rampant functional claiming in high-tech patents"; and an FTC "section 6(b)" study "to better understand the ways in which patent trolls violate the antitrust laws and harm innovation and competition."

In joint comments, Google, Inc., BlackBerry, EarthLink, Inc., and Red Hat, Inc., also called for an FTC study under section 46(b) of Title 15 of the U.S. Code, "otherwise known as Section 6(b)," which "enables the Commission to engage in a wide-ranging probe of business practices." They recommended that the FTC "initially focus on the information technology industry. The IT industry has been a principal target of litigation by PAEs and has witnessed notable transfer patents from operating companies to PAEs."

Microsoft Corp. said that despite the passage of the America Invents Act (AIA) and efforts at the U.S. Patent and Trademark Office to improve patent quality, "suits by PAEs continue to be a serious and growing problem for industry as demonstrated by an expanding docket of PAE cases in both District Courts and the International Trade Commission."

Microsoft added, "In our view, the limited evidence available suggests that the growth of PAE activity is merely a symptom of more general challenges relating to, inter alia, imperfect patent quality, high patent litigation costs, and systemic information and risk asymmetries. Accordingly, we generally agree with the assessment voiced by Professor [Carl] Shapiro [at the FTC-Justice workshop] that the appropriate focus of further reforms should be focused improvements to the patent system, including patent litigation, rather than the PAE business model itself."

Microsoft continued, "Having just finished one of the most significant reform efforts in the history of U.S. patent law, we think that—in most areas—it would be prudent to give the changes made by the AIA a chance to work before advancing further reforms." However, it suggested moving ahead with some improvements in areas not addressed by the AIA, such as increasing transparency in patent ownership to enable "an efficient secondary market for patents" as well patent acquisition and licensing efforts; improving patent quality through clearer claim terms and "[m]ore rigorous standards for applying the written description and enablement requirements"; and adopting a "loser-pays" rule for patent litigation.

The Consumer Electronics Association called for passage of the Saving High Tech Inventors from Egregious Legal Disputes (SHIELD) Act, which would require PAEs to pay the litigation costs of the parties they sue unsuccessfully.

The National Retail Federation also supported the SHIELD Act as a "potential solution." The NRF added, "Retailers are also considering a legislative proposal which would limit the scope of discovery requests in patent litigation to ‘core documents’ to help drive down the excessive costs associated with patent trolls’ current model of abusive and endless discovery requests. … Other legislative solutions could include a requirement that patent trolls articulate, with documentary evidence, how the defendant is violating the patent. In addition, limiting damages to actual and direct damages, as opposed to the current licensing model which allows patent trolls to extort significant settlement monies, would serve as a deterrent to their litigation."

"While all of the proposals are laudable, retailers are also interested in finding a solution that provides immunity from patent trolls altogether," the NRF continued. "[A]s end-users of much of the technology being disputed broadly and vaguely, [retailers] should not be the principal targets of these far-reaching lawsuits," it added.

The Electronic Frontier Foundation said that PAEs "are causing enormous harm to innovators and creators. Companies that actually create products, services, and jobs are under siege by PAEs who purchase vague and overbroad patents to launch lawsuits, or, in some instances, merely threaten lawsuits."

EFF urged the FTC both to "advocate for the public interest with respect to patents and PAE activities" and to "consider deploying its investigatory and enforcement powers against PAEs. EFF believes that at least some PAE litigation, especially that brought against end-users, seriously harms consumers and may not be entitled to Noerr-Pennington immunity." It also suggested that "PAE activity can constitute an ‘unfair’ method of competition that runs afoul of Section 5 of the FTC Act."

EFF added, "The FTC should reject any claim that PAEs incentivize innovation by providing income to inventors. Of the $29 billion in revenues PAEs extracted from productive companies in 2011, less than 25 percent flowed to inventors."

News: Antitrust