Two hundred twenty-five years ago, on July 31 1790, the first patent was issued in the United States. It covered a method of making a fertilizer ingredient, potash.
How times have changed! Over eight million patents later, we’ve moved from fertilizer to a revolution in genetics and digital technologies. Thousands of patents have been issued on computer software and methods of doing business.
Patents are supposed to encourage such dramatic innovation by providing inventors a limited period of time where they can exclude others from using their invention. Nevertheless, the law can struggle to keep up with new technologies. Software and business-method patents have created strain on the way our patent system operates. In particular, these patents have been frequently used by what critics have dubbed the “patent troll.”
Patent trolling for profit
What exactly are “patent trolls?” Their less pejorative appellation is Patent Assertion Entities (PAEs). PAEs generally are business entities that have only one asset, a patent. Typically they buy these patents from small inventors or bankrupt companies. PAEs don’t manufacture anything. Their entire business model is to threaten to sue people for patent infringement in hopes of getting licensing fees for the patent.
The PAE model is effective. Patent litigation is expensive for companies, costing potentially millions of dollars. Once sued by a PAE, many companies prefer to settle to avoid the cost, regardless of the merits of the case.
PAEs, on the other hand, have few litigation expenses. Their only asset is the patent, and often their lawyers take the case on a contingency fee basis, so the lawyer gets paid only if and when the money comes in. Settle the case, then move on to the next target.
A popular statistic thrown around is that 60% of United States patent lawsuits filed in 2013 were brought by PAEs, leading many to view PAEs as parasites.
Congress has reacted, with patent reform legislation on the verge of passing. The legislation is targeted at trolls and contains myriad provisions: creating standards for pleading a case far beyond other forms of litigation, making the loser pay in patent litigation and limiting discovery until the court has interpreted what the patent covers. There seems to be much enthusiasm for such reform, with reform bills making it out of committee in both the House and the Senate in a surprising show of bipartisanship.
Except, we don’t need it, at least not yet.
Legal changes already under way
The patent system is already in the throes of dramatic change, the impact of which we are only now beginning to feel.
Even in the two years since that 60% statistic, we’ve seen a sea change in patent law. To alter the patent landscape yet again risks undermining the value of all patents, not just the PAEs’. The proposed reforms are intended to chill abusive PAE activity, but they would have the same impact on small inventors and universities, who are also entities that don’t manufacture anything. Yet we would not consider them “trolls.”
The changes that have already taken place came from both Congress and the courts.
The Supreme Court, in particular, decided numerous cases in 2014 that could alter dramatically the ability of PAEs to operate. The court made it easier, for example, to force PAEs to pay their opponents’ attorney fees when the PAE loses, making trolls’ suits riskier and potentially less profitable.
Most importantly, the Supreme Court’s decision in Alice Corporation v CLS Bank has dramatically altered the law governing which types of inventions are eligible for patent protection.
Alice invalidated a particular business method – a way to reduce the risk in a financial transaction of one party not carrying through on the agreement. The Supreme Court concluded that the method was merely an “abstract idea.” The patent in essence claimed the idea of avoiding these risks and merely used conventional computer technology to achieve it. According to the Supreme Court, that is not enough to constitute a patentable invention.
The Supreme Court’s decision has created a flood of other decisions invalidating patents on similar inventions, along with those relating to computer software, because courts view them as merely abstract ideas that are being implemented through routine mechanisms. The US Court of Appeals for the Federal Circuit – the court hearing all patent appeals across the country – has found only one patent valid on these grounds in the post-Alice world, invalidating numerous others. These are the areas in which PAEs often operate, and many of their patents are now likely dead.
For its part, Congress substantially reworked the patent system in 2011 when it passed the America Invents Act (AIA).
Among other changes, the AIA created new procedures at the United States Patent and Trademark Office (USPTO) that provide alternatives for challenging patents that are faster and cheaper than litigation.
In particular, the AIA created the “Covered Business Method” (CBM) procedure that targets business-method patents, the favorite playground of PAEs.
Changes need time to percolate through the system
The CBM procedure began in September 2012. These proceedings can take some time, so we are only now beginning to see the fruits of this and other new procedures at the USPTO. Indeed, the Federal Circuit just decided its very first appeal from a CBM proceeding on July 9.
While these proceedings are proving to be popular with parties seeking to challenge patents, the cases are only now making their way through the USPTO and on to the Federal Circuit. Many uncertainties remain about their impact, but all signs suggest these proceedings are meeting, if not exceeding, expectations as a cheaper alternative to challenge bad patents, including those in the hands of PAEs.
As a result of these legislative and judicial actions, the patent system is already in a state of flux, and much of the change is directed to PAE abuses. So why mess with things now?
Of course, when litigants abuse the patent system, it is costly to everyone, and undoubtedly some PAEs are abusing the system. But Congress should be sure that new reforms don’t do more harm than good. Further congressional action now of the wrong kind could reduce the value of patents if it makes it too costly or risky to enforce legitimate patents.
One of the first things we are taught in drivers’ education is that over-correcting the steering wheel can actually be worse than merely staying the course. Congress’ well-meaning legislative proposals run the risk of acting prematurely and over-correcting the patent system, potentially driving it off the road.