THE RISE AND RISE of patent assertion entities (PAEs) in the US has become so serious that the problem is now being tackled at the highest political levels. To demonstrate its importance to the global economy, on 4 June the White House published a piece on its website entitled Taking on Patent Trolls to Protect American Innovation. When speaking of 'patent trolls', it was referring to PAEs that acquire patents for the purpose of litigating them aggressively to collect licence and settlement money from parties they say are infringing.
A study released by the White House reveals that an extraordinary 62 per cent of all 2012 patent lawsuits in America are estimated to have been brought by patent trolls. PAEs have operated mostly in the IT and telecoms sphere because lawsuits on these patents have the potential to cause a lot of disruption to businesses with minimal costs risks. The general rule in the US is that each party bears its own legal costs. The study includes estimates that software patents are nearly five times as likely to be in a lawsuit as chemical patents, and business method patents are nearly 14 times as likely.
The White House study goes on to say that PAEs are estimated to have obtained $29bn in settlement payments in 2011 - but with less than a quarter of that money flowing back in to innovation. To add to this, the loss of business value targeted by PAEs is estimated at about 10 times the sums collected from them - one tenth of the loss is attributable to pay-outs; the rest to businesses' own legal expenses and the disruption and diversion of resources away from their own innovation. The White House concluded: "It's clear that the abuse of the patent system is stifling innovation and putting a drag on our economy. The trolling has gotten out of control, and it's time to act." The Obama Administration announced executive action and called upon Congress to pass legislative changes to curb PAE activity.
Executive action that has been announced at the United States Patent and Trademark Office (USPTO) includes new measures requiring patentees to update register details promptly so that the owner is apparent. Practice is also being tightened when examining software and business methods patents to reduce the number granted with claims that are unclear or obvious, outreach programs are being created to provide information on how businesses can respond to patent trolls, and more robust data is being collected.
The Administration also announced a review of practices in the US International Trade Commission to see whether the criteria for a grant of exclusion orders should be changed to match the criteria for injunctions in District Court cases, which may make it harder for Non Practicing Entities (NPEs) to obtain exclusion orders.
Proposed legislation in the US is aimed at curbing aspects of PAE litigation conduct. There are currently six bills pending. One proposes that it applies to all business method patents permanently, a provision in the America Invents Act which outlines that until 2020 if a business method patent in the financial services is asserted in litigation, then the patent may be put in review at the USPTO with the lawsuit likely to be stayed.
Other bills aim to require plaintiffs to provide more details of the patent claims alleged to be infringed and to introduce cost rules that put plaintiffs at risk of paying defendants' costs; or for PAEs to post a bond to cover defendants' legal fees and costs, requiring them to disclose the real owners and parties behind them. Additionally, the judiciary has suggested more active use of procedural rules that allow costs sanctions against plaintiffs who bring frivolous litigation. Finally, one bill also seeks to protect the public so that if sued for infringing use, the public does not have to participate until the lawsuit is completed against the primary user or manufacturer.
It will be interesting to see whether the various proposed measures will dampen down PAE activity in the US. It also raises the question whether PAE activity might be displaced into Europe and the UK. PAEs may acquire patents in Europe relevant to IT and telecoms and it's important not to be complacent about patent quality. However, the patent litigation system in the UK does not lend itself to the same approaches to the conduct of litigation that have been used by PAEs in the US.
In the UK, the general rule on legal costs is that the loser pays a large contribution towards the winner's costs, and a party starting a claim then seeking to discontinue it must pay the other side's costs. These rules discourage parties starting or pursuing weak or nuisance patent claims. Additionally, a claimant may be required to provide security for the defendant's costs if there is a concern that the claimant may not have funds to pay at the end of the case.
The Patents Court in the UK has specialist judges at trial and appeal level with technical backgrounds and a reputation for thorough and reasoned decisions; validity and infringement is normally heard together; cases are handled quickly with a trial 12 to 18 months from start of an action; and the Court has discretion whether to grant an injunction on patents held valid and infringed.
If a patent owner believes it will prevail with at least one valid and infringed claim and it is prepared to bear the costs consequences of litigation, suing in the UK can send a strong message - and a strong decision can be obtained if successful. However, it has been more common to see a manufacturer that has been sued in the US or Germany by a PAE responding by bringing proceedings in the UK seeking revocation of the equivalent UK patent. Additionally, the Patents Court in the UK is willing to determine whether or not patents are essential to technical standards, which is relevant in the telecoms sector and can affect the royalty rates negotiated.
The UK has not seen an explosion of PAE cases like the US or the same litigation conduct deployed, though there have been some NPEs that have brought claims, especially in the telecoms and standards field. For PAEs wishing to bring proceedings in Europe, Germany has been seen as a preferred jurisdiction for them to start litigation, as infringement and validity are handled in separate proceedings and it is possible to get a finding on infringement well before there is a decision on validity, which may place pressure on defendants to settle.
The changes in the US may mean some PAEs think about moving into Europe. However, they would not be welcomed by industry or politicians, as experience from the US suggests PAEs cause a drain on industry and the economy, and may stifle innovation. An explosion of PAE activity in the UK seems very unlikely, as other court systems in Europe are more attractive for PAEs, as mentioned above the example of Germany and its bifurcated infringement and validity system. µ
Chris Thornham is a partner at law firm Taylor Wessing.