Lawmakers Take Aim At Boom In Frivolous Patent Disputes
SAN FRANCISCO (Dow Jones) -- When Apple Inc. released its vaunted iPhone in June, critics were intrigued by its cutting-edge form touch-screen technology. Barely a month later, a doctor from Iowa publicly claimed he'd actually come up with the idea first, and he filed a patent-infringement lawsuit.
Apple (AAPL) and other big technology companies have long complained that such suits are frivolous -- and are becoming far too commonplace. They've taken their case to Congress, which will soon consider legislation intended to rein in patent litigation and its related costs. The House is expected to begin debating the proposed Patent Reform Act on Friday, while the Senate is expected to take up the issue soon.
Passage of patent reform would certainly placate many technology companies, while angering critics who fear a trampling of the property rights of relatively powerless inventors.
But its effect on occupants of the space in-between -- the holding companies thriving on gathering patents and enforcing them with lawsuits -- is uncertain. Branded by big technology companies as "patent trolls," for supposedly buying up patents for no reason other than to threaten lawsuits and collect cash settlements, these companies aren't easily legislated out of existence, attorneys and experts say.
"The legislation will lessen their threat to defendants, but it won't lessen it to the extent it will go away," said Bruce Rose, a partner in the intellectual property practice at Alston & Bird LLP in Charlotte, N.C.
Patent holding companies range from high-profile operations such as Acacia Technologies Group, to lesser known SP Technologies LLC -- which holds Des Moines, Iowa-based Dr. Peter Boesen's patent in the disputed case against Apple. A lower-profile, but nonetheless prominent, player is Plutus IP LLC and its various affiliates, which have drawn the ire of firms from Intel to Toyota by blanketing hundreds of defendants with patent suits.
Versions of patent reform working through the House and Senate include limits on districts where plaintiffs may sue, and on the amount of damages that may be awarded for infringement claims. The Coalition for Patent Fairness, a group whose members include Apple, Microsoft Corp. (MSFT) and others, has been an outspoken proponent.
"Every once in a while an issue comes along where a consensus emerges that something needs to be done, and this is now in that category," said Mark Isakowitz, a spokesman for the group.
But the drive to enact new laws has raised questions about what constitutes abuse of intellectual-property principles, and whether the government can, or should act against patent trolls.
Speculation
Kelly Hyndman, an intellectual-property lawyer with the Washington firm of Sughrue Mion PLLC, argues that the Patent Reform Act would weaken patent rights in favor of big corporations.
"No one looks at real-estate investors who speculate as trolls," he said. " They're admired for what they do."
Hyndman said companies that seek out high-quality patents have a right to maximize their value -- in court, if need be. And, he said, there should be no requirement that the patents be used to make products. "Other people shouldn't have the right to tell you what to do with your intellectual property," Hyndman said. "This is America."
In effect, Hyndman said, the legislation could water down the value of all patents, and in turn hinder the sort of original thinking and competitive drive that went into them in the first place.
Patent-holding companies often legitimately lay claim to simply maintaining the value of patented ideas.
But there's also "a cottage industry of people who go out and acquire patents solely for the purpose of bringing these suits, and with the hope that they will never have to go to trial," said Rose, the lawyer wit Alston & Bird LLP. Instead, he said, such holders hope for a high volume of settlements from companies wishing they'd just go away.
However, the proposed patent reform in Congress would, at best, "lessen the impact that patent trolls have," by limiting settlement amounts they can demand, he said.
For example, one proposal advanced as part of the legislation is to calculate damages based only on the specific contribution of a patent to a product. Under existing practice, awards are often based on the value of whole products.
Microsoft, for example, lost a $1.5 billion jury decision in patent litigation with Alcatel Lucent last February, which was based on worldwide sales of it Windows software, not just on technology within that software related to the patent. That decision was later reversed.
Critics say that by addressing problems that patents create only after they've been issued, the Patent Reform Act misses the point. "A lot of these problems go away if you clean up what's coming out of the Patent Office," said Greg Aharonian, a patent consultant in San Francisco.
Patent Office examiners are overwhelmed and work under less than ideal conditions, Aharonian said. That's a factor in the issuance of low-quality patents, which leads to proliferating infringement suits, he said.
In July Aharonian went as far as suing Commerce Secretary Carlos Gutierrez, for appointing a deputy director of the Patent Office who Aharonian and fellow plaintiffs say has an insufficient background in patent or trademark law.
The Patent Office has said it is now aggressively hiring examiners to increase the quality of issued patents, at a rate of more than 1,000 new examiners per year.
In a prepared statement Thursday, the Bush administration said it supported some elements of the Patent Reform Act, including the establishment of a limited period during which a patent's validity can be challenged outside of a costly court dispute after it's issued. It criticized other elements, such as blanket directive that would limit damages.
A 'form of hold-up'
Companies in the pharmaceutical industry, which relies heavily on the value of a relatively small number of patents, have actively opposed the reforms. Even the technology industry is divided, with some companies that rely on patent licensing joining the opposition.
Qualcomm Inc. (QCOM) , for example, is a member of The Innovation Alliance, which opposes the Patent Reform Act. It holds an extensive portfolio of patents in cell phones, and has litigated extensively in an effort to uphold that portfolio's considerable value.
Shortly after the Senate Judiciary Committee approved a modified version of the measure in July, the Innovation Alliance complained that "the bill will still erode, not strengthen, patent protections, thereby dampening innovation and stifling entrepreneurship."
But proponents of reform say the real aim is to curb what they say is an illegitimate, and growing, form of business.
Many patent holders know that the large companies they sue are willing to pay out settlements in the $1 million range -- because going to trial can often cost them "on the order of $4-to-$5 million," said Mark Lemley, a Stanford University law professor.
"It's a form of hold-up, and it results from the fact that patent litigation is expensive," Lemley said.
Still, the legislation may have limited effect on such tactics, said Kristie Prinz, an attorney in Los Gatos, Calif.
"The reality is there's not that much proposed yet to significantly damage this business model," Prinz said. "It's the litigation system, not the patent system, that is fostering this."
Some observers say it would be easy to circumvent the legislation's limits on venues where plaintiffs can sue. That's because a plaintiff could establish at least a nominal office in a district where they would like to litigate in the future. Plutus IP, for example, established offices in Texas and Wisconsin court districts, prior to filing patent suits there.
Hyndman, of the firm of Sughrue Mion, acknowledged that "a reasonable market correction" may be called for in the patent system. But passage of the Patent Reform Act, he said, moves too far away from inventor rights, and in favor of corporate rights. Adds Hyndman: "Whether it goes too far remains to be seen."
(END) Dow Jones Newswires
09-07-07 0541ET
Copyright (c) 2007 Dow Jones & Company, Inc.
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