Imagine you’re a small-business owner. You receive a letter from an unknown company threatening legal action concerning the seemingly innocuous scanner you’ve been using in your shop. Specifically, the letter calls out a very obscure and complex piece of patented technology in the device. The letter claims you don’t have the appropriate license to use the technology, but it’s also vague on who owns the patent or whom to contact for more details. What is clear is the proposed settlement amount, which is slightly less than the cost of retaining an attorney to fight the claim.
This scenario is a common demand-letter scheme employed by some non-practicing entities (NPEs) and patent assertion entities (PAEs)—companies that attempt to solicit settlements from end users of patented technology. Some of these groups do not even develop new or innovative technology or products.
Michael Moore is deputy general counsel of intellectual property for Sunnyvale, California-based Rambus, which holds 2,400 patents and applications worldwide. With more than a decade of work in intellectual property law, Moore is an expert in the wording and quality of patents.
“Truly high–quality patents help support the value of the work that all researchers, engineers, and scientists contribute.”
NPEs legally purchase patents that are unused or no longer relevant from the original owners or on the secondary market. In recent cases that have drawn public ire and political attention, some NPEs have targeted small businesses that don’t have the technical or financial resources to defend against infringement claims.
PricewaterhouseCoopers found that two-thirds of all patent infringement lawsuits are filed by PAEs—28 percent higher than five years ago (though changes in joinder rules contained in the America Invents Act in September 2011 likely account for much of this increase). The US General Accounting Office (GAO) reported that software-related infringement accounted for nearly 90 percent of the increase in infringement defendants from 2007 to 2011.
Moore points out that most of the NPE activity cited by PricewaterhouseCoopers and the GAO is related to software patents, which may be open to broad interpretation due to the way the US Patent and Trademark Office (USPTO) permits “functional claiming,” which is based on a function performed by a software program rather than its structure. This is the type of patent favored by PAEs, such as those related to online shopping carts, inventory management, and other concepts that have corresponding equivalents in traditional, offline business.
“These software patents tend to use broad, generic language to describe something that is already very well-known,” Moore says. “Clicking a button to put online items in your shopping cart shouldn’t be patentable.”
By contrast, he says that “high-quality” patents should provide detailed specifications, figures, and comprehensive explanations of the innovation, how it is implemented, and how it improves performance of the underlying product, system, or hardware. They should also include detailed citations to relevant prior art for USPTO examiners to consider in examination.
Remedy Through Reform
In 2014, Congress stepped in to attempt to curtail some questionable patent assertion practices. Most notably, it passed the Innovation Act, H.R. 3309, authored by Rep. Bob Goodlatte (R-VA). The Senate also considered bills from senator Patrick Leahy (D-VT) (the Patent Transparency and Improvements Act, S. 1720) and senators John Cornyn (R-TX) (S. 1013) and Orrin Hatch (R-UT) (S. 1612), among others.
While these pieces of legislation have been well-intentioned and contain some appropriate remedies, critics argue that they take an overly broad approach that negatively affects legitimate patent holders, especially small companies. Senator Leahy withdrew his Patent Transparency and Improvements Act, citing “severe unintended consequences on legitimate patent holders who employ thousands of Americans” as one of his reasons.
On the Trail: Bad-Faith Demand Letters
- Patent holder sells an unwanted patent (no longer relevant to his/her business) to a non-practicing entity (NPE).
- The NPE often assigns the patent asset to a shell company, or assertion entity, within a complex corporate structure, making it difficult to determine who controls the asset and who benefits financially from it.
- The assertion entity sends infringement claims via vague demand letters to small-scale end users of products allegedly using the patented technology. Examples of such assertion letters include those relating to scanners and Wi-Fi products used by thousands of individuals and small businesses.
- Usually, the demand amounts are slightly less than the cost of defending infringement allegations, and the letters often threaten to sue shortly if payment is not sent. Recipients of such letters are often consumer-level users (without technical expertise or financial resources to mount a defense) who settle the claim out of fear of the threatened suit.
“We believe it is more appropriate to leave fee shifting to the courts most familiar with the facts of each individual case, rather than making it mandatory,” Moore explains. He suggests two additional reforms that would lead to better protection of intellectual property and high-quality patents: One would require clear identification of patent owners, their affiliates, and partners or licensors to provide transparency to defendants in any potential infringement action. The other would prevent claimants from targeting consumers or small-business users while preserving the right to take action against infringing product manufacturers or vendors.One of the most contentious reform issues relates to fee shifting, which may require the losing party in a patent infringement suit to pay the winning party’s costs. (Only 9.2 percent of NPEs that go to court win their cases.) However, opponents fear that smaller, legitimate intellectual-property owners and patent holders unable to afford such expenses may choose not to pursue justifiable, good-faith infringement claims. As a result, fee shifting could potentially dampen the pace of innovation if small research-and-development companies and inventors decide not to invest in new research due to the cost of protecting their ideas.
Best Practices to Protect Patent Quality
Rambus has been proactive in improving patent quality and ensuring its ability to protect the company’s intellectual property. Its senior technical experts have worked directly with USPTO examiners to provide technical training on current state-of-the-art technology. The company has also provided testimony to and hosted a delegation from the International Trade Commission to show how protecting US innovation supports research-and-development jobs and strengthens the US economy.
“Truly high-quality patents help support the value of the work that all researchers, engineers, and scientists contribute,” Moore says. “Without this, the patent system and the innovation it is designed to protect are diminished.”
He suggests that interested parties can support patent reform using a handful of best practices. Product designers, manufacturers, and research-and-development companies should engage with leading IP organizations to lobby for measured and effective patent reform. Patent reform should target specific, undesirable behaviors while maintaining the economic value of existing high-quality US patents.
When discussing patent reform, Moore advises highlighting the value that research and development and related innovation provide to the US economy, such as 40 million IP-related jobs, more than $5 trillion of annual economic activity, the three-quarters of all US exports for which IP-related products and services account, and 35 percent of US GDP. He says patents should be treated as valuable corporate assets and key investments to protect research activity. “Work closely with internal business partners to develop a patent strategy that complements existing business and future business strategies,” he adds, which may include licensing for monetization, cross-licensing, or patent sales.
Finally, he advises accelerating the “innovation engine” by recognizing and rewarding individual inventors and project teams. “The more we can raise awareness concerning the value of intellectual property, the better we can appropriately protect owners’ rights and improve the efficiency of the system that’s in place to encourage innovation.”