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Problem Patent Trolls Inspire New Legislation

The increase in patent litigation has moved Congress to consider legislation to stem the practices of “patent trolls:” individuals and companies that use patents to license revenue from other companies or to file-patent infringement lawsuits – rather than to build and sell products using the patented inventions. Several other changes to U.S. patent law are also under consideration.

Patent Trolls and Infringement Litigation

Patent trolls’ aims are not to further innovation in products or services. Instead, they hold a patent, much like a stock investment, until it can be licensed to another company that is developing a similar product using the patented technology. Or, if a competing product actually comes to market, patent trolls file infringement lawsuits in the hopes of cashing in on their patent investment.

Patent trolls have been an especially difficult problem for companies to manage. They are reminiscent of cyber-squatters who bought up Internet domain names during the dot-com boom, and, because of patent trolls’ behavior, patent-infringement litigation is growing at an incredible pace. In the U.S. District Court for the Eastern District of Texas (where many of patent-infringement lawsuits are initiated), filings in 2010 increased by 20 percent compared to 2009.

In addition, new patent cases in the Eastern District outnumbered new filings in every other federal district. The total number of new defendants (3,879) marks a 70 percent increase from 2009 and is more than four times the next highest number for new defendants (884), in the District of Delaware.

The Federal Trade Commission recently issued a report indicating that patent trolls appear focused on hindering companies that have actually innovated rather than “developing and transferring technology” themselves. It also notes that one of the primary problems exploited by patent trolls is the vagueness in patent applications. Some patents are intentionally vague and, as a result, often do not serve their purpose in giving notice about what the covers.

The problem of patent trolls is exemplified when examining small technology companies that create smartphone applications called apps. In May, Lodsys, a firm that holds four patents for smartphone applications (“apps”) that allow consumers to buy things online or respond to polls using their smartphones, filed lawsuits against seven small software development firms, claiming the apps they create for Apple’s iOS and Google’s Android mobile operating systems infringe their patents.

However, Lodsys did not develop the technology for which it holds the patents. An independent inventor did before selling the patent rights to Lodsys. Consequently, Lodsys simply owns the patents and demands payment whenever a developer invents an app that may use its technology, even if the other developer came up with the app that uses similar technology by independent invention.

Proposed Changes to U.S. Patent Law

The most significant proposed change to patent law in the U.S. would alter the way that ownership of a patent or invention is recognized. Currently, the U.S. Patent and Trademark Office (PTO) grants a patent to the first to invent, which frequently results in disputes over who in fact invented a process, machine, manufacture, composition of matter, or any new and useful improvement thereof first.

Bills passed by both the Senate and the House of Representatives would change the system to follow Japanese and European systems that favor the first to file a patent application. Using a first-to-file system would eliminate some uncertainty, as filing dates are recorded by the PTO, but critics say the shift away from first-to-invent would reward people who dash patent applications off to the PTO instead of people who create useful new things.

Limiting Damages

Under other proposed changes to the Patent Reform Act, courts would be required to limit a patentholder’s recovery in an infringement lawsuit to the real economic worth of an invention. This provision is intended to lessen the buying incentive for patent trolls because it would reduce the potential payoff available to them in infringement lawsuits.

Essentially, patents on relatively minor components of a product would not be given a value in excess of their real economic worth. If a component part’s patent does not cover something critically important to the consumer’s decision to buy the product, the new rules will limit the patentholder’s recovery to the actual value the component has to the customer instead of the device’s entire market value as finished product, which could be significantly greater than the value of the patented component part.

The proposed legislation also includes provisions specifically for patents on financial products and services. Both the Senate and House bills would allow some “business method” patents to be challenged based on evidence of prior use or sale, factors that cannot be considered under current rules. Further, the proposed laws would also allow for an extra layer of review of these financial patents by the PTO.

It remains to be seen whether the new legislation will actually stop patent trolls and if other proposed changes to the U.S. patent system will be implemented. If you have questions about patent-infringement claims or how to protect products that incorporate patented inventions, an experienced attorney can advise you.