Reform aside, experts say suits from patent trolls continue to increase

By Bethany Krajelis | Dec 4, 2012

CHICAGO - Despite new rules and upcoming changes, some experts say that the America Invents Act (AIA) fails to address problems associated with non-practicing entities (NPEs).

NPEs are individuals and companies that own patents, sometimes portfolios of tens of thousands of patents, but have no intention of actually using them. Instead, these entities -commonly referred as patent trolls-- bring litigation against those that have infringed on their patent.

Although NPEs, as well the debate over whether they actually facilitate innovation or simply seek money through litigation, have been around for some time, they only just recently became a popular topic for patent studies.

One reason for this is that "the data is easier to get than ever before," said Michael Risch, an associate professor at Villanova University School of Law.

Risch teaches courses in intellectual property, patent and cyber law and has written several law articles on patent matters, including "Patent Troll Myths," which was published earlier this year in the Seton Hall Law Review.

Another reason for the explosion of NPE-related studies, Risch said, stems from the AIA.

Signed into law by President Barack Obama in September 2011, the AIA aims to reform the nation's patent system. Some new rules have already been implemented, but the big changes are set to take effect next year, when the system will move from a "first to invent" to a "first to file" system.

The AIA includes at least two provisions that address NPEs.

One requires the Government Accountability Office to "conduct a study of the consequences of litigation by non-practicing entities, or by patent assertion entities, related to patent claims." The AIA specifically notes the study should include the estimated cost and economic impact of NPE litigation.

Risch said because "everyone wants to get their say in," law professors and patent experts have been researching NPEs and submitting their studies to the GAO.

Frank Rusco with the GAO said "we are working on a draft right now. We expect to have something out early in 2013," but that no exact date has been set.

While the GAO report has not yet been released, the other provision of the AIA that addresses NPEs has already taken effect.

Section 19 of the act prohibits defendants from being joined in a suit unless there are questions of fact common to all defendants.

Prior to the act's passage, according to a recent study, some jurisdictions had allowed patent holders to proceed against numerous companies in one action on the grounds that deciding the scope of the patent was a sufficient basis to join the parties, even if their acts of infringement were unrelated.

This study, "The American Invents Act 500: Effects of Patent Monetization Entities on US Litigation," states that the AIA changed the joinder rules to make it harder for plaintiffs to include multiple defendants in suits filed in their preferred jurisdiction.

This change, the study states, was "aimed particularly at monetizers who had been frequenting the Eastern District of Texas."

Written by Sara Jeruss, Robin Feldman and Joshua Walker, this study uses the term "patent monetizer" as opposed to NPE or patent troll. It was released in October as part of the University of California Hastings College of the Law Legal Studies Research Paper Series.

In an effort to prevent the new joinder rules from distorting its data, the study counted both the number of patent lawsuits and the number of patent defendants sued.

"Our data show that the number of defendants sued by patent monetization entities has also increased," the study states. "This suggests that the rise in suits filed during 2011 did not result from the new joinder rules."

"We also note that the 2011 increases in both the number of cases and defendants followed the general trend of increases across the five years," the study states, referring to years 2007 to 2011.

Based on 100 random patent infringement cases from each year of the five-year period, the study shows the number of suits filed by patent monetizers increased while the number of suits filed by operating companies has fallen.

Operating companies are defined by the study as companies that actually use their patents to create products or services unlike NPEs.

"Specifically, lawsuits filed by monetizers increased from 22 percent of the cases filed five years ago to almost 40 percent of the cases filed in the most recent year," the study states. "This is a remarkably high level, which gives some indication of the extent of monetization activity in the litigation system."

The study also shows that out of the five litigants that filed the most patent infringement suits in the five year period, four were monetizers and one was an operating company.

Risch, the Villanova law professor, said he was surprised that this study didn't show as much of an increase with NPE activity as he expected.

"The way people talk about NPEs, I thought it was going to be a gigantic spike," he said, adding that the study also justified his own research that when NPEs are more likely to sue, individuals are less likely to and vice versa.

James Bessen, a lecturer at Boston University School of Law and fellow at Harvard's Berkman Center on Internet and Society, said he also was surprised by the 40-percent figure in the recent patent monetization study.

"It's pretty telling. Trolls are really more of a symptom than a problem," he said, explaining that NPE-like business models are the result of weaknesses in the patent system.

The study also shows that regardless of who brings a patent infringement suit, the vast majority of these cases settle.

Cautioning that the sample size is too small to safely draw a conclusion, the study's authors state that their data shows operating companies were "slightly less likely to settle and slightly more likely to end the case with a win in some fashion" than NPEs.

Bessen, who has written several patent-related articles including one released earlier this year on"The Direct Costs of NPE Disputes," said the AIA's new joinder rules "will have a relatively modest effect in the long run on patent trolls."

"It may change the economics slightly," he said, "but there is no indication that things are leveling off."

Bessen said legislation that would have put more teeth into the AIA regarding NPEs was left out of the final version of the AIA after interest groups fought it.

In order for real reform on NPEs to occur, Bessen said Congress is "going to have to go back and do it all again."

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