Citing increasing evidence of the massive economic and social costs of patent assertion entity (PAE) activity, on 4 June 2013 the White House announced several executive orders and legislative proposals aimed at curbing frivolous patent litigation. In addition, the President’s Council of Economic Advisers, the National Economic Council, and the Office of Science & Technology Policy issued a report titled “Patent Assertion and U.S. Innovation,” which further describes the problems associated with PAEs. President Obama recently cited the need for further patent reform, and now the Administration is ready to address the “drain on the American economy” that it attributes to PAE activity. The efforts announced yesterday build on various Administration initiatives in this area, including a workshop hosted by the Department of Justice and Federal Trade Commission in December 2012 to assess the competitive impact of PAE activity. Congress has also been active in this area, most recently in the form of a hearing before the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property, and the Internet in April 2013.
The report released by the Administration yesterday defines PAEs as “firms who do not practice the patents they own and instead engage in aggressive litigation to collect license and other fees from alleged infringers.” The report critiques PAEs for not developing technology or translating patents into usable products. It further attacks the aggressive litigation tactics of PAEs, such as acquiring patents solely for the purpose of “extort[ ing ]” payments from alleged infringers, launching threats based on uncertain infringement, and hiding their identify through shell companies, which makes them difficult to defend against and largely invulnerable to counterclaims. The report concludes that PAE practices “create outsize costs to defendants and innovators,” and “result in economic ‘dead weight loss’ in the form of reduced innovation, income, and jobs for the American economy.”
With its seven legislative recommendations, the White House endorsed elements of bills currently pending in Congress that are intended to discourage the aggressive litigation tactics of PAEs. For example, the Administration followed the lead of several pending bills by recommending provisions that would permit fee-shifting so that the loser in some patent cases could be forced to pay the attorney’s fees of the prevailing party, thereby dissuading PAEs from asserting weak patent claims. Another recommendation aimed to improve patent quality by expanding the PTO’s program for the review of issued patents. A bill by Sen. Schumer (D-NY) seeks the same objective.
Other proposals by the Administration would bring the ITC standard for obtaining an exclusion order in line with the four-factor test for injunctive relief from eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006) that is applied in the federal district courts. The Administration further urged Congress to:
- improve transparency by requiring patentees and applicants to disclose the “real party-in-interest”;
- protect consumers and businesses against liability off-the-shelf use of products accused of infringing patents; and
- incentivize public filing of demand letters to improve transparency and curb abusive suits.
The Administration also issued five executive orders expected to ameliorate some of the PAE problems and improve transparency in the PTO process. For example, the Administration ordered the PTO to begin a rulemaking process to require patent owners to designate the “ultimate parent entity” in control of the patent or application involved in proceedings before the PTO. This, the Administration says, will make real party-in-interest the “new default.” The orders further require the PTO to improve training of its examiners to tighten the scrutiny of “functional claiming,” which involves claiming rights to a technology that performs a given function, regardless of how that function is performed. In addition, the Administration announced plans to begin six-months of public events across the country to develop ideas and consensus around patent reform.