The subject of patent assertion entities ("patent trolls") has received a lot of attention in recent weeks. The federal government is now taking action on numerous measures to combat the persistence of these patent trolls. These measures include:

  • The submission of a letter, signed by 18 Members of Congress, urging the Federal Trade Commission to inspect whether these patent trolls are engaging in unfair and deceptive business practices.
  • The introduction of new bills, in both the Senate and the House, aimed at requiring additional procedural requirements to patent infringement suits.
  • The White House's proposed combination of new legislative recommendations and executive actions directed at further incentivizing future innovation in high tech patents.

On June 6, 18 Members of Congress submitted a letter instructing the Federal Trade Commission to examine, through its Section 5 authority, whether these patent assertion entities are engaging in unfair and deceptive business practices. The aforementioned letter was largely inspired by the decision of the Attorney General of Vermont to file suit against MPHJ Technology Investments LLC. The details of this lawsuit are described within the Congressional letter to Edith Ramirez, Chairwoman of the FTC:

"The suit alleges that MPHJ Technology violated the Vermont Consumer Protection Act by engaging in unfair and deceptive acts in which they sent out a series of threatening letters to many small businesses and non-profit organizations in Vermont, and demanded about $1,000 per employee for the patent infringement. The letter states that the patent troll has a combination of issued patents and patents pending which cover the end users' ability to scan a document and transmit it as a PDF attachment directly to an employee's email account. The complaint further alleges that MPHJ Technology, "performed little, if any, due diligence to confirm that the targeted businesses were actually infringing its patents prior to sending these letters."

The Congressional letter goes on to "urge the Commission to examine the practices of patent assertion entities that wrongfully target end users and to utilize the authority it has under Section 5 of the Federal Trade Commission Act if any deceptive and unfair practices are found."

Previously, the FTC has focused on the impact of patent trolls on innovation and competition. This new approach, an examination of unfair and deceptive business practices, has the potential to translate into the statutory authority of the FTC in a much more direct fashion.

Section 5 of the FTC Act affords the FTC the responsibility to ensure the prohibition "of unfair or deceptive acts or practices in or affecting commerce." Within the legislation, differentiations are made between unfair acts or practices and deceptive acts or practices. This differentiation is detailed, by the Board of Governors of the Federal Reserve System, below:

Unfair Acts or Practices

An act or practice is unfair where it:

  • Causes or is likely to cause substantial injury to consumers,
  • Cannot be reasonably avoided by consumers, and
  • Is not outweighed by countervailing benefits to consumers or to competition.

Public policy, as established by statute, regulation, or judicial decisions, may be considered with all other evidence in determining whether an act or practice is unfair.

Deceptive Acts or Practices

An act or practice is deceptive where:

  • A representation, omission, or practice misleads or is likely to mislead the consumer,
  • A consumer's interpretation of the representation, omission, or practice is considered reasonable under the circumstances, and
  • The misleading representation, omission, or practice is material.

In addition to the Congressional letter, Congress has also introduced two bills that intend to add procedural requirements to patent infringement suits.

Patent Litigation and Innovation Act of 2013 H.R.

  • Introduced by Representative Hakeem S. Jefferies (D-NY) on 7/10/2013
  • Cosponsor: Representative Blake Farenthold (R-TX)
  • Latest action: Referred to House Committee on the Judiciary on 7/10/2013

Generally, H.R. 2639 will augment the current patent infringement suit process with additional procedural requirements. More specifically, H.R. 2639 will require a party alleging patent infringement to include in its complaint, counterclaim, or cross-claim: an identification of each allegedly infringed patent, the specific identification of each accused accessory alleged to infringe the claim, "a description of the principal business of the party alleging infringement" and the specific recognition of all co-owners, assignees, and exclusive licensees of the asserted patent. The House bill also provides authority to invoke sanctions in the case of abusive litigation.

Patent Abuse Reduction Act of 2013 S. 1013

  • Introduced by Senator John Cornyn (R-TX) on 5/22/2013
  • Cosponsor(s): Senator Chuck Grassley (R-IA)
  • Latest action: Referred to Senate Committee on the Judiciary on 5/22/2013

S. 1013 is a companion to the House bill mentioned above. However, in addition to the procedural requirements of the House bill, the Senate version also requires that all parties alleging infringement provide a list of other complaints asserting from the same patents. Parties bringing suit must also state whether the asserted patents are subject to any licensing term or pricing commitments through any other entity or whether any person is subject to a direct financial interest in the outcome of the action.

The President has also taken steps to protect innovators from frivolous litigation by patent trolls. On June 4, the President issued seven legislative recommendations and five executive actions. These are detailed below from an extraction of the White House's press statement on the subject. The following legislative recommendations are proposals that the President advocates for Congress to pursue further. The executive actions represent new regulatory priorities that will be pursued by the Administration.

Legislative Recommendations

  1. Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking PTO review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance.
  2. Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases).
  3. Expand the PTO’s transitional program for covered business method patents to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board (PTAB).
  4. Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use. Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer.
  5. Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts.
  6. Use demand letter transparency to help curb abusive suits, incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public.
  7. Ensure the ITC has adequate flexibility in hiring qualified Administrative Law Judges.

Executive Actions

  1. Making “Real Party-in-Interest” the New Default. Patent trolls often set up shell companies to hide their activities and enable their abusive litigation and extraction of settlements. This tactic prevents those facing litigation from knowing the full extent of the patents that their adversaries hold when negotiating settlements, or even knowing connections between multiple trolls. The PTO will begin a rulemaking process to require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the PTO, specifically designating the “ultimate parent entity” in control of the patent or application.
  2. Tightening Functional Claiming. The AIA made important improvements to the examination process and overall patent quality, but stakeholders remain concerned about patents with overly broad claims — particularly in the context of software. The PTO will provide new targeted training to its examiners on scrutiny of functional claims and will, over the next six months develop strategies to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field.
  3. Empowering Downstream Users. Patent trolls are increasingly targeting Main Street retailers, consumers and other end-users of products containing patented technology — for instance, for using point-of-sale software or a particular business method. End-users should not be subject to lawsuits for simply using a product as intended, and need an easier way to know their rights before entering into costly litigation or settlement. The PTO will publish new education and outreach materials, including an accessible, plain-English web site offering answers to common questions by those facing demands from a possible troll.
  4. Expanding Dedicated Outreach and Study. Challenges to U.S. innovation using tools available in the patent space are particularly dynamic, and require both dedicated attention and meaningful data. Engagement with stakeholders — including patent holders, research institutions, consumer advocates, public interest groups, and the general public — is also an important part of our work moving forward. Roundtables and workshops that the PTO, DOJ, and FTC have held in 2012 have offered invaluable input to this process. We are announcing an expansion of our outreach efforts, including six months of high-profile events across the country to develop new ideas and consensus around updates to patent policies and laws. We are also announcing an expansion of the PTO Edison Scholars Program, which will bring distinguished academic experts to the PTO to develop — and make available to the public — more robust data and research on the issues bearing on abusive litigation.
  5. Strengthen Enforcement Process of Exclusion Orders. Once the U.S. International Trade Commission (ITC) finds a violation of Section 337 and issues an exclusion order barring the importation of infringing goods, Customs and Border Protection (CBP) and the ITC are responsible for determining whether imported articles fall within the scope of the exclusion order. Implementing these orders present unique challenges given these shared responsibilities and the complexity of making this determination, particularly in cases in which a technologically sophisticated product such as a smartphone has been successfully redesigned to not fall within the scope of the exclusion order. To address this concern, the U.S. Intellectual Property Enforcement Coordinator will launch an interagency review of existing procedures that CBP and the ITC use to evaluate the scope of exclusion orders and work to ensure the process and standards utilized during exclusion order enforcement activities are transparent, effective, and efficient.

Companies and trade associations within the hi-tech industry have responded to these legislative proposals with both optimism as well as caution and wariness. The SAS Institute, a developer of advanced analytic software, has recently served as a vocal advocate of supplementary legislation after reportedly spending millions to defend itself against, what it deems, frivolous litigation. However, other major hi-tech companies have stated their concern with the recent congressional and executive proposals. Microsoft and BSA: The Software Alliance, a software trade group, have expressed public dismay after asserting that the proposals could, in themselves, stifle innovation. Intellectual Ventures, a patent enforcement company, has called the proposals "misguided and [in need of] further discussion."

Companies may wish to consider joining the debate over appropriate patent litigation tactics and targets, whether through contacting Congress or the Administration.