The House Subcommittee on Courts, Intellectual Property and the Internet has taken an increased interest in the role of non-practicing entities (“NPEs”) in the patent system. The Subcommittee recently held a hearing on “Abusive Patent Litigation: The Impact on American Innovation & Jobs, and Potential Solutions” on March 14, 2013. During the hearing, members of the Subcommittee expressed their concern regarding NPEs and, in particular, a type of NPEs known as patent assertion entities (“PAEs”). The Chairman and other members of the Subcommittee observed that a growing number of PAEs have been targeting U.S. businesses in abusive patent suits. They noted that PAEs have contributed to a proliferation of poor quality patents. Members of the Subcommittee also acknowledged that a number of changes have been implemented by Congress and the courts to address the issue of PAEs, including the Supreme Court’s 2006 decision in eBay Inc. v. MercExchange, L.L.C. and the passage of the America Invents Act (“AIA”). Specifically, the Supreme Court’s standards for issuing an injunction in eBay have made it harder for PAEs to obtain equitable relief in district court. Additionally, the AIA’s new rules prevent PAEs from joining unrelated defendants in a single patent litigation and create new post-grant procedures for invalidating poor-quality patents.

The main question addressed by the Subcommittee was whether Congress should pass additional reform to address the issue of abusive litigation caused by PAEs. Several members of the Subcommittee were in favor of reform. In particular, they expressed that legislative reform may be necessary in order to address the capital that U.S. businesses are currently wasting on defending abusive lawsuits.

However, other members of the Subcommittee cautioned against reform, indicating that it may be important to first examine the effects of the AIA and other recent changes to the patent system. One Congressman suggested that the best way to improve the patent system and cure abusive litigation should be to improve the quality of patents instead of passing legislation such as the SHIELD Act (H.R. 845), which would allow prevailing defendants to recoup litigation costs from PAEs.1 It was argued that such Acts may pressure injured parties into settlement and destroy the balanced approach that the patent system has in place today. The ranking member of the Subcommittee also indicated that it may be difficult for Congress to craft effective legislation without clearly defining the meaning of “PAE.”2 Many members also felt that patent reform may be best left to the courts or the U.S. Patent and Trademark Office.

To further consider the need for legislative reform, the Subcommittee heard testimony from a number of industry representatives. Specifically, the Subcommittee sought clarification on several points. Several members wanted the industry representatives to elaborate on the meaning of the term “PAE.” Other members wanted to know whether exceptions should be carved out in the patent system for various targeted groups (e.g., retailers, end-users).

In their testimonies, many of the industry representatives expressed that the PAE problem has spread from manufacturers and producers to many end-users of targeted products. Particularly, an industry representative from Adobe Systems, Inc. noted that most of the litigation faced by Adobe comes from its customers, who turn to the company for indemnification purposes when they are sued by a PAE. Certain industry representatives also remarked that PAEs typically try to extend the applicability of a patent, such that users of non-infringing technology may be targeted by PAEs in abusive suits. It was suggested that PAEs do so by bringing suits on simple and widely used technology such as Wi-Fi devices, drop down menus on websites, and the use of mobile apps. Many of the patents asserted by PAEs were alleged to have undergone multiple owners and date back more than a decade. Invalidating such patents is therefore difficult because most of these patents have an established legacy and prior art evidence is for the most part scarce.

The industry representatives further remarked that the cost of litigating a case has grown increasingly high. Congressman Jason Chaffetz provided support for this contention, noting that PAEs initiated 62% of all patent litigation in 2012, which cost companies $29 billion to defend. Because the cost of litigation is high, companies that face PAE-initiated lawsuits generally choose to settle. Thus, as an industry representative put it, “patent trolls are business terrorists.”3 They use the terror of litigation costs to exact payments from businesses, thereby inflating the value of their patents. Moreover, because PAEs, by definition, engage in limited marketing and manufacturing operations, they typically face less discovery costs than the business that they target.

To address the problem of PAEs, several industry representatives recommended passing the SHIELD Act, which may discourage PAEs from bringing lawsuits based on weak patents. In addition, an industry representative proposed providing the International Trade Commission (“ITC”) with more tools to prevent PAEs from obtaining equitable relief in unwarranted situations. In particular, because the Supreme Court’s eBay decision has made it more difficult for PAEs to obtain injunctions in district court, many PAEs have turned to the ITC as an alternative forum for seeking injunctive relief. To prevent this type of gaming, an argument that stricter standards should be employed by the ITC was made. Furthermore, another industry representative advocated setting clearer standards for damage calculations in patent cases. During the hearing, the current scheme for calculating damages in patent cases was compared to gambling at a casino, both of which may subject an unwitting party to excessive losses. By clarifying the amount of damages that businesses may face, less business may cave to a PAE’s demands. Additional remedies were also proposed, including: (1) requiring the party requesting discovery outside of the prior art, the patent, and the infringing product to bear the burden of such discovery, (2) deciding whether a case is in a proper venue before going through discovery, and (3) clarifying and strengthening the requirements of Rule 11 of the Federal Rules of Civil Procedure.

Certain industry representatives argued against legislative reform. One of these industry representatives remarked that changes like the SHIELD Act would weaken the patent system and make it harder for patent owners to protect their inventions.4 In addition, it was argued that NPEs keep the market for patents liquid and sometimes are the only entities through which inventors may derive value from their patents. Therefore, instead of reforming the patent system to discourage NPE activity, certain industry representatives recommended improving the quality of patents. One industry representative also noted that the patent system has already undergone a lot of recent changes and argued that the effect of these changes should be monitored before further changes are made.5

In general, many members of the Subcommittee expressed that they were split on whether new legislative reform should be adopted to address the issue of abusive patent litigation. Thus, the question of whether additional legislative reform is needed to address abusive patent litigation remains unanswered.