07 July 2013

5 Troll-Busting Tactics the US (Mostly) Won’t Adopt

Burst BalloonThe United States does not generally seem to think that it has a great deal to learn from the rest of the world.  This is, at least, abundantly clear when it comes to patent law and the associated litigation system.

I have observed previously that patent trolls appear, so far at least, to be as American as apple pie, and more recently I have explained why I do not believe the Australian system is conducive to the success of trolls.  So you might think that if the US is serious about addressing the ‘troll problem’, it would want to look closely at what is done differently in other countries, where the problem does not exist to anything like the same degree.

Unfortunately, my own experience suggests that this is unlikely to occur.  When the proposed legislation which became the America Invents Act was being hotly debated, I found myself on an email list populated by lobbyists with a strong interest in the US intellectual property system.  These people were not lightweights, or without relevant influence in Washington, and I know for a fact that some of the documents they produced (generally opposing the legislation, and particularly the move to a first-to-file system) influenced the debate in Congress.

I was invited to join the list in the first place particularly because I could contribute an ‘outsider’ view, and provide a taste of the perspective of the 50% of users of the US patent system who are not resident in the US.  However, I soon found that my input was more often criticised, or even ridiculed, than it was given any form of respectful consideration.  Indeed, I have never received any more condescending and belittling correspondence than I did while participating in that list.  So I removed myself.

I therefore have absolutely no expectation that what follows will be seriously considered by those with the power to influence the direction of the US patent system.  But the majority of my readership is from other parts of the world.  So for those people, and the many US-based individuals who may be interested in some more radical proposals than are currently under consideration, here are the five things that I would change in the US system to try to bust the patent troll business model wide open!

1. Limit the Right to a Jury Trial

The right to have facts in civil disputes tried by a jury is enshrined in the Seventh Amendment to the United States Constitution.  In patent cases, matters decided by a jury include the facts leading to determination of the ultimate questions of infringement, validity and the quantum of damages payable to the patent-holder if the patent is found to be valid and infringed.

Juries do not provide detailed reasons for their decisions.  The parties to the litigation are required to trust that the issues were sufficiently thrashed-out in the course of deliberations, and that the final determinations are the result of adequate reasoned debate among the jurors.

The philosophy behind the right to trial before a jury of citizens is noble.  However, juries in patent cases have been criticised as being ill-equipped to understand the complex technical, scientific, and legal standards which are often involved.  For example, the concern that juries may be influenced by tangential issues, such as conduct of the parties not strictly relevant to the challenging technical questions to be decided, or by the perceived superior knowledge or expertise of individual jurors, was widely canvassed following the jury verdict in the 2012 Apple v Samsung trial in California.

There is also evidence that the attitudes of jurors, and the manner in which they approach the issues in patent trials, can bias juries in favour of patent owners.

This is all good news for patent trolls, even if a matter never goes to trial.  If targets know that the odds will be stacked against them, that is just another reason to capitulate early, regardless of the merits (or lack thereof) of the troll’s case.

Eliminating juries from patent cases would be a blow to the trolls’ business model.  Failing that, the right to opt for a trial before a jury could be limited to the accused, rather than the accuser.  In criminal matters, the jury is there to protect the rights of the defendant, not to give an advantage to the prosecution which, in any event, has the resources of the state at its disposal.  A patent already puts state-sanctioned power in the hands of its owner, so it is difficult to see why this should be further bolstered by a potentially sympathetic jury.

Of course, this proposal would require constitutional change, so it will not happen.

2. Limit the Presumption of Validity

That ‘power’ I mentioned above stems in no small part from section 282 of the US Patent Code, which provides that each an every claim of an issued patent is presumed to be valid.  As as the Supreme Court confirmed in 2011 (Microsoft Corp. v. i4i Limited Partnership [PDF, 213kB]), the statutory presumption of validity requires that a granted patent claim can only be invalidated by ‘clear and convincing evidence’.

I am unaware of any other country that affords such deference to the work of its employed patent examiners.  In all other countries with comparable legal systems, a court will reassess the validity of a patent claim afresh, on the basis of evidence brought before it, using the ‘balance of probabilities’ (also known as ‘preponderance’) standard, i.e. whether the general weight of evidence makes it seem more likely than not that the patent is invalid.

The argument in favour of a presumption of validity is that it provides greater certainty for the patent-holder and other interested parties, such as investors.  Providing certainty supports the objective of the patent system of providing an incentive to take risks by investing in innovation.

Any proposal to eliminate the strong presumption of validity in the US is likely to meet with strong opposition.  When the Supreme Court considered the issue in Microsoft v i4i a barrage of amicus curiae briefs were filed in support of the patent-holder (i4i Limited Partnership).  Supporters included the US Government, 3M (along with a list of big-name corporates), 19 leading venture capital firms, the Intellectual Property Owners Association and a group of University patent owners and licensees, among numerous others.

But perhaps a compromise could be reached?  For example, the presumption of validity at the ‘clear and convincing’ standard could be enjoyed only by an inventor, or the assignee of record at issue of a patent, with any subsequent owner only entitled to a presumption at the ‘preponderance’ standard.  Reducing the power of patents acquired years after their original examination and issue would be another blow to the trolls’ business model.

No doubt there would be numerous objections to any such change, however, so it is another reform I do not expect to happen.

3. Make ‘Fee Shifting’ the Rule Instead of the Exception

One of the great benefits enjoyed by patent trolls under the US civil litigation system is the fact that attorney fees and other litigation expenses (which we in Australia would call ‘costs’) are only awarded against a losing party in exceptional circumstances.

I do not know how this rule came about in the US (but would welcome a history lesson) because, to the best of my knowledge, the awarding of costs against losing parties is the norm in all other common law countries.  To me this makes perfect sense, but maybe that is because I believe that civil litigation should be a last resort, to be used only when the parties are unable to resolve a dispute between themselves – after all, we’re all adults here, are we not?!

In most civil disputes there are numerous opportunities to settle prior to a final judgment being issued by a court.  There should be some incentive for the parties to recognise that, since someone is going to lose in the end, it might be better to reach a compromise agreement.  Shifting of the costs incurred by the successful party to the unsuccessful party adds to the risk associated with losing, and provides an additional incentive for both parties to mitigate that risk by settling.  Disputes which are resolved out-of-court also save precious judicial resources, and reduce the cost of the court system to the community.

For patent trolls, the fact that they only need to worry about covering their own costs reduces the risks they face in litigating, even if their claims are weak.  Making fee shifting the rule, rather than the exception, would be yet another blow to the trolls’ business model.

This is one suggestion which actually has some slim prospect of happening.  The proposed Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act of 2013 [PDF, 248kB] would make the award of full costs against a losing patent-holder the default position in any case in which it is not:
  1. an inventor or original assignee;
  2. a practising entity (i.e. is exploiting the patented technology by production or sale of items covered by the patent); or
  3. a legitimate university or technology transfer organisation.
This is, in my view, a big improvement on the 2012 incarnation of the SHIELD Act, which placed far too much emphasis on the technology to which the patent applied rather than on the nature and behaviour of the asserting patent owner.

4. Require ‘Genuine Steps’ to Resolve Disputes Out-of-Court

As I noted in my recent post on the reasons why the Australian system is not conducive to patent trolling, under section 6 of the Civil Dispute Resolution Act 2011, an applicant to the Federal Court of Australia must file a ‘genuine steps’ statement, setting out ‘the steps that have been taken to try to resolve the issues in dispute between the applicant and the respondent in the proceedings’.  This applies to most actions commenced in the Federal Court, including patent cases.

The purpose of the ‘genuine steps’ statement is to try to limit the civil cases brought before the court to those in which the parties have been unable, despite reasonable efforts, to resolve their dispute between themselves.  A failure by either party to take adequate steps to resolve a dispute will not usually prevent a case from proceeding, however the court will take non-compliance into account when exercising its case management powers, and also in exercising its discretion as to costs.

Since trolls tend to use extortion-like tactics, such as the threat of expensive litigation, rather than reasonable negotiations in order to extract ‘licence fees’ from their targets, they would be quite likely to fail the ‘genuine steps’ assessment.  The court could use this to make life very difficult for the troll, and to impose financial penalties, such as refusing to award costs against the infringer even in cases where the patent-holder is ultimately successful.

The requirement for something like a ‘genuine steps’ statement in the US could have the effect of restricting the more extortionate tactics employed by patent trolls, and deliver yet another blow to their business model.

5. Provide for Direct Judicial Patent Revocation Actions

Article III of the United States Constitution limits the jurisdiction of Federal Courts to ‘cases’ and ‘controversies’.  The Supreme Court has determined that the standard to be applied is ‘whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant’ relief (Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 US 270, at 273).

This means that although US Federal Courts have the power to declare patent claims invalid or unenforceable, they can only do so once there is a ‘substantial controversy’ between the patent owner and a party seeking such a declaration.  Generally, this means that a victim has to wait to be targeted by a troll before an action for a declaratory judgment of invalidity becomes an option.

Third parties can utilise the re-examination and other review procedures available through the USPTO, however these are themselves subject to appeal to the Patent Trial and Appeal Board, and thereafter to the Court of Appeals for the Federal Circuit.  A court decision, of course, trumps any Patent Office decision.  So why should someone concerned to establish the invalidity of a patent which may have fallen into the hands of a patent troll have to wait until they are targeted, or waste time and money at the USPTO, rather than proceeding directly to a higher authority?

This should at least be an option, as it is in Australia and, to my knowledge, most other major jurisdictions.  The added risk of a declaratory judgment of invalidity instigated by any party would cause trolls to consider the validity of their patents, and their application to the activities of alleged infringers, more carefully.  They might well be compelled to narrow their range of targets – yet another blow to their lucrative business models.

Although, since it seems likely that constitutional change would be necessary, this is another measure that is unlikely to happen.


So there you have it – my formula for busting trolls by undermining the foundations of their business model:
  1. no automatic right to a jury trial;
  2. weakening of the standard applied to the presumption of patent validity;
  3. ‘fee shifting’ to be the rule, rather than the exception;
  4. obligation to take genuine steps to resolve disputes out-of-court; and
  5. availability of direct revocation actions in federal courts.
The 2013 version of the proposed SHIELD Act may just implement the third of these proposals, if it ever becomes law.  The others, however, would appear to have a snowflake’s chance in hell of attracting significant support, even though judicial systems all over the world (including in Australia) are operating perfectly effectively with all five of these measures in place.

My own view is that it is not sufficient to implement just one or two of these measures, so even if the SHIELD Act is passed I doubt very much that anything will change.  The troll business model is supported in the US by a number of pillars of the existing system, and unless it is seriously undermined from a number of angles it is likely to remain too lucrative for many operators to resist.


ak said...

Hi Mark, Nice write up and I particularly like pt.4. Pt.3 might actually work against the genuine inventor, as he may not have the deep pockets vis-a-vis the troll agent and may prefer to settle out-of-court, even if he /she is in the right. Anyway, I think these are good academic arguments with very low prospects of implementation.

Mark Summerfield said...

Pretty much by definition, all of these measures would have some detrimental impact on 'genuine' users of the patent system. There is no getting around the fact that any reform that weakens the position of patent trolls is also going to weaken the position of other patent holders. The trick is to choose measures that will impact the troll business model to a greater degree than the legitimate business models of other patent owners.

Fee shifting cuts both ways. It increases the cost of litigation for any losing party. But it also significantly reduces the cost of litigation for winning parties.

In any event, settling out-of-court should be viewed as a good thing! The court fees paid by litigants are set so as to provide a reasonable degree of access to the judicial system, and do not cover the court's operating costs, so all civil litigation is heavily subsidised by the taxpayer. For example, if I read the budget papers correctly (I am no accountant!), the projected total operating cost (expenses) of the Federal Court of Australia for FY2013 is around $122 million, of which just over $17 million is covered by 'own-source revenue', which I assume is largely court fees. There seem to be some other sources of income, but it looks like the appropriation from the government coffers is about $87 million. Of course, the Federal Court deals with a range of matters that are of genuine community benefit, but there are significant taxpayer dollars spent on resolving disputes between private commercial entities, such as Apple and Samsung.

(As an aside, I believe that in Germany the fees are based on the value of the litigation, rather than being 'non-discriminatory', which is an interesting idea, but running the courts as a 'profit centre' is anathema to the concept of justice as it exists in most common law countries.)

It is all very well to worry about the 'poor' inventor who cannot afford to litigate for fear of being lumped with the other party's costs, but that is the reality almost everywhere. At least the patentee has a choice -- I feel more sorry for the poor respondent who may get dragged into court by a litigious patentee even if he/she is innocent. But I still think that fee shifting as the rule is the right way to go.

Steph Kennedy, IPTT said...

" There is no getting around the fact that any reform that weakens the position of patent trolls is also going to weaken the position of other patent holders" Therein lies the problem, no? To say nothing of the fact that all the US needs is *more* laws, lol! They can't enforce the ones we already have properly, if you ask me.

That said, I think #1 is spot on. Juries are stupid in patent cases, if for no other reason than half the pool will nod off the first day of trial. Patents are, to most people, completely boring. To say nothing of the fact that you get one Velvin Hogan seated and you're done for (ref.: http://iptrolltracker2.wordpress.com/2012/10/03/why-companies-settle-with-patent-trolls/).

I also like #4. We have rules in some civil courts here that actually require a round or two of mediation before a judge will even agree to hear the case. That sort of forces people to work through their differences on their own dime, rather than go through the expense of a full trial, which costs the taxpayers money no matter who sues who.

Just sayin',


Mark Summerfield said...

A number of these proposals would result in fewer, rather than more laws, or simply amendment of existing provisions.

The first requires either repeal, or limitation, of the Seventh Amendment -- start lobbying for Constitutional change! :) There are, apparently, some fairly academic arguments to be made that juries are not required to decide validity issues (see http://www.patentlyo.com/patent/2013/04/patcon-3-plenary-session.html). However, so long as juries decide infringement and damages I think they will continue to benefit patentees.

The second could be achieved by replacing 35 USC 282 with something like the far simpler Australian provision, which states: 'Nothing done under this Act or the PCT guarantees the granting of a patent, or that a patent is valid, in Australia or anywhere else.' I call it the 'all care, but no responsibility' clause.

The third, Congress is actually looking at. I fear that you are right about the problems with 'more' laws, though. The simple thing would just be to give the courts more discretion. By trying to legisltate to specifically target trolls, it is likely that the trolls will just find ways around the provisions.

The fourth also probably requires more legislation, in relation to the conduct of civil proceedings. Incidentally, the courts in Australia can order mediation, and they like to do so where possible, but I think they recognise that there is not much point if both parties are not willing participants. You can drag a horse to water, ...

The fifth is, again, a Constitutional issue. I don't think there is any chance of change there. Aside from anything else, the cure might be worse than the disease. I imagine your federal courts would be quickly swamped if people could go running to them in advance of initiating any real dispute! While this doesn't seem to be a problem in Australia, I have the impression that Americans are more litigious than we are.

Steph Kennedy, IPTT said...

"By trying to legisltate to specifically target trolls, it is likely that the trolls will just find ways around the provisions."

I think you are 100% right on this...you can't deal with these guys using the law, because they've built their whole business model circumventing and bending and twisting the laws we have. They'll just do it again if we change them!

"While this doesn't seem to be a problem in Australia, I have the impression that Americans are more litigious than we are."

Sadly, this is so true. Kids as young as eight and nine can be heard spouting off in arguments that "if you touch my legos again, I'll sue you!" It's funny and sad all at the same time. They get those words from the adults in their lives. Litigation should be the very LAST option, in my opinion, for any conflict. Yet even the very threat of it is what gets people to pay up to these trolls! Maddening!!



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