Almost nobody disputes that America's patent system is a mess, or that it's been that way for an unconscionably long time.
Overworked and misguided patent examiners issue patents for manifestly undeserving claims. An entire industry of patent trolls has sprung up to assemble patent rights and exploit them, not to make products or develop services, but to harass other businesses into paying them off to avoid costlier litigation.
Efforts to reform patenting tend to run into resistance from big businesses, such as the pharmaceutical industry, that long ago figured out how to game the process and are disinclined to give up their advantage. As a result, a system that was written into the U.S. Constitution to encourage invention and innovation has been turned into a "dead weight … on the nation's economy."
That last observation comes not from some radical free-thinker, but from Haldane Mayer, one of the most experienced judges on the U.S. Court of Appeals for the Federal Circuit, which was created in 1982 in part to handle patent appeals. Mayer's remarks came Sept. 30, in a concurring opinion in a case in which he argued that the time had come to render almost all software ineligible for patenting.
"It is well past time," he wrote, "to return software to its historical dwelling place in the domain of copyright." That's where it dwelt until the late 1970s, when it drifted into the patent sphere and launched decades of costly confusion.
Mayer's broadside was one of two signs that federal authorities finally have had it up to here with the inadequacies of the patent system. The other sign arrived late last week, with the appearance of a 269-page report from the Federal Trade Commission taking aim at patent trolls. The FTC tactfully uses the term "patent assertion entity," or PAE, instead of "troll," a label it considers "unhelpful," but every knows who they're talking about.
The Mayer opinion and the FTC report address two aspects of the patent system — low-quality patents and trolling — that are often linked, but that some experts say should be examined separately. "There are a lot of bad things you can do that are unrelated to the quality of patents," says Charles Duan, director of the Patent Reform Project at the think tank Public Knowledge.
Let's take the FTC study first. It's the latest in a series of policy studies dating back to 2003, which indicates how difficult trolling has been to stamp out. The agency divided the troll population into two species, portfolio PAEs and litigation PAEs.
The portfolio firms typically manage smaller numbers of patents but make more money — 9% of all licenses studied by the FTC, accounting for 80% of all the revenue in its survey group. They're sophisticated, assembling groups of patents that might be needed by the manufacturers of specific products, and offering to license them as a package. They tend to use litigation only as a last resort. They're typically favored by the original patent holders, who sell them their rights for sizable up-front payments, and often are backed by wealthy institutional investors. The best known portfolio PAE is Intellectual Ventures, which was co-founded by former Microsoft technology executive Nathan Myhrvold and today claims to have 40,000 patents in "active monetization programs."
The shallow end of the troll pool is occupied by litigation PAEs, which tend to be "thinly capitalized," owned by one or two entrepreneurs operating out of their homes. Their method is the drive-by: They sue first and reach licensing agreements afterwards, with defendants anxious to avoid a trial. Typically, these licenses yielded less than $300,000 each, which the FTC regarded as just below the cost of defending against a patent lawsuit in its early stages. "The behavior of Litigation PAEs," the agency concluded, "is consistent with nuisance litigation."
There are signs, however, that the trolls' strategies are converging. Portfolio companies, says Duan, "haven't produced the returns their investors are looking for, so they're turning to litigation."
As the FTC observed, PAEs by their nature have legal advantages over their targets. They're not manufacturers themselves, so they're not vulnerable to counter suits over patent infringement. For the same reason, they don't face their own discovery risks or expenses. "A PAE may thus be able to subject a defendant to exhaustive discovery requests while itself facing a relatively light discovery burden," the agency says.
But that pointed the FTC toward some possible solutions. One is to limit discovery in patent cases until after the plaintiff is required to establish its case via preliminary motions. The goal is to reduce the cost of discovery for defendants, which would reduce their vulnerability to courthouse bullying. The agency also endorses more fee-shifting, in which the loser in a patent case has to pay the winner's expenses.
It might also make sense to reduce forum-shopping for patent claims. One federal district court dominates patent filings — the small-townish Eastern District of Texas, headquartered in Tyler. This unlikely venue attracted an amazing 54% of all lawsuits filed by litigation trolls, the FTC noticed. That's because its judges have proven to be remarkably plaintiff friendly, and federal rules allow lawsuits to be filed anywhere the defendant conducts any business. Requiring patent lawsuits to be filed only where the patent owner or defendant has significant business would make that a lot harder.
What's left is to upgrade the quality of patents, which would limit the ability of trolls to hold up defendants for ransom. Software patents have been lucrative for trolls because they are almost invariably vague in detail but expansive in claims.
Often, the patent applications merely describe — "in intentionally vague and broad language," Mayer noted — a familiar concept or practice while adding the words "with a computer," often without even specifying how the software works. Do you filter your daily mail, tossing anything that looks like junk? That's not patentable; using a computer to perform the same task with email shouldn't be either, Mayer wrote. He was particularly irked by the threat that patent claimants could interfere with openness and free speech on the Internet with the connivance of the Patent Office, which gave undeserving applicants "the right to exact heavy taxes on widely used conduits for online expression."
Mayer's position is one that may become more widely accepted; it's proper to note that he was concurring, albeit with sharper language, with a 2-1 decision throwing out software patent infringement claims lodged by Intellectual Ventures against Symantec Corp. and Trend Micro. The tide may be turning.
The question remains whether the water will reach Capitol Hill. A patent reform measure was dropped in 2014 by then-Senate Judiciary Chairman Patrick Leahy (D-Vt.) in 2014, and another failed last year, due to opposition from entrenched interests in industry and the legal profession. Nothing more will happen until next year at the earliest, but several roadmaps to reform now exist. The patent process can be remade to serve invention and innovation again, if the trolls can be held at bay.