The long-anticipated Government Accountability Office report on rising patent litigation and the role of nonpracticing entities was published in August to relatively muted response from corporate America and legislative bodies. Rhetoric lobbed from both ends has long defined the public discussion on NPEs, or “patent trolls,” as they are more commonly known. The conversation seems poised to change based on the GAO’s data and conclusion, though, which revealed contradictions regarding the NPE effect.
The GAO report, “Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality,” was mandated by Section 34 of the America Invents Act, which made several fundamental changes to U.S. Patent and Trademark Office procedures. The report’s inclusion came in response to overwhelming frustration with NPEs, expressed up and down supply chains at every level of industry, from small business owners to America’s largest manufacturers and retailers. At the time of the GAO report’s publication, there were no less than six bills in committee in the House of Representatives and Senate, with a seventh bill under discussion, all meant to obstruct NPE practices. Just two months prior, in June, President Obama issued an executive order to combat NPEs, prescribing greater measures of scrutiny for the USPTO to follow when examining software patents. Also in June, the chairwoman of the Federal Trade Commission, Edith Ramirez, announced the commission’s intent to assert greater authority against NPEs by enforcing antitrust laws and commissioning studies of NPE business models. Even state legislatures had started to react. Though patent law is traditionally the domain of the federal government, in May, Vermont passed legislation making a bad-faith threat by an NPE a violation of state consumer protection laws.
Needless to say, NPEs have come under intense scrutiny from lawmakers, industry and a growing rank of academics. Under less scrutiny has been a fundamental question in the NPE debate that the GAO strove to address in its report: Exactly who is a patent troll? Neither the president, nor the legislature, nor the Supreme Court, nor industry reports and academic studies have yet to solidify a definitive terminology, much less a consensus of what entities and business models belong in the NPE category.
Based on this definitional ambiguity, such proposed legislation implicates rising and serious uncertainty. Traditionally, a patent troll was considered any company that owns patents but does not practice them, and usually makes no products. But what of companies that make patented products but also own patents for which they produce no products? And what of companies that make some patented products and only license other patents?
For instance, Google Inc. recently purchased the Motorola Mobility Inc. patent estate, but it is difficult to imagine Google practicing every patent acquired. Google is a large and well-respected technology company, but could it be called a patent troll? Interestingly, Google was found by a judge last year to have inappropriately inflated the price of licenses to certain wireless and video technology used in Microsoft’s Xbox game console. (Perhaps ironically, Google collaborated with Blackberry and Earthlink to generate a report on the growth of NPEs in April.) Other well-respected technology companies have large patent portfolios that do not necessarily cover existing products but are used for collecting royalties. Can these companies now be called patent trolls, too? The IP strategy of owning blocking patents is well known, but is this an activity that could reasonably fall within the crosshairs of the new legislation? One hopes not.
Attempting to grasp the definitional obscurity, the GAO report identified several kinds of NPEs:
“In addition to individual inventors who may choose not to develop products based on their patents, there are other types of ‘nonpracticing’ patent owners, or nonpracticing entities (NPE). For example, some universities are NPEs, as they develop technologies in campus laboratories, and rather than producing and selling products that incorporate these technologies, they license their patents on these technologies to companies who use them in their products. In addition, some private firms are NPEs, as they specialize in R&D, and rather than selling products, they license the patents for those products to fund further research. Some NPEs simply buy patents from others for the purpose of asserting them for profit; these NPEs are known as patent monetization entities (PME). Other PMEs include companies that produced products at one time and still own patents on the technologies for those products.”
Still, the report concluded:
“Experts agree that NPEs have a variety of business models, which makes it difficult to fit them neatly into any one of these categories.”
Astonishingly, the GAO didn’t find the cause of rising litigation in this muddle. Actually, it distanced itself from the NPE backlash within the very first paragraph of its report, as it wrote, “History is filled with examples of successful inventors who did not develop products based on the technologies they patented. … In the United States, the party that owns a patent — the patent owner — is not required to put the patent to use in order to profit from it; he can also license others to use it. In some instances, patent owners may need to actively assert their patents in an adversarial context if another firm’s product infringes their patents.”
Data contained in the report seemed mostly to support caution in the face of the recent slew of NPE legislation. In the years they focused on, 2007 to 2011, the GAO found operating companies brought most of the patent infringement lawsuits, with PMEs accounting for only about one-fifth of the total. Still, even though PMEs accounted for only about one-fifth of the total during this time, PMEs sued close to one-third of the overall defendants, “accounting for about half of the overall increase in defendants.”
This statistic regarding PMEs didn’t sway the GAO, though, in its determination that other factors had greater impact on the rise in patent litigation in recent years. The report pointed out several, including the granting of patents with overly broad or unclear claims, the potential for large awards from the court, “even for ideas that make only small contributions to a product,” the “recognition by companies that patents are a more valuable asset than once assumed” and even the implementation of the AIA, which limits the number of defendants a plaintiff can name in a lawsuit, causing some plaintiffs that would have previously filed a single lawsuit with many defendants to multiply the lawsuit as many times as its defendants.
The GAO ended its report with perhaps the most benign description of NPEs a government entity has made to date:
“Public discussion surrounding patent infringement litigation often focuses on the increasing role of NPEs. However, our analysis indicates that regardless of the type of litigant, lawsuits involving software-related patents accounted for about 89 percent of the increase in defendants between 2007 and 2011, and most of the suits brought by PMEs involved software-related patents. This suggests that the focus on the identity of the litigant — rather than the type of patent — may be misplaced.”
The conclusions of the GAO report suggest that legislatures should carefully consider any bills aimed at alleged NPEs. The law of unintended consequences counsels caution, because undesirable results could arise from attempts to deal with NPEs by instead creating more gray areas and greater uncertainty. The recent implementation of the AIA was a veritable sea change for U.S. patent laws, as practitioners and businesses, as well as the federal courts, race to catch up. Legislation that fails to account for the GAO empirical data will only add uncertainty and drive up the costs of patent litigation further, a result benefiting no side of the current NPE debate.
Mike Hogan is a partner at Feldman Gale. His practice includes litigation and appeals, due diligence, opinion work and counseling on a range of technologies from biotechnology and pharmaceuticals to home improvement technology.
Gregory Hillyer is a partner with the firm. He is an adjunct professor at American University, Washington College of Law.