Chief Circuit Judge Michel Agrees with Me: NPE’s (aka "Patent Trolls") are Not Necessarily "Illegitimate"

A good troll

A good troll!

On his great 271 Blog, Peter Zura posted excerpts of the Chief Circuit Judge Michel’s keynote address at the FTC hearings on “The Evolving IP Marketplace” last December where Judge Michel addressed the state of patent law and patent reform. Anyone interested in patents, the USPTO and patent reform should take a look. I posted a comment on this post, and am reposting it here (with additions) along with Judge Michel’s comments about NPE’s as presented on the 271 blog.

Specifically, I was intrigued by Chief Circuit Judge Michel’s view that NPE’s (“non-practicing entities” also known by the pejorative term “patent trolls”) should not be viewed as somehow “illegitimate.” He apparently believes that by allowing those who are on the receiving end of NPE lawsuits to control the argument by “naming and framing” (my phrase) the problem as “trolls” is not helpful. Here is the excerpt of this part of his speech (again, thanks to Peter Zura of the 271 Blog for posting this–Peter’s emphasis removed):

Then the argument keeps shifting. Well, it’s not so much the number of infringement suits filed every year, it’s who’s filing. Well, why should we assume that a non-manufacturing patent owner shouldn’t be allowed to enforce its patent? What is wrong with a university owning patents based on research of its faculty scientists or research institutes or small inventors or small innovative companies that either can or don’t want to try to manufacture products themselves but license their inventions so others can make them?

Well, are these patentees really illegitimate somehow? I mean, after all, at least up until now a patent has given its owner the right to exclude, not the obligation to make. Then some say, well, it’s not so much the non-practicing entities, it’s certain companies that don’t invent at all, but merely acquire and enforce patents, and of course calling them ‘trolls’ just confuses the analysis because obviously a troll is a bad thing.

It’s a pejorative label. (Some people who used to complain about trolls allegedly have become trolls). But I don’t think that it’s helpful — it’s a slogan. It’s a label. It’s an excuse to not think carefully about the problem, as far as I’m concerned. It’s like talking about ‘questionable patents.’ It’s an excuse to not think carefully about the problem as far as I’m concerned. It’s like talking about questionable patents. It’s not helpful if we’re going to try to diagnose the real illness and prescribe a useful medicine.

Besides, patents, like any other form of property, the essential element of property is it is alienable. You can sell it. You can sell it to anybody you want to for whatever price you want to sell it. Why should that be prohibited? Why should I be prohibited from buying patents if that’s what I want to do, whether I invented them or not, whether I am going to practice them or not, whether I’m a research institution or a university or not? There might be some reasons. Maybe some of them are good, but it’s not self-evident, at least not to me.

Then there’s certainly the debate about motives. Well, they just want to acquire patents so they can squeeze royalties out of infringers. Well, yeah. Hey, this is commerce. This is about money. This is not an altruistic system. The whole constitutional idea was that the incentive of monetary gains would motivate innovation at a greater rate and to better ends than if the lure of money wasn’t there, so I’m a little dismayed when I see it even creep into footnotes of Supreme Court opinions, that certain patentees were just trying to squeeze money out of the accused infringer. Well, all kinds of patentees are trying to squeeze money out of the accused infringer. That’s what the lawsuit is all about, so come on. Let’s be a little more adult about it than to worry about the greedy motive of the patentee. Of course the patentee is greedy.

Judge Michel is right on the money about the NPE argument! As Judge Michel properly asserts, there are many patentees, such as universities, that never intend (nor do they have the wherewith all) to ever make a product covered by the patent claims. Rather, their objective from patenting is to sell or license their rights. If another entity chooses not to buy or license their rights, that entity is effectively “stealing” from the university etc. and should be sued.

The view that NPE’s are a burden on society is one promoted by those companies that must react to lawsuits (or threat of lawsuits) on a regular basis. And, clearly, this is an expensive proposition for these entities. As a result, in recent years, these manufacturers have banded together to develop a framework for making Congress, as well as the public, aware of the negative effects that NPE’s allegedly have on the business community.

To this end, I sat in a Gathering 2.0 webinar this week where Dan McCurdy of Allied Security Trust (“AST”) made the argument that only those companies that actually make a product should be able to sue for damages. This effectively means that only his colleagues (that is, those large technology companies who fund AST) and those other companies in roll of “manufacturers” should be allowed to sue for patent infringement. This is an viewpoint that is in opposition to the public policy with which the patent system is imbibed.

I think what is almost always lost in the “patent troll” argument is the fact that patents exist to disseminate information and promote innovation through public disclosure. People will not do so unless their self-interest is served by giving them exclusive rights to that innovation for a limited term in return for this disclosure. Corporations, along with their lawyers, have long considered patents first and foremost be a legal right to protect their products from competition. In short, corporations appear to believe that the Constitution provides them with a right if they make something that benefits society. This is a perspective of a monopoly right (that is, an affirmative right to sell something) as opposed to a broader exclusionary right.

In other words, public policy is agnostic to the fact that the patentee actually makes something, as long as the patentee meets the disclosure requirements of the patent laws. It is the exclusionary aspect of patents that allows the public policy of innovation promotion through patents to succeed, but it is this exclusionary aspect that provides universities and other NPE’s to sue corporations when they do not actually make the product covered by their patent rights.

In my opinion, the battle against NPE’s is at its core a battle against the public policy that serves as the foundational basis of our patent system–disclosures of innovations that “promote the progress of science and the useful arts.” Those of us who believe that NPE’s meet the objective and, as such, are not inherently “evil” must begin to reframe the argument and communicate the societal benefits of patent publication to those who set public policy. Of course, it will be difficult for the diverse interests of NPE’s to come together in a uniform manner to present the arguments against corporations that today control the public argument. I hope that cooler heads will prevail as we move forward with patent reform in the current Congress.

6 thoughts on “Chief Circuit Judge Michel Agrees with Me: NPE’s (aka "Patent Trolls") are Not Necessarily "Illegitimate"

  1. Evelyn

    It is an abhorration of the patent system when small companies get sued for infringement without actually infringing the patent in question. Ultimately, smaller groups end up getting “shaken down” for fees by these trolls (there is nothing positive to be said about them). Big companies can fight these suits back and sometimes draw a line in the sand – small companies get to buy a license for a patent that they don’t even infringe, since they can’t afford to stay in until the end. Sometimes they get released after incurring massive fees and costs, without any reimbursement.

    This happens regularly: a large firm, like Perkins Coie takes on representation of a patent owner on contingency and sues without prior diligence (which is supposedly required) on the patent as compared to the underlying process/workings of the products of the alleged infringer. Even when the owner/lawyers are shown there is no infringement – most of them take the “buy a license” approach. The law firm, on contingency, gets nothing if they release the company – and they use extremely aggressive and threatening techniques to force a license purchase (for their own benefit, mostly).

    I represent a client in the imaging business who gets “sued” for patent infringement about once every 2 years. They have never actually infringed any of the patents underlying the suits, but they have incurred hundreds of thousands of dollars in legal fees and lost business due to the distraction.

    I think the process for suing for patent infringement must be reformed to force a patent owner and its lawyers to show they have (i) contacted the alleged infringers prior to resort to litigation and after engagement in discussions and review of products/process, etc and are not able to reach an amicable resolution outside of litigation (perhaps through some sort of specialized patent mediation process); and/or (ii) have been able to legally obtain the products under question, have had technical expert evaluation performed and have identified infringement in that documented process – which should be made available to the alleged infringer as part of the suit.

    I think it would be much easier for a company subjected to these suits to stomach it if the patent owner was required to produce documented, technical diligence that led the owner to reasonably believe there is infringement. One of the last suits my client was involved with was an absolute “shake down” – the client’s product in question was downloadable for a 30 day free trial and the patent owner/lawyers never even tried. It cost six (6)months and $100,000+ for the company to get itself released from the suit – and ultimately, the others that were sued with them used one of my client’s patents to show prior art and get the suing party’s patent thrown out.

    The focus shouldn’t be if a patent owner makes a product – it should be that they are required, through evidence, to take reasonable precaution to not sue parties that aren’t infringing and have technical evidence to make them believe there is an infringement.

  2. Jackie Hutter, Intellectual Property and Patent Business Strategist and "Recovering Patent Lawyer"

    Thanks, Michael, I enjoyed reading your NPE discussion.

    I agree with you that we need a more principled way to define “trolls.” I think you have made a good start with threading the needle with respect to NPEs. I also think you have done an excellent job on capturing the disclosure aspect.

    One thing that I have been mulling over (and that I do not think is fully fleshed out in your NPE discussion) is how do we classify manufacturing entities that also acquire patents that they do not practice (either intentionally or because of failed business models). When these entities bring suit against others, do they get a “pass” because they manufacture some things but not this specific one? The modern, strategic view of IP is that it does more than protect those who actually practice. When we look at the folks who fund AST, I am sure that we will see a majority that also acquire patents for offensive purposes. I fail to see how they can be more “virtuous” than those who do not manufacture.

    Lastly, I like to call folks who exploit patents “entrepreneurs.” We may not like their business, but if it is legal (at least today), they have every right to do so.

    Keep giving these great comments. You are really helping elevate the conversation! (and keeping me on my toes)

  3. Jackie Hutter, Intellectual Property and Patent Business Strategist and "Recovering Patent Lawyer"

    Evelyn

    I understand your concerns, but at the core, the issues you raise are not patent-related, but litigation/lawyer related. Patent litigation has become a highly lucrative area of practice (even while patent practice has become ever more commoditized). While I am sure that many people obtain or acquire patents as a business model, I don’t kid myself that lawyers make this happen.

    I don’t think the answer is a “loser pays” system, however, as this would likely benefit the deep pocket patent owners who can practice scorched earth litigation. Rather, the key will be for lawyers to develop business models that do not provide huge returns on the kind of patent troll activity you properly complain about in your post.

  4. James

    The majority of the ‘troll’ problem seems to stem from the lack of a ‘looser pays’ system in the US v. common law countries (ex. UK, Canada).

    This, and the high cost of litigation in the US (in part due to the through discovery process and use of juries) can make it cheaper to pay not insigificant sums to feed the trolls rather than defend on the merits.

    A recent decision from Justice Jacobs in the UK had this to say about trolls.

    So how then did Aerotel make money from the patent? By litigation and the threat of litigation against users. And principally in the US. That is unimpressive, for it is notorious that at least from the middle-90s the US patent litigation scene had become immensely pro-plaintiff. A defendant faced with the possibility of litigation had to take into account all of the following matters: (1) the right of the patentee to insist upon jury trial (juries are apt to be pro-plaintiff); (2) the general level of damages awarded in the US – by juries; (3) the real possibility of triple damages for wilful infringement; (4) the fact that even if a defendant won he would have to pay his own, very considerable, legal costs; and (5) the fact that until the decision of the Supreme Court in eBay v MerckExchange U.S. No. 05–131 (2006) there was a strong view that even a non-exploiting patentee who won would get an injunction as of right.

  5. Scott B. Garrison

    Hi Jackie, I don’t have much of value to add here and if I did it would mimic what you or Judge Michel express. I did however Google NPE’s and articles on them and came across a very interesting series of posts by Professor Adam Mossoff of George Mason University School of Law http://bit.ly/18fhT5

    It seems that the issues we face today regarding patent trolls are not at all new. Elias Howe, America’s first “non-practicing entity” or patent troll successfully used the patent system in the 1850’s to exploit his patent by forcing licenses in that era’s hi-tech area – the sewing machine.

    Take a look, I think you will find it entertaining at a minimum if not informative.

    Take care,

    Scott

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