Michael Steinberg, MPP, Staff Writer, Brief Policy Perspectives

The federal government aspires to foster innovation in society, and perhaps the oldest, most valuable, and least understood way policymakers spur innovation is by issuing patents.  Patents are official documents that give a person or company the right to be the only producer that makes or sells a product for a certain time.  Therefore, through the patenting process, policymakers incentivize innovation by ensuring that inventors profit from creating new products or processes.

During the patent prosecution process, the steps inventors must take to receive patents are extremely complex, and lawmakers and lawyers struggle to keep pace with new innovations in society. Roughly 325,000 patents were issued in 2015, and the number of applications filed increased dramatically over the last few decades largely due to the rise of technology in society and innovations in software.  One of the greatest dangers to innovators is the risk of frivolous lawsuits from patent trolls.

What is a Patent Troll?

Patent trolls, also known as non-practicing entities, are companies that prosecute, buy, or license patents, and once the patents are issued or acquired, the trolls will not use the patented process or produce the patented product.  Rather, the non-practicing entity will sue any company or inventor that loosely infringes on the patent, and since these are typically vague patents, it is easy to prove infringement.  In an attempt to avoid a frivolous lawsuit, the company being sued will often settle the case. However, smaller companies lack the funds to fight or settle the lawsuits.  

Scholars estimated that patent trolls cost U.S. companies $29 billion in 2011, and 55% of lawsuits from trolls involved companies with annual revenues under $10 million per year.  The Harvard Business Review analyzed three different studies that proved frivolous lawsuits decrease venture capital investments in start-ups and reduce innovator spending in research and development.  A 2011 study by the CATO Institute found that litigation from patent trolls exploits vague language in software and related technology patents. The report’s authors state, “The loss of billions of dollars of wealth associated with these lawsuits harms society.  While the lawsuits increase incentives to acquire vague, overreaching patents, they decrease incentives for real innovation overall.”  Policymakers must crack down on patent trolls so that companies are once again incentivized to innovate.

How to Combat Patent Trolls

Policymakers in all three branches of government have the ability to impact the patent system and fight trolls.  The policy remedies from each of these branches target similar aspects of the patent process.  Policymakers are most effective at combating trolls when they ensure specific and high quality patents are issued, clarify and standardize definitions in new technological fields, and reform the litigation process itself to decrease incentives for frivolous lawsuits.

Executive Branch

In 2013, the White House issued a report on patent assertion and innovation reform. It outlined many of the tactics used by patent trolls, including that they use aggressive litigation tactics, target small and large firms, use unclear definitions in innovative fields like software, and negatively impact innovation and growth in society.  The White House recommended implementing policies that will, “foster clearer patents with a high standard of novelty and non-obviousness, reduce disparity in the costs of litigation for patent owners and technology users, and increase the adaptability of the innovation system to challenges posed by new technologies and new business models.”  Because these recommendations were issued by the White House, examiners, lawyers, and patent trolls understand that patent reform is a high priority for the administration, and the United States Patent and Trademark Office (PTO) will actively implement these policies when reviewing cases.

Furthermore, the Government Accountability Office issued a 2016 report on reforms that the PTO, an agency subcomponent, could undertake to improve the patent review process and patent quality.  The GAO recommendations centered around improving the standard of review conducted by the examiners through increased managerial guidance and monitoring.  The report suggests that the PTO establish a consistent definition of what constitutes a quality patent and standardize procedures to efficiently determine if a previous patent should be cited as prior art, which is any publicly disclosed information that is similar or relevant to a patent application. For some applications, the list of prior art disclosures can be lengthy and excessive. GAO also recommends that the PTO leadership assess examiner workloads better, so that agency personnel is incentivized to thoroughly review patents for quality rather than focusing on clearing large quantities of patent applications.  By streamlining, standardizing, and better managing personnel, the PTO would approve higher quality patents and combat patent trolls before the patents are even issued.

Legislative Branch

Congress has also issued reports that study patent procedures and suggest policies to limit patent trolls’ effectiveness.  A 2013 report from the Congressional Research Service delves deeply into specific legislative recommendations on patent reform. Among them are proposals to create IT-specific reforms that only clarify IT definitions and dismiss ambiguous claims, make information on pending and issued patents more easily discoverable, shift more litigation burdens and royalty costs onto identified non-practicing entities, shorten patent terms and change maintenance fee structures, punish firms for not developing or using the patent, and publish assignment and licensing terms for all patents.  These reforms would create better transparency in the process and take away legal power from non-practicing entities, which would protect innovative companies from a number of lawsuits.

Judicial Branch

The legal system will also play a role in patent reform efforts both to help craft patents and litigate cases in court. Patent attorneys can assist the PTO, Congress, and the judiciary in understanding patent intricacies.  In 2014, the Bar Association of San Francisco published an article in support of recent efforts to reform the patent process. The author commended the PTO for implementing training programs to identify and rigorously examine “functional claims.”  These patent claims attempt to protect the goal of a patented device, which broadens the scope of the claim, rather than the structure to achieve the goal. This creates a more specific claim, and the author notes that functional claims “can limit whole areas of innovation and subject defendants to unpredictable claims.”  By obtaining expertise on legal language and litigation techniques, examiners at the PTO will be able to better identify and reject claims and patents that benefit trolls.

Lastly, the Supreme Court has recently helped resolve patent disputes. The precedents have made it easier for defendants to recover legal costs of frivolous lawsuits and challenge vague patent claims.  As noted by James Bessen, the Court set a clear precedent in Alice Corp. v. CLS Bank where the justices ruled that implementing an existing business method on a computer is not patentable.  He argues that this ruling greatly decreased the volume and defense costs of lawsuits filed by trolls, and while he commended efforts by the PTO that contributed to this reduction in litigation, he advised the Court to continue interpreting rules regarding software patents. The Court’s interpretations of patent language will continue to be crucial in clarifying legal definitions for new technologies.

Conclusion

Patent trolls negatively impact our economy and inhibit innovation in society.  Their practices stop companies from investing in new ideas for fear of being sued, and it is the responsibility of the executive, legislative, and judicial branches of government to fight against non-practicing entities and protect American inventors. Government can accomplish this by tailoring policies and reforms to ensure more specific and high quality patents are issued, clarifying and standardizing definitions in new technological fields, and by reforming the litigation process itself to decrease incentives for frivolous lawsuits. Although often overlooked in policy discussions, patent prosecution and litigation are extremely important institutions in our society because they allow government to facilitate and regulate technological innovations that improve our nation. The key to fostering innovation is mitigating the effect of patent trolls on inventors.