Patent Assertion Entities (PAEs, a subset of non-practicing entities commonly referred to as “patent trolls”) are generally defined as entities that generate revenue by monetizing intellectual property rights without commercializing any product or service. In other words, PAEs exploit their patent portfolio through the negotiation of licenses and litigation rather than through the development and manufacture of the patented invention. The role of PAEs in society has become a hotly debated topic, and whether right or wrong, PAEs are often accused of stifling innovation by harassing corporations with frivolous lawsuits. To this end, a recent report alleges that patent litigation brought by non-practicing entities made up 68% of District Court cases initiated in the first half of 2015 (http://unifiedpatents.com/1st-half-2015-patent-dispute-report/).
A core criticism of PAEs is that their bargaining power to extort licensing fees is grossly disproportionate to their contribution to innovation. In a commonly used example, PAEs acquire overly broad patents, claiming ownership over “basic ideas, such as sending a photocopy to email, podcasting, aggregating news articles, offering free Wi-Fi in your shop, or using a “shopping cart” on your website.” (Comment of House Representative Bob Goodlatte, Chairman, House Judiciary Committee, http://judiciary.house.gov/_files/news/2013/Statement%20Abusive%20Patent%20Litigation.html). They then assert these patents against vulnerable companies, hoping that the threat of costly litigation will induce quick and easy settlements agreements. Many companies choose to reconcile out of court to avoid the nuisance and unpredictability associated with jury trials. It is estimated that tens of billions of dollars have been diverted into the hands of PAEs.
Moreover, PAEs are insulated from the traditional tactics employed by accused infringers to deter litigation. Because they are not engaged in any real business activity (they do not produce or sell any product), PAEs are immune to counterclaims of patent infringement. They are thus at liberty to demand expensive discovery from their opponents while remaining unexposed to the same risk. The asymmetric nature of the parties in court gives PAEs another advantage when negotiating settlements.
It is not surprising that the activities of PAEs have garnered attention from critics. In the last few years, there have been numerous legislative proposals aimed at curbing abusive patent assertion tactics. For example, the bipartisan-backed Innovation Act (H.R. 9), introduced by the House Judiciary Committee, offered reform through fee-shifting provisions, heightened pleading standards, and limited discovery. Despite overwhelming support in the House, the bill ultimately failed to pass the Senate. Instead, the Senate introduced its own bill, the Protecting American Talent and Entrepreneurship Act (PATENT Act), seeking similar but divergent modifications to its predecessor. Unable to agree on an effective solution, Congress continues to contemplate a “balanced approach” to stop patent trolls from abusing the system.
Frustrated by the standstill in Congress, private companies are now coming up with their own solutions to combat PAEs. Unified Patents, a self-proclaimed patent troll insurance company, promises to “manage or settle NPE patent litigation or assertions” of its subscribers. NPE, or Non-Practicing Entity, is another name commonly used to refer to Patent Assertion Entities. Members pay an annual subscription fee based on company size and are grouped to into “Zones,” or certain technology areas. Unified narrowly focuses its efforts on particular technologies or industries, specifically content delivery, cloud storage, electronic payments, wireless (non-cellular), eRetail, and automotive. From each Zone’s collected subscription fees, Unified provides a wide range of services, including monitoring PAE activity through ownership data, secondary-market patent sales, demand letters, and litigation, purchasing patents that pose a risk to a Zone, performing patent analytics, and challenging PAE-owned patents in the U.S. Patent and Trademark Office (USPTO).
Iron Dome is another subscription-based membership plan protecting members against PAE patent lawsuits. Once a member is sued for patent infringement, Iron Dome deploys its “rapid-response patent interception,” targeting the asserted patents or the PAE’s collateral patents for investigation. If this investigation reveals an invalid patent, Iron Dome brings it to the attention of the PAE, and requests dismissal of its member from the lawsuit. If the PAE does not comply with this request, Iron Dome prepares and files an IPR petition against the PAE’s vulnerable patent.
Unified Patents and Iron Dome have been effective in their deterrence-based solutions. Both membership organizations utilize inter partes review (IPR), an adjudicatory proceeding conducted by the Patent and Trial Appeals Board (PTAB). The procedure was specifically designed to “establish a more efficient and streamlined patent system that will improve patent quality and limit unnecessary and counterproductive litigation costs.” (H.R. Rep. No. 112-098, at 40 (2011-2012)). Like civil litigation, IPR allows third party challengers to dispute the patentability of one or more claims in an already-issued patent. But rather than lengthy district court litigation before a judge or jury, the new post-grant proceeding is conducted before a panel of three administrative judges with technical backgrounds and must be completed within an 18-month period. Meanwhile, the median time-to-trial in district court is approximately 2.3 years, with some jurisdictions exceeding a median of 3 years, according to PWC’s 2014 Patent Litigation Study. (http://www.pwc.com/us/en/forensic-services/publications/assets/2014-patent-litigation-study.pdf).
Additionally, an IPR is a relatively inexpensive forum to adjudicate a patent validity dispute. The cost of instituting a proceeding consists of a $9,000 requesting fee, and an additional $200 fee for review of each claim in excess of 20. If initiated, there is an additional $14,000 fee, plus a $400 charge for review of each claim in excess of 15. (7 C.F.R. § 42.15) The largest cost to patent challengers involves the legal fees, which usually range up to hundreds of thousands of dollars through final decision; and will fluctuate with the complexity of the matter and adversarial nature of the opponent. (Meaghan H. Kent, Carly S. Levin, Fabian M. Koenigbauer & Steven J. Schwarz, United States: 10 Reasons Every Defendant in Patent Litigation Should Consider Inter Partes Review, Mondaq (Apr. 26, 2014)). On the other hand, a patent lawsuit costs an average of $530,000 – $3.6 million through the end of discovery, and $970,000 – $5.9 million through final disposition. (AIPLA Report of the Economic Survey (2013)).
Unified Patents was the first independent entity to successfully invalidate a patent using inter partes review. Unified Patents, Inc. v. Clouding IP, LLC, Case IPR2013-00586, IPR2014-00306, Page 37, (PTAB March 19, 2015). Filed against Clouding IP, LLC, Unified Patents challenged U.S. Patent 6,738,799 (‘799 patent) covering a method of file synchronization often employed by cloud storage companies. The PTAB, on March 19, 2015, invalidated all challenged claims from the ‘799 patent, finding them unpatentable over the asserted prior art. Thus far, Unified Patents has filed 24 validity challenges, while Iron Dome has filed three IPR petitions.
Despite arguments that these membership organizations are not the real source of petition, the PTAB has allowed institution of their IPR petitions. For example, patent owners have argued that Unified is not the real party-in-interest because “Unified’s only source of revenue is subscription fees that are paid by its subscribers so Unified can file post-grant proceedings on behalf of its subscribers.” Unified Patents Inc. v. iMTX Strategic, LLC, IPR2015-01061, Paper 9 (PTAB Oct. 15, 2015). However, the PTAB has found this argument unpersuasive, noting that of question of whether a particular entity is a real party-in-interest is a “highly fact dependent question that is assessed on a case-by-case basis.” Id. (quoting Office Patent Trial Practice Guide, 77 Fed. Reg. 48,756, 48,759 (Aug. 14, 2012) (citing Taylor v. Sturgell, 553 U.S. 880, 893-95 (2008))). “While multiple factors may be relevant to the inquiry, ‘[a] common consideration is whether the non-party exercised or could have exercised control over a party’s participation in a proceeding.’” iMTX Strategic, IPR2015-01061 (PTAB 2015). In Unified Patents Inc. v. Dragon Intellectual Property, LLC, the Board rejected the Patent Owners challenge of the named real party in interest, contending that “even if [the Board] accept[ed] Patent Owner’s allegations that Petitioner engages in no activity of practical significance other than filing IPR petitions with money received from its members, this does not demonstrate that any member paid, directed, or suggested to Petitioner to challenge the ’444 patent, specifically.” IPR2014-01252 (PTAB February 12, 2015).
To counter the offensive IPR strategy, non-practicing entity Chinook Licensing DE LLC even attempted to charge Iron Dome with violations under the Racketeer Influenced and Corrupt Organizations (RICO) Act, alleging attempted extortion. According to the filed complaint, Iron Dome threatened to file an IPR petition against Chinook’s patent unless Chinook granted Iron Dome transferable licenses to such. In its Motion to Dismiss, Iron Dome asserted, “Chinook fails to allege any misrepresentation or fraudulent statement and fails to plead any plausible reliance to its detriment.” Defendants’ Opening Brief In Support Of Their Motion To Dismiss, Chinook Licensing DE LLC v RozMed LLC, C.A. No. 14-598-LPS (D. Del. June 25, 2014). Dismissing the RICO complaint, U.S. District Judge Leonard P. Stark agreed that Chinook failed to state a claim as the threat of IPR even in this context, i.e., when accompanied with a draft licensing agreement admitting the asserted patent to be valid and enforceable, did not constitute extortion. Chinook Licensing DE LLC v RozMed LLC, NO. 14-598-LPS (D.Del. Dec. 18, 2014).
It remains to been seen whether, and to what extent, patent reform will reduce the potential for abusive patent litigation by patent trolls. For now, private “insurance” companies advocate for collaboration between small and large companies by pooling their resources in an effort to dissuade attacks against easy targets. But are these membership organizations really so altruistic or merely “reverse patent trolls” bringing about different forms of litigation for their own personal gain?