GAO Report on Patent Litigation Could Spur Further Congressional Action, Advocates Say

GAO found a 31 percent increase in patent litigation from 2010 to 2011, after 10 years in which the number of patent infringement lawsuits in federal courts fluctuated only slightly, the report said (http://1.usa.gov/16R4jTT). That change could have been influenced by the anticipation of changes in the America Invents Act (AIA) of 2011, it said. It also found that companies making products brought most of the lawsuits, and patent assertion entities brought about 20 percent of all lawsuits. Moreover, GAO found that between 2007 and 2011, the number of defendants in patent infringement lawsuits rose by 129 percent. About 90 percent of that increase was attributed to software-related patents, it said, many of which are broad or vague. Stakeholders told GAO the increase in litigation could be attributed to the prevalence of patents with unclear property rights, the potential for large monetary awards from the courts, and the wider recognition that patents are a more valuable asset, GAO said in the report.

The report also addressed PAEs, which it said were responsible for suits against one third of all defendants in patent infringement suits between 2007 and 2011, and which it said accounted for about half of the increase in defendants in recent years. The number of defendants sued by PAEs tripled from 2007 to 2011, it said. One PAE told the GAO it preferred to sue end users rather than technology vendors because it could extract larger settlements. Patent litigation can cost defendants up to $5 million, GAO said, even when there is no damages award. Discovery costs can total up to $3 million, it said, and PAEs don’t face the same litigation burdens. The huge legal fees can force companies to settle before trial, GAO found. Moreover, “company representatives told us that for every patent infringement lawsuit filed against them, they might receive many times more letters notifying them of potential infringement and offering licenses,” it said.

The U.S. Patent and Trademark Office should consider examining trends in patent infringement litigation, including the types of patents and issues in dispute, GAO recommended. PTO should also link the information to its internal data on patent examination to improve the quality of issued patents, GAO said. Both the judicial system and the PTO have already taken actions that are likely to affect patent quality and litigation, including several under the AIA, it said. GAO was directed by the AIA to issue the report on the consequences of PAE litigation, and to recommend ways to minimize its negative impact. The law asked for the report by September of last year.

Lawmakers on both sides of the aisle have weighed in on the issue of PAEs this year, with legislation from Reps. Jason Chaffetz, R-Utah, Peter DeFazio, D-Ore., Ted Deutch, D-Fla., Judy Chu, D-Calif., and Darrell Issa, R-Calif., as well as Sens. Charles Schumer, D-N.Y., and John Cornyn, R-Texas. Further legislation is expected from Senate Judiciary Chairman Patrick Leahy, D-Vt., and House Judiciary Chairman Bob Goodlatte, R-Va., later this year, aides told us. House Judiciary Ranking Member John Conyers, D-Mich., and IP Subcommittee Ranking Member Mel Watt, D-N.C., said in a May statement they wanted to sit on PAE legislation until the GAO released its findings. Representatives for Leahy, Conyers, Schumer and Chaffetz had no immediate comment. FTC Commissioner Julie Brill has also said she supports having the FTC use its authority under Section 6(b) of the FTC Act to study the business practices of PAEs and examine how they affect competition and consumer interests (CD Aug 1 p10). An FTC spokesman declined to comment on the report, saying the agency is still reviewing its contents.

A House Judiciary aide told us the committee has been receiving comments and working with interested parties to make any necessary changes to the discussion draft Goodlatte released in May. The aide said Goodlatte expects to release an updated version of the discussion draft soon, and said “the GAO report reinforces the concerns that we have heard from stakeholders and makes clear that steps need to be taken to address abusive patent litigation stemming from low quality patents.”

"The report will be valuable in accelerating the current legislative push for patent reform,” said Charles Duan, director-patent reform project at Public Knowledge, echoing other groups that advocate for oversight of PAEs. “The report highlights the complexities and inconsistencies of patent litigation, which demonstrates the need for broad and universal reform,” Duan said in a release (http://bit.ly/1f58r1P). “It furthermore identifies numerous areas for improvements in patent quality to protects [sic] innovators and acc[e]ss to technology.” CCIA’s Sloan said: “Companies facing the expense of nuisance lawsuits are encouraged that this additional evidence may motivate improvements to specific rules for patent litigation sooner rather than later,” and said the report highlighted the need for Congress to support patent reform measures. She said Capitol Hill is aware of the problem, but “as with so many things, it’s like, when does the noise and the pain become enough that you're willing to prioritize it?”

The report “confirms what start-ups and entrepreneurs live with every day,” said Jon Potter, president of the Application Developers Alliance. “Patent infringement lawsuits and demand letters from patent trolls are a constant threat, and the cost of fighting back is often crippling. Vague and overly broad patents are the weapons that enable troll abuse,” Potter said. Michael Beckerman, Internet Association president, said the report “only scratches the surface,” since it acknowledges that much of the impact of PAEs is undetected. “For every lawsuit filed, a company faces many more demand letters, and small companies tend to settle quickly to avoid high litigation costs. Congress must take action to put patent trolls out of business for good.”

But as “troubling” as the study’s findings were, its recommendations were “rather weak,” said Electronic Frontier Foundation staff attorney Julie Samuels in a Thursday blog post (http://bit.ly/1f5iHXU). Its report “essentially recommends nothing,” she said. Moreover, it failed to address the harm of demand letters, many of which do not result in lawsuits, she said. GAO said it couldn’t clarify the extent of the practice because it lacked reliable data on the letters issued outside the court system. But “therein lies the rub,” Samuels said. “Because lawsuits often never get filed, there is no public record. ... Until Congress requires that trolls publicly report the letters they sent, this problem likely won’t get fixed.” She said the evidence from GAO, FTC, the Congressional Research Service and statements from President Barack Obama and leading lawmakers mean “the time for reform is now.”

Keith Kupferschmid, Software and Information Industry Association senior vice president-intellectual property policy and enforcement, said the report reveals a “large and growing problem and looks favorably on a number of possible improvements to the patent system. ... Like predecessor reports by other groups, the GAO report identifies numerous concerns with the patent litigation system including but not limited to, the high-cost of patent litigation, the potential for large patent damage awards, poor quality of certain patents and recent increases in the amount of patent litigation.”

The report, however, concludes that the identity of the litigant, be it a PAE or an operating company, is probably not the right lens through which to view this issue, said Russ Merbeth, chief policy counsel for Intellectual Ventures, which critics describe as a PAE. “At least in the study, whether it’s an operating company or a patent monetization entity [PAE] isn’t really the right question to ask,” he said. “It’s really, is there a behavior driving this? And I don’t know that the report really finds that there’s a particular behavior driving it.” Moreover, even the GAO report attributes some of the increase in litigation to the AIA, he said.

Merbeth also pointed to a PricewaterhouseCoopers study earlier this year that had very different numbers for how many patent litigation cases involved software (http://pwc.to/1f5gDiz). He said the discrepancies “indicate that these numbers can be a little bit slippery and it can be hard to draw hard and fast conclusions based on any one of these studies.” He said the impacts of the AIA were only just beginning to be understood. “There are a whole lot of changes contemplated under the AIA and that the PTO currently has in mind that could, over the long term, have a significant impact on litigating patents,” he said. “We need to give a little more time for the AIA to be implemented before we start running around making a whole bunch more changes that industry will have to deal with, that small inventors will have to deal with, that large operating companies with patent portfolios will have to deal with, that patent monetization entities, that everybody will have to deal with.”