Here’s why the House patent bill won’t put a stop to patent trolling

December 6, 2013

In March 2006, a lawsuit came within days of shutting down the network for BlackBerry, which at the time was the preferred mobile device of the suit-wearing crowd. A small firm called NTP owned several patents that essentially covered the concept of checking e-mail wirelessly. The firm had won a lawsuit against Research in Motion, creator of the BlackBerry, and Judge James R. Spencer had hinted that he would order RIM to shut down its system if a settlement wasn't reached quickly. With no real alternative, RIM wrote a $612.5 million check to NTP to settle the case.

NTP didn't allege that Research in Motion had copied the work of NTP's founder, Thomas Campana. Campana's patents were simply so broad that it was practically impossible for anyone to create a wireless e-mail product without infringing them. Indeed, NTP's patents were so broad that the firm would eventually sue almost every major company in the wireless market, including Apple, Google, Microsoft, HTC, LG, AT&T, Sprint, T-Mobile and Verizon Wireless. All those companies and more settled their claims with NTP last year.

Patents are supposed to promote innovation, but broad patents like NTP's have had the opposite effect. With thousands of similar software patents floating around, it has become almost impossible for technology firms to innovate without accidentally infringing patents and becoming embroiled in litigation. In effect, the patent system has become a kind of innovation tax, forcing high-tech companies to spend more money on patent lawyers and licensing fees than on engineering talent.

The House of Representatives approved patent legislation called the Innovation Act on Thursday. Supporters have portrayed it as an historic blow against patent trolling. But while the legislation will discourage some litigation tactics favored by trolls, it does nothing to fix the patent system's fundamental problem: the proliferation of low-quality software patents that have turned the system into an impediment to innovation.

NTP is hardly the only patent troll to plague the technology sector in recent years. Another company, Eolas, claimed to have invented the concept of embedding interactive content in Web pages. The firm managed to get more than $100 million from Microsoft before its patents were eventually ruled invalid. And over the past two decades, dozens of other firms have obtained broad patents covering obvious concepts and used them to extract settlements from deep-pocketed technology companies.

Technology firms have been lobbying Congress for years to rein in these attacks. For example, legislation that passed the House Judiciary Committee in 2007 would have limited damage awards in patent infringement cases. But by the time that bill evolved into the America Invents Act, which Congress enacted in 2011, almost all the substantive reforms had been stripped out, leaving procedural changes such as a switch to a "first to file" rule for granting patents.

As Congress was working on the America Invents Act, two things were happening that would reshape the politics of patent reform. First, trolls were changing their tactics. "Classic" trolls targeted large technology companies seeking multimillion-dollar payouts. In the last few years, we've seen the emergence of a new generation of trolls. These companies threaten hundreds or even thousands of firms, seeking nuisance-value settlements measured in the thousands rather than the millions of dollars. They target restaurants, realtors, hotels and other small and medium-size firms. Because these firms know little about patent law, they make easy targets.

The second change: Technology companies have been spending massive amounts of money to beef up their patent portfolios. A coalition of technology companies paid $4.5 billion for patents belonging to the bankrupt firm Nortel in 2011. Microsoft bought around 800 patents from AOL for $1.1 billion last year. Google's 2011 acquisition of Motorola is widely believed to have been motivated by a desire for Motorola's more than 17,000 patents. And almost every large technology company now has large teams of lawyers filing hundreds or even thousands of patent applications per year.

These developments have transformed the political dynamics of the patent debate. By targeting brick-and-mortar businesses, the new generation of trolls has dramatically expanded the political constituency for anti-troll legislation. But at the same time, technology companies' growing patent portfolios have made many of them leery of any reforms that could lead to some of their hard-won patents being invalidated.

The result is a patent bill that focuses narrowly on the particular tactics favored by trolls — like vague infringement accusations and targeting end users rather than technology vendors — but does nothing to address the more fundamental problem that there are too many low-quality patents. The original version of the Innovation Act had one modest provision to deal with low-quality patents, but that language was stripped out after an aggressive lobbying campaign led by incumbent software companies with large patent portfolios.

If the Innovation Act is enacted into law — it still must be approved by the Senate and President Obama — it will provide some relief to main street businesses who are ill-equipped to deal with patent litigation. But it will do nothing to reverse the patent system's detrimental effects on high-tech innovation. As the examples of NTP and Eolas show, the unseemly tactics targeted by the Innovation Act are not the only way trolls can profit from overly broad patents. NTP and Eolas did not target end users, hide behind shell companies, make vague infringement allegations or seek nuisance-value settlements.

At best, the Innovation Act will return us to the status quo of a few years ago, with trolls focusing their lawsuits on technology vendors rather than end users. That might seem good for consumers, but like all taxes, the innovation tax imposed by low-quality patents ultimately gets passed on to the rest of us. The cash that cellphone vendors have paid to NTP will ultimately come out of the pockets of the gadget-buying public in the form of higher prices.

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Brian Fung | December 6, 2013