FTC probe of patent troll activity driven by competition concerns

The dual risks of limiting competitiveness and restraining innovation have caused the Federal Trade Commission to announce a probe of patent trolls.

FTC Chairwoman Edith Ramirez is planning to wield the agency’s subpoena power to launch a 6(b) investigation** into the trolls’, or so-called Patent Assertion Entities’ (PAE), litigation strategies and business methods, as they “raise red flags for competition and consumers.”  FOSSpatents reported on the webcast of the announcement here.

This sounds very much like my first post on this blog, in which I discussed affirmative, strategic discovery steps a defendant facing an NPE/PAE/troll should take to defend vigorously against unfounded infringement claims that are designed solely to extract a nuisance-value settlement, as litigation would not be cost-effective.  Maybe Chairwoman Ramirez read my piece?  Maybe not, but FTC staff certainly reviewed the EFF’s public comment on curbing PAE/troll activity, in which the Electronic Frontier Foundation demanded:

“The FTC should consider deploying its investigatory and enforcement powers against PAEs. EFF believes that at least some PAE litigation, especially that brought against end-users, seriously harms consumers and may not be entitled to Noerr-Pennington immunity.”

This enforcement investigative effort (the FTC acknowledges that it may lack proper jurisdiction over the patent-related portions and may leave actual enforcement to other branches of the federal government) comes on top of the legislative initiatives and bills discussed previously on this blog.

** A so-called 6(b) request involves Section 6 of the FTC Act, 15 U.S.C. Sec. 46.  Its sub-section 6(b) empowers the Commission to require the filing of “annual or special … reports or answers in writing to specific questions” for the purpose of obtaining information about “the organization, business, conduct, practices, management, and relation to other corporations, partnerships, and individuals” of the entities to whom the inquiry is addressed.  Recipients of a 6(b) order may file a petition to limit or quash, and the Commission may seek a court order requiring compliance. In addition, the Commission may commence suit in Federal court under Section 10 of the FTC Act, 15 U.S.C. Sec. 50, against any party who fails to comply with a 6(b) order after receiving a notice of default from the Commission. After expiration of a thirty-day grace period, the defaulting party is liable for daily penalties, each day of noncompliance.

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Sad times for IP trolls — a multi-front war on NPEs has begun

Sad-Troll

It’s been a sad time for trolls lately.

As we reported here yesterday, a U.S. Congressman has introduced proposed legislation to combat patent trolls, AKA non-practising entities (“NPEs”), from hiding behind multiple layers of shell corporations that, in turn, own the patents-in-issue outright or are exclusive licencees thereof.

That’s not all the trolls’ worries, however.  In Europe, the European Commission recently issued a public tender notice, calling for a study on “the Changing Role of Intellectual Property in the Semiconductor Industry

Call for tenders: The European Commission will launch soon a call for tenders for a service contract of a maximum value of EUR 60 000.

The purpose of this call for tenders is a study which will firstly focus on the expected changes in IP strategies and patenting practises of the semi-conductor industry due to the concentration/specialisation, the emergence of foundries and fabless, technological developments in the sector and the appearance of non-practising entities (NPE). Secondly the study will focus on the effects these developments will have for the further development of the global semiconductor sector in general and the European clusters in particular.

That’s not good troll news, as any two-front war (here, EU and U.S.) is exponentially harder to win than one with a single enemy.  (Ask the Germans, they know.)

“But wait, there’s more!”

If the proud northern state of Vermont can be counted as a “third [and potentially fourth] front,” it just earned that right in the war on patent trolls: the state’s Attorney General stated on 22 May 2013 that Vermont had sued an NPE troll for violating the VT consumer protection laws, a “groundbreaking” one-of-a-kind suit for the state (indeed, for any state to date.  More to come, I’m sure…).

Attorney General Bill Sorrell issued the following press release:

Vermont Attorney General Sues “Patent Troll” in Groundbreaking Lawsuit (May 22, 2013)

In an effort to protect Vermont’s small businesses and non-profit organizations, Attorney General Bill Sorrell filed a first-of-its-kind lawsuit today against MPHJ Technology Investments, LLC. It marks the first time that a state attorney general has filed suit against a so-called “patent troll.” The complaint alleges that MPHJ Technology has engaged in unfair and deceptive acts under Vermont’s Consumer Protection Act.

MPHJ Technology claims to have a patent on the process of scanning documents and attaching them to email via a network. The Attorney General’s complaint alleges that the company has sent letters containing multiple deceptive statements and demanding about $1,000 per employee, to many Vermont small businesses as part of a nationwide campaign. At least two of those businesses are non-profits that assist developmentally disabled Vermonters.

Patent trolling is a national problem. A recent major study out of Boston University estimated the cost of patent trolling on the US economy at $29 billion in 2011 alone. Representative Peter Welch recently co-sponsored the Saving High-Tech Innovators from Egregious Legal Disputes (“SHIELD”) Act of 2013 in Congress to address the problem and the Federal Trade Commission held a workshop to address patent trolling in December 2012.

The Vermont Legislature passed first-in-the-nation legislation creating a new tool for targets of patent trolling and for the Attorney General to address the issue. Governor Peter Shumlin is expected to sign the bill into law today.

Gov. Shumlin indeed signed into law the amendment that permits lawsuits against patent holders making bad-faith IP infringement allegations.

Oh, it’s not over yet…

“If you call within the next 10 minutes, we’ll include yet another U.S. Senate anti-troll bill for free!

This is in addition to the [fifth-front? I’ve stopped counting] simultaneous introduction by U.S. Sen. John Cornyn (R-Tex.) of the “Patent Abuse Reduction, requiring greater levels of claim disclosure by plaintiffs, identification of related entities, and greater cost risks for unsuccessful claimants as well as cost-sharing of extensive U.S.-style patent discovery that goes beyond the “core documentary evidence”.

Call now!

We can’t wait to see the comments of the likes of NTP, Wi-LAN, Ray Niro and other NPE-specialised attorneys on these multi-pronged attacks.  I’m sure they will (quite likely much more quietly, because nobody want to support a ‘troll’ publicly) lobby against the proposed legislative initiatives.  Yet, they will have a tough time arguing that they are being targeted unfairly.  That’s because there’s a difference to “tort reform”, i.e., prior decades’ Republican complaints about personal-injury and product-liability lawsuits.  What’s different this time around about the ‘war’ on plaintiffs’ lawyers and allegedly “frivolous” lawsuits is that the legislative and executive governmental attacks on IP NPEs and their lawyers/lawsuits come from all political stripes & colours, not just Republicans

IP-ID? Identifying patent ownership – a patent troll’s nightmare?

patenttroll

[Our first blog post was on patent trolls.  Here we go again, as it is mildly related to competition issues.]

In an effort to “bring much-needed transparency to our current patents system,” Congressman Ted Deutch (D-Fla.), has introduced proposed legislation that would require any sales or transfers of patents to be disclosed to the Patent and Trademark Office (PTO), including information on the real “party in interest.”

The bill (H.R. 2024), bearing the common name “End Anonymous Patents Act”, would require this “IP-ID” (our moniker) for all new patents and for existing patents upon scheduled maintenance fee payments.

According to Deutch:

“Patent trolls go to great lengths to conceal the relevant ownership and interests involved. This total lack of transparency by people seeking to game the system unfairly disadvantages businesses honestly seeking to license patents and those targeted in frivolous lawsuits brought by trolls.”

An IP professor at Santa Clara Univ. School of Law wrote in her year-old paper, “The Who Owns What Problem in Patent Law, that “the ‘who owns what’ problem frustrates risk management and decision-making about patents, creates arbitrage and hold up opportunities, and forms a major component of patent notice failure.”

While some interest groups, such as the Electronic Frontier Foundation (“EFF”), want even more disclosure than what the pending House bill proposes — including identification of license(e)s — the “IP-ID” proposal would go a long way toward eliminating patent trolls’ ability to hide behind various layers of shell companies.

On the attack against NPEs & patent trolls…

How ironic that the first post on Global Antitrust should be one about IP and not pure antitrust.  I’ll leave it at that for now.  I just had this on my mind, and it is timely, so here it is: my 2 cents on NPEs and trolls.

patenttroll

In Europe, positive headway against the continuing onslaught of illegitimate IP lawsuits by so-called patent trolls or non-practicing entities (NPEs) is being made with the EU Universal Patent Court’s proposed regime (starting as early as 2014) of a mandate of losing-party-pays, limits on multiple defendants and on discovery, and the rule of proportionality and fairness.

In the United States, lacking a UPC equivalent other than the Federal Circuit, there are a few (novel) ways of combating the NPE fraud.  This is a quick-and-dirty summary of those available to accused infringers, from my personal perspective, to stop trolls dead in their tracks.

One is just basic litigation and discovery strategy and is hardly new.  However, I would like to see it used more frequently.  It’s not for the faint-of-heart, however — those are advised to settle, quite simply, by good outside counsel.  For accused infringers with more to lose (especially in the future) from settling cheaply now rather than litigating with guns blazing, however, they should litigate, and litigate hard-core.  Often, trolls use a strategy of contacting hundreds if not thousands of the accused infringer’s clients and product users, thereby adding pressure to the manufacturer, in the hopes of attempting to push a quick global settlement.  In that scenario, the NPEs (and possibly the entity that sold or assigned the IP-at-issue to the NPE in the first place) may be accused of a conspiracy to engage in baseless sham patent litigation (maybe even include a RICO claim here?).

While it’s not the easiest thing to prove, one can win a “baseless- or sham litigation” claim, as long as one gets the right discovery from the entities involved.  One of the trickiest issues may be to get around any assertion of attorney-client privilege by the IP troll’s law firm – these two parties are often so closely bound together that their claims of attorney-client privilege and work product will cover everything under the sun.

In the end, your success will turn on your legal counsel’s ability to (1) create water-tight discovery requests, (2) pursue discovery shamelessly to the fullest from the NPE, its prior IP-assignors (don’t forget!), and its (non-lawyer) officers and directors even individually – private e-mail accounts etc. – to get around privilege issues, (3) evaluate very closely the NPE’s privilege logs, and (4) challenge each and every suspect claim of privilege you identify.  With that, you may have a good factual / documentary basis to get your sham litigation claim off the ground and past the MSJ stage.

Other, newer avenues are more technical and rules-based.

For instance, Rule 11 (against improperly grounded or frivolous lawsuits) and 28 U.S.C. section 285 (for attorney’s fees and costs) can be a powerful combined two-punch against NPEs and their counsel when used appropriately.  This was the case in the December 2012 case against NPE Raylon LLC, where the Federal Circuit found that the NPE’s IP claim construction was “a clear instance where no objectively reasonable litigant [] would believe its claim construction could succeed,” holding that it was frivolous and sanctionable under Rule 11 and awarding fees and costs under section 285.

Yet another potential shield for accused infringers is use of the new 35 U.S.C. section 299 provisions, in the aftermath of the America Invents Act (AIA).  It allows for joinder of multiple [e.g., a slew of NPE-brought] legal actions against distinct defendants, where the IP claims against those parties “arise] out of the same transaction, occurrence, or series of transactions or occurrences relating to the making, using, importing into the United States, offering for sale, or selling of the same accused product or process.”  The economies of scale and the avoidance of piece-meal settlements with smaller defendants in individual lawsuits may well help stem the tide of patent trolls suing hundreds of accused infringers in federal court.

Perhaps one day, I’ll write a bit about bringing antitrust counterclaims against IP fraudsters…