VOICES FROM THE INDUSTRY: Patent trolls drawing attention of courts, government

Almost $3.5 billion: That, according to a recent IP Law 360 estimate, is the amount of judgments and settlements in intellectual property disputes in 2006. Equally remarkable, that amount was “markedly” down from the comparable figure for 2005.

A recent article by
Bloomberg News stated that juries awarded $1 billion in patent infringement damages in 2006. With that kind of money changing hands, it is not surprising that companies, known critically as “patent trolls,” have been formed to acquire patent portfolios to assert against traditional businesses and attempt to profit through large settlements or judgments.

These companies emerge from the shadows of industry, if they are active in one at all, to assert patents against established participants. Examples include the suits by NTP against Research-In-Motion, the maker of the popular BlackBerry; by z4 Technologies against Microsoft; and by SCO Group against IBM.

At a minimum, these types of lawsuits cost businesses millions of dollars in defense costs and potentially far more if there is an adverse result. As one example, Research-In-Motion paid more than $600 million to settle last year with NTP.

In 2006, all three branches of the federal government took or considered measures to reign in the problems created by patent trolls.

Supreme consideration

In one of the biggest patent cases of last year, the Supreme Court dealt a significant blow to patent trolls with its June 2006 decision in eBay v. MercExchange, which considered whether eBay’s Internet auction site should be shut down because it infringed on a business method patent.

Prior to the eBay decision, part of the leverage that patent trolls used to extract hefty settlements was the threat of an injunction. For many years, the law stated that, upon a finding of patent infringement, an injunction prohibiting the infringing activity was nearly automatic. In eBay, however, the Supreme Court ruled that a successful plaintiff in a patent case must still satisfy a four-factor test before obtaining an injunction. Since the Supreme Court’s decision in eBay, in about nine cases, federal courts have applied the fourfactor test, and about half have concluded that an injunction should not be issued. At least one decision to issue an injunction was stayed pending appeal.

Last October, the Supreme Court heard arguments in a case on the proper standard for whether the claims of a patent are obvious and therefore invalid. Currently, it is not enough to find all the elements of a patent claim in more than one prior public reference to invalidate the patent. Rather, the party asserting invalidity must further prove that there was some “motivation, teaching or suggestion”-the MTS test-to combine the prior references in the same way as the patent claim. At the oral
argument, several of the justices appeared to believe that the MTS test is so vague that it is meaningless, but it is not clear what test the justices will endorse. If the Supreme Court follows tradition, the case should be decided no later than June.

Legislative attention

Second, the executive branch also got into the act. The Patent and Trademark Office has proposed several changes expected to decrease its workload and improve the quality of issued patents. These proposals include limiting the number of patent claims that can be included in
any patent and also limiting the number of patents that can be pursued based on a single application.

Finally, Congress also considered a number of reforms to address patent trolls. The current legislative session ended, however, with no action being taken. This was in part because powerful lobbying groups, such as the pharmaceutical and the information technology industry could not agree on the solutions.

Although the eBay decision should lessen their leverage, the continued presence of patent trolls underscores the need for thorough patent clearance of new prod
ucts. When a new product is being developed, the business should review relevant patents to ensure that the new product is not covered by any of the claims. Another relatively recent change to U.S. patent law even allows products to be cleared against claims of some pending patent applications. While the cost of patent-clearance opinions varies widely, the price is likely to be a mere pittance compared to the cost of patent litigation.