The patent troll debate

The national handwringing over the proliferation of so-called “patent trolls” is embodied in Boston, where two of the city’s most prominent and important economic drivers find themselves at odds over federal legislation designed to curtail abusive and frivolous intellectual property lawsuits.

In one corner is the technology and startup community, which largely is fed up with trolls stifling the innovation economy by making dubious claims of patent infringement and using the threat of costly litigation to extort licensing fees or settlements.

Case in point: Boston-based pay-by-phone company LevelUp has gone public in recent months with the revelation that it is has spent hundreds of thousands of dollars defending against three such lawsuits. A review of federal court records bolsters that complaint, revealing that the number of patent infringement suits in Massachusetts has nearly doubled from 41 in 2009 to 81 in 2013.

In the opposite corner of the ring is the higher education sector, which believes the legislation, the Innovation Act, is overly broad in scope and unintentionally would ensnare not only trolls, but also sincere patent asserters.

Trolls often are defined as non-practicing entities, those that hold a patent for a product or process but have no intention of developing it. But a definition that broad also includes research institutions and the nonprofit “technology transfer organizations” they sometimes set up to license and enforce their patents.

In a joint statement from six national university organizations — which count virtually all of Boston’s colleges and universities among their combined membership — the higher education community warns that the Innovation Act’s attempts to reduce abusive litigation practices also would “constitute a substantial disincentive for universities and startups to enforce patents on new technologies and innovations, which undermines the goal of the patent system.”

Lawyers, too, are split over the proposed law, which would drastically change the way suits are litigated in Boston’s most vibrant practice area: IP.

As passed in the U.S. House of Representatives, the Innovation Act would require more specificity in complaints, require plaintiffs to name anyone who has a financial interest in the patent being litigated, make losing plaintiffs pay defendants’ legal fees, delay discovery, and allow technology vendors to step into the shoes of end users to defend patent lawsuits on their customers’ behalf.

The legislation, which is pending in the U.S. Senate, is supported by the Obama administration.

‘System allows it’

Patent trolling’s toll on the U.S. economy — pegged at $29 billion in 2011 by Boston University School of Law professor Michael J. Meurer and lecturer James Bessen — make action necessary regardless of unintended consequences, said Victor H. Polk Jr. of Boston’s Greenberg Traurig.

Polk, an IP litigator who primarily represents electronic companies, cited as an example a case in which he presented the plaintiff suing his client for patent infringement a piece of evidence that would invalidate the patent.

“They say, ‘Well, it’s still going to cost you $1.5 million because the judge won’t hear this until all the discovery is done. We’ll settle for low six figures,’” Polk said. “Those kind of cases are really a problem because most clients are not going to want to expend significant resources for the honor of proving their point. … I’ve heard the word ‘shakedown.’ I’ve heard the word ‘extortion.’ On the other hand, our system allows it.”

Such practices have become so prevalent, Polk said, that the need to curtail them outweighs the potential negative consequences of the Innovation Act, even though he sympathizes with those who do not see themselves as patent trolls.

“It’s a very hard issue because the companies that have real patent portfolios and who have a real stake in innovation don’t want to make it impossible to sue,” Polk said.

The Innovation Act makes it more difficult and more costly to bring such suits, Polk said, noting that the pleading requirements are tougher and that provisions for attorneys’ fees have been included.

Unintended consequences

A review of recent federal patent infringement lawsuits in Massachusetts reveals examples that appear to fit the patent-troll mold: a plaintiff files several substantially similar and vague lawsuits against companies in the same industry that are settled within a matter of months. The plaintiffs include T.M. Patents, a firm that merely holds patents from the failed Massachusetts company Thinking Machines Corp., and DataTern Inc., a patent-licensing company that a federal judge in New York banned from filing lawsuits in 2012.

But lawsuits filed by Boston University also would fit the mold. The school recently sued dozens of the biggest names in the technology and consumer electronics industries for allegedly infringing on patented LED technology created by a BU professor. Most of the companies agreed to settle for an undisclosed amount in January, just three months after BU filed the majority of its suits.

BU officials declined interview requests, and a school spokesman referred comment to the American Association of Universities, which opposes the Innovation Act and joined in the statement from the higher education community referenced earlier.

Susan G.L. Glovsky of the Boston IP firm Hamilton, Brook, Smith & Reynolds said the opposition of the higher education community underscores the potential unintended consequences of the law, which she jokingly referred to as the Anti-Innovation Act.

“You can’t label one group as bad without ensnaring good, innovative companies and universities that are engaging in research and development and that need exclusive rights to protect the developments that the company comes out with,” Glovsky said. “There can be abuse in any litigation, but I don’t think there is greater abuse or less abuse in enforcing patents.”

Glovsky said it is premature to pass a new patent reform measure when existing laws, including the America Invents Act of 2011, are still being sorted out by the courts. For example, the law already provides for fee-shifting in exceptional cases, and the U.S. Supreme Court recently heard arguments in two suits in an attempt to define when a case qualifies as “exceptional” under the language of the statute. Other pending Supreme Court lawsuits will address issues that can contribute to unfair patent enforcement, including the validity of ambiguous patents.

Glovsky also pointed out that many states have the ability to combat abusive patent asserters, including those that send frivolous and vexatious demand letters that often succeed at spooking vulnerable small businesses and nonprofits into paying up to avoid a lawsuit.

While Massachusetts Attorney General Martha Coakley has stopped short of endorsing the Innovation Act, she has expressed a willingness to go after trolls using the state’s consumer protection laws and, possibly, “additional local legislation aimed specifically at the trolls.”

“It’s crucial that we’re able to protect companies, especially those in our innovation and startup sector, from abusive and frivolous demands that can shut a business down before it even starts,” Coakley said.

BU Law professor Meurer takes issue with Glovsky’s argument that existing laws should be sorted out before new patent reform is passed. Measures such as the America Invents Act simply lack any teeth to deter patent trolls, and no amount of court interpretation will change that, he said.

And while Goodwin Procter’s Michael G. Strapp agrees with Glovsky that individual judges and courts can develop — and, in some parts of country, already have developed — rules to deal with frivolous patent lawsuits, his colleague at the firm, Elaine Herrmann Blais, said that encourages undesirable forum shopping and that a blanket law for the whole country, such as the Innovation Act, would be better.

The biggest disagreement among those interviewed by Lawyers Weekly was whether provisions such as heightened pleading standards and fee-shifting would block only trolls, or also traditional, meritorious patent holders.

“To me, it doesn’t close the door on anything; it just changes the combination to get in,” Blais said.

Both Meurer and Polk agreed and noted that proposed hurdles should be easy to clear for patent holders with strong cases who do their homework.

Glovsky, however, said it is naïve to believe a corporate general counsel would not think twice about bringing even a strong case after considering the risk of possibly losing a jury trial and having to pay an opponent’s fees. For the same reason, she said, a small inventor trying to take on a large multi-national corporation that stole his patented invention would have a hard time finding a firm to take his case on a contingency basis.

IP growth unstoppable

Wellesley, Mass.-based BTI Consulting predicted that IP litigation would be the nation’s second-fastest growing practice area in 2014, with projected growth of 2.8 percent to a market size of $3 billion.

But BTI president and founder Michael B. Rynowecer echoed what seems to be the local consensus: that in Boston specifically, IP is the hottest practice area due to the density and depth of its high-tech and biotech industries.

But whether the Innovation Act becomes law or not, lawyers said they do not expect that trend to abate. Blais said troll cases are merely a nuisance to clients and not the type of driver that grows a practice area.

“I don’t think anything’s going to put a brake on it,” said Robert M. Asher, a patent lawyer at Sunstein, Kann, Murphy & Timbers in Boston. “IP and innovation in the Boston area is just too important and too central to what we do. My concern isn’t with the lawyers. My concern is with the incentive to grow small businesses.”