Innovation, Non-Practicing Entities and the Current State of Litigation Reform

By: In: Technology Escrow On: Aug 25, 2014

The United States is known as the land of opportunity – entrepreneurship and innovation are in our genes. Patents were initially designed into the U.S. Constitution as a way to protect ingenuity and innovation; however, there is a serious misuse and abuse of patents today.

Patent assertion entities (PAEs) or non-practicing entities (NPEs), misuse patents as a business strategy. These non-practicing entities, or so-called “patent trolls,” do not create products themselves; instead they bring lawsuits against those who do.

In 2013, the U.S. Patent and Trademark Office granted 300,000 patents, a 7% growth from the year prior, according to a report from PricewaterhouseCoopers. Last year, patent holders also filed 6,500 litigation cases, a 25% rise from 2012. Non-practicing entities accounted for two-thirds of the infringement cases in 2013, a huge leap from 28% in 2009.[i]

Non-practicing entities are stifling innovation because even though the patents asserted in the suit may be frivolous, it’s often easier for smaller companies to settle out of court and pay a licensing fee to the NPEs, rather participate in a costly and time-consuming lawsuit.

According to a Boston University study, NPE lawsuits cost American companies more than $29 billion each year. Many small businesses cannot afford to fight back against non-practicing entities or get funding to continue their businesses. In addition, new innovations often do not come to market because of the threat and cost of litigation which places a drain on product investment and innovation.[ii]

Another recent study by Catherine Tucker, a professor of marketing at MIT’s Sloan School of Business, finds that over the last five years, VC investment “would have likely been $21.772 billion higher… but for litigation brought by frequent litigators.”[iii]

So what is being done about non-practicing entities? There are fourteen bills that have been introduced this Congress to deal with some aspect of the NPE issue. A few basic areas that are being addressed:

  • making the Covered Business Method review program available to more industries to allow them to deal with existing bad patents NPEs often assert
  • curbing abusive litigation tactics NPEs use
  • protecting end-users
  • adding transparency to get at who is really supplying NPEs with patents and with funding

Patent litigation reform aimed to curb abuse by non-practicing entities has been in the works, but has recently stalled when the latest legislative proposal was taken off the table in May.

Some legal experts think that the recent Alice Corp. v. CLS Bank decision by the Supreme Court may also have an effect on NPEs. This ruling says that an abstract idea applied to a generic computer is not enough to transform that idea into a patent-eligible invention. CLS Bank asserts that Alice is a non-practicing, patent assertion entity, and therefore, some lawsuits now pending will be resolved on summary disposition under section 101, which could halt the action of some NPEs.[iv]

If the superfluous lawsuits disappear, then the remaining lawsuits have a more significant status. Therefore, legal discovery and protective orders become more important as plaintiffs and defendants strive for a sense of control, balance, and trust during the discovery phase of litigation.

At Iron Mountain, we deliver a Discovery Escrow Service that has been designed to simplify and facilitate pre-trial discovery to meet the needs of both parties by providing a secure and controlled environment that allows plaintiffs to access and examine the intellectual property in question, while eliminating the potential exposure and risk associated with defendants delivering that proprietary information directly to plaintiffs.

We believe legitimate litigation should be handled seriously. Iron Mountain is a trusted partner for legal discovery. If you would like more information on Iron Mountain’s Discovery Escrow service, please visit our website at www.ironmountain.com/discoveryescrow or email me at john.boruvka@ironmountain.com or my colleague david.strouse@ironmountain.com and we’d be happy to discuss with you further.

 

 

Sources:

[i] http://www.fastcompany.com/3032870/fast-feed/patent-trolls-accounted-for-two-thirds-of-infringement-cases-in-2013?partner=rss

[ii] http://www.declareinnovation.com/Issues/Patent-Reform.aspx

[iii] http://arstechnica.com/tech-policy/2014/06/new-study-suggests-patent-trolls-really-are-killing-startups/

[iv] http://fortune.com/2014/06/19/supreme-court-limits-the-scope-of-software-patents/

 

 

 

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About the author

John Boruvka

John Boruvka, vice president for Iron Mountain’s Intellectual Property Management business unit, has been involved in the technology escrow and intellectual property management field for more than 25 years. His focus is helping companies create solutions relating to protecting intellectual property assets. Mr. Boruvka is considered an authority in the field of technology escrow and issues surrounding the role of a neutral third party in helping protect and manage intellectual property. Follow me on Twitter @JBoruvka