By Patti Murphy
Four years after Congress passed legislation that was intended to overhaul how patents get issued and enforced, and one year after the U.S. Supreme Court addressed the issue, there's a new battle brewing in Washington over what have come to be known as "patent trolls."
Patents are a sort of limited monopoly granted by the federal government to inventors who can prove that they have created something that is unique and useful. Over the past 15 years, however, a combination of factors led to a rise in companies that buy up dubious patents then demand licensing fees or legal settlements from organizations with products and services built around technologies that seem to leverage those patents.
Many of the patents, however, are really no more than concepts. Patent litigation involving financial services has grown dramatically in recent years – by almost 290 percent between 2009 and 2013, according to federal court records. And according to a study by Harvard Business School Professor Josh Lerner titled The Litigation of Financial Innovations, patents involving financial activities are 27 to 39 times more likely to be litigated than nonfinancial patents.
"These patent entities survive on threats of litigation and settlements from everyday businesses large and small, to the tune of $30 billion a year," said David French, Senior Vice President for Government Relations at the National Retail Federation. "Auto manufacturers, bankers, grocers, realtors, restaurants, retailers and technology companies all have been targeted and victimized by trolls."
In January 2015, the NRF introduced United for Patent Reform, a broad-based coalition created to push for patent litigation reform. Members include retailer, lodging, restaurant, franchise and homebuilder associations, as well as technology companies (Amazon.com Inc., Cisco Systems Inc., Facebook Inc., Google Inc., Intuit Inc., Oracle Corp., SAS Institute Inc. and Verizon Wireless among them) and the Electronic Transactions Association.
It's not just retailers who are getting slammed by patent trolls. Unified Patents Inc., an organization that tracks patent trolls, estimates that 83 percent of patent litigation in the electronic payments industry was driven by what are officially known as NPEs (for nonpracticing entities). NPE litigation and threats cost companies $10 billion a year, the group asserted. The international consultancy PricewaterhouseCoopers (PwC) calculated that damage awards for NPEs tend to be 4.5 times higher than damage awards to "practicing entities."
Unified Patents, whose membership comprises mostly large companies and banks (JPMorgan Chase & Co. is a member), tracks over 180,000 patents related to electronic payments. More than 1,000 of those patents are held by NPEs, said Gary Bender, who oversees the group's Electronic Payments Zone. He said that in addition to Chase, 19 other financial services companies are members of the group, which tracks patents such as those related to secure electronic transactions, digital wallets, and card and payment device readers to protect its members from patent claims.
Kathryn G. Underwood, President and Chief Executive Officer at Ledyard National Bank, in Norwich, Vt., knows first-hand how costly patent claims can get. Ledyard was notified in September 2011 that the $434 million-asset community bank's nine ATMs were in violation of a patent that was held by an NPE (or patent troll). The patent holder told the bank that rather than take the matter to court, it was willing to settle for a mere fraction of the cost of the violation, provided the bank came up with the money in two weeks, Underwood said.
"On its face the claim was absurd," Underwood said in testimony before a House Judiciary subcommittee in 2014. "The patent [in question] covers the process of connecting an ATM to the Internet. Ledyard's ATMs, being older models, connect to the bank via closed telephone circuits. Infringement was impossible. Though we informed the troll of this fact, through our lawyer, it was of no interest to him. His sole interest was enticing a costly settlement."
Identical demands were received by at least eight other community banks in the region, Underwood said. One settled immediately. After much consideration, including an estimated legal bill that exceeded the requested settlement amounts, all of the banks eventually settled.
"Choosing to settle was a painful decision," Underwood told lawmakers. "It violated my basic sense of fairness." But litigation was a route fraught with risks that could drag on for years. "The settlement demand on the other hand was a known cost. The risk could be monetized and quickly put behind us," she said. That's what patent trolls count on, "and it is especially effective when it is targeted at a small business with limited resources," she added.
Debates over the need for patent reform have been simmering for years. In 2011, Congress passed the Leahy-Smith America Invents Act, which at the time was described as the most sweeping reform to the patent system in over 50 years. The law, among other things, was supposed to clamp down on frivolous lawsuits and the issuance of dubious patents.
Then in 2014, the U.S. Supreme Court dealt another blow to the trolls when it ruled, unanimously, that routine business practices and concepts cannot be patented. That case pitted Alice Corp., an Australian firm that claimed a patent on a method for mitigating settlement risks in foreign exchange transactions, against CLS Bank International, a New York company that settles about $5 trillion a day in foreign exchange transactions between banks and other traders. The patent claims had been invalidated by several federal courts, and the High Court's 2014 ruling upheld those decisions.
Separately, in Octane Fitness LLC v. Icon Health & Fitness Inc., the Supreme Court also ruled in 2014 that federal courts can compel companies that file and then lose patent infringement cases to pay all legal costs when a lawsuit is deemed frivolous.
And in 2015, a U.S. District Court in Maryland relied on the High Court's decision in the Alice case to deny claims asserting Capital One Financial Corp.'s online banking service infringed on patents related to custom budgeting tools that were held by Intellectual Ventures Management LLC, a Bellevue, Wash.-based patent holding and invention lab. (Intellectual Ventures also has lawsuits alleging patent violations against several other large banks, including JPMorgan Chase and Bank of America Corp., according to published reports.)
While the Supreme Court's 2014 decisions were seen as a blow to patent trolls, it was not a knockout blow. The 2015 Patent Litigation Study:A change in patentee fortunes by PwC revealed there were 13 percent fewer patent lawsuits in 2014 than 2013 – the first such decline in years. Median damage awards also fell, to the second lowest point in 20 years in 2014. But 2015 has been shaping up differently.
According to United Patents, more than 1,600 patents were in litigation in June 2015, compared with just under 1,500 the previous June. The group said about two-thirds of the cases in both years were instituted by trolls. Meanwhile, the NRF claims that in April and May 2015, at least 60 retailers were sued by a patent troll over the use of online shopping carts.
Julie P. Samuels, Executive Director of Engine, a research foundation that advocates for tech entrepreneurs, wrote that the Supreme Court's action has "resulted in throwing out some really crappy software patents. This is good news. It is the first step in weeding out the worst patents." Her comments were contained in an opinion piece published in 2014 by Roll Call, a Washington, D.C., newspaper that caters to the political power establishment.
"Patent trolls have abused our patent system with their coercive bribery schemes for far too long," said the NRF's French. He noted that a consensus is building within the business community and government circles for legislative reforms. (Patent reform legislation was debated in the last Congress but scuttled in the run up to the 2014 elections.) "The White House, Supreme Court and Congress have all signaled that patent reform is necessary, and now is the time to act," French added.
Several bills pending in Congress have broad bipartisan support that would further restrain frivolous patent suits, and at least two (one in each chamber) have been approved at the committee level. The Senate legislation, known as the Patent Act, was introduced by Sen. Chuck Grassley, R-Iowa, Chairman of the Senate Judiciary Committee. The bill, if enacted, would make it cheaper for companies to defend against patent claims and impose higher standards or proof and financial costs on trolls when their lawsuits are deemed frivolous.
"The time has come to reform our patent system so innovators are free to develop important advances in technology without the threat of lawsuits from patent abusers only interested in making a dollar," said Sen. John Cornyn, R-Texas, a co-sponsor of the Patent Act.
Similar legislation, the Innovation Act, was overwhelmingly approved by the House Judiciary Committee in June. The Judiciary Committee in that chamber is chaired by Rep. Bob Goodlatte, R-Va., chief architect of the Innovation Act. Goodlatte's legislation, which has more than two dozen co-sponsors from both political parties, seeks changes in the way the U.S. Patent and Trademark Office issues patents and would require a greater burden of proof on the part of those pursuing patent infringement judgments.
"At its core, abusive patent litigation is a drag on our economy and stifles innovation," Goodlatte said. "The tens of billions of dollars squandered on settlements and litigation expenses associated with abusive patent suits represent truly wasted capital – capital that could have been used to create new jobs, fund research and development, and create new innovations and technologies." Goodlatte's bill is slated for an autumn 2015 vote before the entire House of Representatives.
According to a report in The Hill, a Washington publication that follows Congress, opposition from key House Democrats and Republicans threatens to derail the Innovation Act. But that hasn't stopped the NRF and others from lobbying for passage. The day after Congress returned from its summer recess, the NRF-led United for Patent Reform coalition brought executives from retailing and other industries to Washington to press members of the House and Senate for action on patent reform. The Patent Act is scheduled for a vote this fall before the full Senate.
No universal agreement exists on what changes are needed in patent law, although there has been much discussion about "venue shopping." Apparently, certain court districts are known to be more generous with patent infringement awards than others. More than half of the 1,600-plus patent lawsuits on U.S. court dockets in the second quarter of this year, for example, were filed in federal courts in East Texas, where judges and juries tend to look more kindly on patent claimants than alleged patent infringers.
The Patent Act, among other things, would require that any patent infringement case be filed in the federal court district where the defendant business is headquartered.
Not all patent infringement lawsuits, of course, are initiated by NPEs. Mobile imaging software provider Mitek Systems Inc., for example, has sued several financial institutions and solutions providers for alleged violations of patents it holds that relate to the use of smartphones and tablets to support mobile photo check deposit and bill payments.
And Apple Inc. has been in litigation with mobile phone manufacturer Samsung Corp. for several years regarding alleged infringements of patents regarding smartphone technologies. The Supreme Court is currently considering a request from Samsung's lawyers to overturn a federal circuit court ruling that awarded Apple $550 million in damages for infringements of those patents.
Meanwhile, Apple was recently granted a patent for a person-to-person payment technology, and that has led some pundits to suggest a patent infringement slugfest may be in the offing for the mobile banking market. The patent Apple was granted describes a secure system for sending "encrypted payment packets (instructions) from one mobile device to another." The news of Apple's latest patent followed Google's acquisition of the patents and technologies that support the mobile payment scheme Softcard. Originally known as Isis, Softcard was created as a joint venture of Verizon Wireless, AT&T Mobility and T-Mobile, the three largest mobile carriers. Softcard, which closed its doors after being acquired, said it owned or had pending 120 patents related to mobile wallet technologies. The deal with Google means the majority of new Android phones (those sold through Verizon, AT&T and T-Mobile) now come preloaded with Google Wallet.
The international consultancy PwC issues yearly reports that track patent litigation trends. Its latest report, for 2015, identifies 10 industry classifications that, PwC said, accounted for 90 percent of all patent infringement decisions between 1995 and 2014. It's not that they are all winners. In fact, the consultancy noted that patent-holder success rates are below 40 percent in each of these 10 industries. Here's the breakdown of PwC's findings:
In the long run, however, it may not matter which company has more patents on its technologies and products, or which has the most mobile wallets in use, noted attorney Adam Atlas. "There are also some unknown patents waiting in the wings that could prevent certain payment systems from proceeding without acceptable license fees," he said.
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