Apr 18, 2016

Patent Trolling: What It Is and Why It Is Important to CPAs

Peter CalcaraBy Peter Calcara, Vice President - Government Relations

One of the most interesting and satisfying aspects of being a government relations professional is the array of issues and personalities one encounters. Of course tax legislation and auditing and accounting pronouncements are priority No. 1 of all the issues we deal with on a daily basis, but sometimes we get to delve into unique areas, such as patent trolling. Never heard of patent trolling or patent trolls? Well, you’ve come to the right place.

Patent assertion entities (PAEs), commonly referred to as “patent trolls,” are a person (usually an attorney) or company that attempts to enforce patent rights against accused infringers far beyond the patent's actual value. Randall Ray Rader, former Chief Judge of the U.S. Court of Appeals for the Federal Circuit, defines a problematic patent troll as “someone simply seeking litigation-cost settlements, or, in other words, any party that attempts to enforce a patent far beyond its actual value or contribution to the prior art."

Patent trolls often do not manufacture products or supply services based upon the patents in question. These entities obtain and assert rights for the sole purpose of filing patent infringement lawsuits. Patent litigation is a growing problem. In 2013, patent troll litigation reached a record high, up 13 percent over 2012 and more than a tenfold increase over the past decade. Lawsuits brought by patent trolls were up nearly 42 percent in the first quarter of 2015 over the previous quarter.

Why is this important to CPAs, and why should PICPA members be aware? CPAs across the country, including some PICPA members, are becoming more frequent targets for these patent trolls. Here’s how the scheme works.

It typically starts with a letter, a patent demand letter, sent by a PAE to a company or an individual accusing the recipient of patent infringement. The letters tend to demand that the alleged infringer take a specific action, such as ceasing the infringing action or agreeing to a licensing arrangement. A detailed demand letter, including a summary of the alleged patent infringement, helps to establish that the recipient/alleged infringer has the high degree of knowledge to meet this standard. Current law, however, does not dictate any specific content requirements or level of detail for demand letters.1

The alleged patent infringement relates to processes and systems common to CPAs and their practices – using a copier or scanner to scan and e-mail a document to a computer or other device. If the business refuses to pay a license fee (some demands are $1,000 per employee) or ignores the letter, the PAE or a Patent Holding Company, via its attorney, threatens to bring legal action in federal court.

While there is a perception that patent trolls mainly target tech companies, the truth is that they target a broad range of businesses. Since 2012, patent trolls have sued more non-tech, main-street companies than tech companies, often for use of technology such as document scanners, drop-down menus located on a website, and Wi-Fi, to name a few. The cost of defending these lawsuits is 30 percent higher than simply settling, resulting in about 90 percent of these lawsuits being settled out of court.

For many small CPA firms, as well as other businesses, these settlements represent a large percentage of their revenues. Such results are categorically unfair since PAEs often purchase patents that are near expiration and attempt to expand the reach of issued patents far beyond their original scope. Patents were originally purposed to encourage the development of new inventions by providing protections to the inventors. PAEs simply use patents as a method for enhancing quick revenue with minimal work.

Current law incentivizes PAEs to saturate the judicial system with frivolous lawsuits as a means to get-rich-quick, leaving their targets little in the way of recourse.

In response to this growing national and state problem, the PICPA recently meet with U.S. Sen. Bob Casey (D) to make him aware of this growing problem and potential impact on the CPA community in Pennsylvania.

The PICPA and other business organizations are pursuing legislative reforms that protect off-the-shelf use of technology, reduce cost of defending against PAEs; and require patent trolls to pay for unsuccessful litigation. There is legislation pending before Congress that would address this abuse.

The PICPA supports The PATENT Act of 2015 (S.1137), which is sponsored by Sen. Charles Grassley (R) of Iowa. The bill would require patent owners to explain the basis for alleged infringement when they file a complaint. It would protect innocent customers by ensuring claims between a patent owner and a business proceed before claims between the patent owner and the end user. The bill would further instruct the courts to develop rules and procedures to reign in the out of control discovery costs that patent trolls use to force unwarranted settlements from innocent defendants. This would help protect businesses from unfair or deceptive demand letters. It would also require that a losing party pay other sides attorneys’ fees. The PATENT Act is a strong step forward that will protect small business and CPA firms and enhance Pennsylvania’s economy from frivolous lawsuits that are a drain on industry.

Abuses by patent trolls have created a climate of fear that discourages risk taking and expanded economic growth. And it must end.

For more information visit UnitedforPatentReform.com or follow @U4PatentReform.

1 Patent Litigation Reform Legislation in the 114th Congress, Brian T. Yeh, legislative attorney, and Emily M. Lanza, legislative attorney, Congressional Research Service, Feb. 8, 2016.

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