Patent infringement lawsuits have long been the business version of a first world problem — a thorny matter for the Googles and Samsungs of the world. But in recent years, so-called patent trolls, shell companies that exist only to sue other companies for allegedly violating patents the shell company owns, have been going after much smaller businesses, from coffee shops to real estate offices. Officially known by the less pejorative term “patent assertion entities” or “non-practicing entities,” these companies rarely create any products of their own. Rather, they buy patents (often on the cheap) and then threaten to sue anyone using technology covered by those patents … unless they fork over some cash.

Because the cost to defend a patent infringement suit can be prohibitive, many small businesses simply roll over and write the check. Congress, the White House, the U.S. Supreme Court and now many states have taken steps to help businesses defend themselves against the problem, but it remains a confusing and controversial issue. To make some sense of it, we sat down recently with UC Davis law professor Peter Lee, a nationally recognized authority on patent law, to hash out this complex issue.

First, let’s be clear: Not everyone suing for patent infringement is a patent troll, correct? There are, in fact, many legitimate entities that sue to protect their patents.

Yes. “Patent troll” is a pretty derogatory term, but there are other types of institutions that also have a lot of patents and don’t actually make products and that may or may not be considered patent trolls. Universities, for example. UC Davis has lots of patents, and it doesn’t actually manufacture anything. So if UC Davis asserts a patent against another party, is it a patent troll? I think most people would say no, but in some ways it fits the technical definition.

And there are also big companies that produce products but have large portfolios of unused patents, correct?

Exactly. Google might have thousands of patents it doesn’t do anything with. It doesn’t commercialize those technologies, and so it might be considered to be a non-practicing entity. In fact, IBM, Cisco and Apple all produce tangible products, but they also have thousands of patents they don’t do anything with. Still, they may enforce or threaten to enforce (the law) against another party for some sort of strategic reason, either because of litigation or because of business considerations.

Big companies remain the top target for such suits, but we hear more and more now about much smaller businesses being hit with these pay-or-else suits. How significant is this issue to the broader business community?

I don’t see it as a widespread phenomenon. I think the anxiety, though, is that it is possible. So-called end users — the mom-and-pop stores, the hotels, the coffee shops — may actually see themselves being sued for patent infringement. All of this arises from the right to exclude, which is inherent in a patent and says that having a patent doesn’t mean you have the right to practice your invention. But it does mean you can exclude others from practicing your invention.

Over the past few years Congress, the courts and President Obama have all tried to deal with this issue. Where are we with it now?

There has been some progress from Congress. In 2011, it enacted the America Invents Act, the most sweeping reform to patent law in about 60 years. It doesn’t all pertain to patent trolls, but many elements do. For instance, a typical patent troll strategy is to sue dozens of people at one time. But the AIA now requires litigants to bring independent lawsuits against different parties. That creates more of an obstacle, almost a transaction cost, for the litigant. That’s promising, though not nearly enough to really address the issue. Other provisions, for instance, proved too contentious to be in the final bill. One was what’s known as remedies reform. When you sue somebody and win, you get a remedy — often monetary damages. There’s fear that damages awards have gotten so large they actually give more leverage to patentees, including patent trolls. That was ultimately dropped out of the 2011 bill, but Congress is now considering a number of what I think are very promising proposals.

Like what?

For one, fee shifting. Let’s say someone brings a suit that falls below the legal standard of good faith. If [the party bringing suit] loses, they would then pay the attorney fees of the vindicated company, which can be significant — perhaps as high as $2.5 million just in attorney fees. For a lot of defendants right now, even if they think they’re right, it might be in their economic, rational self-interest just to settle and avoid paying all of these attorney fees. So fee shifting can help mitigate that kind of perverse incentive.

Do you think that’s enough of a hammer to discourage the bad guys while not discouraging the guys who have a legitimate claim?

To a certain extent, but the devil is in the details. For instance, patent trolls often create shell companies to hold patents and to bring suits. But these shell companies may not have any assets other than those patents, and they might not have the money to pay for the defendant’s attorney fees. So fee shifting may be an empty insurance policy for alleged infringers. Variations of the proposal would couple fee shifting with a bond that requires someone bringing a patent infringement suit to post a bond in case you lose and have to pay the other party’s attorney fees. I think that is a more promising way to put some teeth into this proposal.

Do you see that happening?

I don’t know if we’re going to get the bond. I think there is some momentum behind fee shifting, but there is a lot of fear that universities and the independent inventor are going to be chilled from bringing legitimate patent infringement suits. I don’t like looking into a crystal ball, but I would say there is some political momentum behind the fee shifting. I don’t know about the bond.

States are getting into the act, too. Several adopted laws this year banning so-called bad-faith patent-infringement suits where the patentee knows their patent claim is dubious. Given that patent law is generally in the purview of Congress and the courts, how effective can this be in dealing with trolls?

As you say, this has historically been the purview of the federal government, and it’s not entirely clear whether or not states can regulate in this area. I do, however, think that it’s very important that state legislators are actually talking about this. I’m a little bit skeptical of the broad impact of states regulating patent trolls, but I think it’s indicative of how egregious this phenomenon is perceived as being.

Isn’t there also growing pressure for the U.S. Patent and Trademark Office to change how it issues patents?

First, we need to draw a distinction between fastidiously enforcing the standards we have now and actually changing them. I think there’s room for both. Let’s just focus on the first. There are thousands of patents granted every year, but empirical research shows that a high percentage of them do not meet the standards of patentability. Among other things, a patent has to be novel, and it has to be nonobvious. But the patent trademark office may not actually expend a lot of time and energy [ensuring that they meet the standards].

How does this impact entrepreneurs trying to bring innovative products to market?

I think most small entrepreneurs would agree that their patent request should at least satisfy the current requirements of patentability. But there are also many people who think patents perversely impede innovation. For example, let’s say I’m starting up a company and I have this cool new technology, but then I find out it bumps up against a dozen or so patents. They may not actually be very accurately worded, but they’re still something I need to worry about. But if I don’t have that thicket to maneuver through, maybe it’s easier for me to innovate. Secondly, the thing I would say is if you truly accomplish something innovative, and you truly disclose it in a robust manner, you should
get a patent.