Are you sitting comfortably? Then I will begin….
Once upon a few years ago, an agile band of hardy software developers with badly trimmed facial hair (let’s call them the goaties) saw green pastures across the wide Atlantic Pond and embarked upon a journey to break into the augmented reality market there.
The first goatie made his bold foray into this green pasture, but no sooner had he closed his MacBook Pro after his first pitch, than a troll appeared brandishing a flimsy collection of patent claims. The timid goatie thought for a moment then said to the troll, don’t threaten me, threaten my customer he’s bigger than me and he’s got more money. The troll ‘kindly’ agreed to let the first goatie leave (once he’d paid a small toll) and the goatie left the new pastures, casting a longing look over his shoulder at the fertile meadows he was leaving behind.
The next goatie approached the field and was quickly intercepted by the troll, this time waving a rolled up writ. The medium sized goatie looked around for help, but found none, so he told the troll “I don’t like the way you do business, but I’ll pay you to just go away.” He paid over the money and as a parting shot said “But don’t sue my customer just because he’s bigger and richer than me.” The troll thought for a moment and having extracted a slighter larger tax (let’s call it a ‘license fee’, after all this is a bedtime story for lawyers), he grimaced (trolls don’t smile after all) and left the goatie to mop up software around the edges of the field, knowing both the undeveloped software landscape and the supplier would soon be gone.
Finally into the field entered the third goatie; bigger and more robust than the brothers that had gone before. The troll sidled up to the third goatie and, brandishing his patent wrapped club and the settlements made by the first and second goaties, demanded that the third goatie pay him a sizeable sum. The third goatie put his head down to think….
What does all this mean? I am genuinely saddened by the threat my AR clients face from US non-practising entities (also known as patent assertion entities) who coerce, bully and extort money, not from them, but from their customers, thereby reducing the market for AR in the US, increasing the overhead for developers and the cost to customers (which then have to include a percentage to cover PI & IP insurance and a sinking fund for legal fees). Whilst so much has been written about patent trolls that it may hardly seem worth replaying the issues here, what is apparent is that in an emerging field such as AR, these claims are a fact of life but they really do stifle innovation.
So, what can be done to avoid such claims? The answer is almost nothing. A software supplier with a patent of its own provides the classic sword for clients, but is by no means an effective shield. What is more, an innovative agency or early start-up is unlikely to have a granted patent of its own anyway. A Japanese client once recounted a traditional proverb to me to the effect; ‘the nail that sticks up highest is hammered down hardest.’ So it is in the world of AR, the highest profile suppliers have had their customers targeted most often and the biggest brands using AR have been charged the highest toll. The pain of NPEs can probably be lessened with a mixture of legal and commercial strategies, but these are a salve and not a cure.
Legal Solutions: Challenge the NPE’s Patent
Challenging the troll’s patent is a possibility, but is expensive. A full re-examination in the USA can cost upwards of a quarter of a million dollars and take 2-3 years. An alternative approach for business method patents is review under the ‘Covered Business Method’ process. Here patents can be reviewed if the patent grant was fundamentally bad and the method claimed is questionable, but again this process takes time and costs at least $150,000 in fees.
A better option would be to challenge the NPE’s patent under the Inter Partes Review process, which requires a re-exam to be determined within 12 months of filing and which has short deadlines for disclosure and limited discovery. The main advantages of Inter Partes Reviews is that there is no estoppel and they grant the petitioner a right to seek a stay of associated patent litigation, taking the pressure off the supplier or customer and pushing out the timing of legal fees. Stays are granted in about 75% of such cases. Additionally, by the six-month point, the Patent Trials and Appeals Board will make an initial determination of whether the patent claims the applicant seeks to challenge are contestable or not, giving both sides a clear indication of which way the case is likely to go. If sufficiently bleak for the NPE, this determination can be useful for suppliers and customers in securing a settlement at a greatly reduced rate or in seeing off the NPE entirely. In just over 18 months since the Inter Partes Review process was launched, nearly 1,000 cases have been filed but only 20 have gone all the way to determination, indicating the lack of appetite NPEs have to defend these cases. Whilst an Inter Partes Review costs only around $25k in official fees to instigate, costs can rapidly escalate when prior art has to be found and legal fees are incurred in preparing the submission. Add depositions as the matter progresses and very quickly the $25k to kick off becomes a drop in the ocean of six figure legal fees. Of course, the same goes for the NPE as contingency fee arrangements aren’t available for Inter Partes Reviews!
Whilst the NPEs’ strategy remains to make nuisance claims and settle for sums just below the cost of first stage litigation – in the knowledge that most customers would rather settle than be involved in a scrap with a troll – none of the above methods seem particularly attractive as all of them are costly and have no opportunity for recovery of fees. This economic point is one much debated on Capitol Hill as the US Legislature works hard to put an end to unwarranted patent assertion.
Sit Tight and Wait for the Cavalry
There are currently twelve separate bills in Congress designed to defeat NPEs. Some consolidation seems likely, but the measures fall into four broad categories:
1. Curbing abuse of the litigation system by NPEs. Patent assertion claimants will be required to give clearer specifications of the infringement claims made. Most discovery will be postponed until after claim construction is complete, significantly reducing the trolls ability to scare defendants with massive discovery requests. Then, aside from ‘core documentary evidence’, a requesting party will have to pay the costs for production of anything it asks for, again reducing the scope for trolls to embark on fishing expeditions or tie up respondents in expensive document production.
2. Protecting the end-user of patent. These measures are intended to prevent nuisance claims against users, which should really be directed against the original supplier. By granting genuine parties of interest wider rights to join the litigation, the troll will be limited to suing single infringers not multiple licensees. There are also moves to extend the Covered Business Method review to a wider range of industries and as part of the wider review of the patents system, the USPTO will be allocated more of the money it takes in fees from the Federal pot.
3. Transparency. Legislation will make it easier to lift the veil and establish who backs the troll and if they genuinely trade. A further bill is intended to deal with demand letters from NPEs which are sent in bad faith, giving the FTC powers to sanction the senders.
4. Fee shifting. Typically NPEs engage attorneys to work on a contingency basis, meaning there is little financial risk for them in bringing claims and each successive claim tends to use the same documentation and follow the same formula anyway. New proposals would require NPEs to make the equivalent of a payment into court to cover the defendants’ costs, so that they are also on risk in the litigation. Another sea-change in US patent litigation practice would require the loser to pay the winner’s fees where non-infringement is proved.
Matt Levy, Patent Counsel at the US Computers and Communications Industry Association, has written an excellent round up of the various legislative proposals in a blog at www.patentprogress.org/2014/03/04/patent-progress-guide-to-patent-reform-legislation/ if you want more specifics.
Whilst the above reforms will likely cause a seismic shift in the US patent troll landscape, in the meantime there are always commercial solutions for software companies (and/or their customers) to explore if faced with a claims by an NPE.
Commercial Solutions
Ensure & Insure
First, take steps to find out whether the technology is already being used by others or a like patent exists. This can be done with a freedom to operate search, provided that the scope can be narrowed sufficiently (eg AR for fitting prosthetics, not ‘AR for medical use’). In reality it is often nearly impossible to achieve an adequate level of comfort from FTO searches and they come so heavily caveated, they are hardly worth having. With over 2,000 patents referring to AR on the US register, it is hardly surprising that the writers of them feel a reluctance to commit to a definitive opinion though. Alternatively the supplier can seek insurance. With a good non-infringement and/or an invalidity opinion from suitably qualified US counsel, insurance can be secured either on a project by project basis or on a blanket basis – provided the supplier’s T&Cs always limit the warranties and cap liability.
It’s Good to Talk, Sometimes
If your client is one of many like businesses being sued, you might approach the other parties about a collective defence or knowledge sharing exercise; there is safety in numbers and trolls don’t generally like dealing with organised opposition. I have tried this and it has been greeted with enthusiasm by the lawyers but reluctance by their clients; the reverse of what I was expecting. Also, if prior art is available, it is more likely to be found by many acting together than by individuals acting alone.
A supplier can always decide to keep a low profile and not promote itself, reducing its exposure to the NPEs, who mostly do online research to identify ‘targets’ to sue. Leaving customer details off web sites can make a supplier seem a lot less attractive to a troll, who can’t pick their honey-pot clients to sue.
In some cases it just doesn’t pay to enter a dialogue with the troll. No matter how small or underfunded your client is, the NPE will want something for its troubles and keeping quiet and ignoring the troll is a strategy that works in nearly 15% of cases! Sometimes though, you may wish to speak to the troll, albeit in soothing tones and in ‘listening mode’. The troll may actually accept less than it first requested once it knows your client is barely in profit or there has been no calculable revenue from the use of AR for e-commerce (reducing likely damages). If your client has a patent, you might even consider a cross license arrangement and a grant of rights to the troll, though perhaps the less said about that, the better!
Fairy-tale Ending?
One hopes that before too long US legislation will make trolls a thing of the past, but only time will tell and until then it is worth considering all options before even responding to an NPE claim.
But I didn’t finish the story. What happened to the third billy goatie gruff? Well, he sniffed the breeze and caught a hint of the way the wind was blowing. He put down his head and he charged at the troll.
The end.
Joanne Frears is a Solicitor and Director IP Innovation Technology at Jeffrey Green Russell Limited.
