Barnes & Noble's Filing Clearly Explains Why The Patent System Is Broken And How To Fix It

from the now-if-only-someone-would-listen dept

Via Groklaw, we learn of Barnes & Noble's excellent filing with the FTC and DOJ concerning the problems of today's patent system, and some suggestions on how to fix it. You can read the full filing on the FTC's site. In recent years, the FTC has grown increasingly concerned about our broken patent system, in particular about patent trolls -- which they prefer to call "patent assertion entities" (i.e., businesses who exist solely to use patents in to seek money from others). And, more recently, the FTC has teamed up with the DOJ to see if there's anything that can be done to help fix the situation.

As Groklaw notes, the B&N filing is clear, concise and highly readable. It outlines the problem directly:

The patent system is broken. Barnes & Noble alone has been sued by "non practicing entities"—a/k/a patent trolls—well over twenty-five times and received an additional twenty-plus patent claims in the last five years. The claimants do not have products and are not competitors. They assert claims for the sole purpose of extorting money. Companies like Barnes & Noble have to choose between paying extortionate ransoms and settling the claim, or fighting in a judicial system ill equipped to handle baseless patent claims at costs that frequently reach millions of dollars.

As they point out clearly, even when they have a very strong case -- either when they don't infringe and/or when the patent is bogus, a lawsuit is incredibly costly in terms of time, money and effort.

In the current system, patent trolls overwhelm operating companies with baseless litigation that is extremely costly to defend. Patent cases generally cost at least $2M to take through trial, and frequently much more. Litigating, even to victory, also entails massive business disruption. Companies are forced to disclose their most sensitive and top-secret technical and financial information and must divert key personnel from critical business tasks to provide information and testimony. The process is exceptionally burdensome, especially on technical staff. Document discovery and depositions seem endless.

Patent trolls know this and as a result, they sue companies in droves and make settlement demands designed to maximize their financial take while making it cheaper and less painful to settle than to devote the resources necessary to defeat their claims. The current system lets them do so even with claims that are unlikely to prevail on the merits. That is because, whether win lose or draw, the rules effectively insulate trolls from negative consequences except perhaps a lower return than expected from any given company in any given case. They can sue on tenuous claims and still come out ahead. And so the broken system with its attendant leverage allows trolls to extract billions in blackmail from U.S. companies and, in the final analysis, consumers.

One of the great things about the filing is that it reminds the FTC and the DOJ of the constitutional underpinnings of patent law -- not that patents are required or guaranteed, but that their purpose is to promote the progress of the useful arts. If that is not happening, then the use of patents in such a manner should be seen as unconstitutional.

The Patent and Copyright Clause grants Congress the power "[t]o...promote the Progress of Science and useful Arts," not science fiction and litigious arts. (Article 1, Section 8, Clause 8 (emphasis added)). But the current system allows trolls to pursue fantastic allegations—claims that would be laughed out of the room in actual scientific or technical circles—in endless litigation that taxes and taxes true innovators while making no meaningful contribution to society. Barnes & Noble's experience exemplifies this and industry data confirms it. See, e.g., James Bessen & Michael J. Meurer, "The Direct Costs from NPE Disputes" at 2, Boston Univ. School of Law Working Paper No. 12–34 (June 28, 2012) (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id= 2091210) (estimating direct costs of troll litigation on economy at $29 billion for 2011 based upon study that included data from 82 companies and finding additional empirical support for earlier conclusion that "much of the cost borne by technology companies as they defend against NPE lawsuits is a social loss and not a mere transfer"). The system has lost its true north.

As the company notes, while it's been sued by more than two dozen trolls, and has spent tens of millions of dollars defending itself against them in court, not a single court ruling has come out against Barnes & Noble and in favor of the trolls. Whenever we talk about patent trolls, some troll supporters show up in the comments to insist that the companies complaining have clearly infringed and should just pay up. And yet, once again, we see that's clearly not true. But Barnes & Noble still has to spend all that money defending itself, and not innovating and providing more value to the public.

Barnes & Noble goes on to point out not just how ridiculous some of the patents are, but also how the trolls keep on fighting and demanding money, even after they have lost the case:

Even the most plainly baseless lawsuits are expensive and can take years to defeat. In at least four cases, Barnes & Noble has faced litigation by patentees asserting the same theories on which they previously lost. In one case, for example, Barnes & Noble is alleged to infringe patents because BN.com uses the HTML language and returns search results other than exact matches. The patentee asserted these allegations against Barnes & Noble despite having tried and lost a case against other ecommerce retailers based on the same functional allegations levied against their websites. In two of these four cases, the patentees ceased pursuing claims against Barnes & Noble once the United States Court of Appeals for the Federal Circuit affirmed their earlier losses. But in two others, the appeals are not yet final and although Barnes & Noble has filed dispositive motions, the litigations have carried on actively for years.

In two other recent cases, Barnes & Noble achieved victory at the district court level on summary judgment. In one such case, the Court awarded Barnes & Noble its costs—but the total awarded was less than $50K. The company expended millions to achieve that victory, but attorneys’ and expert fees are not recoverable as a matter of course.

Appeals routinely follow summary judgment victories, and Barnes & Noble's experience has been no exception. The Federal Circuit now has a mandatory mediation program. In that program, Barnes & Noble has received demands for substantial settlement payments—even in cases that it won below. One such demand, for example, exceeded $3M. The settlement demands that patent trolls make on appeal, particularly in the wake of complete defeat, have nothing to do with the merits. They underscore the uncertainty and expense that accompany appeals and potential retrials in patent cases.

In a growing number of cases, patentees sue Barnes & Noble on multiple patents only to drop one or more of them before trial. This practice underscores that many patent claims are not made in good faith. Rather, plaintiffs frequently assert patents for additional leverage to force companies to expend significant resources mounting a defense on multiple fronts even when they know they will not ultimately prevail.

Barnes & Noble and other technology companies see countless lawsuits in which the asserted patents purport to cover products and technologies common to the entire industry. We face repeated allegations that anyone using Wi-Fi, anyone using 3G, anyone using MP3, anyone with an e-commerce website, anyone using Ethernet, and, recently, anyone using InfiniBand technology, to name a few, is infringing and must pay a hefty price to license purportedly essential patents. The allegations sweep far beyond specific innovations to which a patent might legitimately lay claim.

I recognize I'm quoting extensively from the filing, but it really is that good and deserves to have so much of it highlighted.

At the end, Barnes & Noble suggests five specific fixes that it believes would help minimize the problems of the patent system. I agree with many of the suggestions, though still think they could go somewhat further. Let's look at the five suggestions.

Require Losing Patentees to Pay Costs and Expenses, Including Attorneys' Fees

This is basically B&N coming out in support of the SHIELD Act, the law currently proposed in Congress that would do exactly what's described above. Obviously, this would help in the situations where trolls are asserting clearly bogus patents hoping that companies will settle to avoid the cost of the litigation. It is not a perfect solution, but one that would likely hold back some of the worst trolling activities. It's interesting to note that the filing also suggests allowing such fee shifting for situations in which a troll files a lawsuit over a particular patent, but later drops that patent from the lawsuit. Often, we've seen that such bogus claims are made merely to drive up the cost of defending the lawsuit, even though even the trolls know the patent in question has nothing to do with the actions of whoever is being sued.

Require Actual Reduction to Practice and Commercialization

I know this one is popular among many patent system critics, and I can understand the argument for it. It would, certainly limit significant amounts of patent trolling. My main concern with this one, however, is that if you can envision a good patent (and I know some argue there's no such thing, but let's assume it's possible), perhaps the patent holder isn't in a position to commercialize the invention. Where I would support this is with a small tweak: that the either the patent holder has commercialized it or they've partnered with someone else who has done so. That one tweak would make this quite useful in stamping out patent trolling.

Also, as B&N points out, this requirement serves another important purpose: limiting outrageous attempts to stretch what a patent really covers, including taking a very minor thing and pretending that it's of central importance to a completely different invention. When a defendant can point to how the patent holder actually commercialized the offering, it's much easier to highlight how the patent holder clearly wasn't trying to cover what the defendant eventually did.

Cap Damages at the Amount Paid to Acquire a Patent

This is another interesting suggestion -- and one that I haven't seen much discussion about. Barnes & Noble's argument appears to be that a troll, who has purchased the patent and has no interest in bringing a product to market, doesn't have any real "damages" other than the cost it took to acquire the patent. Furthermore, since the nature of patent trolling usually involves paying a rather small amount for the patent itself, before spinning around and claiming hundreds of millions in "damages," this would certainly help take away a big incentive to patent trolling.

That said, frankly, this one is a bit less compelling. Patent system supporters will argue, perhaps reasonably, that the "damages" are the loss of relevant licensing revenue. And that could possibly make sense, though in most trolling cases, it's unlikely that there's any real likelihood of licensing fees making sense.

Require Clear and Convincing Proof that an Invention is New and Non-obvious for a Patent to Issue

I've been a big supporter of this argument for years. The Patent Office is just really bad on this front, issuing all sorts of bad patents on a regular basis. In part, this is because there is no such thing as an adversarial hearing in determining if a patent should be issued. There's just one side. On top of that, the incentives for the patent examiner is to approve patents, not to reject them. So we get a ton of bad patents. If we raised the bar for what's patentable while also putting the burden on the patent applicant to provide a high level of proof, that would help to reject many bad patents.

And this wouldn't be a real "change," rather it would be bringing the patent system in line with where it's supposed to be. Already, patent law requires that an invention be both new and non-obvious. Yet, patent examiners don't really do a good job making sure it is both of those things. They may look at some prior art, but often miss tremendous amounts of compelling prior art showing that the invention has already been done before.

My bigger complaint has been the lack of real "obviousness" testing by the Patent Office. Right now, they mostly just look at prior art to see if they can show if the new invention was anticipated by previous inventions. But patent art is really what applies to whether or not something is new, not whether or not it's "obvious." While the two may seem related, they may not be. As an example to help illustrate the differences: imagine a world in which lots of people are thinking about how to stream video online, but they're held back by a lack of bandwidth. As bandwidth naturally increases over time, the video streaming becomes technologically feasible. In that case, the technology to create the stream is not complicated -- the factor that was holding it back wasn't the lack of a compelling invention or breakthrough, but rather waiting for an ancillary technology -- broadband -- to catch up.

In that case, you could argue that the "invention" is new, but that it's also obvious. That's harder to show via prior art, but should be clearly understandable to those with actual knowledge or experience in the field.

On this point of obviousness, I'd also go one step further, as I've advocated in the past: introducing both an independent inventor's defense and the ability to use evidence of independent invention as evidence of obviousness, since multiple players all reached the same place separately. This makes sense in that it also stops the patent system from destroying the value of the work that every other innovator, who was not the patent holder, did to get to that point.

Keep Trolls Out of the ITC

This is another good one. As we've talked about for years, patent holders get a ridiculous two cracks at making life difficult for those they claim are infringing. First in the courts, and a second time at the ITC, where the rules are different. The ITC can't order monetary fines, but it can issue injunctions that will block products from being imported into the US, which can be a very big deal for many companies. Not too long ago, trolls rarely went to the ITC, as it was believed that you had to be actually selling the invention in question to make use of that path -- but after trolls convinced the ITC that patent licensing itself could be counted as having a "domestic industry" that needs protecting, patent trolls have been flooding the ITC.

Barnes & Noble reasonably suggests a return to the previous way things were where the ITC can only take part when there's an actual product being produced.

All in all a really great filing and some fantastic suggestions, though personally I'd push for that independent inventor defense, combined with independent invention being evidence of obviousness. Hopefully, the FTC, DOJ and others pay attention.