Patent infringement lawsuits on the rise

by Kristen D’Andrea

Published: September 25, 2013

Seth Weinfeld

Seth Weinfeld

America’s first “patent troll,” George B. Selden, was awarded a patent for the automobile, which he called a “road engine,” in 1879. But rather than beginning production on his invention, Selden waited for the automobile industry to become established and, in 1895, threatened lawsuits against any automobile manufacturers he believed infringed on his intellectual property, including Henry Ford.

In recent years, there has been a sharp increase in the number of patent infringement lawsuits filed by patent trolls, also known as nonpracticing entities. These companies claim a patent on an invention that they do not use to manufacture, create or sell a product, and then sue the company in the industry actually practicing the claimed invention. As the number of companies choosing to engage in predatory practices has risen, state and federal governments are increasing their efforts to crack down on frivolous lawsuits and illegitimate patent assertions.

From 2010 to 2011, the number of patent infringement lawsuits increased about 31 percent, according to an August 2013 report to Congressional Committees conducted by the U.S. Government Accountability Office. From 2000 to 2011, approximately 29,000 patent infringement lawsuits were filed in U.S. district courts. In New York, the number of companies sued by patent trolls rose 75 percent, to 288, from 2006 to 2012, according to the organization Patent Freedom.

Among the higher-profile cases, Yahoo last year was widely criticized for filing a lawsuit against Facebook for violating more than 10 of its patents relating to features including messaging, privacy controls, social networking and advertising display; the companies eventually settled the suit.

Several explanations have been offered for the sharp increase in lawsuits. For starters, the sheer number of issued patents per year has increased in every technology, said Seth Weinfeld, a partner at Scully, Scott, Murphy & Presser, an intellectual property law firm in Garden City.

“The more patents issued, the greater the patent pool available to use in litigation,” he said.

Another reason for the increase, he said, involves the size of verdicts for damages being awarded by judges and juries.

“Individual strategies have developed to maximize profit in view of the larger damages,” Weinfeld said.

A 2012 study that looked at all district court patent decisions that proceeded through trial from 1995 to 2011 found that the median damage award was more than $5 million dollars.

In September 2011, President Barack Obama signed the America Invents Act, which came into effect earlier this year. While the AIA updated the way patents are issued and prosecuted, it made it more challenging for trolls to file one lawsuit naming multiple parties.

Efforts to combat this growing problem continue across the aisle on the federal and state level. Members of Congress have continued to suggest several bills to make it more challenging for patent trolls. Earlier this year, Vermont became the first state in the nation to enact a law to combat patent trolling. And, in May, U.S. Sen. Charles E. Schumer introduced legislation to improve the patent prosecution system. His bill would allow patent infringement litigation claims to be reviewed by the U.S. Patent & Trademark Office, avoiding costly litigation fees for defending businesses.

According to a 2011 survey of patent lawyers by the American Intellectual Property Law Association, the cost of defending one patent infringement lawsuit, which excludes any damages awarded, ranged from $650,000 to $5 million in 2011, depending on how much was at risk. Under current law, a company hit with a patent suit must either pay to defend the suit or pay a licensing fee or settlement agreement.

“Patent trolls are bullying New York’s technology companies, stymieing innovation and dragging down growth,” Schumer said.

Patent trolling is more common in software and business method industries, such as telecommunications and wireless software, which are low-barrier-entry fields in which it is easier for a nonpracticing entity to develop a technology without actually implementing it, Weinfeld said. Claims in software and business method cases are generally broad and vague, he said. Lawsuits are less common in the fields of biology or pharmaceuticals, for instance, where more research and development is necessary, and claims are narrower and don’t allow for owners’ broad interpretation, he said.

“The increase in patent trolling parallels the increase in software and business method patents over the last 20 years,” Weinfeld said.

Despite their derogatory depiction by some as trolls and leaches that do not add anything to the economy, nonpracticing entities are operating well within the current rules and statues of the government, he said.

“It’s a business strategy for them,” he said.

“Specific companies go around purchasing patents for the sole purpose of generating revenue through these practices,” Weinfeld said. “That’s their business model and it’s been a very successful business model to say the least, thus far.”

For 30 years, Melville-based CopyTele Inc. was a technology development company. Last October, the company brought in a new management team and announced a new business model, which shifted its focus from technology development to patent monetization and patent assertion.

Over the past 11 months, the company has stabilized its balance sheet, closed its product development operations and monetized CopyTele’s own patents (developed over the past 30 years), while acquiring patents from third parties, according to Robert Berman, CTI’s president and CEO.

The company has filed 20 patent infringement lawsuits across five patented technology areas, including the most recent against 10 of the largest U.S. airlines in connection with the technology used to do point conversions in frequent-flyer programs.

Another patent infringement lawsuit was filed by CTI in connection with its patented J-Channel Window Frame Construction technology.

“Our inventor is a former window manufacturer that was forced out of the business by a consortium of larger, more powerful competitors, who misappropriated his J-Channel technology,” Berman said. This scenario is not uncommon, Berman said, noting small companies often innovate, are then taken advantage of by larger companies and often don’t have the resources, sophistication or knowledge to fight back. That’s where CopyTele comes in, to partner with the company to help monetize their patents.

To the naysayers who blame nonpracticing entities for creating frivolous litigation and an increase in patent infringement lawsuits, Berman says it’s simply “name-calling nonsense created by larger companies that engage in predatory practices.”

He points to last month’s U.S. Government Accountability Office report, which, he said, proved “nonpracticing entities provide a valuable service to small companies and inventors, and it’s exactly the way the patent system should be working.”

Berman concedes there are some abuses in the industry, as with any industry.

He would like to see legislation focus on those abuses, as opposed to who is doing them. Attempts to classify one type of company would be “discriminatory and unconstitutional,” he said.

“It’s unfair to say all nonpracticing entities are bad and that the litigation they bring is frivolous,” Berman said.

Rather, he wants legislation to focus directly on the frivolous litigation, regardless of who brings it.

“Congress recognizes how important patents are to our economy,” he said. “Any tinkering has to be done with significant thought. Otherwise, the ramifications, which could have a chilling effect on innovation, would do so much more harm than good.”