Issues in Brief

Thwarting the IP Grinches

Vice President, General Counsel and Secretary
December 9, 2013

Intellectual property is the driving force and number one asset of every manufacturing company. It’s why Coke locks its secret recipe in a vault. Why Apple and Samsung pursue multiyear, multimillion-dollar litigation. Why Syria, Russia, and China have legions of cyber-warriors trained to hack into industrial computer systems. Why worldwide patent applications were up to 1.9 million last year alone. (And why MAPI is hosting an Intellectual Property Law Forum on March 5.)

Companies clearly understand the enormous value of intellectual property. According to the IP5 Statistics Report, 2012 Edition, approximately 92 percent of the 1.8 million patents filed in 2011 originated in the IP5 (consisting of the European Union, Japan, Korea, China, and the U.S.). As of the end of 2011, 7.9 million patents were in force globally, an increase of 6.6 percent from 2010. Collectively, the IP5 offices granted almost 924,000 patents in 2012, a rise of 17 percent over the previous year.

While the worldwide value of IP assets is incalculable, it would likely be googols of dollars. And big assets draw big attention. For manufacturers, this makes the IP protection mission critical, especially amid continuous and ongoing threats from hackers, pirates, trolls, and even the Patent and Trademark Office.

Thwarting the Hackers and Pirates
Stopping hackers and pirates is a laudable first step in the war against IP criminals. The annual cost of IP cyber-hacks in the U.S. has been estimated at $300 billion, endangering a projected 40 million jobs. U.S. federal and state governments are stepping up their efforts to protect IP, and several states have begun leveraging unfair competition laws to enable prosecution. The use of pirated software is a popular target:

  • Washington state employed its ban on the sale of products manufactured using stolen technology to negotiate a large settlement with a Brazilian multinational aircraft manufacturer
  • Massachusetts forced a Thailand-based seafood company to stop using unlicensed software and pay a civil penalty
  • California’s attorney general filed related lawsuits against Indian and Chinese apparel manufacturers
  • Tennessee’s attorney general worked with Thailand’s attorney general to expedite a settlement with a company that stole software to produce tires it exported to the U.S.

DOJ regularly pursues counterfeiters, IP pirates, and hackers at the federal level, and the FBI has an entire division focused on industrial espionage. Each case, however, takes time, money, and resources and cannot eradicate the barrage of constant IP threats.

Stopping the Trolls Isn’t Enough
Patent trolls are no small IP threat, either. According to a study from Boston University, patent trolls cost defendants $29 billion in out-of-pocket legal costs and settlements in 2011. An August 2013 GAO study reported that the number of firms sued for patent infringement more than doubled from 2007 to 2011.

Patent trolls seem to be able to do something almost no one else can—bring Congress and the White House together. On December 5, the House passed The Innovation Act (H.R. 3309) on a 325-91 vote. Two days earlier, the White House announced its support for this Republican-introduced legislation intended to curtail the dreaded patent troll. Strong opposition comes from some powerhouse groups, including the American Bar Association, the Federal Circuit Bar Association, the American Intellectual Property Law Association, and the National Association of Patent Practitioners—all of which are concerned that congressional micromanagement of the patent process could make the situation worse.

Not all patent trolls are the same. Some are bottom-feeders who buy up patents and send out hundreds or thousands of broad demand letters hoping for quick settlements and checks, sometimes going after large company customers rather than the companies themselves. The Federal Circuit Court heard two cases last month in which Microsoft and SAP were trying to stop a patent troll from suing 72 of their customers.

Another type of troll is the larger, targeted “industrial troll” more likely to go after larger companies all the way through trial. Many experts agree that even well-written, targeted legislation will have only marginal impact on the bottom-feeders and almost no impact on industrial trolls. Still, at last count, there are at least 10 other bills in Congress related to stopping or curtailing patent trolls.

A “No” From PTO?
One commentator thinks the elusive solution to the majority of patent woes is for the PTO to “just say no.” According to James Bessen of Boston University School of Law, there is a peculiar feature in U.S. patent law that prevents the PTO from rejecting any patent application with absolute finality. Patent examiners can issue rejection letters, including a “final rejection” letter, but all the applicant has to do is file a continuation that keeps the patent application pending for as long as 20 years. Bessen claims that every other major patent office in the world can reject patent applications, and he points to a 2011 study from the UK to argue that this is one reason no other country suffers so greatly with patent trolls.

His theory may have some substance. A University of Richmond study noted that no U.S. patent applications are ever rejected—only abandoned or approved. In 2012, 11 percent of patent applications were abandoned. After examining patent applications and their results from 1996 to 2012, the researchers found that an increasing percentage of “applications” are requests for continued examination and that allowance rates are increasing.

The Scourge of the RCE
One very recent example of the impact of requests for continued examination (RCEs) is the Apple vs. Samsung case. In 2005, Apple applied to patent the “slide to unlock” feature on the iPhone despite the existence of several similar patents, including one for mobile phones. Undeterred, Apple filed and kept refiling despite repeated rejections. After receiving a “final rejection,” Apple submitted an RCE in 2011 with new language that the user must maintain “continuous” contact with the screen. Despite other patents implicitly using that method but not stating so specifically, Apple’s patent examiner ultimately issued patent No. 8,046,721. Apple sued Samsung for infringement and was ultimately awarded $929.8 million in damages even though a British court subsequently deemed the patent invalid.

If the PTO had the ability to “just say no” to Apple’s patent application, the issue could have been avoided and cellphone manufacturers would have been innovating rather than litigating. On a much grander scale—perfectly suited for this season of miracles and giving—Bessen argues that eliminating RCEs would deliver a veritable sleigh-full of wondrous gifts to the IP world: a reduced backlog of patent applications; a lower burden on patent examiners; saved time, money, and resources for the PTO; deterrence of patent trolls; and ultimately a restored focus on true innovation. Perhaps this vision is correct; perhaps not—but it certainly raises a point about finality, and about large companies with more resources having a much greater ability to fight their way into a patent.

Conclusion
Most everyone agrees that intellectual property protection is critical and that trolls, pirates, and hackers constitute significant threats. What’s missing is a viable solution. Legislation targeting patent pirates is moderately helpful, but resources are limited and only a small fraction of infringers will ever be caught. Targeting patent trolls with tweaks to the patent litigation system may deter bottom-feeders, but will do little to hinder larger trolling operations. Giving the PTO the authority to issue ultimate rejections and eliminate continuations may provide some relief to the system, but only Congress can grant these powers, and a cadre of powerful lobbyists will work tirelessly to see that such authority is not granted. Staving off the IP grinches will require considerable effort; however, the reward will be to further preserve U.S. manufacturing’s creative labors.

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