Politicians want “loser pays” rule for patent trolls

http://arstechnica.com/tech-policy/2013/02/pissed-off-politicians-want-loser-pays-rule-for-patent-trolls/

by Steveism • 13 years ago

229 129 13 years ago

arstechnica.com

TallboyOne• 13 years ago

Reading about this patent trolling just makes me angry :(

dromidas• 13 years ago

I really hope this works like they intend. For some reason I see patent trolls figuring a way around it though.

eli• 13 years ago

IANAL and I don't know nearly enough about it, but one potential problem with "loser pays" is that you could be found guilty of some relatively minor infraction and then get slammed with legal bills that are far in excess of the original damages.

cmsmith• 13 years ago

This is addressed in the article. Losing defendants don't have to pay. Meaning that if you sue someone and win, you still have to pay your own legal bills.

chimeracoder2• 13 years ago

This is really easy for patent trolls to get around - patent trolls (NPEs) are typically shell companies that have no assets that can be seized (aside from the patent itself).

pronoiac• 13 years ago

Won't that mean that if they lose a case, they shut down?

chimeracoder2• 13 years ago

So they spin up a new one. Shell companies are like EC2 instances - cheap and disposable.

cosmie• 13 years ago

It means the troll's shell company, whose only asset is the now-useless patent, is shut down. The parent company isn't touched, nor the thousands of other subsidiaries owned by said parent company.

Bill_Dimm• 13 years ago

Couldn't the judge require the patent troll to put money into escrow to cover their opponent's estimated legal expenses (otherwise not allow the case to proceed)?

neotek• 13 years ago

Because you don't limit access to the courts based on how much money someone has. That's insane.

lancefisher• 13 years ago

This is a really good step though. If paying legal fees becomes a problem for NPEs, then perhaps the next step is to require NPEs to post a bond before going to trial.

milfot• 13 years ago

What (good) purpose do shell companies serve?

LLC is limits liability doesn't it? Its not no liability. Surely a more effective and wide ranging measure would be to enforce limits on the limitations. If no one wants to take some small amount of responsibility for a company, that company has no business existing.

damoncali6• 13 years ago

They're not really shells. They're very small companies created to limit the exposure of the owners to liability. This is not weird or abnormal in business. Real estate guys use separate entities for their projects all the time. If one gets in trouble, it leaves the others intact. That is the whole point of limited liability.

zizee• 13 years ago

I have always understood the "limited" liability means that the company is liable, but the shareholders are not.

In the case of the shell companies the owner is the parent company, not the shareholders. Thus the shell companies limit the liability to the parent company. This allows the parent company to sue people without the risk of an adverse ruling.

JumpCrisscross5• 13 years ago

The shell would have to post a bond when it is deemed to be a non-practising entity, i.e. not subsection (d) compliant.

"Any party that fails to meet a condition under subsection (a)(3) shall be required to post a bond in an amount determined by the court to cover the recovery of full costs." [1]

The subsection (a)(3) reference points to the subsection (d) exemptions for original inventors, parties which have made "substantial investment" in exploiting the patent through "production or sale of an item covered by the patent", universities, and technology transfer organisations "whose primary purpose is to facilitate the commercialisation of technology developed by one or more institutions of higher education".

[1] http://cdn.arstechnica.net/wp-content/uploads/2013/02/SHIELD... § 285 subsection (b)

jrs2353• 13 years ago

How could the judicial system incorporate rules to pierce the corporate veil in such situations and therefore expose the shell company creator(s)? Would something like this help? And what are the cons?

jmduke• 13 years ago

This is called the English Rule (http://en.wikipedia.org/wiki/English_rule), and is adopted in nearly every Western democracy (besides, of course, the US).

drzaiusapelord• 13 years ago

How do you stop me from making LLC's or s-corps with almost no assets over and over again to sue? Most patent trolls have next to nothing in assets.

If people aren't in threat of losing their savings or their home then they aren't going to care about such rules.

learc837• 13 years ago

The bill proposes that once the plaintiff is declared an NPE they must post a bond to cover the defendant's legal costs.

dllthomas3• 13 years ago

Worst case, the court could pierce the corporate veil, but apparently there is the bond requirement mentioned in my sibling comment as well.

rayiner7• 13 years ago

Comparing the U.S. to other western countries is fraught with pitfalls. The English rule discourages private litigation, which is a more reasonable practice in Europe where there is aggressive public enforcement of the law. It's not a sane practice in a country where everything from labor rights to health and environmental rights are largely enforced through private litigation (by design).

rmc2• 13 years ago

I assure you that there is loads of private litigation in European countries (eg UK). There's even a term for it "compo culture", there are ads on TV looking for people who have been injured and they sue the other party.

will_brown2• 13 years ago

As the article mentions, but not by name, the US has a similar rule typically called "prevailing party fees". The article also mentions in the US the prevailing party fees must be triggered by statute or a provision of a contract - but fails to mention this is done quite frequently, in fact so much so that I would say while each party bearing its own fees is the rule in the US by default, but the exceptions (prevailing party fee triggered by statute or contract) are used more generally than the default.

Aside from common law vs civil law, Europe and the US have fundamentally different legal systems (adversarial vs non-adversarial). I think the non-adversarial system supports the English Rule, while the US adversarial system unnecessarily drives up attorneys fees and costs so legislators authorize attorneys fees only in specific types of cases where it is justified, and of course where a provision is included in a contact (of course parties in the US have the ability to contract such provisions).

incomethax• 13 years ago

What struck me from the article:

>For example, successful copyright plaintiffs usually win attorneys' fees if they have a registered copyright.

That means that the MAFIAA gets their legal fees back if they sue the 9-yr old down the street and win?

IMO that's pretty messed up.

mmcconnell1618• 13 years ago

I believe the article said defendants are exempt from paying legal fees to the other side. The rule would be "plantiffs's pay when they lose."

JumpCrisscross5• 13 years ago

"The bill would allow patent defendants to file a motion seeking to have a judge rule that the patent owner is a certain type of 'non-practicing entity'—although the bill doesn't use that term. If the motion is successful, the lawsuit can still proceed, but if the patent-holding company loses, it will be on the hook for legal costs."

The bill is essentially a judicial shortcut to make patent litigation riskier for non-practicing entities, precisely, non subsection (d) entities. Unfortunately, there is little judicial consensus (to the best of my limited knowledge) on what this means. ARM produces nothing tangible - it licenses designs. That makes ARM look like a non-practicing entity. Yet few would brand it as a patent troll.

Having losing plaintiffs pay is good. But it still leaves the defendant bearing the risk of adverse judgment. Even the non-practicing entity shortcut means hiring a lawyer. Perhaps, for patent suits, the plaintiff should have to, as part of filing the suit, dislose whether they or their beneficial owners' related entities have a history of filing patent suits deemed frivolous.

nitrogen2• 13 years ago

One could argue that ARM's "practice" is producing designs. They are heavily involved in the creation and implementation of their patents, making them different from any troll that licenses "patents" they bought rather than "designs" they created.

JumpCrisscross5• 13 years ago

So patents are only valid if held by their originator? That would make the IP non-transferable. In ARM's case, it would mean a takeover would invalidate its value.

digikata• 13 years ago

Maybe one could look at how many customers elect to licence the patents vs how many are litigated into being customers. Or look at the availability of the patents for license. If a company holds a lot of patents, has no technical staff to develop products, and doesn't have sales staff to try to license their IP in any markets, we might conclude the company is a non-practicing entity whose only purpose is the litigate their way to customers.

skeltoac2• 13 years ago

According to subsection (d) it is sufficient to meet any single condition. For how many of its patents would ARM not meet the first condition?

(1) Original Inventor Such party is the inventor, a joint inventor, or in the case of a patent filed by and awarded to an assignee of the original inventor or joint inventor, the original assignee of the patent.

JumpCrisscross5• 13 years ago

So instead of make thing, get patent, sell patent to troll we have make entity, make thing, get patent as entity (thus making the entity the original inventor), sell subsection (d)(1) compliant entity to troll? Someone please tell me this is wrong.

arbuge2• 13 years ago

" it still leaves the defendant bearing the risk of adverse judgment."

This is the major flaw IMHO. In jurisdictions like Marshall, TX adverse judgements happen 80%+ of the time. So I don't see this as radically changing the status quo.

mseebach• 13 years ago

The article mentions "actually using the patent" as being a criteria - having a history of having people voluntarily pay you for your IP seems to be pretty clear cut evidence of "actually using the patent".

The bigger loop-hole, it seems, is the exemption of "technology transfer organizations". What is the difference between a legitimate such, and a shell patent troll? They both have the explicit purpose of holding an inactive patent for the purpose of commercialising it.

OGinparadise3• 13 years ago

Pays what? They will create a few LLCs for each case with next to zero assets. If they lose the case the patents are almost by definition worthless, so they get nothing.

However, think of trying to legitimately sue Microsoft, or Apple or Google for using your patent. You have their bills to worry about too and they can out-lawyer almost everyone. This is no doubt loved by the largest corps, it does nothing to stop trolls but makes it much harder for a real person /entity to sue them (with tens of billions in the bank)

Edit: Imagine the first day in court, months after the other side's billing has started: you see 16 lawyers on the [Google's, MS, Apple's] side and have a heart attack! 16X$400 an hour (on the low side) X 5 hours = $32,000 for half a day, just to show up in court.

elpachuco• 13 years ago

>>Pays what? They will create a few LLCs for each case with next to zero assets. If they lose the case the patents are almost by definition worthless, so they get nothing.

Sounds like fraud to me. I'm sure this loop hole could get closed.

eridius2• 13 years ago

Perhaps, once deemed an NPE, the plaintiff could be forced to put up the legal costs in escrow for the duration of the trial? Not only will this require them to be able to pay if they lose, but it will be a further deterrent to even attempting to sue.

DannyBee5• 13 years ago

This would definitely be a good case for piercing the corporate veil.

damoncali6• 13 years ago

It's neither fraud nor a loop hole. Suppose you are a patent troll and you set up a business to extract value from a particular patent. You start out with $100k and buy a patent for $50k. You use the other $50k to sue someone and lose. You now owe them, say $30k. (I made up the numbers, but they don't really matter - the point is that liabilities are greater than assets at the end).

Where is that $30k going to come from? It doesn't exist. If you think that this is a case where you should breach the limited liability provided by incorporating, you're opening a pretty huge can of worms - it's pretty much the basis of our economy.

It's a lot more complex than "you can't do that".

rayiner7• 13 years ago

> However, think of trying to legitimately sue Microsoft, or Apple or Google for using your patent. You have their bills to worry about too and they can out-lawyer almost everyone.

This is why pushing "loser pays" in the U.S., along with binding arbitration, has been a favorite pet project of some people.

learc837• 13 years ago

>However, think of trying to legitimately sue Microsoft, or Apple or Google for using your patent. You have their bills to worry about too and they can out-lawyer almost everyone.

The bill addresses that by applying the losing plaintiff pays only to non practicing entities. It specifically excludes original inventors.

jrs2353• 13 years ago

What about the fact that the original inventor is actually a human being that through an employment "contract" agrees to assign and transfer any patents to the employing company? How does this idea affect things?

OGinparadise3• 13 years ago

As a non-lawyer, I read the bill and found it surprisingly very short. As usual the devil is in the details. Probably judges will be able to fill in the many details, go all the way to SCOTUS and then back to where we were.

The easiest way would be to fund USPTO so they stop issuing bogus patents.

SoftwareMaven2• 13 years ago

Re your edit: the judge would have to approve this before the case starts. If you can show you are the rightful inventor, you shouldn't have a problem.

OGinparadise3• 13 years ago

What's wrong with selling your patent? You dedicate x years or $xxxxx but can't see it to completion so you cash out?

noselasd2• 13 years ago

If you legitimately sue them, you're not a patent troll/NPE and this new rule wouldn't apply.

It'd suck as much as before to lose.

vacri• 13 years ago

Why can't the people in your second example use the tactic in your first example?

logn• 13 years ago

That's true and this helps big corps but this is one case in politics where I really don't care. Software patents are universally bogus and have no business being enforced. Anything that reduces anyone's ability to sue is good in my opinion. To combat the LLC with zero assets issue, which is a good point, I'd like to see a system whereby they establish standards to pierce the corporate veil and go after personal assets, which they tend to argue in cases where the LLC/corp is essentially just a front.

trotsky• 13 years ago

One of the real problems in this whole situation has been defining NPE's. Law scholars seem to be unable to come to anything close to a consensus on how to define one (legally) without causing a lot of collateral damage. So now congress wants circuit court judges to be on the hook for labeling every plaintiff? Sounds like a good way to make sure a little venue shopping will solve all the plaintiff's problems. It's not like NPE's don't already have a history of that /s

noonespecial2• 13 years ago

Almost there. All we need now is a personal penalty for the lawyer who knowingly brings the frivolous case and I'd bet that it would tip the balance just enough so that trolling mostly disappears.

rayiner7• 13 years ago

You mean like Rule 11(b)(2) and 11(c)?

http://www.law.cornell.edu/rules/frcp/rule_11

noonespecial2• 13 years ago

I wonder how effective it would be if every trolling victim filed this motion for sanctions automatically. Of course, that assumes going to court in the first place, which brings us back to the original problem, I guess. Could this be used along with the judge's ruling that the troll is this type of NPE?

As in: You're a troll, pay the defendant, oh and your lawyer pays too?

noselasd2• 13 years ago

Or, http://news.ycombinator.com/item?id=5215758

cooldeal• 13 years ago

Unfortunately, this is doing to stack up the deck against individual small inventors.

This guy would've had to start a car company in order not to be liable for millions in legal fees if he lost?

http://en.wikipedia.org/wiki/Robert_Kearns

Somehow I think the big companies will exploit this, and start violating NDAs and real patents willy nilly, since the bar has been raised for them.

But the patent trolls are doing enough damage too, I am not sure if it's worth hurting a few real deserving inventors.

h4pless• 13 years ago

Correct me if I'm wrong, but the article states that if the plaintiff is the inventor or original assignee, they would qualify as a practicing patent holder and would not be liable for paying the defendants fees. In Kearns' case, he would not be liable for paying defendants fees because he was the original inventor of the technology.

ramblerman• 13 years ago

"The bill would allow patent defendants to file a motion seeking to have a judge rule that the patent owner is a certain type of "non-practicing entity"—although the bill doesn't use that term. If the motion is successful, the lawsuit can still proceed, but if the patent-holding company loses, it will be on the hook for legal costs."

a) I doubt your example of Robert Keans, who is actually an inventor and not a patent troll would be found to be the latter by most judges.

b) If the motion is successful, you can still pull out and save the costs. You did lose, but you didn't go broke trying.

So It's probably not quite as dramatic for the little guy, as you suggest.

AnthonyMouse9• 13 years ago

  The plaintiff is an inventor or original assignee. 
  The plaintiff is actually using the patent.
  The plaintiff is a university or "technology transfer organization"

Last one shouldn't be there. It's redundant with the first in 99% of the cases that matter and sets up an obvious method for the trolls to rebrand themselves as universities or "technology transfer organizations" for the sole purpose of evading the law.

Also, forget the "loser pays" system. Just make establishing one of the first two a prerequisite for having standing to sue for patent infringement.

Karunamon• 13 years ago

s/university/accredited university, and strip out the technology transfer organization bit (though again, that leaves ARM in a weird spot)

Somehow I doubt that patent trolls will develop curriculums and bring in students for the sheer purpose of bilking inventors.

AnthonyMouse9• 13 years ago

ARM falls clearly into the first category. They hire engineers who develop chips and are the original assignee of the patents.

>Somehow I doubt that patent trolls will develop curriculums and bring in students for the sheer purpose of bilking inventors.

Maybe. I could see how they might partner pretty quickly with the likes of the University of Phoenix however.

learc837• 13 years ago

The most important part of this bill isn't that it forces losing plaintiffs to pay legal costs, it's that it forces plaintiff's classified as an NPE by the judge to post a bond to cover the defendant's possible legal costs.

This will vastly increase the cost of operation for NPEs.

scottevi1992• 13 years ago

I missed that part - if this is accurate - then I agree that this could have an impact.

mtgx• 13 years ago

It should be for everyone asserting patent infringement allegations, not just "trolls". That way, they would at least think twice about using trivial patents against others, knowing that if they lose the trial, they have to pay the winner's expenses.

It would also encourage some companies to take companies who are asking them to pay "patent fees" to Court if they think the patents are not good enough, and they could win.

jessriedel3• 13 years ago

I don't think definition of "trolls" is a sensible way to handle the problem either, but I think the idea is that if you don't restrict it to trolls, then Google can wantonly infringe on a patent owned by Joe Littleguy. Joe couldn't possibly risk suing Google when he might be responsible for the millions in legal defense that Google could rack up in a heartbeat.

arbuge2• 13 years ago

It's great that the trolls would have to pay for losing the lawsuit, but the basic problem remains - the company being sued can't afford to be the losing party, leading it to pony up outrageous settlement/royalty fees.

Even for junk patents, certain well known jurisdictions (read: Marshall, TX) award the trolls in these cases 80%+ success rates at trial. The trolls would only be on the hook for the remaining 20%, in addition to having collected all the settlements and royalties for cases which never made it to trial.

In view of the above I don't see this changing much of anything.

edouard1234567• 13 years ago

I would go a step further and ask the plaintiff to subsidies the defense and only get reimbursed if they win. In many cases (including one I was involved in) the defendant doesn't have enough cash to hire a proper defense and is forced into settling. This will put all the burden/risk on the plaintiff and therefore limit the abuse against small start-ups that typically don't have access to a lot of cash.

lsiebert• 13 years ago

Don't patent trolls already create LLCs or other corporate firewalls so that if they are countersued, they don't have assets?

learc837• 13 years ago

Yes. But this bill requires NPEs to put a bond to cover the defendant's legal fees in case they lose.

will_brown2• 13 years ago

Very bizarre to focus on the symptom and not the cause. Legislators appear to acknowledge the USPTO gives out patents to patent trolls and yet wants to focus on curbing their enforcement not their registration. Perhaps this is a necessary step, because so many patent trolls currently exist, but why don't the legislators focus instead on cutting the head off the snake and prohibit patent trolls from successfully registering a patent in the first place.

For example, Trademark law requires that a application indicate the date of first use in commerce, and the one exception is filing under "intent to use". I know there are a lot of arguments against a similar provision for patents, but why not make this distinction in Patent applications, because if a patent is actually used in commerce, then you basically insure the holder is not just a troll.

scottevi1992• 13 years ago

If "patent trolls" are formed as shell companies (located in the eastern district of texas) that have no assets other than the patent and enough to sue (i.e. corporation whose shareholders form it by merely contributing the patent and a nominal amount of funds), then this bill is useless unless it also permits piercing of the corporate veil (or equivalent for other limited liability entities such as LLC) such that the shareholders or directors are also liable for the attorney's fees of the defendant. Otherwise, why would a patent troll place assets other than enough to litigate in their shell companies?

olliej• 13 years ago

That was my thought - i couldn't see why this would make things better (you don't remove trolls, but people who we don't want to consider trolls would now run the risk of simply being outspent and then bankrupted -> which could "hilariously" result in them selling the IP to an actual troll...).

I think the fix would be to stop allowing overly broad patents (eg. actually say how what you're doing what you're claiming, instead of saying "i have an idea" and not saying how to do it)

fpgeek• 13 years ago

Why should "loser pays" be limited to patent trolls?

I understand that they're the least sympathetic players is a patent system, but a bogus patent lawsuit is a bogus patent lawsuit. I would even argue that, in many cases, a company trying throw sand in the gears of their competitors by using patents that never should have been granted is worse than a patent troll. At the end of the day, a patent troll just wants to extract money (and typically is happy to extract it from all players equally). A company suing its competitors, by contrast, is trying to upset the competitive balance in some market which can easily have more far-reaching implications.

One counterargument I've heard is that we don't need "loser pays" for practicing entities because they can be countersued with your own portfolio, so you can eventually negotiate a truce based on MAD. To me, this misses the point. MAD is a workaround for some bugs in the patent system, not an end in itself. If there's a better way to discourage trumped-up patent lawsuits, we should use it too (or even instead, depending). And MAD has significant weaknesses (doesn't protect small players vs big players, favors incumbents, etc.) that a broad "loser pays" could help.

jheriko• 13 years ago

Maybe I am naive, but can't we do even more to make patent trolling impossible?

Like forbidding their transfer to such non-practicing (or any) entities to begin with? Or maybe not having patents and finding a new way to encourage development in medicine - which afaik is the only area where patents have a measurable benefit.

(to make clear i mean /benefit to society/ not money)

Politicians want “loser pays” rule for patent trolls

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