For more on patent reform, see my February 2008 Liability Outlook, from which this is excerpted.

Despite some in the media calling patent reform dead,[1] on January 24, 2008, the Senate placed S. 1145, the Patent Reform Act of 2007, on the general calendar. The next few weeks will be critical to the legislation, which the House passed in September.[2] Although much of the discussion has focused on the different perspectives and concerns that the high tech and the biotech/pharma industries have about the legislation, the fact remains that the patent litigation system is broken.

Impetus for new patent legislation came in response to the growing problem of "patent trolls"--holders of weak patents, often purchased in the open market and used solely for the purpose of litigation against successful companies. The problem predates the neologism: the notorious Jerome Lemelson made himself a billionaire through "submarine patents." Lemelson would file a vague patent, which would remain secret "underwater" while he navigated decades-long delays in the patent office. Then, as new technology became available, Lemelson would amend claims in the pending patent, have the patent issued, and "surface" to claim that his long-ago filed patent "teaches" the newly invented technology. By threatening suit against hundreds of companies and offering to settle for a fraction of the cost of litigation, Lemelson and his attorney Gerald Hosier obtained over $1.5 billion in royalties[3] before a defendant was willing to stand up and spend the money on the legal expenses to invalidate the patents--well after Lemelson had died.[4]

While subsequent congressional action closed the specific loophole Lemelson used, others noticed the litigation business model. According to the Wall Street Journal , "lured by the potential returns, hedge funds and other institutional investors now are bankrolling businesses that buy up patent portfolios" and litigate them through contingent-fee attorneys.[5] Affiliates of Erich Spangenberg’s Plutus IP have sued 476 different defendants in 42 lawsuits. The vast majority of those lawsuits allege infringements of patents that Plutus IP purchased for $1,000.[6] The use of invalid patents in litigation is more than theoretical. Philip Jackson sued his attorneys, Chicago plaintiffs firm Niro, Scavone, Haller & Niro, for malpractice after his $12.1 million jury verdict against Glenayre Electronics Inc. was reduced to under $3 million; Niro challenged the malpractice suit by claiming that the patent Jackson had successfully enforced was invalid.[7] In 2006, approximately 6,000 defendants were sued in 2,800 patent cases; in 2007, the six thousand mark was reached in early October, implying a 30 percent increase in patent litigation in a single year. Such litigation stifles substantial technological innovation. Patent trolls claim to block entire fields, and one cannot hope to innovate in these areas without the financial capital to handle the threat of patent litigation. IBM has 370 corporate patent attorneys,[8] not just to avoid the pitfalls of infringement, but to create a patent portfolio that can provide counterclaims (or cross-licensing opportunities) if a commercial entity were to sue them for infringement. Since the late 1990s, patent litigation costs have outstripped patent profits.[9]

One element of reform that is especially important is venue reform. 

In 1990, the Federal Circuit held that the definition of "reside" created in 1988 amendments to 28 U.S.C. § 1391, the venue statute for general civil cases, also affected the meaning of the word "reside" in the earlier 28 U.S.C. § 1400(b).[10] While before corporations could only be sued where they had a regular place of business, now corporations could be sued for patent infringement in any district the plaintiff chose, so long as the defendant was subject to personal jurisdiction. Plaintiffs now had their choice of forum.

In 1990, the Eastern District of Texas had exactly one patent suit filed. In 2006, the number had risen to 264 filed against 996 defendants. The first ten months of 2007 surpassed that number: 312 cases filed against 1,253 defendants. And 60 percent of these cases were filed in the federal court in Marshall, Texas (population 25,000)--about a tenth of the entire nationwide patent docket in the improbable center of American patent litigation.

While it is an exaggeration to say that a defendant can never get summary judgment in Marshall,[11] the exaggeration is only slight. Suits can be expected to go to trial, and a trial can be expected to cost $2.5 million on top of the millions of dollars in legal fees for pretrial proceedings.[12] The "rocket docket" gives defendants little opportunity to engage in discovery that might invalidate weak patents. Moreover, the expedited procedural schedule increases the expense of complying with discovery, lest disproportionate sanctions be issued for technical failures to comply.[13]

As one patent attorney argues,

Juries in East Texas, unlike those in Houston, Dallas or Austin, are much less likely to have a member with any technical training or education, which exacerbates the problem from the defense perspective, but makes East Texas federal courts an attractive venue for would-be plaintiffs, who know that the jury will, instead, gravitate toward softer or superficial issues that are difficult to predict.[14]

Defense attorneys complain of the court’s idiosyncratic jury instructions that make invalidating patents unlikely. "[P]atent plaintiffs whose cases go to trial in Marshall win 88 percent of the time, according to research firm Legalmetric, compared with 68 percent nationwide."[15] With all these factors, individual defendants often find it economical to settle, especially if faced with an offer less than the cost of trying a case.[16]

Venue reform is an area in which only Congress can solve the problem. There is little chance the Supreme Court will hear an appeal on the Federal Circuit’s interpretation of the venue rules, and the Federal Circuit has shown no inclination to revisit its earlier decision.

 

1. E.g. , Rita Weeks, Recent Developments in Patent Reform Legislation , MONDAQ BUSINESS BRIEFING, July 12, 2007; Patently-O, Congressional Patent Reform is Dead; Long Live Administrative Reform, Aug. 30, 2007, http://www.patentlyo.com/patent/2007/08/congressional-p.html (last visited Feb. 13, 2008).
2. H.R. 1908, 110th Cong. (2007).
3. Nicholas Varchaver, The Patent King , FORTUNE, May 14, 2001, at 202.
4. Symbol Technologies v. Lemelson Medical, Education & Research Foundation, 301 F. Supp. 2d 1147, No. 01-701 (D. Nev. 2004), aff’d , Symbol Technologies v. Lemelson Medical, Education & Research Foundation, 422 F.3d 1378, No. 04-1451 (Fed. Cir. 2005); Brenda Sandburg, Judge Torpedoes Dead Inventor’s Patent Claims , THE RECORDER, Jan. 27, 2004.
5. William M. Bukeley, Aggressive Patent Litigants Pose Growing Threat to Big Business , WALL ST. J., Sep. 14, 2005, at A1; see also Nathan Vardi, Patent Pirates , FORBES, May 7, 2007.
6. John Letzing, Speculator of mundane patents casts a long shadow , MARKETWATCH, Sep. 7, 2007, http://www.marketwatch.com/News/Story/congress-mulls-patent-reform-holding/story.aspx . The Polaris patents are quite weak; Patent No. 6,411,947, issued in 1997, claims to teach responding automatically to emails, though that functionality has been available in some software since at least the 1990 release of Procmail. See discussion at Slashdot blog, Google and Others Sued for Automating Email, Aug. 28, 2007, http://yro.slashdot.org/yro/07/08/28/2252231.shtml.
7. John Bringardner, A Bounty of $5,000 to Name Troll Tracker , IP LAW & BUSINESS, Dec. 4, 2007. "The case settled in late September [2007] for an undisclosed amount." Niro has been accused of using patent litigation to sue critics on the Internet, bringing a patent infringement suit against Greg Aharonian, the author of the Internet Patent News Service, for criticizing a jpg decompression patent. Id.
8. Michael Fitzgerald, A Patent Is Worth Having, Right? Well, Maybe Not , N.Y. TIMES, Jul. 15, 2007.
9. Id. (citing JAMES BESSEN AND MICHEL J. MEURER, DO PATENTS WORK (forthcoming 2008)).

10. VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990).
11. Maurice Mitchell Innovations, L.P. v. Intel Corp., No. 2:04-CV-450 (E.D. Tex Nov. 22, 2006) (invalidating patent), aff’d, No. 2007-1108 (Fed. Cir. Sep. 24, 2007).
12. M. Craig Tyler, Patent Pirates Search for Texas Treasure , TEXAS LAWYER, Sep. 20, 2004.
13. Sam Williams, A Haven for Patent Pirates , TECHNOLOGY REVIEW, Feb. 3, 2006.
14. Tyler, supra note 12.
15. Williams, supra note 13.
16. A complaint in the Eastern District has "has a nuisance value of a few hundred thousand dollars the minute it is filed and served." Id. Even in the Maurice Mitchell case, Intel could not obtain attorneys’ fees, and even its relatively modest bill of costs was rejected. Maurice Mitchell Innovations, L.P. v. Intel Corp., 491 F.Supp.2d 684 (E.D.Tex. 2007).