The New Breed of Patent Trolls

Music Let's keep going here.

The next conversation we're going to have is about patents.

I think all of you know, you probably wouldn't be in this room if you weren't aware of some of the issue that intellectual property and patents cause for tech companies in the tech community.

It's actually going through a bit of an acceleration this year.

We had one Supreme Court case decision this spring in T.C. Heartland, which basically decided you can't just drag anybody you want into East Texas, no matter what you might think of East Texas, to sue them.

There's another very important case going up to the Supreme Court this fall, the oil states case, which is challenging some of the administrative procedures used to challenge patents.

That's a big year when you get two Supreme Court cases in the same year.

There's also a flurry of legislative activity, a number of other things going on in the thought community about patents.

We thought it would be a good idea to get some of the smartest people we know on this topic and have a conversation about where we think all of this is going, if this is just a lot of activity to keep us running in place, or is there some direction here?

Vera Ranieri is at EFF, the Electronic Frontier Foundation, working day and night on patent issues.

She's a Harvard Law grad who spent several years at a private firm litigating in the trenches on some of these patent cases, and then decided she wanted to do, as much as she might love that on a day-to-day basis, she wanted to make the world a better place by going to EFF and seeing what she could do about that.

Li Cheng is a bit of a legend in this area. When he was at Newegg, their approaches to taking on patent challenges, let's say aggressively, Li can talk a little bit more about that if he wants to, made them a company of some renown, and he has transitioned that into a bit of his mission as well.

He's now with Symmetry IP, which is a group that's formed to create a platform where folks interested in this area can come together and do things like source amicus briefs to put in front of courts and all of that.

We're going to walk through a little bit of a discussion of the current state of affairs and where we think it might be going and how we might push the world in a virtuous direction on all this.

Vera, let me start with you.

At the core here is the patent itself, the actual piece of property, which is both issued by and then oftentimes adjudicated, to some extent, by the Patent and Trademark Office.

Is that the real villain here? Is that where the sole problem lies?

Is that where we should be focused on a solution? Well, I don't like to blame one person.

I think I like to blame everybody instead. Yeah, we'll probably get around to everyone before we're done, yeah.

I think it's important to think about how someone gets a patent in the first place.

Someone thinks they come up with an invention, and they often go to a patent attorney, and that attorney will write up a document that includes a lot of patent words in it and is written in a kind of this really opaque way.

In software, actually, this can be a really big problem.

It often uses words that are not standard or are difficult for people to understand, and then they file that at the Patent Office.

Then an examiner gets their hands on it, and they look at it, and they say, okay, I think this is what the patent owner is trying to claim here, and they look for prior art and things like that.

In the software space, it is really difficult to find prior art. A lot of where inventing happens in software is actually right here in businesses.

It's not that people are always filing patents on things that they do.

They just find a solution and do it.

They don't publish it in a patent. They don't write a paper that's peer-reviewed and put into a journal somewhere.

They just do it. The Patent Office, when they examine these patent applications, tends to focus on patents.

If you, in the Patent Office, you're an examiner, and you've never seen this before, and you look at patents, and they don't talk about it either, you're like, okay, and you issue the patent.

Patents these days, on average, the examiner will spend 19 hours before they issue a patent.

You talked about this the other day.

Talk about the incentive structure for those examiners. How does that generally work inside the building?

Yes, that's a good question. Examiners, they are part of a union, and part of their union deal is they do work and get credit when they issue patents.

That's the best way and fastest way to get work off their docket, is to issue a patent.

There's no way to actually reject a patent.

The patent applicant can keep coming back over and over and over. If you're an examiner, and you're like, I only have 19 hours.

I have 20 other applications behind me.

I didn't really find anything, so I'm just going to issue it and let people later deal with it.

If we can figure out how to commoditize thoughtful scrutiny, we could get somewhere, but short of that and building that into the union contract of the Patent and Trademark Office, is there anything that you would see in the system that would change that dynamic or clean up that process?

I think it's really hard. The patent examiners don't have a lot of time. I would give them way more time.

There's also currently right now incentives at the Patent Office to not search the Internet when you look for prior art.

That to me seems like a big problem.

Patents don't become public for about 18 months after an application is filed.

During that time period, patent examiners aren't actually allowed to search the Internet for prior art.

That's a big problem. As you know, Internet is constantly changing.

If you have to look three years later, oftentimes the material you needed is already gone.

That's what we do. Sounds like a nasty Internet filter at work.

Lee, that's one actor in this dance, is getting the patent issued.

I think something that you focused on a lot is the other partner, which is then how the court system or other enforcement proceedings would work.

Is that where the fault should lie?

Is that where we need to focus on making the improvement?

I absolutely think so. I would agree with Vera that there's a lot of blame to go around.

Patent trolling itself is really very much a manifestation of something much broader, which is litigation abuse.

Patent trolling is, if you look at the problem historically, trolling is just one flavor of litigation abuse.

It's far too easy in America to sue someone. It's almost impossible to hold anybody accountable for filing frivolous and bad lawsuits.

That's really what opened the doors very broadly to people taking patents and abusing them.

When you assert a patent, it costs almost nothing.

To defend yourself against any assertion, it costs thousands and thousands of dollars.

The situation has absolutely gotten better.

One of the reasons that Newegg was able to embark on the strategy that we did was because even as early as maybe 2006, 2007, when we first started getting hit, there were already signs at the higher levels of the judiciary, the Supreme Court, some of the federal circuit judges.

They recognized that this was a problem that could cripple America, that there were a lot of inequities.

There have been a lot of cases and rulings over the years, including T.C.

Hartland this year, that have been rationalizing patent law.

That is an incredibly slow process. Very easy to find loopholes around any judicial decision.

It's really very imperfect and hard to really say that any decision can make a deep, deep impact, significant impact.

We still have trolling today. It's better now than it ever has been, but the ultimate solution ...

Actually, sadly, there is no ultimate solution here. There really isn't.

There's an ongoing battle. The best we can hope for in our society is really largely driving this phenomenon, which uniquely impacts the innovation community, hurts entrepreneurs, stifles startups.

We can drive it to a sustainable nuisance level.

It's getting there, thanks to efforts like Cloudflare against Blackbirds and many other people who are putting up a fight.

It's getting there, but it's going to be a long fight.

One of the things we talked about, and I'd like to elaborate on a bit, is this is a moving target.

You could think that there's an equilibrium to be reached, and the court might be moving in the right direction, but to some extent, the goalposts keep moving.

When you think you've got the target, you've got folks doing new creative approaches to litigation or using a litigation system to do that.

I didn't know if you had any examples you wanted to talk about where you find that just as you start to find movement on things like TC Heartland, we've had some rationalization, you all of a sudden have new and expanded challenges as well.

You can think of trolling essentially as, again, part of the litigation industry.

There's so much money at stake, literally billions and billions of dollars every year at stake.

It's not surprising that you have some very creative human beings on the assertion side, on the plaintiff side.

A lot of lawyers have become assertors themselves, including the Blackbird people, Blackbird founders.

They're protecting their livelihoods. They're advancing their livelihoods.

They're going to evolve their tactics. You close the door in Texas, the filings go up in Delaware.

They don't really care if they have to file in Nevada either because it's just a couple hundred bucks to file another lawsuit.

We see developments. They're really clever. We were just talking earlier about recently there's been a lot of news about Allergan in the pharma industry, for example, protecting themselves against administrative challenges or trying to.

This is a great example. By basically selling their portfolio of patents that could be challenged administratively, through a somewhat more streamlined process, patents subject to invalidity challenges, they sold it to an Indian tribe and they're claiming, making a very, very clever legal argument that the Indian tribe essentially is protected by the sovereign immunity doctrine against administrative challenges.

Freaking creative as hell. Other people are following suit.

Other patent holders outside of pharma are following suit.

It's a cat and mouse game as long as there's money to be made frivolously asserting or abusing patents.

That's what we've ... The patents, the intellectual property is that.

At the end of the day, it is property. They are rights and the ability to make money or something of value.

The questions become, how do you allocate that in the right way?

More importantly, how do you set up an incentive structure?

I think both of you ended up hitting on that. How do you set up an incentive structure that leads to the optimal allocation for societal good?

I think the general sense probably in the room is we don't have that system right now.

Jumping back then maybe to the administrative side and not just with the patent surveyor at their desk, other ways to set up the system you think in the patent application and approval process, Vera, that could lead to a more rational and efficient and optimal allocation of those rights?

Yeah. I don't want anybody to be confused.

I don't think we should be doing an absolutely thorough job at the patent office.

It's very clear that the vast majority of patents at issue have zero economic value, will never be enforced, and just sit there and don't do any harm and don't cause trouble.

Unfortunately, there's a very small percentage that should not maybe have been issued, are applicable to many people, and impose these costs on outsiders who often...

And it's very, very rare you actually see a case of copying.

These are actually usually independently created and independent inventors who are sued by someone who has a patent.

And it's these patents that cause the problem.

And so one thing that we were discussing earlier about how to better allocate costs here is that if a patent becomes economically important, maybe we should be charging patent owners more so that we can weed out ones that aren't economically important.

So patent owners every few years have to file what's called maintenance fees at the patent office.

And right now, they're only several thousand dollars, which in the grand scheme of things is not a lot of money.

But maybe what we should do is say to patent owners, if you want to keep this patent, prove that it's worth something by paying a lot of money to make it worth something.

And allow these patents to prove their worth. And then that way, when someone comes in who needs to show it's invalid, there's costs on both sides.

Right now, a lot of the costs are on the people who are alleged to have infringed the patents, not on the patent owners.

And I think there needs to be a reallocation of those costs.

But how do you get... But I think part of that issue is, we described it up front, it's very much a singular process, right?

The people who might have an interest in exposing the prior art aren't in the process.

It's just the applicant and the reviewer.

And even on review, if you sort of raise the bar a little bit and say, prove to us that this is something of value to you in a productive fashion, do you still get those other folks to start to pay attention in the door?

Or is it only that the other companies that might want to raise a hand and do something here are not going to pay attention until they get sued?

Is there any reasonable way to get them in the game at an earlier point in that process?

Unfortunately, yeah.

The way the patent system is set up right now is that competitors who may have an interest in not seeing a patent issue have no rights to actually participate.

And in fact, there's a lot of concern that if they tried to participate, they would actually hurt themselves.

The patent office, the examiner, and the applicant have this ex parte conversation, meaning no one else is involved.

And these are people who work together a lot. They're often... They're friendly.

They're in a business relationship. The patent office actually calls applicants their customers.

I would argue that the public should be the patent office's customer and not applicants.

But so the patent office views these people as their customers and they want to help them.

And if someone else tries to come in, there's a concern that the patent office will be persuaded by an applicant to kind of ignore what should invalidate that patent.

But what I'd like to see is lower costs, like the process that is currently at the patent office, it's called inter partes review, it's dramatically lowered the cost in challenging patents.

And I think it's been a really good development. Unfortunately, the patent owners are pushing back on it right now.

And I think that's because it's taken away a lot of leverage and it's managed to invalidate a lot of patents that shouldn't have been issued.

And unfortunately, as you mentioned, the oil states case might undo it, but I'm hopeful it doesn't.

Yeah. I mean, that... I don't know that frightens is maybe a little too much of a term, but it's pretty darn close to that.

You know, you have a... The country issues patents under a legislative scheme that says we're gonna give people these property rights under a law passed by Congress.

Congress later finds the flaw in that. They set up their own administrative process, this inter partes review, to sort of evaluate whether or not that was given correctly in the first place.

That is much quicker and lower cost.

But now there's this challenge to whether or not they can do that, whether Congress, having given it, can also potentially take it away, or whether there's this constitutional property right, as I understand the argument, that Congress then can't sort of challenge that.

That can only be done by the courts, and so we're forcing you back into the court system.

This might be the easiest question of the day, but do you sympathize with the argument for...

That these are important rights and it's difficult to take them away in a maybe similarly flawed administrative proceeding at USPTO?

I think I would have more sympathy if there was a more rigorous evaluation at the outset.

Unfortunately, what I see is not that rigorous evaluation.

To allow someone to say, well, I have this really strong property right coming out of the office after the office spends only 19 hours looking at it, this to me is...

There's an imbalance. If the court does, and I hope they don't, and I think there's really good arguments why they shouldn't, but if the court does say that this current administrative procedure is unconstitutional, what I'd like to see Congress do is then say, okay, we need to do much more at the outset before we ever issue this patent if it's going to be given that high scrutiny.

It's a great way to set it up to think about it, that really you get the advantage where when you come in, it's such a low bar to clear, it's pretty easy to get it, but then you're going to argue if you want to go back in front of the same people, the same forum, and invalidate it, no, no, no, no, there's got to be this really high bar to do it then, and you've got to go to court.

It can only be an Article III judge or whatever that does it.

It's a really... It's already a high bar.

Having enough ways, yeah. Even an IPR, right? It's helpful, but it's already a high bar.

To file an IPR, it costs anywhere from 100 grand to maybe 300.

It's just better than going through court, right? And if even that small tool in rationalization is taken away, well, it's not the end of the world.

I mean, I'm not terribly worried about it. I mean, what I see as the solution, I've always viewed it, we never got a chance to take any of our court cases to the point of actually trying to create law in the area of damages.

It's an economic solution.

It's really creating disincentives to frivolously assert patents by making the damages available tied to whether the patent's actually practiced.

It's really a focus on achieving the end of the Patent Act, which is to benefit society, and removing the very, very rosy, idealistic mythology around patents, that patents represent some sort of stroke of genius to some guy sitting in a little garage that should entitle that person, if he hires a lawyer to translate that idea into legalese, should entitle somebody to a windfall.

You eliminate the right to a windfall, right?

How would you define, though, you say you want them to at least be practiced, which for means that you actually try to do something with it, you try to make something, you try to run a business.

But can you draw that line effectively?

Maybe you do have your independent ... The mythology would be you have your independent inventor in their garage, but they can never get off the ground because behemoth industry sort of beats them to the punch and through unfair business practices.

How would you ... Is there a way that you could define the genuine attempt to practice a patent?

I killed a lot of brain cell thinking about this.

We don't want to push you over the line, but if you could spare a few more, that would be great.

There aren't many ... There's a compromise that I would love to see occur, which would be saying that a patent that's not practiced, perhaps, it's not worth nothing, but it's not worth a windfall.

So if something's not practiced, you simply toggle down the amount of damages available from some percentage of profits, some percentage of revenue to say, okay, you get your filings feedback, maybe you cap it at a million dollars.

It's a healthy return for a guy in a garage who hasn't really been able to take this monopoly grant and use it to benefit society.

By the way, patents. Think about it this way.

Patents are monopolies. Monopolies are bad for society, and we shouldn't have an arm of the government handing them out like candy, including three to me.

My three patents are ... I won't say they're an indictment of the past, but you see the point.

It's really just rationalizing the economics and disincentivizing frivolous assertion.

You can reward the garage inventors, but they don't deserve a gigantic windfall if they do not bring the benefit of their invention to society.

So let's talk a little bit about the winds in the other direction of this conversation, right?

Because Lee, you yourself brought up that a lot of the same people who are the victims of this sort of litigation that push back hardest against it are also people who have their own patents that have some value.

And so to some extent, you need to be cognizant of the way that that balance shifts on the other side of the equation.

So how do you go about thinking about how you sort of achieve that balance between, on the one hand, being able to innovate and run a company and do all of that free from what you might perceive as frivolous claims against you, but also maintaining the value that you might have as an individual or as a company in your own intellectual property?

How do you think in terms of drawing those lines?

I'm a purist and idealist, so I'm probably not the ...

I'm not going to give the most So you don't draw a lot of lines. Yeah.

I mean, I'm not going to give the most balanced answer. I'll give that disclaimer right now, right?

I think that the people who start companies ... Let's just take a step back and think about all of the successful technology companies in the last 50 or 60 years.

None of them, I can't think of one off the top of my head, right?

The Googles and the Facebooks and the Apples and so on, none of them became successful initially because they had patents that they enforced heavily against other people.

They made products and services that added tremendous value to society and to everybody's lives.

They eventually developed robust patent portfolios as they got bigger defensively.

It's really largely defensively. They needed to duke it out with bigger competitors and so on.

I would hope that their founders and the people who run those companies, that they keep in mind the importance of preserving the ability in our society to innovate, to start companies.

Companies like Cloudflare right now, right? You have patents, but did you guys use those patents and sue people and is that why you're successful?

Heck no, right?

I would hope that people retain that sense of idealism about what patents represent, right?

Maybe you might need to have some, but if you're basically internally just giving people incentives to scientists and developers to file patents and you're giving them a reward, they're never turning into products, they should be looking heavily about whether or not that program continues to be worthwhile and be honest about it, right?

Instead of defensive about the fact that, oh, we may have spent a ton of money in the past, so let's now lobby for, I guess what euphemistically is called robust and strong patent protection so that we can help keep others out of the market even if we don't really compete against them, right?

It is interesting to think, I mean, the paradigm there is the pharmaceutical patent, right?

You own it for 20 years, on 20 years and one day, the price of the pill goes to pennies, right?

Because you do that. I don't know if it's just the way that all tech patents would be obsolete in 20 years that you, well, there are a lot of them being sued under that are 20 years old, but whether or not, but it's hard to imagine a corollary in the tech world where everyone was just sort of waiting for that 20 year and one day and then you could, you know, use all of Facebook's patents.

I don't think it quite works that way, so it's a very different field. Let me, before we open up to questions, I've got one of my own.

So you get your magic wand, you both live neck deep in this world.

I'm giving you the magic wand, I'm giving you one pretty simple and straightforward, so no sub points, but one, like one change you could make either on the administrative side or the judicial side or whatever, change one rule that may not solve the problem but would remove the needle in this space that we could all go write our representatives about or start conversations about to do as much good in this space as possible.

What do you think that would be?

I won't put either of you on the spot, but if you want to raise your hand if you have an idea.

I figure you've got a smile, so I'll go with you first. Well, I was thinking more if I lived in a perfect world, you know, everybody would get free lawyers and, you know, all the prior art would exist forever and I could go back onto...

That's the answer you get when you get three lawyers on the stage. Everybody gets a lawyer.

You get a lawyer. You get a lawyer. The lawyer gets a lawyer.

You get a lawyer. The lawyers need lawyers. Anyway, I'm sorry, Vera. Go ahead.

But why that? What's the rationale behind that? What do you think? Well, the rationale, and Lee talked about this briefly, is that litigation is really expensive.

And unfortunately, what I see is that people are not winning or losing patent lawsuits because of the merits.

What they're winning or losing on is the cost of their lawyers.

When a patent owner comes to a company and says, pay me $50 ,000 to license this patent, and you look at it and you know that you have been doing it for way longer than when this patent application was filed, but your lawyer tells you that it's going to cost you about $200,000 to figure that out, and you might not win even then, it's a rational business decision for a lot of companies to just pay the $50,000 to the patent owner to go away, even though they should not have had to pay that.

Make sure that I get that lawyer's business card afterwards, because $200,000 should be a bargain, and we need to put them on retainer.

Exactly. Lee, same question. The first item, if we're being tactical and focusing on patent law, patent abuse, one of my wishes was granted, T.C.

Heartland was decided, and that by itself ...

In the recent years, I've been lobbying and asking, when I go up the hill to lobby, I've been asking the folks I talk to to focus on venue reform, because East Texas really shifted the balance so hard that by issuing T.C.

Heartland, we have impacted potentially upwards of 40 to 50% of abusive patent cases.

Wow. I want to clarify a bit. I'm sure for the non -lawyers who may not know this.

Before T .C. Heartland, you could generally sue a company anywhere that they were selling their product, which for a tech company is everywhere in the country.

A lot of these cases became centered in East Texas, and I wouldn't think that venue would matter that much.

Now, you don't want to go ... Lee, I want you to talk a little bit.

Why did venue, just the mere place, the home field advantage in some ways, why did that matter so much over the substantive arguments in those cases?

It wasn't even a home field advantage. It's what the judges in those cases could do.

They could just drag the cases out. They wanted ... Essentially, the story was that they turned East Texas, which is a couple of communities about two and a half, three hours outside of Dallas, they wanted to make sure that East Texas was economically stimulated.

These judges had a deep sense of duty to their local communities, and these cases could drive a lot of revenue to local businesses and so on, and so they wanted to make sure everybody showed up there in court.

Just imagine, though, if you're a defendant, having to pay a $500 to $800 a hour lawyer to drive three hours to and three hours back to go to every single court hearing.

You basically have to write the check. Judges have a lot of discretion in federal courts, justifiably, in general, but not quite in this case, in this venue.

They held on, so East Texas ended up becoming the place ... Plaintiffs' lawyers speak with their feet, right?

It became the place where about 45% of all patent cases in all of the United States were being filed, and this one decision by the Supreme Court potentially addresses a huge volume of frivolous patent filings.

My next tactical item, I've already expressed it, it's damages, reforming the law of damages.

If we rationalize the law of damages, take away the incentives to abuse patents, plaintiffs' lawyers will go find some other area of law to abuse.

Then I don't care. Well, I want to make sure, because I know a lot of people think and talk in this space, so I want to leave more than enough time for questions.

Anybody have questions on this issue? I know I see one question over there.

You got ... Oh, there we go. Hi. I have two questions. First, there wasn't a whole lot of discussion of post-grant review, and I'd like to get the panel's thoughts on whether or not post -grant review can be a useful way for companies to get rid of newer patents that perhaps shouldn't have been issued.

Then second, there was a little bit of discussion of the oil states case.

I'd like to hear what the panel's thoughts are on if the oil states case doesn't come out the way that is good for the building community, what the ideas are in terms of the patent office maybe issuing an advisory opinion on the patentability of the patent and how much that might help.

Okay. Very good. Vera, do you want to take the first question?

Yeah, sure. And then maybe leave a second. I think post-grant review can be really helpful in areas where there may be one or two patents that are pretty important to a business.

Unfortunately, I'm not sure how well that can work in the software space.

There is just too many software patents, and unfortunately, they're really hard to search and figure out which ones are going to be asserted against you.

And so for those not aware, post-grant review is this procedure at the patent office for newly issued patents and newly applied for patents where a third party can come in and say it shouldn't have issued.

But you have to do it really quick soon after the patent issues.

And oftentimes, it's really hard, especially in software, to know which are going to be the important patents, to figure out where you should be investing your money.

And unless you're a fairly large company with a lot of legal resources, I don't see it being that impactful in software.

I think it could have a lot of impacts in the pharma space, for example, or an area where there are those few patents that matter a lot.

And you know almost immediately that your product is now implicated.

Like if they issue a patent on batteries and you're trying to build next-generation batteries, you know that that's there.

If you're in software, you don't know how it's going to get applied because it's more abstract.

Quickly on the second question, Lee, which is basically, you wake up after a Royal State's bad decision, anything Patent and Trademark Office can do to use their limited powers to tie something together on an advisory opinion or something else.

I never had an opportunity to file an IPR to implement the Newegg strategy, so it doesn't bother me at all.

Well, hopefully, we're not all back here having the same conversation at the Cloudflare's 20th anniversary summit.

But until then, please help join me in thanking Lee and Vera for their time today.

Thank you.