High court can halt big payouts that fuel patent trolling

Patent trolling, or at least abusive patent litigation, returns to the spotlight this Tuesday as the U.S. Supreme Court hears oral arguments in the long-running Samsung-Apple patent infringement suit.

Apple accused Samsung of infringing its design patents. Most involve design aspects, such as rounded-rectangle corners and icons organized in a grid that Samsung argues do not significantly contribute to value or create substantial consumer differentiation. Samsung is appealing a Ninth Circuit Court decision that upheld a $400 million award in favor of Apple, which the court calculated to represent as the total profit Samsung derived from the infringing phones.

{mosads}The case highlights a twofold problem that has contributed to more than a decade of abusive patent litigation: a proliferation of low quality patents and an antiquated law that requires defendants to pay 100 percent of the profits from their infringing product.

First, statistics show the U.S. Patent and Trade Office (USPTO) has been steadily lowering the bar for issuing design patents. In 2007, USPTO granted 17,000 design patents, up from 7,000 in 1997. By 2012, the USPTO’s allowance rate, that is, the percentage of patent applications approved, had increased 20 percent from 2009. The flurry of patent approvals stems from complaints that the grant process was moving too slowly and, in the end, it may have overcorrected. Today, critics say the USPTO will grant a patent to any design. For example, last month, the office awarded a patent for a display screen interface design that consisted of three text rectangles across the top, with a text square below it, As the Electronic Frontier Foundation noted, the patent is so unspecific that even the USPTO’s own mobile interface could be accused of infringement. 

Second, the original law that grants the patent holder all profits from the infringing product dates from 1887. Back then, a specific design could indeed have been instrumental to the value and differentiation of a product. Today’s smartphones, however, rely on more than 250,000 patents. This case should compel us to rethink the logic behind awards of hundreds of millions of dollars over one or two patents that do not add appreciable or tangible value to the product as a whole.

The combination of the USPTO’s patent milling and the six- to eight-figure court awards for infringement has created a toxic environment for innovation. According to a recent report from the U.S. Government Accountability Office, filings of new patent infringement lawsuits increased from about 2,000 in 2007 to more than 5,000 in 2015, while the number of defendants named in these lawsuits increased from 5,000 to 8,000 over the same period.

In bringing a suit so questionable in merit and requested harm remedy, Apple is an exception because it actually makes smartphones. Most patent suits are brought by non-practicing entities (NPEs) or patent trolls –whose sole purpose is to buy up dozens, hundreds, or thousands of low quality patents on the cheap in hopes of leveraging one or two into a hugely profitable settlement. Since current law offers total profit awards, if their claim is upheld, NPEs start out with an incredibly strong bargaining position—so strong that the defendant often waives the right to a trial and simply writes a hefty check.

The NPE, then goes looking for its next target.

The Supreme Court has the opportunity to provide guidance on design infringement awards. In a brief filed by the U.S. Department of Justice, while taking neither side in the case, warned that the approach of calculating damages based on profits for the entire product “would result in grossly excessive and essentially arbitrary awards.”

In recent years, the High Court has been favorable toward rulings that stand to reduce trolling, suggesting a concern about the current level of patent law abuse. In last year’s term, the Supreme Court rejected a challenge to a USPTO review system that allowed companies to challenge the validity of patents and get a speedy decision. That followed 2014’s landmark Alice vs. CLS Bank decision, in which the court declared that software that simply implemented abstract business methods was not patentable.

These decisions, which reduce the leverage patent trolls have, are key to the patent reform that will free up American innovation. Still, it’s frustrating that progress is occurring only incrementally. The USPTO must get better at filtering out weak patents, and Congress should be more pro-active with legislation which will restrict patent abuse. In the meantime, here’s hoping the Supreme Court continues to support modernizing and improving our patent system.

Steven Titch is an independent policy analyst focusing on telecommunications, internet and information technology. His work has been published by the R Street Institute, the Heartland Institute, the Reason Foundation and the Competitive Enterprise Institute.