Over the past several years, no issue has served as more of a lightning rod for patent litigation reform than the role of so-called patent trolls in the litigation process. Terms such as patent trolls, non-practicing entities (NPEs), or patent assertion entities (PAEs), have been used by many in the litigation community to describe a wide range of entities that are asserting patents they do not practice for the purpose of extracting payments from third parties. These patent rights could have been obtained through their own research and development and prosecution efforts or through the acquisition of others’ patent rights. A common thread among these entities, however, is that they do not practice these patents themselves through the manufacture or sale of products or services that incorporate the patented technology. Instead, they identify potential users of their patented technologies and attempt to get those users to pay for that use.
While patent trolls are generally included in the NPE or PAE bucket, it is their behavior that has caught the attention of the courts, states, and the U.S. Congress. While terms such as extortion or shakedown are often used to describe how these entities seek to monetize their technology rights, this behavior has generally been allowed under existing laws. A patent is, after all, a property right—an exclusive right to exclude others from using an invention without the permission of the patent owner.
In this article, we present the perspectives of two different players in the Great Patent Troll Debate. Presenting the State perspective is William (Bill) Sorrell. He has been the Vermont Attorney General since 1997 and under his watch, Vermont became the first state to enact new legislation (“Bad Faith Assertion of Patent Infringement Law”) targeting bad faith assertion of patents. Vermont has also taken action against a patent troll under the existing Vermont Consumer Protection Act. Presenting an NPE perspective is Anthony (Tony) Brown. He is the founder and CEO of Cascades Ventures, a boutique patent licensing firm. Tony has the dubious distinction of being the person for whom the term “patent troll” was initially coined.1
You may be surprised at how much our interviewees agree on certain topics. As you would expect, they also disagree on some key issues. Is additional legislation needed to prevent patent litigation abuse? Would additional legislation undermine the purpose of the patent system? Do states have a role in regulating patent assertion behavior that occurs within their borders?
Stout Journal: When you were in private practice, did your practice include patent litigation?
Bill Sorrell: No, none whatsoever. I am not a patent law expert by any stretch of the imagination.
Stout Journal: Turning to the topic of NPEs, are Vermont’s actions an attack against patent rights?
Bill Sorrell: What Vermont has done, both from a regulatory stance in an enforcement action that my office filed, as well as the legislative enactment, are not intended to be anti-patent. They’re anti-patent troll or anti-bad-faith assertions of patent infringement.
We’re not trying to wade into the fight of whether there shouldn’t be any software patents or whatever. We are really looking at this subset of the patent world that involves pretty outrageous claims of patent infringement prior to the filing of a lawsuit.
Stout Journal: Could you give us some background on the problem with NPEs in Vermont? In other words, what brought this to the forefront?
Bill Sorrell: First of all, I’ll use the term “patent trolls.” I had never really heard of patent trolls until I heard a piece on National Public Radio maybe two, three years ago while I was driving to work and thought “what an outrage.” And then I saw an article in the New York Times sometime subsequent to that, but had no clue that there were patent troll issues in Vermont until spring of 2012. A group of tech-savvy Vermont companies—and I’ll mention one because they’ve gone public with it—MyWebGrocer. These Vermont companies asked the Vermont Secretary of Commerce and me if we would attend a meeting with them. And we did. We talked about patent trolls and how they [the Vermont companies] were being victimized and paying large amounts of money to lawyers to fend off patent infringement claims that were being made against them. And basically they asked if it was possible for Vermont to take action to make Vermont a less friendly environment for patent trolls. And I said, “Well, patents are creatures of federal statute, but we’ll take a look.”
Stout Journal: What led to your lawsuit?
Bill Sorrell: Starting in about September of 2012, approximately 75 small businesses and nonprofits in Vermont received letters from one or another of about 40 shell subsidiary corporations of MPHJ Technology Investments. Over the Fall of 2012, some Vermonters received up to three letters from these entities or their legal counsel. Complaints were made to our office about these letters that related to alleged violation of MPHJ patents for scanning documents and then sending them via email through a computer network. The first letter was kind of benign. The message was along the lines of you’re a good business but you’re in violation of our patent. We know you’ll want to come into compliance.
The letters said companies all over the country are agreeing to pay us licensing fees of between $800 and $1,200 per employee. It’s really important that you be in touch with us within two weeks to resolve this amicably. And then the second letter from the Farney Daniels firm delivered a message that can be described as: “we’ve been retained by MPHJ. You didn’t respond to the first letter. This is serious. We are prepared to sue. We hope that’s avoidable. Be in touch with us within two weeks to negotiate an amicable resolution to this matter.” And then the third letter, also from Farney Daniels, along the lines that “you haven’t responded to MPHJ’s first letter, or to our first letter, and now see the attached draft complaint. Businesses all over the country are agreeing to pay us these licensing fees. If you don’t reach agreement with us within two weeks, litigation will ensue. And be in touch right off or face the consequences.” When it was brought to our attention that not just small businesses but, for example, a not-for-profit in Springfield, Vermont, that just operates on state and federal funding to bring homecare to developmentally disabled Vermonters, and another nonprofit that provides services to those Vermonters with disabilities to assist them in their daily living tasks, we turned around and sent a CID, or Civil Investigative Demand, to MPHJ Technology.
Stout Journal: What was the effect of the CID?
Bill Sorrell: I think it’s fair to say that got their attention. They didn’t come close to fully complying with the CID request, but we got enough through our investigation that in late April or early May of that year, we filed suit under Vermont’s existing Consumer Protection Act for unfair and deceptive acts and practices in commerce against MPHJ.
Stout Journal: Had Vermont’s new consumer protection legislation passed when you filed suit?
Bill Sorrell: No. Although we had filed the action against MPHJ a couple of weeks before, we had to effect service on them through their registered agent and just coincidentally we got notice that service had been effected a day or so before a public bill-signing ceremony the Governor was having on Vermont’s anti-patent troll legislation.
Stout Journal: So the case against MPHJ was filed under the then existing consumer protection law?
Bill Sorrell: Yes.
Stout Journal: The MPHJ action was filed by the Attorney General’s office and not a private individual, correct?
Bill Sorrell: Yes. The new statute is another arrow in the quiver for my office to protect Vermont businesses. Vermont’s Consumer Protection Act, unlike some state Consumer Protection Acts in the country, does include corporations as consumers, as victims. We’re able to step in to protect corporations and nonprofits the same as individual citizens. We have had that authority, and now we have the new statute also. Our lawsuit is currently being litigated and we’ve been removed to federal court, and we’re fighting to get it back into state court where we believe it belongs. We’re fighting a motion to dismiss for lack of personal jurisdiction with the defendant MPHJ contending that simply asserting patent rights does not subject a company to state personal jurisdiction. We’re fighting that fight, basically saying listen, that’s an awfully big shield—that you can do whatever you want in Vermont, in violation of Vermont’s Consumer Protection Act, as long as it’s under the guise of a patent infringement allegation.
Stout Journal: On what provision under the existing consumer protection law were you able to act?
Bill Sorrell: The statement in at least one of the letters from MPHJ or their counsel was that if you don’t pay us or agree to pay us within two weeks, litigation will ensue. We waited months after the letters were sent and MPHJ filed not one lawsuit in Vermont, and we contend in our complaint that we believe MPHJ or their shell subsidiaries have sent literally thousands if not tens of thousands of these letters around the country, and on information and belief, MPHJ or the shells had not filed one lawsuit.
Stout Journal: They have yet to file against any firm?
Bill Sorrell: Just to bring us up to speed, my understanding is that just within the last few weeks, MPHJ filed its first lawsuit.
Stout Journal: Are you aware of any developments in other states?
Bill Sorrell: I think the Minnesota AG’s office sometime this past summer heard of MPHJ letters similar to what came into Vermont, and there was some interaction between the Minnesota AG’s office and MPHJ or their counsel. An agreement was reached that MPHJ and their counsel would not send any more letters into Minnesota without running those letters by the Minnesota AGO. I think that’s the resolution, and I think there is a requirement that the Minnesota AG office not unreasonably withhold approval of the letter or letters.
I also understand the Nebraska AG had taken some action last summer to stop this type of behavior by patent trolls and their law firms. The Nebraska Attorney General effectively tried to stop MPHJ’s law firm, Farney Daniels, from sending any demand letters to Nebraska businesses on behalf of its client.
In response, Farney Daniels sued the Nebraska AG, and just recently the Nebraska AG withdrew its cease and desist order.
In mid-January 2014, the New York Attorney General announced a settlement with MPHJ relating to conduct in New York very similar to what Attorney General Sorrell describes in this interview. Oregon and Kentucky are also considering laws to combat certain NPE practices.
Stout Journal: What unique factors do you think led Vermont to become the first state to enact legislation and to take enforcement action to combat abusive patent litigation?
Bill Sorrell: Well, credit goes to those businesses that got together and saw a bad situation and came to myself and the Secretary of Commerce and said, “Help.” And we were willing to listen and act. But independent of that were the letters to much smaller businesses and nonprofits. And maybe in part because our interest had been piqued by the meetings with the business group, when we saw these letters and looked below the surface through our investigative powers, we found evidence that they were making statements in commerce that were not true, that they had not done one iota of due diligence before sending the demand letters as to whether these individual small businesses and nonprofits had violated their patents. And there was the suspicion that the business plan of some of these trolls, for lack of a better term, was to pick on small businesses that were unlikely to have legal counsel on staff. What MPHJ wants is a thousand dollars per employee. And so for an entity in Vermont that’s 10 employees to spend $10,000 to have this headache go away as opposed to paying private counsel $10,000 plus just to get an opinion on whether to fight or not, some might well rather pay than fight.
Stout Journal: Do you view this as a national problem?
Bill Sorrell: Vermont is about two-tenths of one percent of the U.S. population. MPHJ sent multiple letters to roughly 75 entities in Vermont. Now, unless they were thinking that Vermonters are particularly gullible or easily bullied, if you assume a geographic distribution of those letters, you do the math and you’re looking at 40,000 or so of those letters to businesses nationwide. And we now know there have been similar letters sent to businesses in other areas, such as Minnesota and Nebraska, and I believe the District of Columbia.
Stout Journal: Do you have a sense for how many businesses actually paid?
Bill Sorrell: No. Unless and until there is more attention paid and more awareness of these bad-faith patent assertion efforts, the lion’s share of businesses and organizations that get these demand letters, they don’t go out and publicize the fact that they’re being called patent infringers. They keep it quiet. I believe it’s just really the tip of the iceberg that state and federal officials are aware of. But now with the Congress considering any number of patent reform measures, and with Vermont and other states entering into the fray, more publicity as to what patent trolling is and the fact that it’s real at the local level, presumably in all 50 states, I think we’ll get a better handle on how much of it there is.
Stout Journal: Do you know of any actual legislation proposed by
Bill Sorrell: There is a handful of states that are interested in the issue, and there is a so-called sign-on letter from a bipartisan collection of states going to the Senate Judiciary Committee on state concerns about patent troll activity and the hope that certain state interests are accommodated in whatever comes out of the Congress. Action in the House on the Innovation Act came too quickly to send a sign-on letter, but I did send a letter to our lone congressman. I think state-level interest is going to increase more than decrease.
I also know that the Vermont statute was submitted to the Counsel of State Governments for consideration, and they have adopted the Vermont statute as a “model act” for states to try to combat bad-faith patent infringement assertions.
Stout Journal: Do you have any concerns about the proposed federal legislation?
Bill Sorrell: One of the concerns we have about the Innovation Act which recently came out of the House with a strong bipartisan vote is that those transparency disclosure obligations don’t apply until a lawsuit is filed. And I was just on a panel at Penn Law School, and heard a professor from the University of California Hastings talking about a paper that she and some colleagues had written looking at trends in patent assertion lawsuits for the last half dozen years.
But then she acknowledged during her panel presentation that all of what she has in her research document or paper is just the tip of the iceberg. And she quoted the White House as saying that 90 percent of patent assertion efforts do not end in litigation. I think the states will be suggesting that the trigger for greater transparency be at the time of the patent assertion demand letter.
Stout Journal: So, you view patent litigation abuse as both a federal and a state issue?
Bill Sorrell: Yes. However, we acknowledge that patents are creatures of federal statute. And if you take a look at the complaint we filed, we tried religiously to avoid saying anything about whether MPHJ does, in fact, have patents, or what those patents control. We looked at other aspects of those demand letters, and what MPHJ or its subsidiaries had done prior to sending the demand letters into Vermont, and contended violations of our Consumer Protection Act from those statements, inactions, and actions. So we’re not looking to fight what their patent actually controls in our state court action. And in the Vermont statute, again, it’s about bad-faith assertions of patent infringement.
Stout Journal: What does the sign-on letter to the Senate hope to accomplish?
Bill Sorrell: A hope that Congress makes a clear statement that state enforcement efforts under our consumer protection laws are not preempted. That there is room for enforcement of our consumer protection laws even when patents are the vehicles for the acts in commerce. Since this is a matter that’s very relevant to our pending lawsuit, we also want a clear statement that asserting patent infringement in a state does constitute personal jurisdiction for state enforcement of state law.
Stout Journal: Do you consider the Vermont law to be anti-NPE?
Bill Sorrell: No, not at all, and that’s why I started by saying that what Vermont’s done, both in the enforcement action and the legislation, is not anti-patent. And we understand that for any number of reasons, somebody who legitimately owns a patent might monetize that, and there is nothing illegal about that. If a patent clearly controls this or that technology, and the inventor or the university or whatever that owns the patent decides to take some amount of payment for the rights to enforce that patent, you have good-faith assertions of infringement of clear patent protections, we have no beef with that and it doesn’t matter to us whether it’s an NPE or the original inventor or patent recipient who makes the assertion.
Stout Journal: Do you have any view as to how the factors used to show bad faith in asserting a patent were derived?
Bill Sorrell: It was that process of meetings and drafts that our office had with the private counsel retained by the Vermont businesses. We were conducting our investigation of MPHJ at the same time these drafts were going back and forth, and so we had clear evidence of what was going on in Vermont, and what we thought just wasn’t right goes into some of the criteria for bad faith and the corresponding indicia of good faith in the statute.
Stout Journal: Concerning Vermont’s new consumer protection law, has thought been given to what analysis would be required to determine which accused products are covered by the claims of the asserted patents?
Bill Sorrell: That’s going to play out in individual cases going forward. So I’m reluctant to give chapter and verse of exactly what plaintiffs will be considering and ultimately what judges will be considering and potentially appellate courts.
I think when the first lawsuits are filed under the new Vermont statute, I’m sure there will be more flesh added to the bones of the statute through those cases. My guess is there will still be preemption battles, and attempts to strike down the statute as preempted by federal law, and that’s why we’re interested in the Congress making some definitive statements about state Consumer Protection Acts and/or Vermont-style anti-bad-faith assertion acts.
Stout Journal: Have you seen any indication that Congress is moving in that direction to provide that declaration or acknowledgment to states?
Bill Sorrell: I talked to Senator Leahy and the Judiciary Committee staff. I mentioned the sign-on letter that will be going to Congress. I actually talked with a prominent D.C. attorney whose firm represents a number of large corporate interests in the country and asked what his view was as to how some of the very large, well-known U.S. corporations feel about state enforcement efforts in this arena. If supportive of state-level efforts against bad-faith infringement, would those corporate interests be willing to weigh in before Congress on some of the matters that are particularly important to the states. And the feedback I got in a quick giveand- take discussion gives me hope that it won’t be just the states communicating with prominent members of Congress, that the states have legitimate interests and shouldn’t be cut out from enforcing their consumer protection acts.
Stout Journal: Now, one of the factors that is listed in determining bad faith is the patent holder’s offers to license the patent for an amount that is not based on a reasonable estimate of the value of the license. Is that an area where you think that there might be a role for expert testimony?
Bill Sorrell: I have to believe that on some of these more subjective criteria or indicia, that expert testimony would be important, if not absolutely necessary, both on the side of making a case or defending a case.
Stout Journal: Are you familiar with Federal Circuit Chief Judge Rader’s view on the patent litigation; that he thinks patent litigation reform can be best handled in the courts and that new legislation is not needed? Do you have an opinion on whether patent litigation reform can best be handled by the courts?
Bill Sorrell: I have not personally heard Judge Rader speak or read what he’s had to say.
But, I have two reactions. First, it goes back to the fact that 90 percent, plus or minus, of patent assertions don’t end up before a judge. So, I question how much, if any, influence a judge can have on a case that’s not filed. Second, with all due respect, if they have all this authority, why haven’t they addressed this bad-faith patent assertion problem yet? My view is you haven’t taken care of your business and now Congress, and hopefully the states, are going to do it.
Stout Journal: I noticed under Section 4199-A of the new law that the Attorney General has the authority under this chapter to make rules. I’m not that familiar with how that would work. What rules have you made or do you anticipate making under the Act?
Bill Sorrell: Under the state’s Consumer Protection Act, the Attorney General is given authority to promulgate rules to put flesh on the bones in different areas of business, whether it’s food product labeling or to sort of give more description as to what is an unfair act, practice or dos and don’ts. This authority was put into this statute just to be consistent with our authority under consumer protection generally. We have not exercised authority under rule making yet, and it’s, at least as of today, not high on the priority list. I’d be interested in hearing from practitioners or those interested as to some suggested rules that we might consider proposing. I’d welcome suggestions from those who read this interview.
Stout Journal: Thank you so much for your time.
Stout Journal: Tell us a little bit about your decision to move from the practice of law to the field of patent licensing and enforcement.
Tony Brown: Well, I was a partner at a firm in Chicago and I had been practicing in the corporate area for a number of years and was growing increasingly sort of disillusioned with the practice of law in a major firm, not for any reason associated with my law firm. I wanted to try my hand at business and I left the firm and tried a couple of things that didn’t work out for one reason or another or I didn’t feel like pursuing them. And then I sort of coincidentally stumbled on this area of patents. A former client of mine had a patent and was interested in technology. At the time, this was 1996 or 1997, it was an area that was way below the radar screen for everyone. Companies had patents, but there really wasn’t much in the area of licensing activity other than IBM. So we started a little company with the idea of testing the concept of whether there was a business that could be made from patent licensing.
The first objective was to acquire the rights to a patent, and so with this former client, we did some research and found a patent that looked very interesting just by searching a database.
Stout Journal: This was not something that your client owned already?
Tony Brown: No. This was a patent that was owned by a third party. We had done a search and identified this patent that potentially would have a lot of value in a licensing program.
And this particular patent had to do with the compression, transmission, decompression, and display of the data. It was really a very fundamental patent that dealt with the way things evolved on the Internet, although the patent predated the World Wide Web. It was very fundamental to what eventually happened on the World Wide Web.
So the next step was to try to acquire the rights to this patent. The patent was owned by two individuals. One was deceased and the other was still alive, and the one who was still alive was named Anthony Rozmanith and the one who was deceased was Neil Berinson, and he was survived by his widow. So I first contacted Mr. Rozmanith and discussed the idea with him. I asked him, “What are you doing with your patent? What steps have you taken to try to license it or monetize it in some respect?” He said, “Nothing. We have done nothing with the patent and it never really occurred to me to do anything with it.” I said, “Well, can we help you try to license this patent and we’ll do it on some kind of a joint venture basis. We’ll spend the money to do it and figure it out and then share the net results with you.” So I spent probably a year negotiating with him and it was like pulling teeth. I couldn’t get a deal done with him. So then I went to Mrs. Berinson, who was the widow of the other inventor. She was working as a secretary, had serious health issues and had very little income. So I contacted her and I said, “Would you be interested?” And she said, “Where do I sign?”
I had the rights to one half of the patent and I went back to Mr. Rozmanith and I said, “Okay. Mr. Rozmanith, now I have Berinson’s interest and you can’t do anything without me and I can’t do anything without you, so let’s work together and try to make some money.” He finally said okay. So it took a year to get the rights to my first patent, and then we put together a licensing campaign and I retained a very highly regarded plaintiff’s patent lawyer named Ray Niro to represent us. And we ended up licensing that patent to many different companies and generating significant revenues, some of which went to my company, and some of which went to Mr. Rozmanith and Mrs. Berinson. I got the sense that there was a business to be made here, that there were valuable patents out there that were not being monetized and that had potential. The inventors in many cases were often desperate to figure out ways to make money with their intellectual property that they had spent a lot of time and effort and money and sweat and tears to develop.
We sort of got a reputation as being a company that did this, and people would come to us with their patents.
Stout Journal: So it was more a relationship you were developing with private inventors, as opposed to corporate entities, at least at that stage of the game?
Tony Brown: Yes. I think it’s changed now, but back in those days, corporations were not interested in really exploiting their intellectual property (IP). Today I think you’ll find a very different situation. In the early days, it was all individual inventors or small companies. If we went to a large company we were told, “We’re really not interested. We use these patents for defensive purposes, but we’re not looking to try to make money with our patents.”
Stout Journal: In that first experience, were you able to get licenses before suing the folks you thought were infringing?
Tony Brown: I was amazed, but one of the first companies we contacted sent us a check by return mail. But other companies we did have to sue, so it varied. We had some responses where people said, “Yes, we know we need a license, we’ll agree to your terms.” And other companies just wouldn’t even give us the time of day and we had to sue them. Ultimately, the patent became a very politically hot item at the patent office because it was such a broad and important patent, and there was a lot of pressure from a variety of places for the patent office to take that patent back. We went through three re-exams and every time we would overcome the prior art. By the time of the third re-exam, the patent had expired. But it was a great experience. We made some money for the inventor, and particularly the widow. For her, it was life changing.
Stout Journal: You were recently quoted in Crain’s Chicago Business as saying that most patents are not worth the paper they’re written on. How do you select patent licensing opportunities that are worth the paper they’re written on?
Tony Brown: Well, that quote was taken a bit out of context. It’s really like buying art. You have to find the good pieces and figure out what the rest is. It’s just like in the art world; there is a lot of stuff that isn’t worth a lot. But then there are these Rembrandts that exist. So what we try to do is to identify those really valuable pieces of intellectual property. There is a tremendous volume of material you can look at, but there are only a few great artists and there are only a few great works, so the trick is to find them.
Stout Journal: What type of due diligence do you conduct on a patent before you decide to acquire it?
Tony Brown: We’re extraordinarily selective about what we take on. I read every patent that I consider. I pay particular attention to how the claims are written. You can have a great invention, but if the claims aren’t properly worded, the patent is worthless.
I read the patent and the file history. The file history tells you a lot about the patent. It also tells you what kind of problems you might encounter in enforcing the patent because there may have been statements made in connection with the prosecution of the patent that are detrimental to positions you might want to take down the line. So the file history is extraordinarily important.
I talk to the inventor. I am always interested in the inventor’s understanding of the technology, of what’s happening today in the field of his interest. I want the guy or the woman to be truthful and honest and deal with me on an open basis. And I also like there to be a good story. I like to learn how the person came to invent the invention. It gives you a sense of satisfaction working with someone that you think is sympathetic. It also is good if you happen to get to trial to have an inventor who has a great story to tell.
Stout Journal: Are you also looking at the marketplace? Are you looking for patents that are currently being used or may be used in the future?
Tony Brown: Oh, absolutely. We do a study of the particular products that we think may be infringed by the patent, and we prepare claim charts with our experts or attorneys. Sometimes, I get involved with patents where there may not be any current infringement, but I think it’s a great idea. In some cases, there may only be a pending application. I will get involved because I think it has potential and I can also help guide the inventor through the process of the prosecution with the patent office and work with the prosecution attorney to make sure that the claims that are issued are good claims, that they’re well-written, well-drafted and will stand up.
Stout Journal: Do you typically do any type of financial analysis to evaluate whether to acquire a patent?
Tony Brown: Not what you probably would think of as a financial analysis. I get a general sense of what the potential market for the product would be. But I don’t sit down there and do spreadsheets to figure out what’s at the end of tunnel.
Stout Journal: It sounds like the relationship with the inventor is an important factor for you. Would you ever acquire a patent where you didn’t have the cooperation of the inventor?
Tony Brown: Well, in my old company I did and I came to regret it in a couple of cases. But since I formed my new company, I really pretty much have limited myself to situations where the inventor is involved. When I started, there weren’t a lot of people out there trying to buy patents. Now there are a lot of people out there just trying to buy patents, including the big companies, the Googles of the world. Then there are the financial guys who are getting into this with their funds, and so there is a lot of money chasing patents now. My old model was I would partner with whoever owned the patent and I would pay the expenses and we’d share the proceeds. Now you run up against competition where people are offering patent owners large sums of money. I don’t do that. I still want to be in a partnership with the inventor and I want to have a sharing arrangement. I’m not going to go in and just buy patents like some of these companies do. It’s just not my business model.
Stout Journal: You were the person for whom the term “patent troll” was originally coined. Do you find that term “patent troll” to be offensive?
Tony Brown: I find it to be mildly amusing, until it gets used to try to destroy the credibility of my inventors. The use of epithets is a common tactic used by special interest groups to discredit people who oppose them.
The real story of how the term patent troll was created is this: We were involved in some litigation with Intel, and Peter Detkin, Intel’s then patent counsel, gave an interview in which he described my company as a patent troll. An Intel spokesman had previously called my company a patent extortionist and we sued for defamation. So they had to come up with something else and Detkin apparently thought of troll. Ironically, Detkin went on to become one of the founders of Intellectual Ventures, which is now arguably one of the largest patent trolls, although I suppose they would somehow try to distinguish themselves.
I think there is a lot of rhetoric in this area and a lot of namecalling. It’s really just trying to assign a label to something in order to influence not only the judges in the cases but also the people in Washington who are looking at legislation, the commentators and even the President. So I don’t really get offended personally by it, but I do think that it leads to a lot of misunderstanding as to the role of companies like mine.
It should not be about who owns or asserts a patent. If you’ve got a good patent and it has value, it doesn’t matter if the patent is owned by Apple or an NPE. When you rent a building, does it matter who the landlord is? Should that matter in terms of the landlord’s ability to rent his office building? He’s not allowed to rent it if he’s not a nice guy? If you take away the licensing rights, it’s like saying to an owner of a building, “Okay. You can live in the building, you can sell the building, but you can’t rent it.” What’s that going to do to the value of your building? Who’s going to want to build a building?
Stout Journal: Is there a preference that you have in terms of how you describe your business?
Tony Brown: Well, I consider my company to be a patent licensing company that works in partnership with inventors. We do what we can to try to create value for inventors who have, what we consider, to be valuable intellectual property. It’s a valuable service that we provide to inventors and patent owners and I think it is probably a necessary service given the fact that the playing field is so often slanted in favor of the big companies.
People are at a tremendous disadvantage when dealing with the Microsofts of the world. And so what we try to do is to level the playing field a little bit, provide these people with some guidance and some strategic understanding of how the patent world works, and also provide them with financing to help pay for some of the expenses that are involved. There are people who do what I do in venture capital.
Stout Journal: Do you see your role as a licensing company adding value to society or to the broader economy? And if so, how?
Tony Brown: I’m certainly adding value to the people who have patents who come to me for help. At the end of the day, in order to have a really strong patent system and have incentives for people to invent, file patent applications, and go through the process of getting a patent, there has to be a set of rewards for those people because it’s very expensive and takes years to get a patent, and much more expensive if you have to enforce it. If you’re an individual and not working for a big company, the financial burden and time commitment can be overwhelming. A patent is a property right and one of the sticks in the bundle is the ability to license your patent to third parties to create value. And if you take that element away, if you say to people you can sell your patent, you can practice it, but you can’t license it, I think you’re diminishing the value of the IP to the point where people are going to really think whether to incur the expense of getting this patent, because at the end of the day it’s going to be of diminished value.
So I think I do create value by facilitating the licensing of these patents and, that in a sense, I help provide a marketplace for licenses to exist. Without that marketplace for licenses, I don’t think that the patent system would work. So what Congress is doing and what some of the courts have been doing in cutting back on those rights is potentially undermining a very valuable asset of this country, which is the patent system.
Stout Journal: I’m going to kind of switch gears here a little bit and start talking a little bit more about the litigation side of the practice. The first question is, do you believe that patent litigation abuse exists?
Tony Brown: That’s a hard question to answer because I don’t really know. I hear stories about people writing thousands of demand letters for a patent and they don’t even describe what the person is doing to infringe the patent. I expect, like anything, there are abuses.
What’s disturbing to me is that there are people getting in the business who really don’t understand the patent world and they don’t understand how patents work. They don’t understand the law. And so there probably are abuses, and whether it’s any more than you’d find in, say, tort law, I don’t know. I mean, there are ambulance chasers and there are people in the medical malpractice field and slip-and-fall lawyers—all sorts of areas where there are people who try to take advantage of the system and don’t have valid claims and they’re just trying to get nuisance settlements and that kind of thing. Whether it’s more or less prevalent in the patent field, I don’t know. But it wouldn’t surprise me if there are some bad actors out there doing things that they shouldn’t be doing. But, even assuming that’s the case, I don’t think you want to blow up the entire patent system to fix those limited types of situations.
Stout Journal: Are there particular types of behavior that you would view as patent litigation abuse, things that just don’t seem right to you?
Tony Brown: I think it would be the same for any field of law. If you assert a baseless claim, that’s really what it comes down to. If you are charging someone with infringement and you haven’t done a claim chart, you haven’t really analyzed the thing or your analysis is patently wrong, or there is a piece of prior art that someone has given you which is totally on point and just destroys the patent, those are cases where you have to look at them carefully and ask is there a basis for this claim? But I think that analysis would apply to any lawsuit that was filed.
Stout Journal: In terms of trying to curb those types of abuses, do you think it’s fine the way it is, let the courts deal with it, or do you think there is something else that could or should be done?
Tony Brown: I think the courts have plenty of weapons for dealing with that issue. There is a statute that allows for an award of attorneys’ fees in an exceptional patent case, so the judges have discretion to consider whether it’s an exceptional patent case or not. There is the Rule 11 provision, which they can apply. There is malicious prosecution, and the Supreme Court apparently is going to consider two cases that will also have a bearing on widening the discretion of the lower courts to grant an award of fees. So I really don’t think it’s necessary for Congress to do anything more on this.
And if Congress goes too far, then only big companies are going to be able to enforce patents. The Googles of the world would love that because then all these people are going to be trying to sell their patents to Google. And Google will be able to buy them at a big discount because there’s nothing else they can do with their patents.
Stout Journal: What do you believe are the main reasons that patent litigation reform is such a hot topic right now?
Tony Brown: Because of the lobbying by a group of high-tech companies. This is a result of more important patents being issued. We’re seeing advances in technology each year at a pace akin to the Industrial Revolution, particularly relating to information and biotechnology. It is a renaissance in terms of inventions, and so there are a lot more patent applications being filed, there are more patents being issued, and patents are becoming more important.
So there have been more licensing efforts as well. The special interests have decided to try to get Congress to take action to prevent small companies and individual inventors from going after them. The individual inventors and the small companies—they’re not as well organized and they don’t have the resources that the big tech companies do.
Stout Journal: Over the past couple of years, we’ve seen a number of initiatives by legislative bodies and by the courts to attempt to rein in some of this bad behavior by so-called patent trolls. Based on your prior answer, it sounds like you do not see a need for any legislative changes in that area. Is that correct?
Tony Brown: Well, I think it’s been two years since the America Invents Act was enacted. That was the largest patent reform since 1836, so we’ve had a huge overhaul of the patent system just two years ago. We’re still waiting to see how that’s going to work. I don’t think that Congress should be rushing in and doing it again right now. Some of the things they did two years ago are probably not going to turn out to be wise moves. I think it would be prudent for Congress to wait and let the courts sort some of this out first before taking further action.
Stout Journal: You mentioned the America Invents Act. What impact, if any, have you seen from that act on the type of work that you’re doing?
Tony Brown: For one, it prohibited you from filing an action against unrelated parties for infringement of the same patent. Now, if you have a patent and there are five companies that are infringing it with essentially identical products, you have to file five different lawsuits involving the same patent. It’s creating tremendous problems for the courts because it used to be that one judge could efficiently handle the case against five defendants and there would be coordination of the Markman hearing, discovery, and summary judgment motions. Now you have potentially five different judges presiding. You could have five different Markman rulings on the same claims on the same patent. So it’s created a mess, in my opinion, and it is the model of judicial inefficiency.
Inter partes review is another area that people are just trying to get a handle on. You’re basically going to the patent office and having the patent office conduct a mini trial on validity. You’re finding that more defendants are now saying let’s go to the patent office and stay the case that’s still in its early stages. We don’t know how that’s going to work—there is estoppel in the law so that the patent office decision is supposedly going to create an estoppel where it can’t be re-litigated in the court. Your case is going to be bifurcated where part of it is going to be tried in the patent office and maybe the infringement part of it is going to be tried in the court. How is that going to work together?
Stout Journal: We have started to see that individual states are looking at either existing or new consumer protection laws to try to curtail potential abuse by patent assertion entities. Do you have any thoughts on whether this is more of a state issue or a federal issue or whether consumer protection laws are the right way to be dealing with these issues?
Tony Brown: I think it’s a federal issue. It’s a provision of the Constitution that creates the patent system. To get the states involved in this I think is a huge mistake. It will create more problems than it solves. One of the conundrums you have in this business is that if you don’t put someone on notice, then you may potentially waive your rights. With laches and equitable estoppel, if you sit on your rights and you don’t assert them, then eventually you’ll lose your rights. You have to give notice, and you should give notice because if a company is infringing the patent, you want to alert them to it, and maybe they’ll change the design of the product or maybe they’ll figure out they need to pay a royalty or maybe they’ll contest it, whatever it is. The idea that the states are somehow going to prevent you from notifying companies of infringement, I think raises not only First Amendment concerns and federal preemption issues, but it’s just bad policy because you really have to be able to put people on notice. Now, that’s not to say that you can send a thousand letters to a thousand people with a baseless claim. I think that there are ways of dealing with that in the federal system.
Stout Journal: Part of the reason that Vermont is moving forward with its legislation is that at least some of the patent assertion entities that are filing suits against Vermont companies have not done an adequate job of demonstrating that the defendants are infringing. How much of a burden is it for a plaintiff to perform the due diligence before filing a suit to establish infringement to understand whether somebody is actually using the technology?
Tony Brown: You do your due diligence before filing the suit. We prepare very detailed claim charts. We will send a letter to a company saying, “Here’s the patent, here’s our claim chart, here’s your product. It looks like this product infringes. Let’s discuss it. Let’s discuss a license.” We’re inviting a discussion; come back to us, tell us how we’re wrong, tell us what’s incorrect about this claim chart, tell us whatever you want to tell us. More often than not, the response you get is, “we don’t believe we need a license. We respect the intellectual property of other people, sincerely yours.” So what are you going to do? The company does not want to engage in a discussion. They do not want to show you where you’re wrong, and they’re basically telling you to go pound sand. So you have no alternative but to file a complaint, and then they’ll have to set forth their position. And, by the way, if they set forth their position and they convince me that I’m wrong, I’ll drop the suit.
Stout Journal: But I think the abuses that have some of the states up in arms are some people in this space who have just been sending out infringement letters without performing any due diligence, without checking in what way the accused parties are infringing. If that’s going on, what solves that problem?
Tony Brown: I suppose the companies that receive those letters can respond by asking for a claim chart. Let’s see your proof, and see what they produce. If they don’t produce anything, then the companies are totally justified in ignoring the letter. Just because someone sends you a letter, it doesn’t mean you’ve got to send them a check.
Stout Journal: You’re aware of some of the developments in Congress, and that the U.S. Congress is considering bills to deal with patent litigation abuse. Is there anything that you’ve seen in any of these proposed bills that you could get behind, or do you really just want to sit back and see how things develop with the America Invents Act?
Tony Brown: I think I’d like to see how things work out with the America Invents Act before we try to reinvent the wheel again. A number of the provisions in the new proposed legislation are already being implemented by the courts. For example, they want to have a higher pleading standing in the new law so that you have to plead with more specificity. I just went through a case where we amended our complaint three times because the defendants had filed motions to dismiss for failure to state a claim. We ended up with a 40-page complaint with the most detailed claim charts attached to it that you could imagine, and the judge finally said, “I’m not dismissing this case; they’ve stated a claim.”
It used to be that the motion practice was for summary judgment. Now the motion practice starts with a motion to dismiss for failure to state a claim based on the complaint. Before you do anything else, the defense bar is challenging the specificity of your pleading. Now, under federal rules, you are entitled to notice pleading, which means you just have to put them on notice of what the claim is. You don’t have to make your case in the complaint. And the defense bar is saying we want more and more detail, more specifics in order just to get past the motion to dismiss stage. Some of the federal judges are allowing that and some of them are not. But one of the provisions of the new law is—let’s increase the specificity required. Well, that’s happening, and I really think it’s something that’s best left to the discretion of the individual judges.
Stout Journal: What is it about patent owners, whether they are inventors or financial buyers of patents, what is it about the fact that they don’t practice the patent that makes people object to it so much?
Tony Brown: I don’t think people object. I think there is a select group of big high-tech companies that are using that as leverage to try to put the kibosh on the licensing business. Take IBM, for example. IBM is really the original patent troll if you want to use that term. When I got into the business, it was legendary that IBM was pulling down a billion dollars a year of net profits from licensing patents, just from its licensing activity. It was the most profitable element of its business. And it wasn’t just licensing patents that it practiced. Maybe some of them, but they had thousands of patents in different areas, and many of them it didn’t practice. But IBM would go in and have a licensing negotiation with a company and say, look, we’ve got whatever number of patents, and I think you probably infringe some of them, so why don’t you take a license? And that was their negotiating strategy. And no one complained about that.
That’s okay, but little Joe Schmo has a patent and he wants to license it and, oh my god, he’s not making a product? Oh, we can’t let him do that.
Stout Journal: Chief Judge Rader of the Court of Appeals for the Federal Circuit has come out publicly opposed to congressional legislation on patent litigation abuse. He and many other prominent judges believe that the current judges have the authority and the ability to handle these issues themselves. What do you think federal judges can do more effectively to try to curtail perceived patent litigation abuse?
Tony Brown: The Chief Judge also sees the full problem—that litigation abuse is a two-way street and that big company infringers can be just as bad or worse. He calls them “grasshoppers.” Federal judges have a lot of arrows in their quivers. They can kick you out of court faster than your head can spin on a motion to dismiss or a motion for summary judgment. They can hold you in contempt. I think they’ve got plenty of power. There may be some abuse by both sides, but the vast majority of these cases are very complicated, very technical, and it’s not like you can just sit there and say this is a frivolous case. You have Markman hearings and half of them are overturned at the Federal Circuit. That’s how difficult this business is for judges to figure out. Even the judges get it wrong half the time.
Stout Journal: One wrap-up question. Where do you see the future of patent monetization going?
Tony Brown: I’ve thought about this quite a bit, and here’s what my concern is: If Congress and the states keep undercutting the ability of the individual inventor or the small company to license his patents, then I think you’re essentially going to have the “Wal-Martization” of the patent world. Companies like Google and Intellectual Ventures and RPX and Rock Star and Apple and Samsung will become great “conglomerators” of patents because the only place you’ll be able to go with your patent is to one of these companies to sell it. You won’t be able to license it. People like me will be out of business. So what are you going to do with your patent? It’s going to be too onerous to try to license it. Congress will have made it too difficult. It will be too expensive. You won’t be able to find lawyers who will want to handle it, and the risks will be too great.
So the world is going to be full of patent wars between these huge companies, and the independent inventor is going to be out of the picture. No more Edisons or Wright Brothers. It will be disastrous for our patent system. Our patent system has been described by a former head of the PTO, David Kappos, as the greatest engine for innovation the world has ever seen. And it is; because you can create an asset with an idea.
And if you destroy the patent system, then you go back to what we had before, which was trade secrets. People would only disclose their inventions if there was a confidentiality agreement in place. That would be bad because the world wouldn’t know what your invention was unless they contracted with you to see it. You can’t build on top of these things because great inventions engender other inventions, but they have to be disclosed. The patent system allows you to disclose your invention and provides you with protection that people aren’t going to take your idea and use it without paying you. If you take away that element, then you’re back to the dark ages. And by the way, the new director of the PTO is a former Google patent counsel, which also doesn’t bode well for the independent inventor.
Stout Journal: Tony, thank you so much for your time.