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Patent Changes Pending

Patents are designed to encourage innovation. At least that's a common theory, but the result isn't always so clear. The premise goes that the innovator gets about 20 years of exclusive rights to the innovation in exchange for its public disclosure. It was Alexander Graham Bell's patent of the telephone that not only led to the Bell System empire, but an entirely new, innovative industry.

Increasingly the patent system is considered a barrier to innovation. As Time reports: "In 2011, Apple and Google spent more money on patent litigation and defensive patent acquisitions than on research and development." When patent litigation overshadows actual innovation, we have a problem. It's a problem that continues to grow; typically there had been about 3,000 patent infringement suits filed each year, but that number has been climbing, to about 4,500 in 2012.

Infringement lawsuits are becoming so lucrative that a new breed of firm exists for the sole purpose of acquiring patents, and then filing infringement claims. These firms are not-so-affectionately known as patent trolls and they are proliferating across industries. Last February, in a Google Hangout, President Obama said of patent trolls, "they're just trying to essentially leverage and hijack somebody else's idea and see if they can extort some money out of them."

Patent trolls accounted for 40% of intellectual property lawsuits in 2012, according to a study by Robin Feldman of the University of California Hastings College of Law in San Francisco. The patent trolls aren't just suing big firms either. The state of Vermont filed a suit against MPHJ Technology Investments for unfair and deceptive practices against Vermont businesses of all sizes. MPHJ had been using more than 40 shell companies to threaten infringement suits in Vermont--the technology in question: Scanning and emailing documents, something that, although it is a common practice, could be construed as the patented intellectual property of MPHJ.

(Editor's note: This post originally misstated the status of the Vermont suit.)

Upon receiving a demand letter threatening a lawsuit, most companies perform a quick cost-benefit analysis that compares the cost of litigation to the cost of settling or licensing. Even when confident of no wrongdoing, it may be more cost-effective to simply agree to licensing. That's what trolls want.

Earlier this month, the White House took action to improve the situation by issuing five executive orders and suggested regulatory changes. The White House wants to make life harder for trolls, but the regulatory changes are where the juice is at.

The executive orders are a good start and have already taken effect. The measures are intended to increase the burden on those claiming infringement, and to make such claims more transparent (instead of using shell companies). The White House wants Congress to legislate that patent case penalties include total legal fees be paid by the non-prevailing party.

The crux of the problem really isn't trolls. Innovators should be allowed to sell their patents as one means of monetization. Specialized licensing firms, known as non practicing entities (NPEs), should be allowed to buy them. The problem is that the line between a respectable NPE and a troll is a hard one to draw. It's a challenge to separate them legally, but fighting "trolls" has become one of those rare bipartisan agendas.

The bigger opportunity has to do with vague, broad, or trivial patents that create a cloud of ambiguity that clogs the courts. The White House is asking the Patent and Trademark Office to keep patents narrow and specific. Patents carry a lot of weight, but don't undergo an exhaustive review process. The Patent Office is a national monopoly and its review process generally only includes information from the applicant's side. Several have proposed a more formal post-grant review process as a more balanced/adversarial approach to test validity. The current post-grant review process is very complex.

Last March the US changed its patent approach to align with the rest of world to recognize "first to file" instead of "first to invent." That change alone is expected to significantly reduce patent lawsuits.

Dave Michels is a Contributing Editor and analyst at TalkingPointz

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