Harvard Business review

It’s Time for the U.S. to Tackle Patent Trolls

Patent trolls are a major economic problem in the U.S., slowing growth and innovation, and costing companies time and money. Director of the USPTO, Kathi Vidal, also has an opportunity to take immediate action that will substantially improve how our patent system functions and advance U.S. innovation. It involves repealing a rule instituted by their predecessor that made it harder for firms being sued by patent trolls to take advantage of special expert judges.

The Biden administration and Congress have recently made a series of commitments to support industries that are of high strategic importance. The Inflation Reduction Act and Chips and Science Act provide much-needed resources to bolster advances in green energy and increase our domestic supply of semiconductors – two critical long-term priorities.   

Yet, there’s another significant challenge facing our innovation economy, one that often goes under reported. Abusive patent lawsuits against some of our most innovative companies are on the rise, forcing more and more successful businesses to delay hiring new workers, raising wages, and developing new products. Instead, they’re forced to spend money defending themselves against meritless accusations. 

The wealthy investors who file these abusive lawsuits, and are often referred to as “patent trolls,” buy up portfolios of broad, unused patents that, in many cases, the U.S. Patent & Trademark Office (USPTO) never should have issued in the first place. They then assert the low-quality patents in lawsuits to accuse others of patent infringement – all this even though the patents being asserted will continue to go unused. 

The impact on American innovation is devastating. According to one study, each year, patent trolls create $29 billion in direct, out-of-pocket costs from the companies they go after. Another study found that the companies that settle with patent trolls, or lose to them in court, wind up reducing investments in research and development by an average of more than $160 million over the next two years.  Massive amounts of money are being drained from the hardworking people who are driving our economy forward to instead line the pockets of wealthy investors who are offering no goods or services of their own.

The problem is especially threatening for progress in areas like the renewable energy sector, an industry where products often rely on hundreds or even thousands of underlying patents. U.S. leadership in green technology is critical both to curb emissions and because renewable energy has the potential to be a hub of innovation and strategic advantage for decades to come.  

The USPTO recognizes the sector’s importance, and its climate change mitigation program will foster research and development in this area. Yet, automakers and other companies generating cutting-edge technology in this sector are constantly forced into battles with patent trolls that drain resources and delay innovation. Letting patent trolls slow down green-energy advancements would be a colossal mistake. 

Critics say that the problem of patent trolling is an invention of large corporations, and that cracking down on patent trolls will mean hurting “the little guy.” These assertions are not backed up by the data: Analysis has shown that almost 60% of the companies sued by patent trolls are small or medium-sized; patent-troll litigation costs smaller companies more relative to their revenue; and when infringement claims are settled out of court, smaller companies again pay patent trolls more relative to their revenue.  

It is past time for Washington to fix this broken part of our patent system and ensure innovators and entrepreneurs have the tools they need not just to get by, but to get ahead.  

Over the long term, the USPTO needs to be resourced to handle the high volume of patent applications it receives and focus on patent quality, only granting patents when an idea is novel, useful, and non-obvious. On average, examiners now only spend 19 hours to reviewing each application. We must also improve transparency in the patent system so that the public knows who the true owners of patents are and patent trolls are prevented from misrepresenting their identities. But the director of the USPTO, Kathi Vidal, also has an opportunity to take immediate action that will substantially improve how our patent system functions and advance U.S. innovation. 

The first step Director Vidal must take is to fully repeal the NHK-Fintiv rule, which was unlawfully implemented by her predecessor. This rule makes it more difficult for innovators targeted by patent trolls to have expert judges at the USPTO determine whether the patent being asserted against them is valid. Those expert judges exist to give businesses and innovators targeted by patent trolls a cheaper, more reliable alternative to litigation; limiting their use is a step backwards. 

In 2011, Congress recognized that our patent system needed a significant overhaul and a large bipartisan majority in the House and Senate passed the Leahy-Smith America Invents Act (AIA). The AIA made a number of changes, shifting the U.S. from a first-to-invent to a first-to-file patent system and creating the review process at the Patent Trial and Appeal Board (PTAB), which allowed expert judges to review patents of questionable validity.  

The AIA had a large positive impact on U.S. economic growth and after 2011 patent troll litigation began to decline. 

But this progress was interrupted by the previous USPTO director, Andrei Iancu, who unilaterally made the Fintiv rule precedential in 2020. Under Fintiv, petitions for PTAB review are denied based on factors unrelated to a petition’s merits. Primary among them, PTAB review is denied if there is parallel litigation already in progress involving the patents in question. For example, a startup gets notified that an LLC that they have never heard of, and that they can’t find much information about, is suing them for patent infringement. If this litigation is expected to begin ahead of a potential PTAB review, then review is declined because litigation is already in process. This is especially troubling because PTAB incorrectly evaluates future trial dates in more than 90% of cases.   

When Congress passed the AIA, we intended for review to be in place as a protection for businesses and innovators who were in this exact position, actively facing infringement claims. For review to be denied due to parallel litigation, it is removed as an option in the instances where it is most valuable. Fintiv was supposedly instituted in the name of efficiency, with the PTAB not getting involved in disputes that the courts were already handling. But, particularly in highly technical matters, PTAB judges are far better equipped to handle disputes than the courts are and needing to proceed with litigation opens up defendants to a massive financial burden and increased risk.   

In essence, Fintiv has forced more companies, including everyone from small startups to large manufacturers, to spend more of their time and resources defending themselves in expensive litigation with the possibility of disastrous outcomes, despite having done nothing wrong.    

Repealing Fintiv would give innovators currently under siege a fairer, less expensive, more efficient option for resolving infringement disputes. It would allow them to spend less of their money hiring lawyers and invest more of it creating jobs, lifting wages, and developing more of the cutting-edge products that catalyze our economy and improve our quality of life. 

Director Vidal’s recent interim guidance signaled the potential for positive action on the Fintiv question, but the USPTO needs to formally repeal this harmful rule as soon as possible.  America’s innovators, workers, and all of us who want to see our economy thrive again will be the better for it. 

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