The White House today announced “major steps to improve innovation in high tech patents” by restricting activities of “patent assertion entities,” also known as “patent trolls.” The list included five executive actions and seven legislative recommendations.

The announcement is available here.

Also today, the National Economic Council and Council of Economic Advisers released a report, entitled “Patent Assertion and U.S. Innovation,” [pdf] that found significant harm to the economy from these types of firms and made recommendations to address them.

“Specific policies,” the report said, “should focus on fostering clearer patents with a high standard of novelty and non-obviousness, reducing disparity in the costs of litigation for patent owners and technology users, and increasing the adaptability of the innovation system to challenges posed by new technologies and new business models, would likely have a similar effect today.”

Patent assertion entities (PAEs) are firms that amass patents and sue others for infringement of those patents, but do not typically manufacture anything themselves (and so cannot reciprocally be sued for infringing others’ patents). The threat – or reality – of patent lawsuits has been seen as stifling innovation.

Following the 2011 passage of the America Invents Act (AIA) reforming US patent law, President Obama said in February 2013 that US “efforts at patent reform only went about halfway to where we need to go.” The next needed step was to pull together stakeholders and find consensus on “smarter patent laws.”

The executive actions included: 1) requiring patent applicants and owners to regularly update information about who really controls a patent; 2) new training to US Patent and Trademark Office (USPTO) examiners on improving clarity of claims, especially in the software field; 3) a website to help educate end-users facing demands from a possible trolls; 4) expanded outreach efforts and more data and research regarding patent policies and abusive litigation; and 5) an interagency review of procedures of Customs and Border Protection and the International Trade Commission to ensure transparency and effectiveness in exclusion orders barring importation of infringing goods.

The legislative recommendations to the US Congress included:

1. Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking PTO review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance.

2. Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases).

3. Expand the PTO’s transitional program for covered business method patents to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board (PTAB).

4. Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use.  Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer.

5. Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts.

6. Use demand letter transparency to help curb abusive suits, incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public.

7. Ensure the ITC has adequate flexibility in hiring qualified Administrative Law Judges.

Meanwhile, Intellectual Ventures, perhaps the largest of the so-called PAEs, today announced several patent infringement complaints against another target of popular scorn, financial services companies. Intellectual Ventures (IV) filed complaints against JP Morgan Chase and Fifth Third Bank, a week after it filed complaints against PNC and First National Bank of Omaha. “We have attempted to engage in licensing discussions with each of these companies, but our efforts to do a business deal have not been successful,” a spokesperson said. IV published a statement to its blog, IV Insights.

As to the White House announcement, IV said it is still reviewing today’s announcement on patent reform.

Reactions

Available reactions from US stakeholders appeared to be generally positive.

Gary Shapiro, president and CEO of the Consumer Electronics Association (CEA), gave a vivid response, stating: “President Obama’s decisive action today against Patent Assertion Entities (also known as patent trolls), is on the side of innovation and job creation and against the spineless parasites of society who ruin American businesses.”

“Obama’s strong action specifically directs the Patent and Trademark Office to determine the ultimate corporate owner when patents are filed and allows the court greater discretion in awarding attorney fees for spurious patent litigation. The President also urges Congress to pursue legislative approaches to curbing patent trolls, including protection from end users and ‘loser pays’ fee shifting,” he said.

“The President’s actions are appropriate and necessary given the rise in threats of lawsuits and actual suits against millions of American businesses who have done nothing wrong other than use common Web tools or try to create and sell products incorporating common technology,” Shapiro said. “Businesses ranging from the smallest startup to the largest Fortune 500 company are suffering from the enormous waste that the threat of litigation and actual litigation are causing. Each one of these threats must be taken seriously by a company. The cost of fighting these suits comes directly off a company’s bottom line and requires time and resources to be taken away from research and the hiring of Americans.”

“Patent troll litigation now dominates all patent litigation. Additionally, they are often brought by overseas investors and law firms who extort businesses that calculate that it is cheaper to settle rather than to pursue the six- or seven-figure costs against defending a patent claim,” he said.

Charles Duan, director of the Patent Reform Project at Public Knowledge, said in a statement: “As we have seen in recent weeks, abusive patent practices are serious issues that have attracted attention from lawmakers. We are pleased that the administration introduces new reform proposals, and also supports many of the ideas presented in legislation currently proposed by Senators Cornyn and Schumer, and Representatives Goodlatte, Deutsch, DeFazio, and Chaffetz. Additionally, the five executive actions address issues such as patent quality and International Trade Commission enforcement of patents, patent issues which have posed serious problems for American consumers and businesses.” He called on Congress to follow through.

Matt Tanielian, executive director of the ITC Working Group, a group of more than a dozen companies working to reform the ITC, stated: “A critical element of the patent reform plan announced today is its call for action on the growing abuse of the International Trade Commission by patent trolls. The plan calls for creating more consistency between the ITC and the courts under the eBay decision. A more equitable standard for obtaining an injunction, as called for by the White House, would make it far harder for PAEs to use the ITC process as a means to extort licensing fees from legitimate businesses. The White House clearly recognizes that patent trolls are increasingly using the ITC as a parallel, and sometimes primary, venue for going after businesses operating in the U.S. In order to truly stem the tide of abusive patent litigation, Congress must address the abuse problem both in the courts and at the ITC.”

The Computer & Communications Industry Association (CCIA) said “the most important executive order targets overly broad patents and would give patent examiners the training and the tools they need so they will refrain from approving those patents to begin with. The goal would be to eliminate a large group of poor quality patents so trolls won’t have the tool to abuse the system in the future. Other proposals would help address the problem of trolls using threats of legal action on shaky grounds to extract money from legitimate companies that can’t afford to go to court.”

CCIA CEO and President Ed Black said in the statement: “These White House proposals should offer real relief for companies that for too long have been had to navigate a draining, expensive and unfair regulatory system that has become unbalanced by those seeking to abuse it. The Administration’s announcement is recognition that the patent system is out of control and not functioning as its founders intended. The patent system is no longer about rights, or even who is right in court, but too often who has the funds to use the legal system and patents as weapons against innovative US companies. We need a balanced patent system that is based on a true cost benefit analysis of this regulatory regime intended to promote not hinder innovation.”

Matt Smith, a partner with Foley & Lardner, in a statement identified some key points in the announcement. He said the White House is “clearly articulating the direction in which it wishes patent law to move.  This is unusual on the heels of a major piece of patent reform legislation. Certain of the recommendations made by the White House could, depending on implementation, significantly impact the balance of power between patent owners and accused infringers.”

He also said that while the legislative recommendations have the potential to be much more powerful, the executive actions may ultimately have more impact because they do not need congressional approval and are much more likely to be implemented. “It may be difficult to muster sufficient energy in Congress for these proposals so soon after passage of the 2011 America Invents Act,” he said.

Smith also pointed specifically to legislative recommendation 4 as potentially “very significant.” “Depending on implementation,” he said, “it could exempt retailers from liability for patent infringement if they purchase “off-the-shelf” products for resale. This would force patent owners to target the manufacturers or upstream suppliers. This could be a positive step, because it might put liability in the hands of the party that has the power to re-design the product. In some cases, however, there might be no one left in the United States who would be liable for patent infringement, thus allowing manufacturers to take advantage of the U.S. market without having to worry about patent infringement.”

Legislative recommendation 5 also could be “very significant,” Smith said. “If the ITC were to apply the Ebay v. MercExchange test, the chances of a non-competitor obtaining relief at the ITC would go down significantly. This would make the ITC relatively unattractive in disputes between non-competitors, even where no patent troll is involved.”

Finally, Smith pointed to the second executive action as potentially “quite significant.” That’s because “if the PTO limits ‘functional claiming’ in an extreme way, patents to technology based on software might disappear, because it is difficult to claim software without using a functional description.”

[Update:] Vern Winters, partner with Sidley Austin LLP, said: “The president’s proposals reflect a balanced and nuanced approach to a complex set of problems. As the economic data cited in the white paper reflects, the problems from PAE litigation are quite significant. The proposal to require that exclusion orders in the ITC be subject to the same requirements as permanent injunction orders in the district courts would restore balance and address the forum-shopping problems that have recently arisen, with more PAEs turning to the ITC rather than the district courts.”

[Update:] At least one critic of the proposal, US patent attorney Greg Aharonian, issued comments on his list suggesting that the measures will not address the real underlying problems with the quality of patent issued by the USPTO. He said the tightening of functional claiming aimed at software patents, and creating glossaries, is a “pablum proposal” because the issue has been addressed constantly over the years. In addition, he said, “neither the courts nor the PTO has ever properly defined ‘functional’. So how can applicants be expected to write better ‘functional’ claims, and how can examiners narrow-down more ‘functional’ claims, if there is no glossary as to what ‘functional’ means. Or what ‘abstract’ means. Or what ‘obvious’ means.”

Aharonian also took issue with the proposed change to “allow sanctions on litigants who file lawsuits deemed abusive by courts.” He asked what definition of “abusive” judges should use, beyond a lawsuit filed over an expired patent. The real question is why many of the patents get approved in the first place, he said.

He also said that the proposal would be useless against the significant money “paid as blackmail to trolls happens outside of the courts.” “Nothing meaningful will ever happen until new measures are allowed that can be applied to the big granddaddy trolls such as IBM. Read the March 17, 1997 Business Week article on IBM’s trolling – it’s where everyone else learned the game being played – 16 years ago,” he said. While IBM rarely, if ever, sues a company in court, it instead has a lucrative practice of sending numerous patents to companies for the consideration until they give in and “license” part of IBM’s portfolio.

Aharonian predicted that the real intent of the plan is get support for more legislation in piecemeal fashion, starting with business method patents (legislative recommendation 3), then for all computer-related patents (which he said make up 50 percent of all issued patents), and finally for all patents.

“Once again,” he said, “no where in the proposals is there anything to reform PTO management, to hold PTO management more accountable, to get rid of the crap patents that cause all of the post-grant headaches. Why? Why not treat the disease, instead of the symptoms? Doesn’t Obama really care about the patent system?”