By Morris Panner
In the 1980s and early 1990s a new form of lawsuit abuse – the shareholder strike suit -- hit America’s tech sector. Until Congress stepped in, specialized law firms regularly exploited stock price fluctuations to file crippling legal actions against newly public companies. Today, so-called patent trolls are behind an epidemic of equally abusive patent infringement cases. With a new ruling out of the Federal Circuit, the abuse is about to become even worse, unless Congress or the Supreme Court steps in.
I know about these problems first hand. In June 2000, I became CEO of my first tech start up. Patent troll litigation was just getting going, and within the year, our little company was hit with a frivolous infringement claim.
After the suit was filed, our lawyer told us that just to respond would cost more than $100,000. We didn’t have the money to fight, so we diverted some of our precious seed capital and settled. Like most such cases, it was legal extortion – and it worked.
What my firm experienced was relatively unusual more than a decade ago. It has now become common. Non-Practicing Entities, the formal term for trolls, acquire patents (often thousands of them) but don’t try to use them to produce anything. They lie in wait for someone else to market a legitimate product that they can argue somehow uses their patented invention and file a suit.
According to Gene Sperling, Assistant to the President for Economic Policy and Director of the National Economic Council, more than 60 percent of all patent lawsuits in America are brought by patent trolls. In 2011, victims of these litigations paid $29 billion. This is a particular problem in the digital economy. With the standards for obtaining a software patent far too loose, patents that protect simple business processes have given rise to claims that defy common sense.
The Supreme Court is currently deciding whether to hear an appeal of a decision by the Federal Circuit Court of Appeals that – unless the Supreme Court steps in – would open the door to dubious cases even wider. Limelight Networks v. Akamai Technologies sets two digital heavyweights against each other.
Akamai claims Limelight indirectly used its patented process without permission so customers could receive digital content faster over the Web.
It started as a fairly common corporate grudge match. Two lower courts ruled that Limelight did not infringe. However, on en banc review, a one-vote majority of the Federal Circuit said that Limelight may have infringed by carrying out certain steps of Akamai’s patent while encouraging its customers to perform others.
For years, established legal doctrine has held that a patent covering a process or method was unitary. An accused violator had to use all the patented steps to be liable for infringement. If more than one person or group performed any of the steps, the violator had to have legal control of all of them to be liable. By the same token, if someone else not under the accused infringer’s legal control performed one or more steps in the method, the patent was not violated. The roots of this rule run deep: the principle that a patent covers the whole invention but not the separate parts of it goes back well over a century.
In August 2012, six of the eleven Federal Circuit judges overturned this clear and simple requirement for infringement. They said that a patent may be infringed if all the steps are performed by multiple actors, even if noone is responsible for performing all of the steps. That is a very big change.
It’s the judiciary’s job to interpret the law, not rewrite it. If this expanded definition of infringement is not overturned, the floodgates for frivolous lawsuits will be opened wide. Here is how.
Up until recently, as an entrepreneur, you could look at a patented method and assess whether you (or your agents or contractors) were performing all of the steps in that method. Patents have become too broad and often silly, but at least you could know the rules of the road.
If the Federal Circuit decision stands, as an entrepreneur you can be accused of patent infringement based on the notion that the actions that you perform, along with the actions of others whom you don’t control, infringe the patent. In our digital and networked economy, software and hardware work seamlessly together, and some of the most innovative services in our economy are those that allow users to add their own new ideas. Think of the iPhone and the millions of apps that it has helped to engender. Once a patent troll can target not just the actions of a single defendant but the interactions among service providers, suppliers, and customers, there is no end to the litigation the decision can engender.
Akamai is not a troll. But if this ruling is allowed to stand, the trolls will have obtained one of their most potent weapons to date.
The case hasn’t received the public attention it deserves. I first learned about it from my brother, who is counsel to Limelight. Yet in the past year it has become a hot button for major digital companies like Google as well as emerging entrepreneurs. Rarely do both big and small technology players line up on the same side of any issue, but we all recognize the critical danger this ruling poses.
Popular culture may romanticize Steve Jobs and the Google kids but the true heroes of today’s innovation culture are the far-sighted people who built a rule of law unique in the world.
We are in desperate need of legal rules that help to enable innovation and put a stop to pointless and draining litigation. The Supreme Court is waiting for the Solicitor General’s recommendation on whether to hear Limelight v. Akamai. Whatever the Solicitor General says, the Court should take the case. If it doesn’t, only Congress will be left to get it right. That is not a reassuring alternative.
One way or another, America’s innovation future is at stake. America’s technology entrepreneurs need greater clarity in the nation’s patent rules.
Morris Panner is CEO of DICOM Grid and the former chairman of the Software and Information Industry Association.
