Thursday saw lawmakers busy themselves with the issue of patent reform surrounding a bill introduced by Representative Peter DeFazio, an Oregon Democrat, which would raise the stack on any party bringing an infringement case that was not also a “practicing entity.” As complicated as all that may sound, the heart of the bill is targeted at shifting the cost of litigation to a party that does not actually use the patent but still brings suit and loses. Major technology firms including Cisco Systems, Inc. (NASDAQ:CSCO), Apple Inc. (NASDAQ:AAPL) , and Google Inc (NASDAQ:GOOG) all support the bill because each spends millions every year defending these cases. Still, the proposed law poses some real hazards that ultimately outweigh its benefit as written.
The new legislation is targeted specifically at patent litigation enforcement companies — aka PLECs, or “patent trolls” as they are more affectionately known by the companies that they harass and annoy. A PLEC does not actually make anything, but rather hunts for patents that it believes are being infringed and then files lawsuits. In rare cases, the original patent holder — the inventor of the patented technology — is a party to the suit, but in most cases, the PLEC buys the patent for itself and then goes about enforcing it.
The best-known patent troll case, and the one which brought the practice en vogue, was one that involved a judgment against Research In Motion Ltd (NASDAQ:BBRY) (then Research In Motion), in which it was ordered to pay $612.5 million to NTP for patents the smartphone maker had infringed. What made that case especially egregious was the fact that Research In Motion had independently developed the technology and not acted in bad faith. Furthermore, the U.S. Patent Office had issued NTP “non-final rejections” of the patents held by NTP but had not processed the matter quickly enough to protect RIM. The judgment was the largest patent ruling in history at the time in was given, having only recently fallen to the Apple Inc. (NASDAQ:AAPL) ruling in the Samsung case.
On the other side of this battle are the actual technology companies like BlackBerry and Cisco Systems, Inc. (NASDAQ:CSCO) and Google Inc (NASDAQ:GOOG) that uses these patents to protect the things that they make. Last fall, The New York Times did an in-depth review of the issue:
In the smartphone industry alone, according to a Stanford University analysis, as much as $20 billion was spent on patent litigation and patent purchases in the last two years — an amount equal to eight Mars rover missions. Last year, for the first time, spending by Apple Inc. (NASDAQ:AAPL) and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings.
Cisco Systems, Inc. (NASDAQ:CSCO) reported that it spent $50 million last year to defend 50 baseless cases. Clearly the cost of patent litigation is out of control and some type of reform is appropriate. The very existence of PLECs is premised on exploiting inefficiencies in the system and allowing non-productive opportunists to profit from them.
The new law and the American Rule
Under the terms of the new law, a party that brings an unsuccessful patent suit may be ordered to pay the legal fees of the company it sues if the judge determines that such relief is appropriate. The plaintiff would be automatically exempted from such a determination if the original inventor or a university was a party to the suit. More significantly, if the party bringing suit is actively involved in the manufacture of a product that relies on the patent, this cost-shifting option would not come into play.
The problem with the entire concept is that in the U.S., we follow what is called the American Rule. Under the American Rule, all parties are responsible for paying their own legal fees. This differs from the English Rule under which the losing party is responsible for the legal fees of the winner. The concept behind the American Rule is that injured parties should not be chilled from bringing legitimate cases by the fear that if they lose they may be forced to bear the crushing legal expenses of larger defendants. In general, we Americans cannot help but root for, or at least try to protect, the little guy.
Rep. John Conyers, D-Mich., said: “We have a measure before us that the plaintiff pays and the defendant who might be an alleged patent infringer pays nothing. This is disturbing.” What this comment highlights is the idea that putting a law on the books that subverts the American Rule should be somewhat offensive to us all. While the aim of the law is to effectuate important patent reform, this may not be the best way to accomplish it.
Each of the above companies has made full-throated supports of the new law. This makes sense given the ever-rising cost that these nuisance suits represent. While this issue is not likely to be resolved in the immediate term, it warrants the attention of all technology investors.
The article Cisco, Apple, and Google Join Forces on Patent Law originally appeared on Fool.com and is written by Doug Ehrman.
Fool contributor Doug Ehrman has no position in any stocks mentioned. The Motley Fool recommends Apple, Cisco Systems, and Google. The Motley Fool owns shares of Apple and Google.
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