As patent trolls continue to wreak havoc on American businesses, some have pointed to the Supreme Court’s June ruling in Alice Corporation v. CLS Bank International as having solved all our problems. Such an assertion is absurd.
The Supreme Court’s unanimous ruling in Alice and the subsequent lower court decisions were an important step in invalidating a significant number of patents that should never have been issued, but there are several reasons why this alone is not enough. To truly stop trolls from taking advantage of imbalances in our patent litigation system and strong-arming productive companies, Congress must pass comprehensive patent reform legislation.
The Alice decision potentially throws out patents that offer little in the way of invention other than the notion to “do it on a computer.” Alice Corporation had a patent for implementing escrow payments on a computer. But escrow payments are an ancient technique for securing payment and there is nothing particularly inventive about the idea of performing escrow transactions on a computer. There may be over 100,000 such patents affected by the Alice decision and these are some of the worst used by patent trolls.
However, these are not the only patents fueling the surge in patent trolling. There are over 2.7 million patents in force today. Many of these also should never have been granted and are still available for opportunistic litigation. Just last month, one troll sued several retailers for selling, not for manufacturing, a bicycle basket for dogs.
The best estimates suggest that patent litigation might fall 10 to 20 percent this year compared to 2013. That is an important step in the right direction, but it is still only a single step. The number of patent lawsuits filed in 2013 was up 13 percent over 2012 and up over 700 percent since 1982. We have a lot further to go in reducing wasteful litigation before the patent system returns to promoting innovation instead of discouraging it.
Indeed, patent lawsuits filed by trolls cost operating companies over $29 billion in out-of-pocket costs; when things like employee distraction and lost business are included, that number jumps to $80 billion per year. It is not the large corporations fronting these costs either. Eighty-two percent of companies that are targeted by trolls have annual revenues of less than $100 million.
Furthermore, the Alice ruling does not prevent patent trolls from demanding payments based on the cost of avoiding litigation. And that is how a lot of trolls operate. When you consider that an in-court defense can cost a small or medium company an average of $1.75 million per case, it is no wonder many companies choose to settle before any court action begins. Only legislation can stop this shake down. It is important that Congress act.
Trolls are likely to adapt to the Alice decision just like they have adapted to other cases that the Supreme Court has decided since 2000. For example, after the 2006 eBay v. MercExchange ruling which ended automatic injunctions in patent cases, some thought this would end the troll business model; instead, lawsuits filed by trolls increased significantly. According to one study, these suits represented 22 percent of all patent litigation in 2007. Five years later that number had jumped to 40 percent. The Supreme Court has been moving patent law in the right direction, but given the large amounts of money at stake and the ability of trolls to adapt, the Court alone cannot solve this problem.
Unless Congress passes strong reform legislation that addresses the costly litigation that is at the heart of the patent troll business model, and it is signed into law by the president, trolls will continue to pose a threat to American inventors, innovation, businesses and our economy.
Bessen, a former software developer and CEO, is a lecturer at Boston University School of Law and co-author of the book “Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk.”