A legal loophole allowing companies to mount fraudulent attacks on patents without fear of punishment—and with no prospect of redress for the victims—has widened of late, a new study shows.  Called the “integrity loophole” by outgoing Rep. Spencer BachusSpencer Thomas BachusBiz groups take victory lap on Ex-Im Bank On The Money: White House files notice of China tariff hikes | Dems cite NYT report in push for Trump tax returns | Trump hits Iran with new sanctions | Trump praises GM for selling shuttered Ohio factory | Ex-Im Bank back at full strength Export-Import Bank back to full strength after Senate confirmations MORE (R – Ala.), this lacuna was created in 2010, when a federal court of appeals seemingly removed all state law protections for inventors whose patents are subjected to “sham” litigation before the Patent and Trademark Office (PTO).  When Congress expanded the PTO’s administrative system for challenging patents, it opened vast new opportunities for abuse, while providing inventors no federal remedy like that once ensured by state law. 

We’re currently witnessing an evolution of abuses in this field.  The classic strategy was to use administrative proceedings for challenging a patent’s validity to keep it from ever being enforced in the courts: companies would play fast and loose with the evidence, falsify key dates or alter some technical diagrams—anything to persuade the PTO to take a second look at the patent and keep it tied up for years.   The new approach does all this, but it also uses these proceedings to turn a profit.   Hence the emergence of the so-called “IPR Troll” (named for one of these administrative procedures, inter partes review), a mirror image of the better known and widely denounced figure of “patent troll.”

IPR Trolls use PTO processes to extort money from inventors; the $37 million “shakedown” of patent owner VirnetX is one recent example.  Reports are surfacing that hedge funds are exploiting the loophole, too, telling inventors: “either pay us, or we’ll file challenges against your patents with the PTO and short your stock as the news reaches Wall Street.” 

If a miscreant marched into an auto dealership and threatened to blow up the place unless he received, say, a Bentley, a Rolls Royce, and a Lamborghini, we would call that extortion.  And in patent law terms, that’s just what happened to my company: we received a demand for three free, transferable licenses to our patent—valuable commodities which the extortionists demanding them obviously intended to resell—or else our patent would be challenged before the PTO.  We refused to yield and a petition attacking our patent’s validity was filed.  Luckily, the PTO realized the petition was meritless and denied it, but in all too many cases the Office acts on the basis of false evidence. 

Why doesn’t the PTO always catch the fraud?  Patents, because they deal with complex technology, are often difficult to comprehend—and this opens a wide berth for fraud masquerading as technical argument.  Justice Breyer noted last term that patent attorneys are “very brilliant” at dressing up baseless arguments in abstract, jargon-laden language; Justice Kennedy agreed that sometimes a judge can study a patent case for weeks, “with all the experts,” only to find “there’s nothing there.”  The same is true at the Patent Trial and Appeals Board (“PTAB”), which administers these proceedings.  Indeed, the Office has acknowledged that “third-party allegations” have at times induced it to issue “improper/unnecessary orders” forcing patents to undergo reexaminations that weren’t actually merited. 

Clearly, there is little reason for confidence that future attacks against my company won’t be forthcoming.  The PTO can do little to deter them beyond sanctioning the attorneys involved, but most often the Office prefers not to delve into these matters.  Veteran patent practitioners will remember the failure in the 1980’s of the PTO’s “fraud squad,” an attempt to self-police by an agency better-suited for dealing with cutting edge science and technology than weighing issues of fraud and intent. 

The courts are the right forum for redress, yet their hands are largely tied.  My company’s attempt to fight back was shut out: the court dismissed our case against the extortionists, holding that we could not even state a claim under state law.  Congress must create a federal remedy empowering the courts to punish IPR trolls and to compensate patent owners subjected to fraud and extortionate demands.

Patent law scholar John R. Thomas has testified that the integrity loophole is a “concern to small business” and urged Congress to pass “legislation that would allow an aggrieved patent holder to obtain relief against parties that have challenged their patents in an inappropriate way.”  He’s right. 

The patent community is arrayed to address patent reform early next year.  Whatever compromise they reach, this is a bipartisan issue that all sides can agree on: the patent system shouldn’t tolerate fraud, and its victims should be compensated. 

Salmon is an attorney based in Glenview, Illinois.