In an effort to protect businesses from frivolous patent lawsuits, the House of Representatives recently passed a bill called the Innovation Act by a vote of 325-91. What’s more, the bill passed within two months of being introduced. Soon afterward, the Supreme Court agreed to hear a case that revisits the section of patent law concerning what exactly can be patented in the United States. And this comes just two years after President Barack Obama signed the America Invents Act, which, despite criticism, instituted the greatest reform to the system in nearly 60 years.
Why so much attention to patent reform in such a relatively short period of time? Because “patent trolls” — companies that exist solely to acquire patents and then sue other companies for infringement — are filing more lawsuits than ever, more than 3,000 in 2012 alone. The typical targets are tech companies, startups and multinational corporations, because of the software they use, but brick-and-mortar businesses also get sued. And these companies say all this litigation, or even the threat of it, is severely hampering innovation and dramatically increasing the cost of doing business.
But the problems with the patent system aren’t just with the legal process. Getting a patent in the United States is surprisingly easy. And it’s this ease of acquisition that’s led to a vast amount of patents with no value as innovations.
There’s a patent on sending hyperlinks to mobile phones. There’s one for displaying images on websites and one on serving personalized ads over the Web. Even if the patents weren’t originally intended to cover these ubiquitous technologies, they can be claimed as such because they employ broad, vague language that a lawyer can use to make the case for infringement. David Martin, the founder of M-Cam, a company that analyzes patents to assess their value, believes that about one-third of all active patents fall into this category.
So the patent system is deeply flawed and the U.S. government is trying to fix it. What follows is a look at the problems and the proposed reforms through one patent’s journey from idea to issuance, and then litigation.
U.S. patent No. 5,675,507 describes a simple solution to a problem. A fax message is sent to a central office where it's stored digitally on a server so it can then be viewed in a Web browser.
Phyllis Huster, a consultant who lives in Seattle, claims she conceived of the idea and developed it in the early 1990s with her former colleague Charles Bobo. Huster was a communications consultant at the Emory University Police Department in Atlanta at the time, and Bobo was an email administrator at Coca-Cola.
Huster claims she noticed that detectives in the department were having difficulty sharing digital faxes with one another, so she began drawing diagrams of a system that would allow them to store and view the faxes with a browser. And after developing the idea as she consulted for different companies, she claims Bobo wrote software based on her concepts in 1994.
“I’m sitting there with [an Apple] Newton, with a little PCMCIA card, you know, with the little wireless, running at — literally I think it was 19.9k — on a Bell South modem network,” Huster said in a recent interview. “And I’m able to go to a website and I’m able to pull up a fax TIFF file.”
Huster claims the invention was “revolutionary.” Bobo started a company called NetOffice, which sold subscriptions to the system, and Huster was a consultant. She recalls that roughly 3,000 customers subscribed to the service.
Sounds pretty straightforward so far, right? A couple of people found a problem in the real world, and they developed an idea to solve it. Things became complicated, though, when Bobo decided to apply for a patent on the invention in 1995 and was rejected.
The United States Patent and Trademark Office (USPTO) issues rejections when an examiner finds an invention unoriginal or finds that a similar concept has already been patented. But here’s the first important piece of the patent puzzle to understand: The process does not end there. Instead, a negotiation begins. The applicant can ask the examiner what needs to be added to the application, or what language needs to be changed, in order to have it approved. Even if the examiner issues a “final rejection,” the applicant can keep trying. Bobo’s patent application was rejected on Aug. 30, 1996. On Aug. 28, 1997, after a year of back-and-forth communication with the examiner, the patent was approved.
Daniel Nazer, a staff attorney at the digital rights organization the Electronic Frontier Foundation, said this is not uncommon.
“The insanity of the patent system is that a final rejection is never final,” Nazer said. “The only way to get rid of a patent applicant is to give them a patent.”
After being issued his first patent, Bobo kept applying for subsequent ones related to the fax-to-server idea. He was ultimately granted a total of at least five. This is a practice known as “thicketing,” in which an inventor applies for multiple patents to build a stronger intellectual property. But even after issuing a patent, the USPTO can deem it invalid if there is sufficient evidence of what’s called “prior art,” which is published proof that someone else thought of the same invention first. Prior art can include any public documents, such as books or articles — or previously existing patents.
This is where David Martin and M-Cam sometimes come into the process. M-Cam has a database that includes 90 percent of all the patents that have ever been issued and a matching system that determines how similar they are to a patent in question. Recently, Martin did a search to see if any previously existing patents matched Bobo’s.
He found 5,160 matches.
This is just one of them.
Martin points out that some language in this particular patent is very similar to Bobo's. This patent says it's a "method of integrating voice messages with text messages in an electronic mailing system," and Bobo's says it's a "communications messaging platform."
Neither the America Invents Act nor the version of the Innovation Act that passed the House addresses this problem with the patent system, but the Senate or the Supreme Court could still take action to fix it.
“A ruling may call some of the worst patents out of the system,” said Nazer, adding that the problem isn’t limited to software. A patent was issued recently for a method of filming yoga classes.
The business of litigationThe next chapter in the story is also very common and crucial to understanding the need for reform. In 2004, a company called J2 Global Communications announced that it had acquired Bobo's patent portfolio from his company, NetOffice. J2 Global owns a suite of cloud-based services as well as online publications including PC Magazine, AskMen.com and the popular video game review website IGN. Once J2 Global obtained Bobo’s patents, it began suing companies for infringement.
According to the lawsuits, Bobo’s patents on storing fax messages are now considered patents on Web-based email and messaging — and any company that offers its customers these features could be sued for infringement. J2 handled its own suits for five years before it began outsourcing the licensing and litigation of the Bobo patents to Unified Messaging Solutions, a subsidiary of the Acacia Research Group, in 2009. Acacia is one of the largest patent-licensing firms in the country.
Lawsuits abound
One provision of the America Invents Act, instituted in 2011, required that patent infringement lawsuits could only be filed against one company at a time.
J2 Global had been filing an average of just over three lawsuits per year since 2004, sometimes against large groups of companies, before outsourcing the licensing and litigation of the Bobo patents to Acacia. After the America Invents Act kicked in, Acacia's subsidiary filed lawsuits against more than 40 companies in 2012.
Cases closing quickly
Out-of-court settlements are not a matter of public record, and defendants are typically required to sign non-disclosure agreements upon settling. But many of J2's and UMS's cases have been closed within a year, indicating that the parties involved likely made a settlement agreement, according to intellectual property attorney and consultant Tom Ewing.
The cases "almost certainly settled before trial," Ewing said. "Patent cases take years to try to a final judgment." And few of these lawsuits were open for more than 12 months.
J2 Global's net income and the business of litigation
In 2011, after J2 Global began outsourcing its licensing and litigation business to the Acacia Research Group, J2's net income rose by more than $30 million over the previous year, according to earnings reports filed with the SEC.
While it is not clear what portion of J2's net income comes from patent licensing, a recent lawsuit filed against J2 Global alleges that it could be as much as 90 percent.
J2 Global had been filling infringement lawsuits over Bobo’s patents for five years when it handed over its licensing and litigation business in to Unified Messaging Solutions, a subsidiary of the Acacia Research Group, in 2009. Acacia is one of the largest patent-licensing firms in the country.
Once Acacia took over, it brought the number of lawsuits filed over Bobo’s patents from an average of five per year to nearly 70 in 2012.
Out-of-court settlements are not a matter of public record, and defendants are typically required to sign non-disclosure agreements upon settling. But many of J2's and UMS's cases have been quickly dismissed "with prejudice," indicating that the parties involved made a settlement agreement.
Tom Ewing, an intellectual property attorney and consultant, said those cases "almost certainly settled before trial — especially if the date [the lawsuits] closed is roughly within a year of the case being filed."
In 2011, the year J2 Global began outsourcing its licensing and litigation business to the Acacia Research Group, J2's net income rose by more than $30 million over the previous year, according to earnings reports filed with the SEC.
The reports do not identify what portion of J2's net income comes from patent licensing.
Most companies hit with patent infringement litigation opt to settle out of court and pay a licensing fee to the patent holder rather than mount a costly legal defense. An executive at one company that was sued by Unified Messaging Solutions, who spoke with Al Jazeera America on condition of anonymity, said that companies like these bank on the fear of those high legal costs.
“It’s basically blackmail,” said the executive. “In my mind they’re essentially just crooks.”
The executive added that the cost of this sort of litigation is more than just financial, especially for smaller businesses.
“It’s a major distraction. Instead of worrying about all the good things you can do to build your business, it becomes an issue that does require the senior leadership team’s attention.”
J2 Global Communications did not respond to requests for comment.
The Innovation Act aims to resolve the issue of litigation costs with a provision that requires plaintiffs to pay defendants’ legal fees if the case is found to “have no reasonable basis in law and fact.” The hope is that this will encourage defendants to go to court and prove these patents invalid. Still, a defendant would have to cover its own costs until the case is closed, which is more than enough to run many small companies out of business. To help remedy this, the legislation also requires lower costs in the discovery process and allows small businesses to postpone litigation while larger companies go to court over the same infringement.
The big revealThe Innovation Act also includes a sort of unmasking provision. This is another huge problem with the current system. If you were to look at a recent lawsuit over Bobo’s patents you wouldn’t know that J2 Global Communications, the parent company of PC Magazine and IGN, had anything to do with it. The plaintiff in the suits is Unified Messaging Solutions, one of the more than 50 subsidiaries owned by Acacia, the company J2 Global outsourced its licensing and litigation to. (Acacia confirmed this arrangement with Al Jazeera America.)
The Innovation Act requires that plaintiffs reveal the actual owner of a patent before litigation begins so that the parties who stand to benefit are known.
So Unifed Messaging Solutions is suing companies on behalf of Acacia, which is in business with J2 Global, which bought the patents from Charles Bobo. What about Phyllis Huster, the person who claims to have conceived of the idea in the first place? She’s suing Charles Bobo and J2 Global because she was not named in any of the patents he was awarded. She says that although she and Bobo had discussed patenting the technology, she didn’t know that he actually went through with it. Huster hopes the court will rule that she’s an inventor or co-inventor of the patents.
Reached by phone, Charles Bobo declined to comment, citing ongoing litigation.
In the meantime, Huster is applying for a patent on her own technology that allows restaurant customers to order food and pay for it with their smartphones. She’s currently revising her second rejection from the Patent Office.