The biggest challenge facing American small-business owners today is not a lack of ideas or effort; it’s the layered burdens of excessive government regulation and unforeseen expenses. Policymakers should ease this load whenever they can, helping more small businesses overcome death by a thousand costs.
A little-discussed federal agency is taking the opposite tack. The U.S. Patent and Trademark Office has proposed rules that will saddle small- and medium-size businesses with more unexpected lawsuits, and the exorbitant costs that come with them. The proposal ought to be withdrawn before small businesses pay the price.
Imagine being a business owner and receiving a threatening letter from a company you have never heard of. The letter claims that because you use a contactless payment system, or send customers tracking notifications, or use any number of other basic business practices, you are guilty of patent infringement. The letter demands thousands of dollars, or else the company will take you to court. You try looking up the company making these accusations, but can’t find anything about who they are or what line of work they are in. It’s a scary situation, and it’s a reality for too many small businesses.
The companies sending demand letters are non-practicing entities, also known as “patent trolls.” They rely on intimidation and aggressive legal action to convert low-quality patents they pick up on the secondary market into payouts from unsuspecting businesses. Patent trolls account for nearly 60 percent of all patent litigation in the country, and more than half of the defendants they target have annual revenues of less than $25 million.
With legal defenses against patent troll accusations often running north of $1 million, giving in to payment demands can be tempting for smaller businesses. Because of this dynamic, in 2011, Congress established the Patent Trial and Appeal Board at the Patent Office, and it immediately became a crucial mechanism for getting innocent businesses out of the no-win bind. Instead of settling or going to court, the PTAB is a more efficient, less expensive third path. Any member of the public, including defendants sued by trolls, can ask the PTAB to review questionable patents. When PTAB judges discover a patent is low-quality and shouldn’t have been issued, they invalidate it, ending the legal dispute.
In October, the Patent Office released a misguided proposal, which would fundamentally alter how the PTAB operates. If implemented, the rules will hand patent trolls a significant victory at the expense of the 34 million U.S. small businesses.
The Patent Office claims the rules “would not have a significant economic impact on a substantial number of small entities,” but a close read of the proposal, and common sense, reveals otherwise. The Patent Office is suggesting making it much more difficult for petitioners of all stripes to successfully challenge patents. The new practices range from denying review if there is parallel legal action, meaning the PTAB would no longer be a “third path” when small businesses face active patent troll lawsuits, to denying review if a patent’s validity has been ruled on in a prior, unrelated case.
The obvious consequence for small businesses is that a single PTAB challenge to invalidate a patent troll’s low-quality patent will no longer be an option to stop the troll from shaking down hundreds of small businesses. Each defendant will be left to deal with the settle-or-litigate conundrum.
The secondary effects are even worse for small businesses. Strategic, well-funded trolls will now game the system by suing more small businesses earlier in the process. It’s easy to imagine this scenario playing out. Because, under the new rules, trolls will need just one ruling in any venue saying their patent holds up to scrutiny, they will frontload lawsuits against smaller businesses with less expertise and fewer resources. They will then use those cases to insulate their patents from future challenges.
PTAB critics claim the venue favors larger companies. If larger companies can’t access the PTAB, however, they can at least fall back on big legal budgets and intellectual property expertise. The ones left to the wolves will be the small businesses that are protected, either directly or indirectly, by the availability of efficient, cost-effective patent validity review.
The Patent Office announced an extension of the public comment period for its proposed rule, giving more Americans an opportunity to weigh in on the changes. The agency should go one step further and abandon the policy entirely. Otherwise, patent trolls will be emboldened to acquire more patents, send more demand letters, and continue their predatory practices — all at the expense of American small businesses.