Obama Goes After 'Patent Trolls'

The White House announces executive actions and legislative recommendations Tuesday that aim to protect innovators from frivolous lawsuits.

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By Catherine Clifford

Opinions expressed by Entrepreneur contributors are their own.

President Barack Obama took steps today to protect high-tech startups working to develop sophisticated new technologies.

The White House unveiled a series of executive actions and legislative recommendations Tuesday that aim to protect innovators from being threatened by opportunistic patent-lawyers, known among companies as "patent trolls." In some cases, lawyers hold patents for innovations that they are not intending to create because they are assisting entrepreneurs with legal matters. But in some cases, these lawyers, called patent assertion entities, hold patents for the sole purpose of bringing lawsuits against inventors for infringing upon their rights.

Already invested in their work, many inventors and entrepreneurs settle these cases to avoid the prohibitive costs of going to court and to be able to continue work on their project. The prevalence of these so-called "patent trolls" has surged by 250 percent in the past two years, jumping from 29 percent of all patent infringement suits to 62 percent, according to a report released this week from the White House.

The number of computer and communications patents has risen, and those are often sufficiently vague that there is room for a lawyer to find vulnerable areas in the patent, the report says. Also, before the rise in software-related patent trolling, most patents were held by manufacturers who had no incentive to mar their own company name with patent infringement suits and so would settle cases by cross-licensing.

Related: How to Search for Existing Patents

More than 100,000 companies have faced patent infringement lawsuits in the past year, the report estimates. A patent infringement case is expensive to deal with, even if settled out of court. The median cost of a patent infringement case is $650,000 for smaller cases and for cases fighting over more than $25 million, the median cost rises to more than $5 million, the report found.

What's more, the cases and threat of cases get in the way of the work of entrepreneurs. "The practices of this group of firms, which has come to file 60% of all patent lawsuits in the U.S., act to significantly retard innovation in the United States and result in economic "dead weight loss' in the form of reduced innovation, income, and jobs for the American economy," the report says.

Related: Why Patents Won't Protect You (Video)

In a Google Plus Fireside Hangout in February, Obama surprised and pleased the technology community by admitting that the legislation he passed in 2011 to address the behavior of "patent trolls" went only "halfway to where we need to go." Obama derided these lawyers, saying they "don't actually produce anything themselves. They're just trying to essentially leverage and hijack somebody else's idea and see if they can extort some money out of them." Here's a look at the five executive actions and seven legislative recommendations the White House announced today:

Executive actions:
1. Make "real party-in-interest" the default. The U.S. Patent and Trademark Office will require that patent lawyers disclose and regularly update patent ownership information, including identifying the company that is ultimately controlling the patent. The goal is to prevent patent trolls from hiding behind shell company pseudonyms.
2. Require more specific naming of patents. One way that patent trolls are able to manipulate inventors is by suing under patent lawsuits that are ambiguous. To cut down on overly broad claims, the PTO will develop glossaries and specifications for examiners, especially in the software field, over the coming six months.
3. Protect small-business users of technology. In addition to threatening inventors, patent trolls are tricking Main Street businesses into thinking they have to pay for using a product the business owner may not even be aware is involved in an infringement lawsuit. The President is requiring that the PTO produce new educational materials to help small-business owners know when they may be being swindled.
4. Commit to additional outreach and research. Obama announced six months of events throughout the U.S. to come up with new ideas for updating patent laws. Also, the President says today he will expand the PTO Edison Scholars Program, which aims to bring academics to the PTO to produce more thorough data and research on the issue.
5. Be more stringent in excluding orders. The President ordered the U.S. Intellectual Property Enforcement Coordinator to review and strengthen the processes by which imported goods that infringe on patents are kept out of the U.S.

Related: What Permits and Patents Do I Need to Sell My BBQ Sauce?

Legislation which the President recommends Congress to pursue:
1. Give the PTO and district courts teeth to enforce the "real party-in-interest" disclosure requirement. Obama wants Congress to allow relevant agencies to enforce sanctions if a patent application does not update the patent ownership information.
2. Give district courts more power to award fees. As is allowed for copyright infringement cases, Obama wants Congress to allow attorney's fees to be levied for abusive patent infringement lawsuits.
3. Allow more patents to be reviewed. Obama wants Congress to authorize more patents to be eligible for review by the Patent Trial and Appeals Board.
4. Expand protections for consumers. When a vendor, retailer or manufacturer is involved in a patent infringement suit, temporarily postpone any simultaneous suits against consumers and business owners for using that product. The idea is to protect unaware small-business owners from being forced to pay fines they don't owe.
5. Enforce standards for the International Trade Commission to file an injunction. The ITC has the authority to require that the importation of goods and services be stopped if they violate a patent. Obama wants Congress to be sure that the ITC follows the due process established by the 2006 Supreme Court case eBay Inc. v. MercExchange, which requires a four-part investigation before injunction is filed.
6. Make demand letters publically searchable. Obama wants Congress to require that letters submitted demanding payment in patent infringement cases are available to the public in a searchable database.
7. Allow the ITC hiring flexibility. Obama requests that Congress give the ITC flexibility to hire administrative law judges.

Related: Radicals & Visionaries: Invention vs. Innovation

Catherine Clifford

Senior Entrepreneurship Writer at CNBC

Catherine Clifford is senior entrepreneurship writer at CNBC. She was formerly a senior writer at Entrepreneur.com, the small business reporter at CNNMoney and an assistant in the New York bureau for CNN. Clifford attended Columbia University where she earned a bachelor's degree. She lives in Brooklyn, N.Y. You can follow her on Twitter at @CatClifford.

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