Troll hunters: The U.S. war on intellectual property and its potential impact on the global economy

By Maurice N. Ross*

By Michael Darcy Brown, Stock Photo 45685957

The U.S. has long been the world’s leader in protecting intellectual property rights, often criticizing China, Russia, India, and countries in Latin America for lack of respect for patents, copyrights, and other intellectual property rights. China, India, and to a lesser extent Russia have made significant progress towards acknowledging the importance of respecting intellectual property rights in international trade. Ironically, however, a war is being waged within the U.S. to weaken U.S. intellectual property right laws and make it more difficult to enforce U.S. patents, copyrights, and trademarks against counterfeiters and other infringers. The outcome of this war—being waged in both federal and state legislatures within the United States—could have a profound impact on international trade. 

The “founding fathers” of the United States believed that it was crucial for the economic success of America’s fledgling democracy to provide economic incentives for those who devote their energies to developing new technologies as well as works of art, music, and literature. Thus, pursuant to Article I, Section 8 of the U.S. Constitution, Congress was empowered: “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”  

Exercising its constitutional authority, Congress enacted federal patent law, copyright law, and trademark/trade-dress laws based on the assumption that providing exclusive property rights to technological innovators, writers, artists, and musicians would be critical for assuring the advancement of science, technology, and the arts. This basic assumption, embodied by Article 1, Section 8 of the Constitution, and underlying U.S. patent, copyright, and trademark/trade-dress law, is under attack by an “anti-troll” movement that has found a sympathetic ear in the White House, in Congress and in state legislatures. 

Officials in two states, Vermont and Nebraska, have recently directly challenged the federal patent and copyright systems by prohibiting standard enforcement tactics utilized by attorneys for patent and copyright owners for decades.[1] Legislation is pending in Congress that would fundamentally change patent laws to penalize patent owners who bring unsuccessful infringement suits by making them responsible for their adversary’s attorneys’ fees, an outcome that under currently law is rare and limited to “exceptional cases.” See 35 U.S.C. Section 285. If this legislation passes, it would fundamentally reduce the economic value of U.S. patents, copyrights, and trademarks, making it much more difficult to enforce U.S. intellectual property rights against companies which import or export counterfeit products.

The internet and related digital technologies have dramatically reduced the costs of sharing new works of science, literature, art, and music with others, since sharing can be accomplished across oceans and continents with a mere click of a button. With this reduction in the costs of distribution has arisen the belief among many that they should no longer have to pay to use emerging technologies. Further, a distinction is now made in U.S. culture between those companies who manufacture and distribute tangible products and those who profit by developing and licensing their technologies to others.  

While few doubt that companies which manufacture and distribute products should be permitted to aggressively enforce their intellectual property rights against infringers, there is a groundswell of opposition within the United States to the activities of “non-practicing entities” (“NPE’s”) (i.e., individuals, companies, and others who do not use their intellectual property to manufacture and produce products) in licensing and enforcing their intellectual property rights against infringers. 

Pharmaceutical companies who enforce their patent rights against foreign-based generic pharmaceutical companies are considered to be engaging in acceptable activity, whereas NPE’s, individual inventors, universities, and their attorneys who attempt to enforce their patent rights are characterized as “trolls." Traditional book publishers, record companies or movie studios who aggressively enforce their copyrights against their competitors are considered to be engaging in acceptable activity, but individual copyright owners or filmmakers who retain counsel to pursue small businesses and individuals who illegally download and distribute their copyrighted materials are considered copyright “trolls."

Indeed, there is an unprecedented level of opposition to patent and copyright infringement enforcement techniques that have been traditionally considered entirely acceptable within the United States. Techniques long considered acceptable in the U.S. include: (a) cease and desist letters from lawyers who take cases on a contingency fee basis (these cases have been the bread and butter of intellectual property enforcement efforts for decades); (b) copyright portfolio and patent portfolio consolidation by companies for purposes of licensing and enforcement (indeed, licensing and enforcement of copyrights is the main business of music publishing companies); and (c) licensing and commercialization activities by universities and other academic institutions, many of which have developed in-house intellectual property licensing departments whose sole mission has been developing streams of revenues from intellectual property rights arising from the research and scholarly activities of faculty members. 

Today, these long accepted practices on behalf of NPE’s are under attack by those who are quick to characterize them as “trolls” simply because they do not produce the products or publish the works of authorship that are protected by the intellectual property (IP) rights, but license those rights to others.

Especially contentious have been efforts by NPE’s and their lawyers to enforce intellectual property rights against individuals and small businesses. Some have asserted that standard “cease and desist” and settlement demand letters are acts of extortion. The basis for this argument is that litigation fees and expenses often exceed the economic value of the patent and copyright infringement damages at issue—thus they argue that it is extortionate to demand settlement of relatively minor claims for damages based upon the threat that the defendant may be exposed to litigation costs (and liability for prevailing party attorneys’ fees) far in excess of the actual damages. It is certainly frightening when an individual or small business gets a formal letter from reputable legal counsel threatening copyright litigation in which statutory damages of up to $150,000 will be sought for willful infringement of each “work” allegedly infringed, together with the copyright owner’s attorneys’ fees (which far exceed statutory damages if the case goes court). 

But it seems to be unreasonable for anti-troll advocates to assert that such cease and desist/demand letters constitute extortion. Rather, in most cases, such cease and desist letters operate as a low-cost alternative to prohibitively expensive litigation. By giving infringers the opportunity to settle the matter prior to incurring litigation costs, these letters often result in a fair and efficient resolution of the disputes.

Some argue that the system as it currently exists is unfair because innocent individuals and companies are sometimes wrongly accused of infringement but are forced to settle rather than incur the substantial legal costs associated with defending themselves. But claims that innocent individuals and companies are wrongly accused of infringement seem vastly exaggerated. Further, it is not in the interest of plaintiff’s counsel in these cases to pursue innocent defendants—if a defendant has evidence of innocence, in most situations, plaintiff’s counsel will gladly choose to drop the case rather than engage in expensive litigation. Anti-troll advocates fail to recognize that the trolls and their lawyers have no incentive to spend thousands of dollars on losing cases.

Proposals have been made by the U.S Copyright Office and others to develop small claims courts and/or alternative federal judicial proceedings for litigating patent and copyright cases involving relatively modest amounts of money. A streamlined, low-cost judicial alternative seems like an attractive alternative to the radical proposals we have seen from anti-troll activists to ban NPE’s and their counsel from engaging in the traditional “cease and desist/settlement” process. However, it seems unlikely given current budget constraints and partisan gridlock in Washington, D.C., that such an alternative system could be appropriately engineered, funded, and implemented.

Further, at the heart of the anti-troll movement is deep skepticism about the fundamental philosophy underlying the U.S. intellectual property law system: that it is necessary for government to create and enforce intellectual property rights to provide incentives for innovation. Many argue that patent, copyright, and trademark systems are impediments to innovation, blocking the free sharing and exchange of technological advancements and thereby hindering research and development and international cooperation among nations. 

Anti-troll advocates in the U.S. are requesting dramatic legislative changes at the state and federal level, which taken to their logical extremes would be to repeal most intellectual property laws. The anti-troll advocates often find themselves aligned intellectually with the approach to intellectual property rights of nations such as China, India, and Russia that have long been accused by the U.S. of having weak intellectual property law systems that improperly and unfairly encourage production of counterfeit products or unlicensed generic pharmaceuticals. Indeed, it is ironic that as China, Russia, and India begin to develop legal frameworks which acknowledge the important role of intellectual property rights in economic development, there is a strong movement within the United States to undermine and devalue intellectual property rights.

Fortunately, however, there are equally committed and well-funded voices within the United States who are committed to strengthening intellectual property laws and their enforcement. The pharmaceutical, entertainment, publishing, and media industries (among others) consider themselves to be dependent upon strong intellectual property law enforcement for profitability and, in some cases, survival. Thus, the anti-troll movement faces powerful forces which would likely attempt to block any effort to radically change U.S. intellectual property laws. Over the next decade, the war on intellectual property within the United States is likely to continue to meet strong resistance from those who believe that the U.S. founding fathers had it right when they determined to empower Congress to enact a system providing powerful economic incentives to those who do the hard work of advancing the sciences and the useful arts.

---

* Maurice N. Ross is an attorney for Barton LLP. If you would like to know more about this posting please contact him for additional information.

[1] Attorney Generals in Vermont and Nebraska have recently demanded that law firms stop sending traditional “cease and desist” letters targeting business that allegedly infringe patents, relying on state consumer protection legislation that many believe is preempted by Federal law at least as applied to “trolls.” See Stephen Jugle, “Patent Troll Behavior Continues To Attract Attention”, Lexology (September 5, 2013). In May, 2013, Vermont enacted anti-troll legislation, (Act No.0044) directed to “bad faith” efforts by patent owners and their lawyers to enforce patents against Vermont companies and individuals. 

The law creates a multi-factor test for use by Vermont courts to determine when acts constitute “bad faith assertions.” The law lists several non-exhaustive factors that courts may consider as evidence of bad faith, including sending demand letters that lack basic information about the infringement claim or that seek payment of unreasonable royalty fees. Targets of bad faith assertions can bring actions (in state or federal district court) to obtain compensatory damages and exemplary damages, plus costs and fees. Vermont's Attorney General simultaneously took aggressive actions under existing Vermont consumer protection law against an alleged “troll” company that sent out demand letters to thousands of small businesses in Vermont and around the country. 

More recently, the Attorney General of Nebraska issued a cease and desist order against a prominent Nebraska law firm, Farney Daniels PC, for representing “patent trolls” and bringing suits against Nebraska-based defendants. A Federal District Court has recently enjoined the Attorney General of Nebraska from enforcing this cease and desist order on the ground that it constitutes an illegal prior restraint in violation of the First Amendment and is preempted by Federal patent law. Activision TV, Inc. v. Pinnacle Bancorp, Inc., No. 8:13CV215, slip op. (Sept. 30, 2013).