Missing link: Patent trolls get caught because judge does his job

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Patent trolls are regarded by critics as a kind of plague. As a rule, they buy or inherit industrial property rights for more or less decisive "inventions" that they have not made themselves. They use them to issue warnings to small and large companies, demanding injunctive relief and usually also high damages. The strategy often works if the affected parties find going to court too complicated and expensive. In this way, the pure rights holders deliberately abuse weaknesses in the patent system and undermine it bit by bit.

Alongside Germany, the USA is considered to be particularly lucrative for patent trolls. 96% of all patent infringement proceedings in the United States originate from litigious exploitation companies that "harass" those affected with their behavior, the Federal Trade Commission (FTC) found back in 2016. The US trade regulator was therefore already pushing for reforms at the time. According to the study, 88% of the industrial property rights cited in legal disputes were in the information and communication technologies sector. Over 75 percent of these were software patents. However, there is no united front in the USA against owners of often questionable patents who do not manufacture their own products and only want to collect money.

The excesses of the phenomenon are currently highlighted by a case brought to light by the US civil rights organization Electronic Frontier Foundation (EFF). In 2022, three companies with strange names and no clear business purpose other than patent disputes filed dozens of lawsuits in the US federal court in Delaware. They accused companies of all sizes such as Reddit, Bloomberg, Tastemade and Skillshare of patent infringement. Some of these lawsuits were based on patent claims for fundamental aspects of modern life. These included, for example, an industrial property right relating to the process of recording working hours via an app.

Food truck operator as a straw man

The plaintiff companies – Mellaconic IP, Backertop Licensing and Nimitz Technologies – were apparently keen to sell the patents at the expense of third parties. However, the cases they filed soon took an unusual turn, which in itself should be the rule. The presiding federal judge of Delaware, Colm Connolly, was actually only carrying out his judicial review duties and demanded further information about the patents and their ownership.

Connolly thus triggered an avalanche of findings and countermeasures. According to the EFF, one of the alleged patent holders is a completely unrelated food truck operator called Hau Bui. He was promised "passive income" – i.e. easy money –. However, he was only entitled to a small portion of the income generated by the lawsuits. The wife of a lawyer at IP Edge turned out to be another owner of significant property rights. This is the law firm associated with all three plaintiffs and specializing in the exploitation of intellectual property rights. The offshoot Mavexar also belongs to this firm.

Following a comprehensive investigation, Connolly initially established that the organizations bringing the lawsuits were letterbox companies. He accused the lawyers associated with them of breaching professional ethics. The judge pointed out that they may have misled Bui, a fast food vendor, about his potential personal liability in the case.

Insights into a "wild" rip-off scheme

Connolly also concluded that IP Edge was the "de facto owner" of the patents asserted in court, but had "gone to great lengths" to conceal its involvement. He stated: IP Edge had arranged for the patents to be transferred to the shell companies, which the firm had "set up under the names of relatively inexperienced individuals". These had been recruited by the office manager of the law firm, Linh Deitz. The judge also reported three IP Edge attorneys to the Texas Supreme Court's Committee on the Unauthorized Practice of Law for engaging in "unauthorized practice of law" in the state. He also reported those responsible to the US Department of Justice and demanded an investigation into individuals associated with IP Edge and Maxevar.

The EFF speaks of a "wild patent troll system". The lawyers involved had questioned Connolly's authority to continue his research. As transparency in federal courts is essential and applies to all parties, the activists, together with two other associations of patent law reformers, submitted a statement in support of the judge. According to the statement, "the public has a right – and a need –to know who controls and benefits from proceedings in publicly funded courts. Companies that have already been victims of patent trolls and the Chamber of Commerce also intervened with similar submissions.

The Court of Appeal subsequently confirmed Connolly's authority to take a closer look at the case in July. This resulted in the solicitors involved being referred to the disciplinary board of their respective professional bodies. One of the licensing companies and its alleged owner made a final attempt to turn the case in their favor despite this clear announcement. In July, however, the Court of Appeals for the District of Washington, which is responsible for patent matters, ruled that investigating Backertop Licensing and ordering the alleged owner to testify was "an appropriate means of investigating possible misconduct".

Hair-raising details made public

According to the EFF, such judicial investigations should be mandatory in the opaque world of patent trolls. Hair-raising details had come to light in court. For example, Nimitz had asserted a single US patent – with the number 7,848,328 against eleven companies. When Connolly asked the alleged owner of the licensing company to testify in court, he was unable to say anything about the content or acquisition of the industrial property claim. He did not even know the name of the patent ("Broadcast Content Encapsulation"). When asked which technology was covered by it, he admitted: "I have not examined it sufficiently to know". In any case, "no money was involved" in the acquisition of the claim.

The Nimitz broadband patent originally came from the Finnish mobile phone supplier Nokia, which assigned this and several other similar intellectual property rights to France Brevets, a French state investment fund, in 2013. This in turn transferred the claim in 2021 to a US company called Burley Licensing, which is linked to IP Edge. Foodtruck owner Bui signed this contract on behalf of Burley.

France Brevets was founded in 2009 with 100 million euros in seed capital from the French government to manage intellectual property rights. The fund was to receive 35 percent of all revenues related to the "monetization and enforcement" of the patent claims in this case. Burley, in turn, undertook to file at least one patent infringement suit within one year and to generate "total gross revenues of at least 100,000 US dollars" within 24 months. Otherwise, the patent rights would revert to France Brevets.

French fund got heavily involved

Burley then founded Nimitz –, a company with no assets other than the one patent. The licensing company received a postal address from a branch of office equipment supplier Staples in Frisco, Texas, and transferred the industrial property rights to the subsidiary in August 2021, while the obligations to France Brevets remained unchanged until the fund was closed in 2022.

It is worrying that patent lawsuits are often funded by companies that have no real interest in innovation, the EFF emphasizes. It is even more worrying when organizations supported by foreign governments, such as France Brevets, manipulate the US patent system for profit.

Nothing is yet known about the progress of Connolly's referrals to the supervisory bodies. Neither the Department of Justice nor the various state bar associations generally speak publicly about ongoing investigations, Joe Mullin of the EFF told heise online. "So we won't know the results of the investigations unless they release indictments or other results."

Basic rulings of the Supreme Court under fire

Every year, hundreds of patent lawsuits are filed in the USA over everyday internet activities. They concern, for example, the viewing of online advertising, the display of picture menus, the sharing of fitness data or the sale via special product directories or of organic products.

The Supreme Court has already raised the bar for software patents significantly with its landmark rulings in Alice v. CLS Bank andMayo v. Prometheus. Methods that only require a computer for their applicability are therefore not sufficient to turn an abstract idea into a patentable invention. The commonplace approach of "let's do it with a computer" should therefore not lead to success in a patent application.

However, there are repeated attempts to circumvent or override the decisions of the supreme court. In 2019, for example, Andrei Iancu, then Director of the US Patent Office appointed by Donald Trump, published drafts for new guidelines for internal examiners, which were intended to make industrial property rights for "computer-implemented inventions" acceptable again. Most recently, two bills in the US Congress made headlines that would also turn back the clock.

Making the patent system great again

One of these is the Patent Eligibility Restoration Act (PERA), which is pending in the Senate and the House of Representatives in various inter-party versions. It would remove key restrictions on patents in the field of computer technology from the Alice ruling. One of the initiators, Republican Representative Kevin Kiley, explained that the USA currently has a particularly restrictive patent system due to "confusing Supreme Court rulings". PERA would cover a wider variety of inventions "that foreign nations like China are already allowing their inventors to patent".

Joseph Heino, patent attorney at the law firm Amundsen Davis, doesn't think so: according to him, inconsistent case decisions were one of the reasons why the Court of Appeals in Washington was founded in 1982. Legislators are proposing to remove the novelty requirement and leave only the usefulness requirement. The innovativeness of an invention would then only have to be examined in accordance with a further clause of the Patent Act.

If this is intended to enable inventors in the USA to patent a greater variety of inventions, PERA will fail, Heino points out. However, the proposal expands the basis for attacks on patentability. PERA could weaken effective protective measures – especially in view of new, rapidly developing technologies. The EFF also criticizes that the draft would also expand the patenting of human genes – although the Supreme Court also essentially blocked this in 2013.

Musk is no friend of patents

The second controversial legislative initiative is the Prevail Act. This is intended to restrict access to reexamination proceedings for previously granted protection claims to individuals and companies that have been directly threatened or sued over a patent. The EFF and other non-profit and membership-based organizations such as Unified Patents or the Linux Foundation would no longer be allowed to get involved, although they already brought down a "podcasting patent" via this route in 2013, among other things. The law would also introduce other changes to the patent challenge procedure that would almost exclusively benefit trolls and a few large rights holders.

PERA and the Prevail Act were supposed to be approved by the Senate Judiciary Committee in mid-November and then passed by the full House. However, they were taken off the agenda at the last minute. What will happen under Trump is still up in the air. His close advisor Elon Musk has often expressed his conviction that patents only serve to "stifle progress".

The entrepreneur himself has only applied for a few dozen such industrial property rights in order to publicize the innovations they contain in a secure manner. In general, patents are "for the weak", Musk once said. There are even rumours circulating on X that he could abolish the US Patent Office with its bureaucracy-reducing institution Doge.

Unitary patent as the great unknown

In Germany, the Bundestag passed a bill in 2021 to simplify and modernize patent law. Its aim is to somewhat limit the sharp sword of injunctive relief under patent law for reasons of proportionality and thus make it more difficult for trolls. According to the ruling of the Federal Court of Justice (BGH) in the heat exchanger case in 2016, it is already the case in principle that a court injunction may not be issued if it would cause "disproportionate hardship". The legislator now wanted to ensure that this previously rarely used corrective with the option of proportionality considerations is also better applied in court practice. Little is yet known about the effects of the amendment. They are likely to be limited.

Another unknown is the new European unitary patent, which will be launched in mid-2023. The Förderverein für eine freie informationelle Infrastruktur (FFII) has long warned that large US corporations and other patent trolls in particular could sue small and medium-sized companies without a large portfolio of industrial property rights in the EU to the ground via the special jurisdiction associated with it. According to him, software patents in particular, which are also contested in Europe, would be easier to enforce as a result of the unified jurisdiction.

(mack)