While the Economy Slows, Abusive Patent Litigation Is On the Rise

Most of us are adjusting to a new normal, thanks to COVID-19. At the same time, while companies across the country are navigating increasing economic uncertainty, many smaller companies — and especially tech startups — are also finding new ways to enable our remote lifestyle.

But it unfortunately appears to be business as usual for abusive patent litigation. Not only are patent assertion entities — sometimes referred to as “patent trolls” — filing new lawsuits everyday, they are filing even more this year than last. And they are suing startups, smaller tech companies and small businesses.

To put it lightly, this is not the time for abusive patent litigation. It creates cost, distraction and uncertainty for any small business, and is now being layered on top of the inherent challenges of running a business during a pandemic. While the government could, for example, grant compulsory licenses to asserted patents, direct federal intervention in volumes of lawsuits across the country seems, at best, unlikely. Solving the growing problem of PAE litigation requires balanced policies that promote patent quality.

The problem: PAE lawsuits are on the rise, and startups and small businesses are being targeted.

PAEs acquire (i.e., purchase) patents for the sole purpose of extracting settlements from other companies. They do not make products or offer services. And if they lose a case, the risks are low — at most they will be out the cost of litigation. This business model means they can pursue very weak cases, and assert low-quality patents that should not have been issued in the first place. Unsurprisingly, PAEs have a negative effect on innovation: They cost innovators billions of dollars each year, declining venture capital investment can be attributed to PAEs and this type of abusive litigation leads to an overall reduction in research and development spending.

While PAEs are nothing new, abusive litigation is on the rise. In the first four months of 2020, there has been a 20 percent increase in PAE litigation compared to the same time last year. And there has been a 30 percent increase this year, compared to the first four months of 2018.

Even a slightly deeper dive casts this problem into sharper relief. Many of us are working from home, moving medical visits online, maneuvering remote education and childcare and increasing online purchases. To make that possible, we are relying on technologies, platforms and services pioneered by startups and smaller tech companies. But those same companies that make our stay-home life possible are the ones that PAEs are suing.

Just in the past two months, one PAE has targeted several small telemedicine companies, including one that is pivoting to make it easier and cheaper to care for uninfected patients outside the clinic. Another PAE has targeted an employee communications platform, while a third is targeting a childhood learning technology company.

Also on the list of companies defending PAE suits are several music streaming services. Not only are we looking to these companies for entertainment, but artists rely on vibrant and diverse platforms to reach their audience.

Likewise, one PAE is suing an e-commerce platform that, even before the pandemic, was making it possible for small retail businesses to create online stores. Now, when retailers are dependent on online sales, the platform is focused on helping its customers weather the pandemic.

Every PAE lawsuit is a distraction from productive efforts. Especially for startups, it means pulling money and resources away from product development, engineer salaries and business growth.

The pandemic compounds those problems. The startup community is already reporting massive layoffs, and even more established tech firms have had to implement hiring freezes, modify contracts and negotiate rent concessions. There are credible concerns that many startups and small businesses will have to shut their doors forever. Even if they are financially stable, the companies being sued by PAEs now are being forced to take some of what they might spend to serve another customer or save another job and instead use that to defend against a PAE’s lawsuit.

What to do about it: Promote patent quality and ensure startups can access affordable, efficient defenses.

The PAE business thrives on low-quality patents and an unbalanced playing field in litigation. The fact that they are taking advantage of current economic turmoil, and increasing litigation right now, hammers home the importance of patent quality and balance in the law.

In recent years, a variety of positive developments empowered startups and small businesses to fight back against abusive patent assertions. For example, in 2006, the Supreme Court confirmed that patent owners should have to prove they are entitled to injunctive relief. In 2011, Congress created inter partes review, a more affordable mechanism through which the patent office can take a second look at low-quality patents and cancel those that should not have issued in the first place. And district courts across the country have adopted local rules that require parties to be forthcoming with their case theories, barring PAEs from obfuscating the facts and dragging cases out to drive up costs. When courts and litigants can resolve cases efficiently, it frees companies up to get back to work and reduces the deadweight loss to innovation.

Unfortunately, some in Congress and at the United States Patent and Trademark Office are trying to unwind these balanced policies. Policymakers should not be making it easier to enforce low-quality patents, or making it harder for startups to access affordable defenses in meritless cases.

Instead, as the current reality of increasing PAE activity during the pandemic makes clear, Congress and the USPTO should continue to put patent quality front and center. If there are fewer bad patents out there, then there will be fewer PAEs who can scoop them up and then deploy them against the innovative startups and smaller tech companies that have become core to our day-to-day quarantine survival and sanity, and will be essential engines of our economic recovery.

Abby Rives is IP counsel at Engine, a policy, advocacy and research organization supporting startups. 

Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.