PATENT TROLLS - A NEW VERSION OF THE MCDONALD'S HOT COFFEE CASE

Patent Trolls: Do they help or hurt innovation and will new legislation kill them?

PATENT TROLLS -- A NEW VERSION OF
THE MCDONALD’S HOT COFFEE CASE
List presenters who contributed to written materials:

Raymond P. Niro
Niro, Haller & Niro
Chicago, Illinois

I.      INTRODUCTION

Politicians long ago learned that, if you simply identify a villain, you can rally the masses around the notion that the
villain has to be eliminated, reformed or destroyed. In promoting tort reform, for example, some special interest
groups chose the case of Liebeck v. McDonald’s (better known as the McDonald’s hot coffee case) to identify as a
villain the personal injury lawyers who sought recoveries for a woman who spilled hot coffee on herself while sitting
in the passenger seat of a parked car. A New Mexico jury awarded Stella Liebeck $160,000 in consequential
damages to cover her medical expenses and $2.7 million in punitive damages to punish McDonald’s for its conduct.
The trial judge reduced the punitive award to $640,000, but did not eliminate it. The tort reformers had finally found
their villain and the $2.7 million punitive award became the focal point of a crusade to encourage tort reform
nationwide.

Corporate-funded special interest groups, like Citizens Against Lawsuit Abuse, erected billboards reading: “SPILL
HOT COFFEE, WIN MILLIONS: PLAY LAWSUIT LOTTO.” Lobbying groups spent astronomical sums to influence
elections and legislation, all in the name of reigning in “frivolous suits” and “exorbitant windfalls” for plaintiffs. They
even named an award for Ms. Liebeck -- the “Stella Award,” given annually for the most frivolous case of the year.

The tactic worked. In a few years after Stella’s case, over 30 states had instituted caps on non-economic damages.
The Supreme Court, in State Farm v. Campbell, 538 U.S. 408 (2003), overturned a punitive damages award,
claiming that a 4-1 ratio of punitive to compensatory damages was much more constitutionally proper. Some would
argue this was all a good thing. But, there are also those who believe the tragic consequence of this effort was that
consumers are now less protected and corporations less concerned about putting profits ahead of the well-being of
the public. A punitive damages award, after all, was one way to deter bad behavior, whether in the form of medical
malpractice or product liability.

And, of course, like the patent troll talk today, the real hot coffee story got lost in the propaganda:

       •       Stella Liebeck suffered third-degree burns on 6% of her body and lesser burns on 16% of her body.
       •       She endured eight days in the hospital having multiple skin grafts.
       •       McDonald’s knew that a liquid at 190°F would cause third-degree burns in three seconds, yet brewed
               its coffee at 205°F, despite previous complaints and numerous injuries to its customers.

II.    PATENT TROLLS

We now have a new villain in town -- patent trolls. This poster was on display at the recent CES show in Las Vegas,
“Club the Trolls”:

After the President’s State of the Union message in which he promised to rein-in abusive patent litigation practices
so American businesses can remain focused on innovation, the Internet Association cheered the President,
proclaiming that: “The days of patent trolls taking $80 billion a year out of our economy and terrorizing
innovative and hard-working businesses are numbered.” IP Law360, “Obama Praised for Pushing Patent
Reform,” Wickham, A., January 29, 2014. So there you have it: $80 billion a year (up from $20 billion), all caused by
the villainous trolls -- which, most unfortunately, include thousands of hard-working individual inventors (and their
small companies) who lack the resources to take on giant infringers. If the special interests get their way, individual
inventors will soon be extinct, not to be heard from again.

Chief Judge Rader, I believe, got it right in a recent speech he gave before the bar of the Eastern District of Texas --
we need to focus on bad conduct, not on categories of litigants:

       Litigation abuse sometimes invites an equally abusive strategy of correction. This misguided strategy
       attempts to define some patent‐owning entities as the source of the problem. Regardless of whether
       you call them NPEs or PAEs or “trolls” or whatever pejorative term suits your fancy, this definition
       strategy is itself an abuse.

Patent Law and Litigation Abuse, November 1, 2013, Chief Judge Randall R. Rader, p. 8.

III.   WHO IS DRIVING THE ANTI-TROLL MOVEMENT?

Likely tens, if not hundreds, of millions of dollars have been spent by Apple, Google, Intel, Cisco, Microsoft, Sony,
Hewlett-Packard and other special interests to influence Congress, the President and the courts. Interestingly, the
Apple-Google-Intel-Cisco-Microsoft group collectively was granted more than 10,000 United States patents last year,
ranking Fourth, Eleventh, Thirteenth, Eighteenth, Nineteenth and Fortieth on the list of the top patentees. No
individual inventor was even on the list.

Not to pick on IP Law360, but that publication has also become a paid mouthpiece for these special interests. Case
in point: on January 17, 2014, IP Law360 ran an article about a patent troll suit that it claimed was doomed to fail at
the FTC. The authors repeatedly used the words “Patent Troll,” and then just as carefully captioned another article,
“Nortel Patent Buyer Accused of Intimidation Tactics.” The Nortel Patent Buyers, of course, were patent buyers, not
trolls. Yet, the Rockstar Consortium that had purchased Nortel patents, who also makes no products and (like the
evil trolls) sues manufacturers for patent infringement, was called only a “buyer” of patents, not a troll. Could this
possibly be because Rockstar is backed by Apple, Microsoft, Sony, BlackBerry (formerly, Research in Motion) and
others pushing the anti-troll campaign?

What about Hewlett-Packard that formed a separate company that also makes no products but, instead, licenses
and enforces patents it purchased? Or IBM, GE, Texas Instruments, Qualcomm and other giants who routinely
license patents they do not practice for billions of dollars each year. Are they trolls?

IV.    THE PATENT TROLL MYTH

Contrary to the propaganda, the facts show this:

•     Patent trolls (NPEs) are not the reason for the rise in patent suits. As the former head of the PTO, David
Kappos, noted:

       To the disappointment of IP alarmists, these fact-based studies conclude that patent assertion entities
       are not responsible for the recent uptick in patent litigation. The building is not on fire. And complaints
       over the sheer number of patent lawsuits cannot simply be chalked up to “too many trolls.”

IP Law360, “Facts Show Patent Trolls Not Behind Rise In Suits,” January 15, 2014, Kappos, David.

•       Likewise, patent licensing and damage awards for NPEs are not excessive, again, according to the only
analytical study done on the subject:

       This paper offers the first empirical study on royalties paid to NPE licensors. Using royalty rate data
       from RoyaltySource and ktMINE, this study concludes that royalty rates obtained by NPEs are not
       different from those paid to practicing company licensors. This finding contradicts the argument that
       NPEs are systematically overcompensated, at least based on evidence from the license market. The
       conclusion holds true across various model specifications, with or without controlling for the effects of
       major factors such as exclusivity, industries, and upfront payments or other auxiliary payments.

“The Myth and Facts of Patent Troll and Excessive Payment: Have Nonpracticing Entities (NPEs) Been
Overcompensated?” Business Economics, Vol. 47, No. 4, Jiaqing (“Jack”) Lu, p. 235.

No factual evidence and no analytical data supports the argument that NPEs allegedly cost the economy $80 billion
a year. It is pure propaganda.

V.     WHAT ARE THE CONSEQUENCES OF THE ANTI-TROLL CAMPAIGN?

The eBay case gutted the patent property right for individual inventors and their non-manufacturing companies by
making injunctive relief nearly impossible for an NPE. Without the right to exclude, the patent right is far less
valuable. Why? Because the right to exclude is the essence of property. How would you feel if a private party could

force you to sell your house or favorite watch at a whim? Property, at its core, is the right to exclude, which is the
very essence of a patent right. Without it, the playing field can never be leveled.

       Who fears a compulsory license? Certainly not a corporate giant who can protract a lawsuit by as many as 4
to 6 years and afford to pay $5 to $10 million in legal fees. Apple, for example, has $150 billion in cash. Invested at
5%, that yields $7.5 billion a year in interest or a little over $20 million a day. Do you think Apple really worries about
a patent infringement suit brought by a so-called patent troll (even 20 cases a year)? Apple could pay its lawyers
$10 million per case which represents 10 days of interest. One case is a half-day’s interest.

By eliminating the threat of an injunction, they can achieve a Aheads, I win; tails, you lose” situation. As former
Federal Circuit Chief Judge Howard Markey observed years ago, that approach is unfair because infringers should
not be treated like willing licensees: A[an] infringer would have nothing to lose, and everything to gain if he could
count on paying [after trial] only the normal, routine royalty non-infringers might have paid.” Panduit Corp. v. Stahlin
Bros. Fibre Works, 575 F.2d 1152, 1158 (6th Cir. 1978) (opinion written by former Chief Judge Markey of the Federal
Circuit). By eliminating injunctive relief (or making it nearly impossible to obtain), a mandatory license, in effect, is
being dictated. And the little guy, no matter how it gets sugar-coated, suffers.

Also forgotten in the debate about “patent trolls” is the important role played by trial judges. Injunctions are
discretionary, not mandatory. So, too, are increased damage awards after a jury’s finding of willfulness. If there is
something amiss, the trial judge can fix it by granting JMOL, denying an injunction or refusing to increase damages.

Worse, what is now left of patent suits brought by individual inventors, namely damage awards, has been
undermined by a series of Federal Circuit (and Supreme Court) decisions -- Unilock USA v. Microsoft Corp., 632
F.3d 1292 (Fed. Cir. 2011) (setting aside the 25% rule as a starting point for a reasonable royalty); Laser Dynamics,
Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012) (making it impossible to reference an infringer’s sales
volumes and requiring that only the smallest saleable patent-practicing unit be used to determine a proper royalty
base). Of course, Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993) (which wipes out most damages
experts before they even begin to testify) seals the deal. The cumulative impact is that, even if an NPE wins before
a jury (which is becoming less and less likely), the Federal Circuit will take any significant damage award away.

As for willfulness, forget it. The case of In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007), put that to
rest six years ago. See also, Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., 670 F.3d 1171 (Fed. Cir. 2012)
(“the objective determination of recklessness … is best decided by the [district] judge subject to de novo review”);
Spine Solutions, Inc. v. Medtronic Sofamor Danek USA, Inc., 620 F.3d 1305 (Fed. Cir. 2010) (defendant is not
objectively reckless if it relies on a “reasonable” defense). So, there now is really no chance for increased damages
in a patent case brought against a giant infringer. All the giant need do is get a legal opinion saying the accused
patent is either invalid or not infringed.

So what is left? A world in which infringers have little or no risk and, with superior economic power, can simply “grind
out” most individual inventors. Wes Whitmyer (a noted patent attorney) summed up the situation this way -- the deck
is stacked:

       Much of the post-war US economic success has been based on innovation secured by strong
       protection for intellectual property rights. Innovation alone is not enough. Innovation without
       protection just encourages copying. Copyists with lower manufacturing cost will destroy the market
       for any innovative product not protected by strong intellectual property laws.       Innovation drives
       growth, but only when it benefits from strong intellectual property protection. A 2012 US Commerce
       Department report (see http://www.esa.doc.gov/Reports/intellectual-property-and-us-economy-
       industries-focus) concluded that 40 million jobs, or 28 percent of the US workforce depends heavily on
       intellectual property. Nearly 35 percent of US GDP comes from IP-intensive industries. Killing
       patents risks destroying our economic engine and puts our future prosperity at risk.

       … Why should copyists halt unlawful activity if the only penalty is possible payment of a small
       percentage royalty? Even more troubling is that the bigger a company is the more incentive it has to
       infringe—so long as it earns more money infringing than it spends to defend the unlawful activity,
       there is no economic incentive to stop. …

I agree with Wes. In the risk-versus-reward analysis that drives most corporate decisions, the risk now is so minimal
that it makes more sense to litigate, not settle.

VI.     THE LEGISLATIVE ONSLAUGHT

The same people that create a mess of nearly everything they touch are now attacking invention at every turn. I
sometimes ask myself if our Congress is still working for the American people. In 2013, no less than 10 attempts
were made to destroy what’s left of individual invention in America:

       The Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act

       The Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act (H.R. 845) was
       introduced in the House of Representatives on Feb. 26, 2013, and is not currently being considered
       by the House Judiciary Committee in light of the recently passed Innovation Act. The bill attempted to
       put more risk on an NPE by requiring the NPE to post a bond to cover a defendant’s legal fees and
       costs in defending the case.

       The Patent Quality Improvement Act

       The Patent Quality Improvement Act (S.866) was introduced in the Senate on May 5, 2013, and is
       currently referred to the Committee on the Judiciary. This bill would maintain the covered business
       method review program and expand it to all industries instead of just the financial industry.

       The End Anonymous Patents Act

       The End Anonymous Patents Act (H.R. 2024) was introduced in the House of Representatives on
       May 15, 2013, and is not currently being considered by the House Judiciary Committee in light of the
       recently passed Innovation Act. The bill addressed transparency by requiring an NPE to identify the
       real parties in interest.

       The Patent Abuse Reduction Act

       The Patent Abuse Reduction Act (S.1013) was introduced in the Senate on May 21, 2013, and is
       currently referred to the Committee on the Judiciary. The bill heightens the pleading requirements for
       claims of patent infringement requiring the plaintiff to identify the patent claims being asserted, details
       of the asserted infringement, the principal business of the plaintiff, and the real parties in interest.

       This bill also attempts to decrease the lopsided discovery burdens in NPE litigation by having the
       producing party pay for “core documentary evidence” but shifting the cost to produce additional
       discovery to the requesting party. Moreover, the bill stays most discovery efforts until after claim
       construction. Finally, the bill further puts an NPE plaintiff at risk by including a cost and fee-shifting
       provision, unless the loser’s positions were “objectively reasonable and substantially justified.”

       The Patent Litigation and Innovation Act

       The Patent Litigation and Innovation Act (H.R. 2639) was introduced in the House of Representatives
       on July 9, 2013, and is not being currently considered by the House Judiciary Committee in light of the
       recently passed Innovation Act. The bill has similar language to the Senate’s Patent Abuse Reduction
       Act with respect to pleading standards and discovery provisions. Additionally, the bill allows suits
       between an NPE and an end-user to be stayed pending resolution of a suit between the NPE and the
       manufacturer. Finally, the bill provides a court with greater latitude in issuing sanctions for frivolous
       filings.

       The Stopping the Offensive Use of Patents (STOP) Act

       The Stopping the Offensive Use of Patents (STOP) Act (H.R. 2766) was introduced in the House of
       Representatives on July 21, 2013, and is currently referred to the Subcommittee on Courts,

Intellectual Property and the Internet. This bill is similar to the Senate’s Patent Quality Improvement
       Act with respect to expanding the covered business method review program.

       The Innovation Act

       The Innovation Act (H.R. 3309) was introduced in the House of Representatives on Oct. 22, 2013,
       and passed on Dec. 5, 2013, by a 325-91 vote. This bill addresses almost every area of reform raised
       in the previous bills. For example, bill adopts similar language to the Senate’s Patent Abuse
       Reduction Act and the House’s Patent Litigation and Innovation Act with respect to pleading
       standards, discovery costs, delaying discovery until after claim construction, and cost and fee shifting.

       As with the Patent Litigation and Innovation Act, the bill allows suits between an NPE and an end-user
       to be stayed pending resolution of a suit between the NPE and the manufacturer. The Innovation Act
       originally maintained the current scope of the covered business method review program, but that
       provision was recently removed by amendment.

       The Patent Litigation Integrity Act

       The Patent Litigation Integrity Act (S. 1612) was introduced in the Senate on Oct. 29, 2013, and is
       currently referred to the Committee on the Judiciary. The bill has a fee and cost-shifting provision
       similar to the Patent Abuse and Reduction Act but like the House’s SHIELD Act, it requires a patent
       owner to post a bond against the fees.

       The Patent Transparency and Improvements Act

       The Patent Transparency and Improvements Act (S. 1720) was introduced in the Senate on Nov. 17,
       2013, and is currently referred to the Committee on the Judiciary. This bill provides end-user
       protection by a manufacturer similar to the House’s Innovation Act, has various transparency
       provisions similar to the Innovation Act and has a provision allowing the Federal Trade Commission to
       take action against demand letters sent in bad faith.

       The Demand Letter Transparency Act

       Finally, the Demand Letter Transparency Act (H.R. 3540) was introduced in the House of
       Representatives on Nov. 18, 2013, and is currently referred to both the Committee on the Judiciary
       and the Committee on Energy and Commerce. This bill requires demand letters sent on behalf of
       NPEs to over 20 companies to have certain minimum content requirements and be maintained in a
       national database.

See, IP Law360, “10 Ways Congress Tried to Address NPE Litigation In 2013,” Keener, J.J., January 2, 2014.

In Oregon, Nebraska and other states, legislatures are considering or have already passed bills to criminalize the
sending of notice letters to accused infringers -- something federal law requires as a prerequisite to damages.

VII.   THE EXECUTIVE BRANCH WEIGHS IN: KICK THEM WHEN THEY ARE DOWN

Google managed to move its former patent counsel to the role of Deputy Commissioner of Patents. Promptly after
she met with special interest groups in a secret, closed-door meeting, she announced that she was in favor of
supporting innovation through legislation aimed at individual inventors:

       … Going forward, the USPTO will continue to actively engage with our stakeholders, members of
       Congress from both political parties, as well as with others in the administration, to further improve our
       patent and patent litigation systems. That includes supporting Congress’ current consideration of
       legislation to target abusive patent litigation tactics and speed resolution of disputes over IP rights.

http://patentlyo.com/patent/2014/01/administration-prosecution/litigation.html, Crouch, D. No surprise there. Now
we have one side of the USPTO that grants patents and another than takes them away.

VIII.   THE THIRST FOR ATTORNEYS’ FEES

One additional way to run the little guy into the ground is to threaten an award of legal fees at every turn. Of course,
the notion that courts (not legislatures) can best curb abusive practices is fair enough. That makes sense. But,
Arthur Miller, who co-wrote the book on Federal Civil Procedure, made this point in a 2013 NYU Law Review article:

        Bogus caseload statistics are propagated, while empirical data is ignored, and fears are spread by
        claims that there is a litigation explosion in this country and that Americans are paying a litigation tax
        that renders our businesses uncompetitive.

(p. 302). Professor Miller then correctly concluded that his research showed that many advocates believed that a
frivolous case was “any case brought against your client” and that litigation abuse was “anything the opposing lawyer
is doing.” 88 NYU Law Rev. 361.

Now, nearly every case that is decided against a patentee results in a claim that the case was frivolous and a motion
to find the case exceptional under 35 U.S.C. § 285 or subject to sanctions against the opposing lawyer and law firms
under 28 U.S.C. § 1927 or, even worse, the court’s inherent power.

Soon, all the law firms who represent individual inventors and their companies may be forced out of business. That is
what the special interest groups want. And they won’t stop until they get it.

IX.     GOODBYE MR. INVENTOR

It is a given that the pendulum has decidedly swung against the individual inventor in favor of larger companies who
have the resources to file multiple patent applications on an idea or wage the expensive IPR post-grant war.
Meredith Addy notes in a recent article she wrote that:

        There’s a trend here. When the America Invents Act changed “first-to-invent” to “first-to-file,” it favored
        larger companies with a larger investment in R&D, a larger war-chest of inventions in their pipeline, a
        cadre of sophisticated IP counsel in-house and/or on retainer who could prosecute and protect the
        patents, and the financial wherewithal to battle any pretenders to their patent crown. “First-to-file” was
        a potentially debilitating move for smaller and entrepreneurial companies, and it was promoted and
        defended by large technology companies.

        The presence in our marketplace of companies that can assert patents on behalf of smaller inventors
        is not a bad thing in principle—or in practice. As I’ve said before, let’s not throw the innovative baby
        out with the larger tub of muddied water. …

http://www.steptoefederalcircuitbusiness.com/2014/02/the-thirty-nine-steps.

Consider the names of individual inventors who ultimately formed companies to exploit their ideas but initially
manufactured nothing: Westinghouse (air brake), Ford (car), Gillette (razor), Hewlett-Packard (oscillation generator),
Otis (elevator), Harley (motorcycle shock absorber), Colt (revolving gun), Goodrich (tires), Goodyear (synthetic
rubber), Carrier (air treatment), Noyce (Intel), Carlson (Xerox), Eastman (laser printer camera), Land (Polaroid),
Shockley (semiconductor), Kellogg (grain harvester), DuPont (gun powder), Nobel (explosives), the Wright Brothers
(aircraft), Owens (glass), Steinway (pianos), Bessemer (steel), Jacuzzi (hot tub), Smith & Wesson (firearm),
Burroughs (calculator), Carothers (nylon), Curtiss (aircraft), Houdry (catalytic cracker), Marconi (wireless
communication), Goddard (rocket), Diesel (internal combustion engine), Fermi (neutronic reactor), Disney
(animation), Sperry (Gyroscope), Williams (helicopter) and even Abraham Lincoln who was granted U.S. Patent No.
6,469. These are individuals who, in most cases, worked alone, without government or corporate support, yet,
created not just new inventions, but whole new industries that employ millions of people today.

It can be argued, of course, that ultimately some of these inventors became manufacturing companies and that
companies that merely buy patents from individual inventors contribute nothing. But what about small companies
that are struggling to compete against corporate giants and need a strong patent system to level the playing field?

As the inventor of the MRI scanning machine, Dr. Raymond Damadian, observed, it’s the small companies that often
provide the economic spark for new jobs:

       Few Americans realize that the great majority of new jobs created for the public are provided by small
       companies with fewer than 500 employees. From 1981 to 1988, companies with fewer than 500
       employees contributed 11.7 million new jobs to the economy. In this period, America’s small
       companies generated two thirds of all new employment.

Patents Legislation: Hearings Before the Subcommittee On Courts and Intellectual Property of the Committee On the
Judiciary, House of Representatives, 104th Congress, First Session, On H.R. 359, p. 128. What portion of the
Constitution or the patent law reserves the right to obtain and enforce patents exclusively for large manufacturing
companies? And how can an individual or small company compete against a large company that decides to copy
and face the risk of litigation?

So, maybe it’s time to say goodbye to the individual inventor. The patent system will belong only to big business.

X.     A CLOSING THOUGHT

I have been privileged to spend much of my career representing the little guy against the giants. And for that, the
American Lawyer named me one of the top 50 legal innovators in the past 50 years:

       Defense lawyers might be irked to hear it, but Niro has had more influence on big-firm patent litigation
       practices than almost anyone. He made a name for himself by winning a string of eight-digit damages
       awards on contingency for inventor and patent-holding company clients in the late 1990s and early
       2000s. Niro’s detractors may criticize him and myriad copycats as shakedown artists who exploited
       the patent laws to garner outsize damages awards and scare up nuisance settlements, but critics
       don’t often pan Niro’s courtroom skills. He brought a trial lawyer’s approach to the dry and technical
       world of patent law by playing up the role of the inventor before judges and juries.

The Innovators: Counsel to the Trolls: http://www.americanlawyer.com/PubArticleFriendlyTAL.jsp?id=
12026115685092. Who knows if that observation is right or wrong? I don’t really care. But, what makes me think I
did at least a few good things along the way is this comment (made in response to anonymous bloggers’ personal
attacks). It means more to me than any award:

       Mr. Niro successfully represented a friend of mine years ago. This friend, who is now deceased, had
       a patent that had been infringed willfully and with full knowledge. The infringing company thought that
       they could get away with it, since the inventor was independent and without much financial backing.
       I’m sure this was a very small case for Mr. Niro, but it was huge for the inventor, for the concept of fair
       play, and for the purpose of having a patent system in the first place. Thank you, Mr. Niro, sir, for
       what you do. - Randy Landreneau, Inventor.

www.ipwatchdog.com/2012/03/18/an-exclusive-interview-with-ray-niro-mr-patent-litiga-tion/id=22872.          I thank you
back, Randy.

Individual inventors like Randy Landreneau are being given a diminished status, not because of what they did, but
because of who they are and the companies they own. And this is so even though their rights were created by our
Constitution. The special interests are staking out a position they perceive is best for them. But, is it best for America
and is it best for innovation? I think time will prove all the reform and anti-troll propaganda will hurt America and
undermine innovation in our country. It’s a real shame.

                                                      ©Raymond P. Niro 2014