Frivolous Patent Litigation Threatens The Technology Revolution – Pacific Research Institute

Frivolous Patent Litigation Threatens The Technology Revolution

Patent trolls have been a plague on innovators for too long. Patent trolls are entities that obtain patents (sometimes obscure patents) for the sole purpose of threatening or filing lawsuits in court and then using the prospect of costly litigation to extort unwarranted payouts from an innovative company. The risks and costs created by these entities are a clear and present danger to entrepreneurship and innovation.

A goal of public policy should be to make it more costly for frivolous patent lawsuits to be filed, while still ensuring that legitimate patent rights are protected. Unfortunately, the current environment does not get this balance right, to the detriment of many cutting-edge firms and industries.

The technology industry, particularly companies inventing and employing the next generation 5G technologies, is extremely vulnerable to this problem because a single IT product typically contains thousands of patents.

That is highly problematic for our economy. 5G technology enables higher capacity network connections that are faster, more reliable, and more responsive. The 5G revolution will improve the functionality of our current telecommunications system and facilitate significant business efficiencies that include faster communications and improved logistical operations. Through advances such as improved intelligence and new options for command and control, it will be invaluable for national defense. 5G technologies will also enable all types of new technologies to emerge, from self-driving cars to smart toothbrushes.

The invention and rollout of 5G technologies are not cheap, however. The total spending on just the rollout of the cutting edge technologies runs into the trillions of dollars. With so much on the line, it is imperative that the patent system protect the rights of patent holders while preventing inappropriate patent litigation from becoming an unnecessary burden on the entrepreneurial companies driving the nation’s 5G revolution forward.

Unfortunately, the ability to launch litigation through the U.S. International Trade Commission (ITC) is throwing off this careful balance. Take the current litigation between Ericsson and Samsung as an example.

Ericsson and Samsung had a patent cross-license agreement for 5G technologies that recently expired. Such an arrangement is commonplace among high-tech companies that produce complex products. A renewal agreement does not require costly litigation. However, in practice, Ericsson has launched costly litigation against its contract partners each time an agreement is being re-upped. In the latest iteration of these tactics, Ericsson filed complaints right after the agreement expired in both the ITC and District Court in Texas, not to mention across Europe.

The filing with the ITC is the most disconcerting, as its purpose seems to be to gain negotiating leverage.

According to the ITC, its mission is to help domestic industries stave off problematic import competition, including “in proceedings involving imports claimed to injure a domestic industry or violate U.S. intellectual property rights”. The problem arises, however, because the scope of the complaints the ITC is willing to adjudicate is expanding, and the ITC’s failure to enforce the requirement of “legitimate domestic industry interests” means the hearings are unfairly tilted in favor of the complainant.  In this case, Ericsson, a Swedish company, does not even make the products it is trying to block from the US market.

As Bret Swanson from the American Enterprise Institute noted, the ITC can impose harsh penalties that include an “exclusion order” that would prohibit the respondent company from importing the infringing product into the U.S. until the dispute is resolved. The exceptionally large revenue losses that would result from a complete ban on the sale of a product pressure respondents to agree to terms that excessively favor the complainant.

Not surprisingly, based on the ITC’s own data, many patent trolls are using litigation at the ITC for precisely these goals. According to the ITC data, non-practicing entities (NPEs, or entities that do not manufacturer products and many of whom are patent trolls) filed nearly one-fifth of all ITC investigations between 2007 and 2020.

The incentives to use ITC litigation to gain leverage during licensing negotiations create large economic costs. Directly, such litigation wastes millions of dollars that could otherwise be invested in ushering in the 5G revolution.

Indirectly, the current litigation environment creates a feedback loop that encourages patent trolls to file more litigation. This obviously increases the amount of money wasted on frivolous litigation. The risks from excessive litigation also hobble innovative firms by causing them to operate in a manner that minimizes their litigation costs rather than maximizing their innovation efforts and technological efficiencies.

Equally troubling, all the costs the ITC is currently imposing are unnecessary. The federal judiciary is well equipped to enforce the rights of valid patent holders. There is no reason to offer a second front to litigate private parties’ contract questions through the ITC, especially with the enormous risk of market preclusion hanging over the dispute.

Frivolous lawsuits have been a pall hanging over the innovative tech sector for too long. Congress can help alleviate this problem by reforming ITC processes, limiting its scope, and increasing the costs for filing a frivolous lawsuit.

I am a Senior Fellow in Business and Economics at the Pacific Research Institute and the Director of PRI’s Center for Medical Economics and Innovation. My research explores the connection between macroeconomic policies and economic outcomes, with a focus on the health care and energy industries. I have over 25 years of experience advising Fortune 500 companies, medium and small businesses, and trade associations. I received my Ph.D. in economics from George Mason University.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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