Advertisement

Blog

PAE Litigation Bludgeons Electronics Supply Chain

The electronics supply chain cannot afford to operate in an unfair business environment where a company's patents are subject to litigation from patent assertion entities (PAEs). These businesses don't manufacture products. Instead, they acquire patents solely to extract financial settlements through lawsuits based on questionable claims.

The Obama administration outlined its views in a June paper explaining the serious damage PAEs are inflicting on companies, including those in the electronics industry. According to the paper, the number of lawsuits brought by PAEs or patent trolls has nearly tripled in the last two years and now account 62 percent of all patent infringement lawsuits in America. Additionally, defendants paid $29 billion to PAEs in 2011 — a 400 percent increase from 2005.

PAEs affect the high-tech supply chain
The electronics industry has had its fair share of cases brought by PAEs, which sue not only original equipment manufacturers (OEMs), but also customers that use hardware and software products.

Supply chain executives in the high-tech sector should take note of recent court cases involving PAEs and OEMs. In June, Cisco Systems Inc. and Hewlett-Packard Co. filed separate lawsuits in the US District Court for the Western District of Texas against Innovative Wireless Solutions (IWS), a nonpracticing entity that filed 41 patent infringement lawsuits in April against Starbucks Corp. and many smaller end users of Cisco and HP wireless routers. Both companies want the court to rule that the three patents held by IWS are invalid or uninfringed.

Cisco is still reeling from a Chicago federal judge's decision in February to dismiss legal claims filed against Innovatio IP Ventures LLC by Cisco, Motorola Solutions, and Netgear Inc. That decision highlights the legal challenges electronics companies face as they combat patent trolls.

Innovatio sued approxiamately 20 businesses, including hotels and cafes, and demanded licensing fees. The Chicago company claimed their use of local WiFi networking technology infringed on its patents. Judge James Holderman ruled that Innovatio's aggressive licensing strategy against Cisco, Motorola, and Netgear customers is protected by the US Constitution. Claims from those three companies “do not establish that Innovatio's licensing campaign alleging infringement of the Innovatio patents is a sham.”

PAE litigation is expensive
Electronics companies are paying enormous sums of money to fight patent litigation, both from competitors and PAEs. Mark Chandler, senior vice president, general counsel, and secretary of Cisco, wrote in a blog post for The Hill last month:

Patent assertion entities have long brought frivolous litigation against large enterprises like Cisco in the hope of extracting settlements, but are now also targeting customers in attempts to extort small, hometown businesses including retailer and grocery stores, and startups in order to try to place a needless tax on the venture investment that is the lifeblood of innovation…
Cisco, despite allocating almost $6 billion a year to research and development in the U.S. and employing 20,000 engineers, spends almost $60 million a year on patent-related legal fees. Ten years ago we had a handful of patent cases, almost exclusively involving competitors. Today we are defending almost sixty, none with companies that actually make anything.

Action against PAEs
Though the PAE litigation threat looms large over the electronics supply chain, there are some encouraging signs of action to curb this activity. In June, President Obama issued five executive actions and seven legislative recommendations designed to protect innovators from PAE litigation.

The International Trade Commission, which deals with patent infringement cases, has created a pilot program to determine whether companies that sue for infringement are involved in production, licensing, and research on a large enough scale in the US to meet the requirements for using the courts. Congress is considering legislation that would curb PAE claims by requiring companies to be more specific about their patent definitions and to provide clarity about patent ownership.

Let's hope such measures will protect and reward those responsible for inventing products. Additionally, the technology industry must demand policies that spare the legions of electronics supply chain customers from unfair demands for licensing fees when they use technology manufactured by a company involved in a PAE lawsuit.

As the electronics industry seeks to improve the patent system, the industry must demand legislation to rein in PAEs. Such an effort will create more supply chain efficiency. It will also spur innovation.

What do you think? Share your thoughts below.

9 comments on “PAE Litigation Bludgeons Electronics Supply Chain

  1. _hm
    August 16, 2013

    This is a very complex issue. President Obama has his view, it does not mean it is true. Law maker needs listen to all parties concerned. This is a time proven concept and it has very balanced approach. If you tilt law in favour of biigger organization, they will abuse it much much more. It will not be fair to small real innovator. They are the main source of innovation.

    Arguing to change law becasue it is costly, does not look valid argument. If judge concludes someone abusing current patent law, they can always give bold judgemet to protect innocent party.

     

  2. Hailey Lynne McKeefry
    August 18, 2013

    There seems to be a lot of recent legislation around this topic. I found this list on opensource.com:

    House Judiciary Discussion Draft. Released by House Judiciary Committee Chairman Goodlatte just before Memorial Day, the proposal includes provisions on cost and fee shifting (i.e., changing the economics of litigation that currently benefit PAEs); transparency of patent ownership; protections for end users; makes permanent the 'covered business method' program (Section 18 of the American Invents Act [AIA]); steps that could lead to greater clarity of pleadings and reduce discovery burdens; and various other provisions. Chairman Goodlatte has been a consistent voice for reform of the patent system. This draft is a good 'first step' to get feedback and scope the issues. As noted below, there are several improvements that would make the bill more meaningful to mitigate the significant impact of PAE's on American competitiveness, which “cost our economy billions of dollars each year.”

    S. 1013, the “Patent Abuse Reduction Act.” Introduced by Sen. Cornyn, the bill thoughtfully addresses the issues of cost/fee-shifting; transparency of patent ownership; clarifying pleading standards; the economic imbalance of PAE discovery tactics; and joinder of interested parties. The bill can be expected to be a key proposal when the Senate Judiciary Committee begins its considerations. It has received positive reactions from key voices in the tech and user community.

    S. 886, the “Patent Quality Improvement Act of 2013.”  Authored by Sen. Charles Schumer, the bill enhances the novel transitional program established in Section 18 of the AIA to give parties an alternative to litigation for business method patents involving a 'financial product.' Sen. Schumer's bill makes the program permanent, and expands it beyond its current limited scope of a 'financial product.'

    Senate Judiciary Proposal. This is forthcoming from Chairman Leahy, who is working with others on both sides of the aisle on the Judiciary Committee. Whether its release or introduction occurs before the Senate finishes consideration of the immigration bill (which is a priority of the Judiciary Committee) remains to be seen.

     

    It does seem like there's awareness of both the problem and its complexities. Do you think any of these are useful moves forward?

  3. Hailey Lynne McKeefry
    August 19, 2013

    I just saw this graphic and it's a clear visual of the trends in this area:

     

  4. Hailey Lynne McKeefry
    August 19, 2013

    I don't know the cost of a PAE that goes to trial, but i  imagine its big. Saw another graphic that makes we wonder how much we're spending needlessly on this:

    Source: Office of Administrative of the United States Courts ,

     

     

    Here's the article with more graphics:http://www.ipwatchdog.com/2013/04/09/the-rise-of-patent-litigation-in-america-1980-2012/id=38910/

  5. elctrnx_lyf
    August 22, 2013

    The technology ownership is owned by the organization those who are trying to control the world and make more money rather than benefit the society. In the long term this would result in more and more lawsuits against the technology companies by the firms who just buy the patent rights from small technology companies. And there is a lot of importance from the companies to actually develop the patentable technologies more than the actual products.

  6. The Source
    August 22, 2013

    elctrnx_lyf

    It is very important for the high-tech industry to have the federal government protect intellectual property rights so that those who have nothing to do with an invention are excluded from making, using or offering for sale someone else's patents. PAEs stand in the way of fair business practices and they must be stopped.       

  7. Eldredge
    August 26, 2013

    Hailey,

       Interesting graphic – it does appear that the non-PAE quantity (number od suits) has stayed relatively constant year over year, and the growth in litigation comes almost exclusively from PAE cases. In fact, the non PAE cases are lower from 2008 on, compared to 2006 and 2007. The number of PAE cases looks relatively through 2009, but doubles year over year from 2010 on. That's a rather frightening trend.

  8. Hailey Lynne McKeefry
    August 26, 2013

    @Eldridge, it's a little bit sobering when you see it in color graphics, isn't it?

  9. Eldredge
    August 27, 2013

    Yes, it is, although I think the graph would have even more impact if the order of the stack were switched to place the non-PAE proportion on the bottom – it would be even easier to see that the growth in cases comes exclusively from the PAE fraction.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.