WASHINGTON – Abusive patent lawsuits are on the rise and Main Street companies represented by J.C. Penney Co. Inc. outlined the scope of the problem on Capitol Hill Thursday as senators considered legislation to curb rampant litigation costing companies millions of dollars.
The Senate Judiciary Committee held a hearing to examine the “Patent Act,” introduced last week, and to hear from companies that have been impacted by abusive lawsuits filed by companies that have been dubbed “patent trolls.”
“Abusive patent litigation is having a serious impact on small companies, innovators, manufacturers, Main Street businesses, high-tech firms and consumers,” said Senate Judiciary Committee chairman Chuck Grassley (R., Iowa). “The volume of abusive patent litigation has exploded in recent years. By some accounts it’s costing the U.S. economy upwards of $80 billion annually. Bad actors are exploiting the high costs of patent litigation and using deceptive tactics to prey on businesses.”
The “trolls” are also referred to as NPEs, or non-practicing entities, and are defined by the National Retail Federation as firms that do not make products but buy obscure patents and then threaten to sue or actually sue companies that use the technology unless they pay a licensing fee. The NRF cochairs the United for Patent Reform coalition with Oracle and has made patent reform a top priority this year.
“J.C. Penney’s business model is simple, but we use a complex array of technologies to enhance our customers’ shopping experience,” Diane Lettelleir, senior management counsel, litigation, at Penney’s, said at the hearing. “J.C. Penney, like countless other Main Street businesses, has been ravaged by the exponential growth and aggressiveness of patent troll industries. While abusive patent companies initially targeted the high-tech industry, they expanded their focus to include Main Street businesses. In fact, in 2012 for the first time, NPEs reportedly sued more Main Street companies than technology companies.”
Lettelleir said the “abusive patentees” prey on businesses that only use the technology because they often lack the technical or legal expertise to fight patent infringement. She noted that the abusive companies then strategically offer settlements to retailers and other types of businesses set below the cost of defense in a lawsuit.
Penney’s has been a defendant in 30 “NPE” lawsuits in the last six years and has received “countless” threatening demand letters seeking settlement.
“None of these NPE lawsuits or demand letters relates to items we sell,” Lettelleir said. “Every claim relates to the technology we used to operate.”
She said Penney’s respects the right of patent holders and inventors to protect against infringement, but said the new bill will protect against abusive patent claims.
Grassley and Sen. Patrick Leahy (D., Vt.) introduced the Patent Act to protect retailers and other businesses from frivolous patent litigation. The legislation establishes a uniform standard for pleading in patent infringement suits, giving defendants real notice of claims and requiring early disclosure about the patent-in-suit. It also seeks to protect end users, such as retailers, who simply purchase a technology or product from a manufacturer and then become a target of a patent infringement suit.
It allows a stay of an infringement suit against the end user while the manufacturer of the product litigates the alleged patent infringement. It also creates a mechanism for a court to cover fees when an abusive litigant is hiding behind a shell company and curbs abusive demand letters.
Sen. Michael Lee (R., Utah) asked Lettelleir to explain how the bill will help retailers and other end users in patent infringement suits, noting that in her testimony she said district courts have been reluctant to stay claims against retailers even when the manufacturer is already defending the allegations.
“We have been called upon to defend various aspects of technology we have acquired from other companies like Cisco or Oracle,” she said. “You can imagine when J.C. Penney is sued on the premise that an Intel chip resides in a point of sale terminal in its store, that we are at a severe disadvantage to even beginning to defend that technology. We do not have access to the evidence that would be required to defend that.”
She added that the provision “doesn’t absolve us of liability but it does shift the burden of proving and addressing infringement allegations to the manufacturer that actually supplied the technology.”