Patent predicaments: Be wary of dubious claims

Judges, legislators, and lawyers have wrestled in recent months with the complicated issue of how to decide fair compensation for intellectual property, as a new threat to U.S. businesses has emerged. Patent-holding companies (PHCs) and patent-assertion entities (PAEs) have attempted to get businesses—including CPA firms—to pay licensing fees for technologies and business processes that seem common. CPA firms need to be ready to respond—and advise their clients—if they are asked to pay licensing fees they do not believe are owed.

In December, the House of Representatives passed the Innovation Act, H.R. 3309, in an effort to protect businesses against the potentially crippling licensing claims often brought by PHCs and PAEs, which are less affectionately referred to by some as “patent trolls.” Attorneys general in some states also have taken action against PHCs and PAEs, but the outcome is uncertain. The patent system is designed to protect the rights, investments, and ideas of innovators in order to reward ingenuity and spark economic growth. But some believe the system allows PHCs and PAEs to try to take advantage of the potential high costs of litigation that may make companies reluctant to challenge a patent claim.

CPAs and their clients have been targets of actions by PHCs and PAEs, which acquire patents and attempt to enforce them without intending to manufacture the patented service or product. The patents sometimes assert claims to technology rights granted before internet use became common. PHCs sometimes use these patents to assert exclusivity rights over processes that have become routine with the proliferation of the internet. PHCs and PAEs have drawn the ire of many in the business community and prompted legislative proposals and even a civil consumer protection lawsuit by William Sorrell, the Vermont attorney general, who has accused one company of unfair and deceptive acts.

Defending against patent infringement allegations can be expensive, so PHCs often enrich themselves by suing—or merely threatening to sue—businesses that do not have the means to pay high legal costs. Even an unsuccessful patent infringement action can cost a defendant $1 million to $2 million or more if the defendant chooses not to settle, according to the lawsuit filed by Sorrell. Faced with the possibility of such high legal costs with no guarantee that they would win in court if they tried to defend themselves, some businesses decide to pay the licensing fee the PHC is charging.

The high cost of litigation in patent-assertion cases can help PHCs continue to demand fees of more businesses. Because the cases often don’t go to court, it can be difficult to tell whether the claim of the PHC or PAE has merit. The rising toll of PHCs on the U.S. economy has been well-documented. In 2009, the total annual direct cost attributed to PHCs was $13.7 billion, according to Boston University researchers. By 2011, the same researchers found, the total cost had risen to $29.2 billion.

One PHC—Delaware-based MPHJ Technology Investments—and its subsidiaries have sent letters to small businesses in a nationwide campaign to get the businesses to pay costly licensing fees, according to Sorrell’s lawsuit. The letters allege that businesses are violating patents by using a simple business process—scanning and emailing a document using a copy machine—the Vermont lawsuit said.

Legal action continues in the Vermont suit. Other states have pursued action against MPHJ, too. New York Attorney General Eric Schneiderman announced a settlement with MPHJ in January that imposes requirements for good faith and transparency in MPHJ’s future communications with New York businesses. The agreement allows businesses that received deceptive letters from MPHJ to receive a refund for any licensing fees paid, according to Schneiderman’s office, which said the obligations the agreement imposed on MPHJ should serve as guidelines for other companies asserting patents in a similar way.

A settlement reached in August in Minnesota requires MPHJ to submit future licensing letters to the state attorney general for review. And Nebraska Attorney General Jon Bruning announced an investigation in July and sent a letter to MPHJ’s legal representatives at the law firm Farney Daniels directing MPHJ to stop initiating patent enforcement in Nebraska during the investigation. Legal action between the Nebraska attorney general and MPHJ and its lawyers has continued since then.

In an email to the JofA, MPHJ legal representative Bryan Farney of Farney Daniels said that federal law is clear and that MPHJ’s actions are lawful. Farney said MPHJ is in an unusual position because its patents cover an entire system and not any single component. He said MPHJ therefore must send “inquiry letters” to large numbers of technology end users because suing the manufacturers is not an option. In January, MPHJ filed patent infringement lawsuits in Delaware against global soft drink icon Coca-Cola; retail giant Dillard’s; the Tennessee-based insurance company Unum Group; and consumer goods company Huhtamaki Americas.

“To be clear, just because such products and processes now are considered commonplace does not affect the validity of MPHJ’s patents,” Farney said. “Such systems were not commonplace or known at the time the inventions were made.”

A sample of a letter from an MPHJ subsidiary included in a court filing by the Vermont attorney general shows that the company told one business that the fair price for a license is a payment of $1,000 per employee. But the Vermont lawsuit said that only a tiny fraction of the businesses that have received the letters purchased licenses, and the actual average licensing fee negotiated by MPHJ with businesses that did pay was less than $900.

In addition to the MPHJ licensing efforts, other patent claims made by other entities to commonly used technology have included:

• Licensing claims aimed at businesses over the process of providing wireless internet access for their customers.
• Claims against online retailers for use of “shopping cart” technology.
• Lawsuits against CBS and NBC for use of audio podcasting technology.

The AICPA has advocated with members of Congress for legislation that would protect the public against unfair patent claims while safeguarding the patent system overall. (A letter further describing AICPA advocacy efforts in this area is available at tinyurl.com/k39pzub.) The AICPA has heard from several state CPA societies and CPA firms that have received inquiry letters from PHCs.

“In response to this growing problem, we favor legislative reforms to the patent system that protect off-the-shelf use by consumers and businesses, reduce costs and hurdles to defend against PAEs, increase transparency about PAEs, and shift costs to PAEs for unsuccessful litigation,” AICPA President and CEO Barry Melancon, CPA, CGMA, said in a statement after the House bill was approved. Those objectives are met by the House bill, Melancon said. The Senate also is considering legislation on this issue. (Additional comments by Melancon regarding the passage of H.R. 3309 are available at tinyurl.com/palhfbh.)

UNFORTUNATE BYPRODUCT

Many experts believe patent trolling is an unfortunate byproduct of a patent system designed to protect the rights of inventors and encourage innovation. Investment of resources and energy into new technology, processes, and intellectual property can slow if no financial reward awaits the developer and investors. The patent system attempts to make sure those who invent, develop, and encourage innovation reap the benefits.

“As far as Congress is concerned, it’s a difficult line,” said Bill Schneider, CPA, CGMA, who served as a member of the AICPA board of directors from 2009 to 2012 and has been monitoring the issue. “Because you have to let people enforce their patents. But when you do that, you’re going to put a tool in someone’s hands who may want to misuse it.”

PHCs and PAEs also are on the radar of the executive branch of the federal government. The White House in June announced five executive actions and seven legislative recommendations designed to protect innovators from frivolous lawsuits and ensure high-quality patents. Also in June, Federal Trade Commission Chairwoman Edith Ramirez said the commission is committed to protecting small businesses from deceptive practices by PAEs. Antitrust laws may be one avenue the FTC could use, and Ramirez said she believes the commission should study the costs and benefits of PAE activity.

Companies whose technology has been the focus of PHCs also have challenged PHCs in legal proceedings. For example, although MPHJ’s efforts have targeted end users rather than companies that manufacture scanning equipment, software, or email systems, three companies that manufacture scanners have challenged MPHJ’s patents. Hewlett-Packard, Ricoh, and Xerox filed petitions in May 2013 with the U.S. Patent and Trademark Office asking for reviews of patents MPHJ uses to assert licensing rights. Hewlett-Packard challenged one patent on its own, and Ricoh and Xerox joined forces to request review of a different patent. Ricoh and Xerox said in a news release that the companies believe the patent is invalid, infringement claims are without merit, and the licensing demands of MPHJ are unsupportable.

“If successful, our action will both nullify the … patent and help disable MPHJ’s licensing campaign against our customers,” Ricoh and Xerox said in a joint statement. “We are confident this is the right action to take to support our customers.”

Farney, the lawyer for MPHJ, said HP, Ricoh, and Xerox have challenged just two of MPHJ’s five patents. Farney said the other three patents have not been challenged, and he said one of them was issued by the patent office after a review of material submitted by those companies. Farney said MPHJ believes the patent office should reaffirm the validity of the two patents under review.

Another manufacturer, Canon, took a different tack. Canon announced in June that it has reached an agreement with MPHJ to protect customers from patent infringement allegations using Canon’s equipment. Terms of the agreement were not disclosed.

“Because providing superior customer service and support is paramount for us, we determined that entering into this agreement was the best way to support our valued customers,” Canon Executive Vice President, Chief Administrative Officer, and General Counsel Seymour Liebman said in a news release.

Yet another manufacturer, Sharp, also has an agreement with MPHJ to protect its customers from patent enforcement by MPHJ, according to Farney and court documents.

VERMONT TAKES ACTION

Meanwhile, in Vermont, the attorney general initiated action against MPHJ after letters from MPHJ subsidiaries allegedly sought license payments from not-for-profits in the state that bring home care to developmentally disabled persons and provide fiscal agent services to disabled residents to assist them with daily living tasks.

But Farney said that MPHJ does not believe its enforcement actions are unfair or deceptive.

“While certain state AGs have complained about a few statements in the letters, to date none of them have challenged the central point that the patents are valid and infringed by those who have relevant scanner systems,” Farney said.

As the PHC issue continues to play out in courtrooms and legislative buildings, Schneider said CPA firms and small businesses need to investigate carefully if they get a letter threatening them with legal action over a patent claim.

“You don’t just need to assume that these patents are legitimate or that they’re doing it right,” Schneider said. “Make sure it’s valid. Especially if you’re a small business. Let’s face it. Most of your large business patent holders aren’t in business to go sue a very small firm for a couple thousand bucks. There isn’t a financial sense to that. So if you’re a small CPA firm and you’re getting threatened with suits, what’s going on here? Is this really legitimate?”

A Job for Legal Counsel

Patent-holding companies (PHCs) and patent-assertion entities (PAEs) attempt to use patents they own to get businesses and CPA firms to pay expensive “licensing fees” for use of ordinary business processes. A letter from one PHC subsidiary included in a court filing by the Vermont attorney general states that the fair price for a license is $1,000 per employee. The AICPA recommends that CPAs and their clients consider the following actions when they are targeted by a PHC or PAE:

• Consult with a legal representative for advice on how to proceed.
• Contact the manufacturer of the equipment being used to see if the manufacturer has an agreement with the PHC allowing consumers to use the equipment without paying a licensing fee.
• Reach out to representatives in Congress to let them know the problems the PHC or PAE is causing for the business.

EXECUTIVE SUMMARY

CPA firms and their clients often face difficult decisions when patent-holding companies (PHCs) and patent-assertion entities (PAEs) demand licensing fees by asserting claims to widely used technology platforms used by the firms and businesses. Paying the licensing fee can be much less expensive than defending against a patent claim but still can exert a heavy price on businesses.

Congress, federal regulators, and some state attorneys general are looking into ways to protect businesses against unfair actions by PHCs and PAEs, but efforts are in the early stages. The AICPA is encouraging regulators and policymakers to act on this issue.

The AICPA advises firms and businesses targeted by PHCs and PAEs to contact their lawyers, contact the manufacturer of the equipment being used, and reach out to legislators to ask for relief. 

Ken Tysiac is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at ktysiac@aicpa.org or 919-402-2112.