By Abby Rives, IP Counsel, Engine Advocacy & Foundation
The importance of transparency in the patent system is rising to the surface right now as policymakers and judges seek to understand who really owns and asserts U.S. patents. This week, a Senate committee will consider a bill encouraging patentees to register their ownership interests with the U.S. Patent and Trademark Office (USPTO). And an appeals court decision from last week will allow a district judge to continue requesting information about who is behind the lawsuits in his courtroom.
Secrecy facilitates abusive patent practices, and those looking to game the system often try to conceal which patents they own or they try to hide behind shell companies in court. Transparency, on the other hand, can reduce waste, mitigate vexatious litigation, and promote the integrity of our patent system while allowing courts to do their job. That, in turn, equips startups and small businesses with valuable information and helps protect them from abuse.
What is Congress doing?
This week a Senate committee is set to vote on the Pride in Patent Ownership Act (S. 2774), introduced by Senators Leahy (D-Vt.) and Tillis (R-N.C.). The bill would adjust patent damages in a way that encourages patent owners to disclose which patents they own and to record that information with the USPTO. The agency already maintains a database — but that is only useful if patent owners provide the agency with accurate and up-to-date data.
In testimony last year, Engine highlighted various ways this bill would help startups. Startups stand to benefit when others know, with confidence, that they own high-quality patents, and startups using patents to protect themselves in the market want the public to know what they own. And better public information about who owns what will reduce transaction costs and legal spending on things like licensing, patent clearance, and litigation.
Importantly, gaps in knowledge around patent ownership also open doors to abuses that disproportionately harm startups and small businesses. Patent assertion entities (PAEs) routinely find ways to hide information about ownership, obscure who is controlling assertion campaigns, and create shell companies to evade liability for frivolous lawsuits. These tactics allow them to do more damage to innovators and entrepreneurs. If startups could publicly access better patent ownership data, it would give them information they need to protect themselves and hold PAEs liable if they are unreasonable, vexatious, or act in bad faith.
Beyond that, the Pride in Patent Ownership Act is a commonsense contribution to our patent system rooted in the pillar of public disclosure. The government grants patents in exchange for inventors adequately disclosing their inventions to the public — there is no reason to exclude ownership from that principle. This bill would also bring the patent system into alignment with areas of the law like trademark and copyright, where there are incentives to register ownership. And it would equip policymakers and researchers with valuable information that could inform sound innovation policy. For example, where Congress looks at patent data to set research funding priorities or for policymakers concerned about the role foreign entities play in our patent system (as estimates indicate that over half of all U.S. patents go to foreign applicants) — knowing who owns what is a critical piece of the puzzle.
What’s happening in the courts?
Last week, the U.S. Court of Appeals for the Federal Circuit declined to block another federal judge from collecting information about some of the companies and attorneys appearing before him and how they are related to one another. And this story highlights how information asymmetries impair the patent system and the judiciary, to the detriment of startups and small businesses.
Between March 2021 and June 2022, a handful of apparent shell companies — including Nimitz Technologies, Longbeam Technologies, Creekview IP, Waverly Licensing, Mellaconic IP, and Backertop Licensing — filed dozens of patent suits in the U.S. District Court in Delaware [1]. The Chief Judge of that court, Colm Connolly, had entered a standing order in April 2022, which required litigants to disclose if a third party was paying for a lawsuit. None of those companies — who each had cases before Judge Connolly — disclosed a connection with the prolific PAE IP Edge. But after months of litigation, Judge Connolly began to realize that these companies seemed to have a common connection with IP Edge. That, in turn, suggested they were violating his standing order, and he scheduled hearings to explore the relationship.
During the hearings, Judge Connolly heard about how the purported patent owners in these lawsuits had been approached by a consulting company — Mavexar — about an “investment” opportunity and a way to earn “passive income.” Mavexar helped these individuals set up LLCs to assert patents and arranged for them to be assigned patent rights. These individuals did not pay anything for the patents, but they did agree to assume the liabilities that came along with asserting them. From there, Mavexar shaped the litigations — retaining counsel, identifying who to sue, deciding how to settle, etc. The hearings also seemed to confirm connections between Mavexar and IP Edge.
Based on what he heard in these first hearings, Judge Connolly requested additional information and called for hearings with other similarly situated parties — but a few of the plaintiffs asked the Federal Circuit to intervene and block further inquiries. In a lengthy memorandum, the judge laid out the concerns motivating him — including whether counsel were complying with ethical obligations, whether the parties were complying with court orders, whether there were other real-parties-in-interest being hidden from the court, and whether there had been fraud on the court and the USPTO when it came to patent assignments. On Thursday, the appeals court issued a decision that the district court was acting within its authority, investigating these types of concerns, and it allowed the cases to continue.
In the course of this proceeding, Engine joined the Electronic Frontier Foundation (EFF) and the Public Interest Patent Law Institute (PIPLI) in an amicus brief emphasizing how orders like Judge Connolly’s promote integrity in the judiciary. In part, the brief underscored how PAEs wielding low-quality patents in frivolous cases can immunize themselves by hiding behind shell companies. For example, even if IP Edge and/or Mavexar advised these individual LLCs to file meritless patent suits, those people who are really pulling the strings could avoid the consequences if the court cannot know who they are. Generally, if a patent owner files a meritless, frivolous suit that stands out from the norm, they can be ordered to reimburse the other side’s legal fees or they might be violating a state law. Those consequences are supposed to deter abusive litigation, but if decisionmakers can avoid them, then that would unfortunately mean they can keep safely filing cases and trying to coerce startups into settling frivolous claims.
These efforts in Congress and the courts to increase transparency and accountability in the patent system are a positive sign, and policymakers should continue to seek ways to support the startup ecosystem by ensuring they have the information they need to succeed and protecting them from those seeking to exploit the patent system by hiding in the shadows.
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[1] Those seven companies have filed approximately 120 patent suits in the past two years, including against startups and smaller tech companies, in courts across the country.
Engine is a non-profit technology policy, research, and advocacy organization that bridges the gap between policymakers and startups. Engine works with government and a community of thousands of high-technology, growth-oriented startups across the nation to support the development of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues.
