Thomas C. Stuart, Ph.D. • Contributing Writer

Patent Assertion Entities (PAEs), also known as patent trolls, hold one or more patents giving the PAE the right to exclude others from practicing their claimed invention. In the medical device sector and beyond, PAEs prey upon companies (i.e. practicing entities) that develop innovative, commercially successful products. Perspicacious in patent matters, PAEs generally have no operating concerns outside of analyzing and interpreting their patent portfolios to identify potentially infringing products, then drafting and filing documents associated with patent assertion and/or infringement lawsuits. Moreover, patent licensing fees generated from asserting and licensing a patent portfolio are typically the only revenue source available to a PAE. Thus, PAE survival and financial success is wholly contingent upon extracting licensing revenue from practicing entities, thereby encouraging hyper-aggressive patent assertion against as many practicing entities as possible.

In practice, when a PAE identifies a commercial product that may infringe upon one or more patents in its portfolio, a patent licensing fee is demanded in exchange for allowing the practicing entity to proceed with commercialization. At this juncture, a practicing entity has no legal mechanism to counter allegations of patent infringement outside of litigation, which is an expensive proposition. In fact, PAEs carefully calculate their patent portfolio licensing fees to be well below litigation costs to encourage practicing entities to choose the less-expensive, licensing alternative. If no license is taken, however, an aggressive PAE usually files a patent infringement lawsuit against the practicing entity.

Despite the unsavory nature of PAEs, which make nothing, yet possess the ability to block innovative product from entering the marketplace, there is nothing nefarious, illegal or new about PAE activity. In fact, pioneering American innovators such as Thomas Edison, Alexander Graham Bell, the Wright brothers, Eli Whitney and George Selden often chose not to directly commercialize their famous inventions. Instead, these famous inventors licensed their patent portfolios to others and aggressively defended their patent rights similar to modern PAE operations. The difference between American patent stalwarts and PAEs is not how they operate, but the patents they hold.

To date, PAEs have impacted the medical device sector to a lesser extent than, for example, the smart-phone sector. The reason the medical device sector has, to date, largely been spared from PAE activity is that traditional medical devices (e.g., stents, syringes) are more mechanical than electronic in nature. Patenting mechanical devices traditionally uses a standardized set of terminology (e.g., screw, hinge, ridge), which are readily depicted in drawings and/or illustrations. In other disciplines, such as the electronic arts, terms of art employ more functional language (e.g., resistors, processors), which may be applied broadly to multiple functions and therefore subject to multiple interpretations. In other words, the traditional mechanical arts patents employ more straight-forward language which is open to less interpretation for a PAE to readily exploit. Therefore, the use of functional language in patents allows PAEs to interpret their patents very broadly and assert them against numerous commercial products.

Despite relatively little PAE activity in the medical device sector, the world’s largest PAE, Intellectual Ventures (IV), has a medical device patent portfolio consisting of an estimated 1,000 individual patents in about 100 distinct categories. To date, IV has asserted patents in at least three patent infringement lawsuits over microchips used in medical imagining equipment. Given its significant patent portfolio and history of aggressive profit-seeking through patent infringement litigation, it seems reasonable to expect IV to increase its role in the medical device sector going forward. Moreover, the incorporation of computer-based, electronic elements, which traditionally are patented using functional claim language, likely will lead to patents covering vaguely defined inventions open to numerous, broad interpretations. In the end, the medical device sector is unlikely to avoid the tolls levied by PAEs in other industries.

Increasingly, practicing entities are seeking to monetize their existing patent portfolios, and this drive toward monetization may lead medical device stakeholders to transfer patents to PAEs. The recent sale of a Medtronic Inc. patent portfolio to Orthophoenix LLC, a company linked to the PAE-firm IP NAV, provides such an example. On April 26 this year, Orthophoenix acquired the Kyphon technology from Medtronic which includes approximately 500 patents and applications. The Kyphon patent portfolio covers devices and methods used to repair vertebral fractures.

On June 5, Orthophoenix sued Sintea Plustec LLC (Sintea), an orthopedic surgical center, alleging that Sintea orthopedic surgeons employed methods and devices infringing upon six Orthophenix patents. Further, Orthophoenix stated in its complaint to the district court that the patent infringement lawsuit was prompted due to the failure of Sintea to respond to a May 13 offer to license its patented Kyphon technology. It appears that Medtronic, perhaps looking to monetize its existing patent portfolio, turned to a PAE to extract revenue from others in its business sector. If such activity becomes pervasive, the PAE toll on the medical device sector undoubtedly will grow.

In a larger context, PAE activity is threatening the credibility of the U.S. patent system. In 2013 alone, the press, corporate America, state governments, the U.S. Congress and even the president of the United States all have adopted patent troll positions, castigating PAEs for their shakedown of American innovators and the patent system as a whole for stifling innovation. However, many of these legislative measures seem to throw the baby (U.S. patent system) out with the bath water (i.e., PAEs). In fact, some of the Congressional proposals likely would stifle single inventors and start-ups from asserting their patents by increasing the requirements for filing a litigation complaint. At best, the current legislative measures do little to mitigate the risk posed by PAEs.

There is little doubt that consensus favors the view that the U.S. patent system is unbalanced and weighted in favor of overly broad patents, particularly those using functional language—the major source of PAE exploitation. However, great care should be taken to return the U.S. patent system to balance, because the system functions well for many sectors. Unlike the electronics sector, the U.S. patent system has worked well in the medical device sector. The reward of market exclusivity for disseminating technological information to the public at large is one reason products such as orthopedic and cardiovascular and vascular devices rarely enter the marketplace without patent protection. When the patent system is balanced, patents encourage innovation by granting inventors a limited, government-sanctioned monopoly to make, use and sell patented technology—but only for a limited time so as to not stifle competition.

Moreover, if vague patents negatively affect the public by (i) providing less direct, explicit disclosure of how to make or use patented technology and (ii) failing to precisely define the “metes-and-bounds” of where patent-rights (i.e., exclusivity) begin and end, the reasonable solution is to require more precise language to describe inventions. In its Aug. 22 report assessing U.S. patent litigation, the Government Accountability Office identifies unclear property rights as the basis for many PAE-initiated patent lawsuits, and recommends that the United States Patent and Trademark Office (USPTO) evaluate changes to improve the patent examination in order to reduce or eliminate the issuance of such vague patents. If the USPTO adapts patent examination to require more precise language, leading to the issuing of fewer vague patents, the major source of PAE activity is eliminated while preserving a patent system that spurs innovation. In other words, the balance between limited market exclusivity in exchange for disseminating knowledge to the public is reestablished in the U.S. patent system.

Despite the plethora of proposed “fixes,” in the short-term, medical device manufacturers cannot rely on government intervention due to the glacial pace of the bureaucracy involved. Instead, manufacturers should consider developing strategies and solutions to protect themselves from PAEs. For example, medical device manufacturers should consider the following in order to mitigate PAE risk: (i) seek advance warning; (ii) attack PAE patents; and (iii) cooperate across corporate lines. Advance warning of PAE activity can come from industry monitoring and clearance searching. Manufacturers may wish to audit their industry to identify PAE patents and analyze those patents to establish potential infringement risk. When a potential PAE risk is identified, the PAE patent may preemptively be attacked using reexamination and patent trial mechanisms as well as pre-issuance submissions for pending patent applications as defined by 2013 America Invents Act (AIA). Finally, multi-company cooperatives are emerging to address the cost of industry monitoring and preemptively challenging pending PAE patents and pending applications using the mechanisms provided by the AIA. Collaborating with a cooperative may afford manufactures greater depth of risk-assessment at lower costs.