How a Dallas Patent Office Will Spur Innovation

Not to mention, unclog local courts and finally defeat the trolls taxing our society.

No beast is so foul as the troll, a brutish creature lurking in the bowels of our infrastructure, subsisting entirely as a parasite, exploitative and manipulative, slowing the progress of our society. The troll is contemptible, because he doesn’t care about progress, and he doesn’t care about society. The troll cares only for himself. And he will exact whatever tolls he’s allowed from whomever he can.

In the business world, the official term for these creatures is “non-practicing entities.” They’re also called “patent-assertion entities” or “patent holding companies.” But they’re most commonly known by the pejorative: patent trolls. Most of these are individuals or companies that don’t do or make anything and exist only to file tedious, expensive lawsuits protecting ambiguous or nebulous patents of dubious value. They demand huge payouts, sometimes clogging court dockets with dozens of suits a year. They slow down start-ups, halting innovation before it even begins, and they attach themselves to—and suck from—giant conglomerates, steadily weakening and potentially crippling business on a mass scale. For the companies that survive, the cost is passed on to the consumer—an indirect tax on all of us. A study from the Boston University School of Law found that these sorts of lawsuits cost American businesses at least $29 billion in 2011, and the numbers are going up. 

Take, for instance, the case of Smartflash LLC, a tiny company with no employees and no storefront that sued Apple for patent infringement. The suit claimed that Apple, the world’s most valued company, willfully used Smartflash’s patented technology in its iTunes software. The plaintiff sought more than $800 million from the tech titan. Within the next few months, Smartflash also sued Google, Samsung, and Amazon. And all of the lawsuits were filed in Northeast Texas. 

BLUE CHIP: Hope Shimabuku became the first director of the U.S. Patent and Trademark’s new regional office in Dallas. An engineer-turned-intellectual property attorney, the former corporate counsel at Xerox is ideally suited for the job. “I know we have a tremendous amount of very important work ahead of us,” she says. Photo by Sohostory
Despite the fact that Judge Rodney Gilstrap of the Eastern District is based in Marshall, Texas—population 24,000—he hears approximately one-fifth of all patent cases in the United States. In the first half of 2015, the Eastern District saw more new patent infringement cases than all other courts in America combined. By the end of the year, Judge Gilstrap alone had more than 1,600 new lawsuits. Around 75 percent of all of those cases were filed by so-called “high-volume plaintiffs”—patent owners that file more than 10 cases in a calendar year—which are often (but not always) non-practicing entities.

Patent lawsuits can be filed anywhere the technology is used—which, for internet-related patents, means everywhere. East Texas is so popular because the patent court there has what attorneys call a “rocket docket.” Cases tend to go to trial faster, which is generally good for a plaintiff. And juries there are known to be particularly “plaintiff friendly,” which is also generally good for a plaintiff. 

Attorneys for Smartflash and co-founder Patrick Racz argued that their client wasn’t a troll. They said he started a company with a line of tech products in the late 1990s. After the business fell through, Racz filed for patent protection in 2008, a move one of his lawyers called “the prudent thing.”

In 2013, Smartflash claimed these tech giants all owed the company royalties for patents involving the sale of digital music and games. The case against Apple went to trial in Tyler in February 2015, likely faster than it would have in other courts. Racz’s attorneys alleged he’d spoken about his data management ideas in 2000 with someone who went on to work at Apple. Attorneys on the other side argued that Apple invented the technology and spent years innovating the ideas. The debate was complex and technical, over incredibly complicated patents that had been issued eight years earlier—eons in the world of technology. After a lengthy deliberation, though, the East Texas jury sided with Racz, awarding Smartflash a stunning $533 million.

With numbers like that, you can understand how a few people have managed to make a fortune suing over patents with questionable value, and why others try. Erich Spangenberg, described in the New York Times as “one of the most notorious patent trolls in America,” started a company called IPNav in 2003 and acquired a portfolio of 14 patents from a company called Firepond. He says he used to make more than $25 million a year. His 14,000-square-foot mansion in Preston Hollow, featuring gold-leaf ceilings, a Baccarat chandelier, and a plush movie theater—replete with ticket booth and concession stand—was on the market for $19.5 million. He once bought so much wine from a Christie’s auction that it had to be delivered in an 18-wheeler. At one point, he owned 16 cars, six of them Lamborghinis. 

“We’re using the courts as a marketplace,” Spangenberg told the Times, “and the courts are horribly inefficient and horribly expensive as a market.”

Of his approach to negotiating with companies, he said he’ll employ any combination of “love, fear, or greed.” 

Over the last decade, the number of patent lawsuits has gone up exponentially. As a result, there’s also been a push to completely overhaul the country’s patent system. Outspoken voices like Dallas Mavericks owner Mark Cuban have called for changes that would ideally shake off trolls and spur faster innovation. His suggestions include nullifying any patents that aren’t used by the owners and potentially doing away with any patents on software or coding. Cuban even donated $250,000 to the Electronic Frontier Foundation to endow what they’ve named the Mark Cuban Chair to Eliminate Stupid Patents.

Though the government has been slow to move, the U.S. Patent and Trademark Office has made changes. President Obama and members of Congress from both sides of the aisle have spoken out against abuse of the system and the stifling effect trolls have on the economy. In 2011, the president signed into law the America Invents Act, which aimed to expedite the patent application process by having more knowledgeable patent examiners in four new regional offices across the country. Until then, the nation had one patent office, in Alexandria, Virginia. Which meant that most examiners and examinations were in Virginia. And if you wanted to talk to an examiner in person, or you wanted to research patents using the government’s facilities, you had to go to Virginia.

With regional offices, examiners will, in theory, have more specific industry knowledge. Every patent examination comes down to one question: does this invention do something new? Examiners with more industry experience—and the ability to meet the applicants in person and work in the same time zones—will help create more precise patents, which should, again in theory, reduce the number of potential troll suits.

Each of the regional offices is located in an industry hub. The first regional one opened in 2012 in Detroit, home of the American auto industry. The next one opened in 2014 in Denver, the center of so much bio-tech research. Last fall an office opened in San Jose, ready to service Silicon Valley. And in November, the final regional office opened in downtown Dallas, close to that East Texas court and home not only to big players in the oil and gas industry, but also Texas Instruments and a large swath of the worldwide semiconductor business.

Each of the regional offices is located in an industry hub. The first regional one opened in 2012 in Detroit, home of the American auto industry. The next one opened in 2014 in Denver, the center of so much bio-tech research. Last fall an office opened in San Jose, ready to service Silicon Valley. And in November, the final regional office opened in downtown Dallas.

The Dallas office itself—in what was once a post office next to Union Station, on South Houston Street—and the 100 examiners eventually working there will help educate the public and demystify the process. There are computer stations set up to allow a search of the patent office’s databases. The room’s glass walls are lined with a row of small white stars, forever reminding you you’re in a United States federal building. On the other walls in the office hang tall posters of patent diagrams from a number of Texas inventions. There’s one for a set of animal shears, one for an old typewriting machine, one for a special kind of soil till, and one for a cotton press invented in Dallas in 1900—part of what launched the area as a textile center for more than half a century. Just being in the office makes you want to invent something. The space itself encourages innovation.

Hope Shimabuku is an engineer-turned-intellectual property attorney who, until last year, was a vice president and corporate counsel at Xerox. In January, Shimabuku became the first director of the Dallas patent office. One of the office’s first tasks will be to help cut down the backlog of patent applications waiting for examination. Though the backlog has been cut 25 percent over the past six years, there are still more than 500,000 applications pending, and the average wait time is roughly 26 months. The goal is to cut the wait time to 20 months by 2019. 

“My first mission is simply getting the office up and going,” she told the Texas Lawbook in January when she officially took over as director of the Dallas branch. “Getting the right personnel in place and trained is critical to us addressing all the other issues, including the backlog. I know we have a tremendous amount of very important work ahead of us.”

Some in the legal community don’t believe the regional office will have a huge impact in one direction or the other. But Dallas City Councilman Scott Griggs, who is also a patent attorney, thinks the new office will be a boon for business in the area. (His district abuts downtown, which he expects will also benefit from having such a prominent building in use so close to the convention center.) He says the face-to-face interaction with examiners will be particularly helpful to local innovators. 

“It’s always good to get a better seat at the table,” Griggs says. “With examiners drawn from a local pool of talent, we’ll be getting better examinations and a higher quality of patent.” 

With a lot of technological innovation, Griggs explains, the window to capitalize on an idea and potentially recoup research and development investment can be very brief. A faster application process will help those companies and stimulate growth, he says, adding, “Having this institutional knowledge will lead to stronger magistrates, stronger judges, and deeper overall understanding of patent law.”

How well the public understands patent law eventually became the issue in that big Smartflash vs. Apple case. A few months after the jury’s verdict, the judge in the case threw out the $533 million award—but not the judgment itself—noting that the jurors likely miscalculated after misunderstanding the court’s convoluted instructions. The Smartflash attorneys continue to insist that the system is working and that their client will be well-compensated. Apple’s attorneys continue to insist the battle will go on, and their company will not pay royalties for technology it invented and developed. Appeals are pending.

Will the new patent office actually help any of this? Will it help unclog the courts? Will it help educate the public and spur innovation? Will it help rid our society of the foul patent trolls? Government officials and companies like Texas Instruments are optimistic. Mark Cuban, who’s been publicly calling for patent reform for more than five years now, would say only this: “Time will tell.”

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