Owners of intellectual property and their lawyers are on the front line of developing voluntary licensing standards, members of a panel discussion said at the Licensing Executives Society (USA and Canada) (LES) 2018 Annual Meeting in Boston this month.

LES has established subcommittees to draft standards in eight different areas, including IP licensing, FRAND licensing, IP valuation and IP protection in the supply chain. At issue in the panel discussion was the work of the subcommittee on IP licensing, which LES has charged with developing a standard for parties’ interactions in licensing intellectual property to enhance efficiency and trust and reduce the need for additional litigation and legislation and regulation in this field.

Much of the distrust sown in the field comes from the steady drumbeat of lawsuits from non-practicing entities in the United States; lawyers from each side shared their experiences with the licensing efforts of NPEs.

Lee Cheng, chief legal officer at eForCity, a Los Angeles-based retailer of premium electronics accessories, said that his first experience with what he termed “abusive assertions” came as chief legal officer of internet computer and electronics retailer Newegg in 2005.

“I’m a corporate lawyer, and I spent the first half of my legal career assiduously trying to avoid the insides of courtrooms,” Cheng said. “If I did my job right, my clients would never get sued and never go to court. So imagine to my great surprise when I got to Newegg and a bunch of patent claims started landing on my desk. I scratched my head and said to myself, ‘Why are we getting sued? We don’t make anything. We’re an internet retailer.’”

That’s when Cheng says he realized that patents could granted for things like the online shopping carts, drop-down menus or search functionalities that are ubiquitous across e-commerce.

“And then, we started getting multiple claims asserting [essentially] the same functionality. We were told, at the time, that everyone’s just writing cheques [to make the claims go away]” he said. “In 2005, Amazon coughed up US$40 million for a license for a shopping cart patent. I thought it was absurd, but I kept being told that everyone’s just paying.”

Cheng says that as an internet retailer of electronics products, Newegg’s profits margins were thin. “We just couldn’t afford to pay serially that kind of money, so we developed a strategy to fight back against the abusive assertion of patents, and we were very successful.”

Cheng says the company fought some 35 claims, taking about a dozen of them to court. “Along with a handful of other companies, I think we helped drive some parity in terms of licensing litigation,” he said.

“We’re all familiar with some of the worst types of abuses and abusers. These are folks who send out thousands of demand letters to mom and pop stores and to coffee shops and whatnot,” Cheng said. “And they would just ask for a couple thousand dollars or they would threaten these small businesses with the cost of litigation. They were just trying to make the claims and to get licensing revenue based purely on the threat of litigation as opposed to any substantive merit to the patent or the assertion.”

The success of NPEs came about largely because there was a lack of licensing standards, Cheng said. “The most important set of standards that needs to be shaped is around what constitutes reasonable royalties. There’s a very strong need to decrease friction in licensing discussions with prospective licensors and asserters. Rational standards should drive returns for legitimate licensors and rights holders.”

Moderator Jeff Bartholomew, a shareholder at Denver law firm Robinson Waters & O’Dorisio, noted that NPEs are not the only players “who act unreasonably and with some abuse.”

Aaric Eisenstein, vice president of licensing strategy at Personalized Media Communications (PMC), a Houston-area inventor-owned patent licensing company, said that he largely agreed with Cheng, but emphasized that abuse goes both ways.

“I think Lee and I are in violent agreement on almost everything,” he said. What I heard was a well-reasoned and cogent argument against abusive behavior. And that’s really the nut of the whole thing. If I’ve got 50,000 demand letters that I’m sending out to mom and pop coffee shops, and I’m saying pay me $2,500 or I’m going to drag you into court, people are rightly upset about that,” he said. “The scenario that I deal with, as the licensor of a patent portfolio, is the opposite end of that same spectrum.”

Eisenstein works for a “mom and pop business” as well, he said. “Pop is John Harvey, with close to a hundred patents and 3,500 claims. They’ve been licensed to companies like Panasonic, Toshiba, Sony, Cisco, Scientific Atlanta, you name it. Real players, real amounts of money, over decades. These were folks who gave real consideration for the patents. John is the quintessential small American inventor [who has] patents on everything from digital rights management to decryption to digital tuning, software downloads, e-commerce, you name it. We’ve got all kinds of patents.”

His frustrations about claims come from a different perspective than Cheng’s, he says.

“We put together the patent portfolio, and mom and pop contact somebody they think is infringing the patents,” Eisenstein says. “You can guess what happens. Deafening silence on the other end. Do you consider that to be abusive? Maybe not. But how about this: When we send out a package, it has information about the company, has our contact information, we’ve got claim charts for exemplary products, we’ve got a prosecution history that dates back to 1981. It’s so heavy, you can barely lift the package. There’s every bit of information you could possibly want to know about our patents, our company and why you should want to do a deal with us. And we get no response.”

Eisenstein then recounted a meeting with a company’s general counsel in which the lawyer told him that the only way he was able to allocate resources to responding to such a package was when he received a scheduling order from the court. Eisenstein says the general counsel was saying “sue me, please.”

“If you can’t have an initial conversation, then I would argue that’s abusive behavior as well,” Eisenstein said. “What I’d like to see, and what we’re working on in the LES Standards Initiative, is the elimination of abusive behavior. It doesn’t matter if you’re a practicing entity, a non-practicing entity, a patent user, a patent owner. Get rid of abusive behavior. Try to get the gamesmanship out of things. We’re not going to fix the fact that going to court is expensive, but we’re trying to get an alternative method of resolving a patent issue, where good faith people can sit down and have a conversation about whether or not there is a valid patent, whether or not it’s infringed and, if so, what it ought to be valued at and what payment ought to be made.”

Bartholomew said that, in a nutshell, is the objective of the LES Licensing Standards Committee and the Licensing Standards Initiative in general. “There are now over 30 states that have enacted what we call bad faith demand letter legislation. They are not uniform in any sense. You always worry about patchwork legislation. People are trying to do business across state lines, and this just creates a mess.”

Roman Buhler, national director of the Madison Coalition, a Washington-based organization which is seeking an amendment to the US Constitution designed to curtail the ability of the federal government to make regulations without Congressional approval, said that the current political climate in Washington has made passing legislation in the states a more attractive option.

“It’s very, very hard to get the majority of the House [of Representatives], 60 votes in the Senate and a presidential signature, so people tend to go after reform at the state level, and you get a patchwork,” Buhler said.

“The question for the community that’s interested in having enforceable and effective and reasonable patent laws is, how do you engage the federal government,” Buhler said. “The risk is that you get a law that is statements of intent without any detail. And then, the details end up getting worked out by regulatory agencies, and the current state of regulatory law is that there is no firm regulatory law. President A can issue a set of regulations which mean one thing. The next president comes along and issues a new set of regulations, and you have a completely different system. The end result of federal legislation without safeguards is a fluctuating patent environment, which NEWS ANALYSIS isn’t good for anybody, because you can’t predict what your property rights are going to be in two or four or eight or 10 years. That is not optimum for investment.”

“We think practitioners and the people in the business are motivated and capable of coming up with our own voluntary consensus standards that would apply to people who want to sign up to the standards for business conduct in the fields of intellectual property management,” Bartholomew said. “That’s what was behind the LES Standards Initiative. But what happens after we get a standard approved [by the American National Standards Institute]? How do we get industry players to adopt these standards, instead of leaving it to the status quo?”

Cheng said he believes industry will adopt the standards easily, once they’re shown it will save them money and reduce their litigation costs by signing on.

Eisenstein hopes for the same kind of broad adoption of LES standards. “If somebody walks into court and says ‘I sued Company A yesterday,’ the judge is going to ask if he tried to work it out using the LES Standards. And if that somebody says no, the judge is going to say ‘Quit clogging my courtroom, go talk to each other and, if you can’t work it out, come back in six months. But first, try to work it out yourselves.’ That’s the level of adoption I’d really love to see.”

Buhler suggested that inaction on the party of rights holders and lawyers could result in exactly the opposite of what they would like to see happen.

“If a consensus begins to emerge on particular standards, and if people perceive that if they don’t do something voluntarily, some other kind of standard is going to be enforced, that is when, in my experience, people really get interested in signing on to voluntary standards.”