Patent News

Dec. 9, 2013

BLOG – A Line of Sight: Legislative trolling for trouble, by James R. Edwards

This post originally appeared in A Line of Sight blog on December 9, 2013.

Congress and the White House are quickly moving legislation that’s deceptively far-reaching — and could very likely disrupt what has been America’s competitive edge: innovation.

On Thursday, December 5, the U.S. House of Representatives passed H.R. 3309, the so-called “Innovation Act.” This mislabeled bill supposedly targets “patent trolls.”

Those are companies that amass a portfolio of patents and then send hundreds or thousands of demand letters to small-fry businesses the trolls allege to be infringing their patent.

Up-front disclosure: I’ve been consulting to a public interest organization opposed to this legislation. However, this article reflects my own views.

Going too Far

The legislative cure may be worse than the disease. The overly broad reach of the patent litigation legislation’s measures goes far beyond just patent trolls. Instead, it will undermine the constitutionally grounded private property right, found in Article I Section 8 of the Constitution, that’s supposed to “secur[e] . . . to inventors . . . the exclusive right to their . . . respective discoveries.”

It’s not the troll nuisance and their demand letters that face a setback should this legislation become enacted. Really, the bill does little to stem demand letters.

Rather, the real victims are going to be small inventors — the next Steve Jobs toiling in his garage at the next disruptive technology and the university bioengineering grad student who’s trying to commercialize a cutting-edge discovery and the doctor for whom necessity in her practice is the mother of invention, who creates a solution for treating patients.

For all these, securing their property right in the form of a patent represents the asset needed to attract investment capital. But who wants to invest in something where there’s going to be much less certainty that the patent guarantees years of exclusivity and the opportunity to recoup that investment with a decent return?

In other words, the legislative “remedies” will drain the pool of investment dollars so vital for moving innovations to commercial success. And the bills could deter bright Americans from putting in the time and effort to develop an idea. And they will diminish the pace at which patented inventions become translated into new enterprises creating new jobs and economic growth.

The patent legislation before Congress devalues all patents. It weakens patents. It makes it far more difficult for an intellectual property owner to defend that property interest against those who steal it through patent infringement. It therefore discourages innovation.

Essentially, Congress stands on the verge of dropping a nuclear bomb, when a rifle is what’s needed.

Trolling for Dollars

A number of members of Congress have heard from a mom-and-pop motel or coffee shop or the like that has received a demand letter. Maybe the letter claims a component in a wi-fi device the business bought off the shelf infringes their patent.

The device is being used for a commercial purpose, providing their customers wi-fi service in their business. That’s one type of patent infringement.

But the demand letter sender isn’t after protracted litigation. Instead, the point of trolling is to play the odds that most small businesses will settle for some fairly nominal amount rather than mount a legal fight against the infringement claim.

The problem that should be dogging proponents is a lack of hard evidence of how significant a problem patent trolls really are. The evidence is anecdotal of its size and scope.

It’s not assessable because patent trolls typically want to avoid having to go to court. You may see a UFO or mermaid sooner than you see a patent troll.

And then there’s the problem of precisely defining a “patent troll.” Other terms like “nonpracticing entity” or “patent assertion entity” apply equally to the disdained patent troll as to the research university, the private R&D lab, the doctor who invents a medical device and patents it but has no interest in giving up his medical practice, and every size and shape and description of legitimate company that owns patents but doesn’t “practice” the patents by doing their own manufacturing. (By that measure, Thomas Edison and the Wright Brothers qualify as “patent trolls.”)

Litigation Whimper

Proponents of this legislation, along with S. 1720, the Patent Transparency and Improvements Act sponsored by Sens. Patrick Leahy and Mike Lee, assert that, well, maybe they can’t prove the patent troll caricature exists at epidemic levels, but there’s a litigation explosion of patent cases. Thus, they claim, the path to the courthouse needs to be made tougher for patent litigants.

The legislation puts onerous requirements on patent owners who pursue legal action. But the same burdens don’t apply to patent infringers. For example, H.R. 3309 demands patent owners go into greater detail in their initial case pleadings. Of course, as New York University law professor Richard Epstein has noted, such details often can’t be known until discovery documents are obtained.

But the legislation imposes limitations on discovery for defendants (infringers), so it will become tougher for patent owners to learn exactly how infringers are illicitly using the patentee’s property without compensation. And those who file suit to defend their patent, but not the infringer, must disclose and update throughout the life of the patent what amounts to proprietary business information. If you’re getting the feeling that these bills stack the deck against IP owners, then bingo!

Those asserting a litigation explosion don’t know their history. IP law professor Adam Mossoff of George Mason University cites a steady patent litigation rate over two centuries. There have consistently been around 1.65 patent cases per patent.

And ignoring the biased “studies” trotted out by special interests, the dispassionate Government Accountability Office recently concluded that about 80 percent of patent cases are brought by big commercial entities, not patent trolls filing questionable lawsuits for low-quality patents.

Missed Opportunity

Unfortunately, the House mostly missed the chance to make H.R. 3309 less bad. Congress rejected an amendment by Rep. Thomas Massie, who owns 29 patents himself, that would have cut the overbroad “customer stay” section. That part allows an infringer and manufacturer to collude so that patent infringers in the stream of commerce can escape having to pay damages to the patent owner.

Another amendment left on the wayside would have limited the customer stay to addressing the problem of smaller businesses receiving demand letters. Courts would stay the judicial proceedings against end-users that have annual revenues under $25 million. Rep. Sheila Jackson-Lee proposed that amendment.

The House also defeated an amendment by Rep. Mel Watt that sought to let judges consider whether the winning party in a patent lawsuit had played tactical games to delay and dodge. In that case, the bill’s new “loser pays” requirement could be reduced or even denied. That would have reduced insult from injury for patent owners who might lose their case defending their patent.

The only bright spot came with the surprise approval of Rep. Dana Rohrabacher’s amendment. This measure preserved the right to de novo review in federal court if the Patent Office denies a patent application. As Ron Katznelson of Bi-Level Technologies has pointed out, this right has existed since the Patent Act of 1836. It is mirrored in the trademark statute.

Its elimination would have been the height of anti-patent antipathy. That’s because de novo review allows the applicant to introduce new evidence and call witnesses. H.R. 3309 would have limited applicants to appellate review. But that would have restricted judges to consider only the evidence from the agency record. The Rohrabacher amendment was one small step for patent rights, but an important step nonetheless.

* * *

This legislation aimed at the heart of this form of defending one’s property will weaken and devalue patents. It does so by raising the risk and reducing the reward of innovation. While large companies have the wherewithal to overcome these punitive hurdles, the little guy doesn’t stand much of a chance. And sizeable companies like Qualcomm with a huge IP base will still suffer harm should these bills become law.

Though perhaps well-intended, the legislation now in Congress incentivizes patent infringement and reduces the consequences for stealing someone else’s intellectual property. The legislation actually punishes the inventor. It falls short of the constitutional standard of a guaranteed, exclusive, defensible private property right in one’s discoveries.

If Congress were an inventor, these bills wouldn’t merit a patent. Nor would any venture capitalist invest in this scheme. Maybe Congress should go back to the drawing board.