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Patent Reform: House Holds Hearing on “Innovation Act”

Written by Marla Grossman (left)
Chris Israel (center)
Stephen Pinkos (right)
Kathleen Slattery (not pictured)
American Continental Group
Posted: Oct 30, 2013 @ 12:25 pm
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Yesterday, the House Judiciary Committee held a hearing on the “Innovation Act,” HR 3309, a bill sponsored by the Chairman of the House Judiciary Committee and co-sponsored by 10 other Members from both sides of the aisle, including the Chairman of the IP Subcommittee.

The hearing focused on the effect the Innovation Act would have on the problem of abusive litigation practices and on the patent system as a whole.  Three central themes emerged from the hearing:  1) there is an urgent need to fully fund the PTO; 2) significant skepticism remains about expansion of the Covered Business Method (“CBM”) program; and 3) some of the more technical aspects of the Innovation Act would help rid the patent system of expensive and wasteful lawsuits.  Divergence of opinion remained among the Members, however, about whether Congress should address fee shifting at this time or wait for the Supreme Court to hear the two fee shifting cases before it, although the witnesses agreed that legislation on fee shifting would be helpful, and Congress should proceed with legislation on this front.

Note when reading the report below that the “Innovation Act,” HR 3309, is different than the “Innovation Protection Act,” HR 3349.  The Innovation Act is the patent litigation reform measure introduced by House Judiciary Committee Goodlatte and others.  The Innovation Protection Act is the PTO funding bill introduced by House Judiciary Committee Ranking Member Conyers and others.

 

Witness List:

Krish Gupta
Senior Vice President and Deputy General Counsel, EMC Corporation

Mr. Kevin Kramer
Vice President and Deputy General Counsel for Intellectual Property, Yahoo! Inc.

Mr. David J. Kappos
Former Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office

Robert A. Armitage
Former General Counsel, Eli Lilly & Co.

 

Summary of Opening Remarks:

Chairman Goodlatte (R-VA)

Today we are here to discuss H.R. 3309, the Innovation Act. The enactment of this bill is something I consider central to U.S. competiveness, job creation, and our nation’s future economic security.

This bill takes meaningful steps to address the abusive practices that have damaged our patent system and resulted in significant economic harm to our nation.

During the last Congress we passed the America Invents Act (AIA). Many view the AIA as the most comprehensive overhaul to our patent system since the 1836 Patent Act.

However, the AIA was in many respects a prospective bill; the problems that the Innovation Act will solve are more immediate and go to the heart of current abusive patent litigation practices.

This bill builds on our efforts over the past decade. It can be said that this bill is the product of years of work. We have worked with Members of both parties in both the Senate and the House, with stakeholders from all areas of our economy, and with the Administration and the courts. To ensure an open, deliberative and thoughtful process, we held hearings and issued two public discussion drafts in May and September of this year, which led to the formal introduction of the Innovation Act last week.

Abusive patent litigation is a drag on our economy. Everyone from independent inventors, to start-ups, to mid and large sized businesses face this constant threat. The tens of billions of dollars spent on settlements and litigation expenses associated with abusive patent suits represent truly wasted capital – wasted capital that could have been used to create new jobs, fund R&D, and create new innovations and technologies that “promote the progress of science and useful arts.”

Within the past couple years we have seen an exponential increase in the use of weak or poorly-granted patents to send out purposely evasive blanket demand letters or file numerous patent infringement lawsuits against American businesses with the hopes of securing a quick payday.

Many of these abusive practices are focused not just on larger companies but against small and medium-sized businesses as well. These suits target a settlement just under what it would cost for litigation, knowing that these businesses will want to avoid costly litigation and probably pay up.

Such abusive patent suits claim ownership over basic ideas, such as sending a photocopy to email, aggregating news articles, offering free Wi-Fi in your shop, or using a “shopping cart” on your website – something is terribly wrong here. The patent system was never intended to be a playground for litigation extortion and frivolous claims…

…Congress, the Federal Courts and the PTO must take the necessary steps to ensure that the patent system lives up to its Constitutional underpinnings.

And let me be clear about Congress’ constitutional authority in this area. The Constitution grants Congress the power to create the federal courts and the Supreme Court has long recognized that the prescription of court procedure falls within the legislative function.

To that end, the Innovation Act includes heightened pleading standards and transparency provisions. Requiring parties to do a bit of due diligence up front before filing an infringement suit is just plain common sense. It not only reduces litigation expenses, but saves the courts’ time and resources. Greater transparency and information makes our patent system stronger.

The Innovation Act also provides for more clarity surrounding initial discovery, case management, joinder and the common law doctrine of customer stays. The bill’s provisions are designed to work hand-in-hand with the procedures and practices of the Judicial Conference, including the Rules Enabling Act, and the courts, providing them with clear policy guidance while ensuring that we are not pre-determining outcomes and that the final rules and the legislation’s implementation in the courts will be both deliberative and effective.

We can take steps toward eliminating the abuses of our patent system, discouraging frivolous patent litigation and keeping U.S. patent laws up to date. Doing so will help fuel the engine of American innovation and creativity, creating new jobs and growing our economy.

 

Ranking Member Conyers (D-MI)

There are few economic issues that our Committee will face that are more important than patents.   Our patent system is not perfect, but it is the envy of the world.  Non-practicing entities, referred to as “patent trolls” present a unique problem. In working towards a solution, our first rule should be to do no harm to our patent system, making sure that we do not slow innovation or increase litigation.  I echo Mr. Kappos’ call for caution. I do not think we should amend fee shifting when the Supreme Court has decided to take it up.  I also do not think we should extend the CBM program when courts are just beginning to look at this.  We should be consistent with our Constitutional power and defer to the courts to craft their own rules.  If we do create rules, they should be consistent for all parties. There should be no special carve outs for pharmaceuticals. Last night, I introduced HR 3349, the Innovation Protection Act, to provide full PTO funding on a permanent and statutory basis.

 

Chairman Coble (R-NC)

The America Invents Act (“AIA”) is the most extensive patent reform since 1836.  The Innovation Act builds on the AIA, as it did not touch on litigation.  The rise in litigation is a problem and we need to do something to fix it.  The rules in the Innovation Act address some of the abusive litigation tactics.  We cannot let innovation be held hostage by frivolous litigation.

 

Ranking Member Watt (D-NC)

I supported the AIA and believe that the USPTO is ground zero for maintaining innovation.  We must find the political courage to fully fund the USPTO.  I am proud to join in sponsoring the Innovation Protection Act and hope that all members will join as co-sponsors.  While the patent troll issue is real, it is not as urgent as it has been portrayed.  The GAO has produced a report showing that non-practicing entities are not responsible for the bulk of patent litigation.  They do, however, use litigation tactics that present unique challenges.  We must be careful of overly proscriptive mandates as we may lose the trust of small inventors.  We risk making things worse with unintended consequences.  For example, the joinder provisions in the AIA were successful in preventing parties from suing many at once, but caused a rise in suits against individuals.

 

Summary of Testimony:

Krish Gupta
Senior Vice President and Deputy General Counsel, EMC Corporation

I strongly support the Innovation Act.  While there is a legitimate role for patent litigation for inventors, patent assertion entities (PAEs) are using the system to generate money and are not creators.  As a result of this type of abusive litigation, innovative companies are suffering losses.  EMC has been sued more than 30 times since 2005 and has spent millions of dollars that could have been invested in innovation.  While the America Invents Act (“AIA”) helped this problem slightly, it did not do enough.  There are issues with discovery and other procedural aspects of patent litigation that need to be fixed. In short, the system as it exists today is highly skewed.  The Innovation Act makes significant strides and certain provisions would specifically impact EMC in a positive way.  These include fee shifting, disclosure of the real party in interest and permitting joinder of that party, heightened pleading requirements, discovery reforms, and the customer suit exception.

 

Mr. Kevin Kramer
Vice President and Deputy General Counsel for Intellectual Property, Yahoo! Inc.

Yahoo! is dependent on its patents and we believe the system generally works well for its intended purpose.  We have seen a rise in patent litigation and a decrease in substantive merits in patent enforcement cases brought against Yahoo.  Without reform, our patent litigation docket will likely increase further over time, increasing costs and decreasing our ability to devote our time and money to more productive uses, such as jobs and investments in new products and equipment.  Improving patent quality will not solve the problem, specifically for patents in the software and Internet industry.  Companies like Yahoo! can take steps to help resolve the problem of abusive patent litigation, including defending suits zealously and acting responsibly in prosecuting their own patents and in selling their own patents.  Regarding reform, we suggest the Committee (1) clarify when the prevailing party can recover fees; (2) establish presumptive limits on discovery; (3) require genuine notice pleading; (4) require transparency of ownership (identification of, and joinder of, the real-parties-in-interest); and (5) limit discovery pending claim construction.  I applaud the Innovation Act’s inclusion of the estoppel correction to the America Invents Act. Yahoo! looks forward to working with the Committee as this bill moves through the legislative process, particularly with respect to the standard for construing claims in PTO proceedings and expanding the scope of the PTO’s Covered Business Method review program, which is limited in scope to only those patents used in the practice, administration or management of a financial product or service.  We generally support the Innovation Act, including the expansion of the CBM program.

 

Mr. David J. Kappos
Former Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office

Innovation is the main driver of our economy.  There is a need for extreme caution in making substantial alterations to this ecosystem.  I congratulate Chairman Goodlatte on a bill designed to improve our strong patent system by removing litigation loopholes that debase strong patent rights.  My most important point is that Congress must ensure full funding of the USPTO. Without the funding, the USPTO will already have difficulty implementing changes made in the AIA before considering added changes in the Innovation Act.  Because of the way the patent system works, we have not yet been able to see the effect of the AIA.  If this additional legislation results in overcorrection, we will not be aware of it until years after the system is badly damaged.  It is important we hear from all stakeholders, specifically some innovators that have not had the chance to make their positions known.

 The GAO report attributes the rise in patent litigation to joinder restrictions under the AIA. I disagree with the labeling of “patent trolls” or “non-practicing entities.”  It is bad policy to frame the issue in bad actors, rather than bad behaviors.

I support the policy behind fee shifting, real-party in interest disclosure, litigation procedure, and joinder, but these provisions are still in need of refinement.  Regarding section 18 and CBM patents, I believe that this section of the AIA should settle in further before modifying it.  Section 18 should not be extended to software related inventions.  Regarding mandatory stay, I support the policy of protecting innocent end-users and retailers, but the language is overly inclusive and may allow some manufacturers to escape liability.  Regarding USPTO inter partes review and post-grant review proceedings, I do not offer support or opposition, but present pros and cons on H.R. 3309’s mandate for USPTO to move from its current claim construction standard of “broadest reasonable interpretation” to “ordinary and customary meaning to one of ordinary skill in the art.”  While the provision may make sense on balance, it must be appreciated that it cuts in the opposite direction from the stated purpose of this legislation.

 

Robert A. Armitage
Former General Counsel, Eli Lilly & Co.

I commend the Judiciary Committee for its work on the AIA and its effort to continue patent reform.  I am pleased the Committee has allowed the opportunity to comment on the two discussion drafts. Patents are a property right and having an inefficient system for enforcing these rights eliminates their economic value.  My biggest concern is that the USPTO cannot access its user fees as a result of sequestration and resolving this should be the highest priority.  I thank Rep. Conyers for introducing the Innovation Protection Act and believe that it is a decisive step forward to permanent action to fix PTO funding.  There are some issues that, while in need of reform, are not ripe for reform at this time.  These include prior use rights and publishing on an invention before patenting.  Regarding post-grant review, the USPTO must use the same claim construction standard as used in district court.  Otherwise, it risks disparate outcomes for patent owners. I understand that it is difficult to find consensus about patent litigation procedures, but such consensus is necessary.

 

Summary of Questions and Answers:

Chairman Goodlatte (R-VA)

  • How would the litigation reforms specifically help with EMC’s and Yahoo!’s cases.
    • Mr. Gupta – We had a case where a plaintiff abused the discovery process along with other procedural tools, and we were offered no compensation after successfully defending.  These reforms would help a situation like this.
    • Mr. Kramer – These reforms provide disincentives for patent trolls.  Genuine notice standards will help everyone know what we’re talking about from the start.  Staying discovery until after claim construction will lower costs.  All provisions make the process more efficient and are tremendous steps.

 

Ranking Member Conyers (D-MI)

  • Mr. Kappos, the GAO report found that patent assertion entities (“PAEs”) are not the main cause of the rise in litigation.  Do you think we need to combat PAEs?
    • Mr. Kappos – The GAO report is nonpartisan and shows total number of lawsuits not changing significantly. That being said, I agree that there is a problem. The problem is not one of identifying bad actors such as patent trolls, but should identify actions and behaviors that need to be restrained and redirected.

 

Chairman Coble (R-NC)

  • Mr. Gupta, Should the DOJ or FTC get involved in patent privateering?
    • Mr. Gupta – Yes, and I believe they are investigating. Holding PAEs financially accountable would go a long way in preventing frivolous litigation because it would incentivize defendants to take cases to trial more often than not. Taking cases to trial removes incentives for PAEs to bring frivolous suits.
    • Mr. Kramer, how do the bill’s provisions act together to level the playing field and does leveling the playing field decrease the likelihood of demand letters?
      • Mr. Kramer – Fee shifting would provide defendants an incentive to defend instead of settling.  If defendants are more likely to defend and would receive fees if successful, then there is more risk than benefit in sending frivolous demand letters.

 

Ranking Member Watt (D-NC)

  • Mr. Kramer and Mr. Gupta, there is a case pending before the Supreme Court on fee shifting.  What do you think of this Committee acting before the Supreme Court reaches a decision?
    • Mr. Gupta – While the Supreme Court does a better job at looking at specifics, enacting legislation to shift the fees would more efficiently solve the problem.
    • Mr. Kramer – Congress is in the best situation to solve these litigation problems, not just Octane Fitness case. The case does not go as far as this legislation can.
    • Mr. Kappos, which provisions are you comfortable with?
      • Mr. Kappos – Fee shifting is good policy but is not without its issues.  Real party in interest is fairly non-controversial, but some say it should be stronger. Staged discovery is a good idea, but certain situations should have different standards. Stay for the customer is good for protecting customers, but the way it is written makes it apply to anyone in the distribution chain.  We don’t want all parties in the distribution chain to be protected.

 

Rep. Smith (R-TX)

  • The Innovation Act codifies Post Grant Review.  What should the committee consider or contemplate regarding CBM? Are there any negative consequences to expanding CBM?
    • Mr. Armitage – Post grant review is positive. I urge committee to respect the compromise in AIA on CBM. Section 18 is not necessary.
    • Mr. Kappos – My first concern is that it should not be expanded to cover all software patents. This sends the wrong message about software patents and many other provisions.  It is too early to say whether extending this makes sense.  There are over 70 CBM proceedings pending.
    • Mr. Kramer – The bill should provide low cost alternatives to challenge bad patents.

 

Rep. Cohen (D-TN)

  • Mr. Gupta, you mentioned a case where you found that you had a license.  How could you not have succeeded in this case?
    • Mr. Gupta – We had to go through months of discovery and even though there was no merit to case, the plaintiff owed nothing to us. We sought section 285 sanctions for frivolous litigation and were found not to meet the extraordinary circumstances standard.
    • Mr. Kappos, what do you find to be the most egregious section of the bill?
      • Mr. Kappos – I don’t find any of the bill “egregious,” but the provision expanding CBM is my least favorite. It is still too soon for us to see the results of what was created with the AIA. Regarding the rest of the bill, I think it is still in need of refinement, but I don’t think any provision is completely unacceptable or bad policy.

 

Rep. Bachus (R-AL)

  • There seems to be a lot of support for the fee shifting and heightened pleading standards provisions.  The provision extending business method patents seems to be a more disagreed upon provision.  Many companies are in favor of this provision.  Mr. Kramer, does Yahoo! support expansion?
    • Mr. Kramer – Companies are looking for low cost alternatives to litigation, especially where the patent is very weak.
    • Are the stay for customer suit provisions controversial?
      • Mr. Kappos – These are not particularly controversial, but should be worded to protect the end user and not the entire distribution chain.
      • Any other recommendations?
        • Mr. Armitage – All the litigation provisions need to be done, but the question is how they should be done.  I have some questions as to Markman hearings and judicial conferences.

 

Rep. Johnson (D-GA)

  • If we make strides to eliminate low-quality patents, we will lessen patent litigation.  I have no doubt that there is abusive behavior and it is causing harm to large and small businesses alike. I believe you all are happy that the Supreme Court will be hearing Octane Fitness. How should we construe section 285? Does anyone disagree about the “exceptional cases?”
    • Mr. Armitage – We should not wait for the Supreme Court to decide those cases.
    • Mr. Kramer – I will not predict what the Supreme Court will do, but that decision is limited to that case for those parties, but this Act goes farther.
    • My problem is the small inventor without access to the cash to protect his intellectual property.  My concern is that legislation will go too far and prevent “good faith” PAEs from helping small inventors.

 

Rep. Marino (R-PA)

  • [Enters five demand letters into the record.] These demand letters are examples of abusive litigation.  One fails to state a claim or the party suing.  Mr. Kappos, are you saying that because abusive litigation is not a huge problem, we shouldn’t penalize those that engage in it?
    • Mr. Kappos – I believe it is a problem, but not the biggest problem.
    • I hope that Courts will take a serious look at awarding fees and sanctions.  I ask anyone on the panel, do you disagree that in Mr. Gupta’s example where the party knew the patent was licensed, there should be fees and sanctions?
      • Mr. Kappos – In this situation I encourage Court to use their power to deal with this.
      • Mr. Gupta – There is a problem with district courts not shifting fees and awarding sanctions inconsistently.
      • Mr. Armitage – Special remedies are necessary in these cases.

 

Rep. Chu (D-CA)

  • I’m happy about the provision protecting end users.  Mr. Gupta, tell us more about these situations and how your legal team decides to intervene with end users?
    • We find ourselves being the covered manufacturer at times and covered customer at times.  When our customers are sued, we intervene. PAEs have figured out how to go down the distribution chain and sue for a discrete part.
    • [Enters a letter in support of CBM expansion into the record.] Mr. Kramer, could you tell us about a situation where CBM expansion would have been helpful?
      • Mr. Kramer – I can’t think of a specific situation, but we are participants in this proceeding and we think it’s important to have low cost alternatives, so we support the CBM program.

 

Rep. Farenthold (R-TX)

  • I commend Yahoo! for not giving in and settling frivolous suits, but there are companies, such as Whattaburger, being sued that do not have the resources to defend and are not in the patent field. Does the bill go far enough to protect these companies?
    • Mr. Gupta – There are many provisions in this bill that prevent this sort of litigation.  Also, if a company like Whattaburger knew that, if they successfully defended, there would be a remedy for being subject to the abusive litigation, they would be more like to defend the suit.
    • Would anyone like to comment on the end-user and the covered customer provision?
      • Mr. Kappos – These provisions need work. For example, it states the covered customer agrees to be bound by the decision against other parties, but parties are never in the same situation. There will be a lot of reorganizing relationships.
      • Mr. Kramer – I steadfastly believe that manufacturers should stand behind their products.  I believe the end-user provisions are great.

 

Rep. Deutch (D-FL)

  • Any work that we can do to prevent the abusive litigation should relate to behavior, not specific business models, as these will change. I want to focus on transparency, a provision I support. Mr. Kappos, you said that real party in interest disclosure should be even greater.  What transparency requirements are needed as a whole?
    • Mr. Kappos – These provisions mainly affect them in litigation, but what about all the other kinds of procedures? These should help with administrative parts of the system also.  We have also discussed the lack of disclosure in demand letters.  This is a great point for why we need more discussion about transparency and disclosures.

 

Rep. Collins (R-GA)

  • My concern is where we are headed.  Should section 18 be expanded? Why should we make permanent we make a provision that is not going to expire for six years permanent today?
    • Mr. Kappos – I will reiterate your fears.  Congress has called for a study to review post grant review, including section 18, due two years from now.  I think we should let this process continue.
    • I have concerns about claim construction in post grant review.  Could you comment on this?
      • Mr. Kramer – There are people on both sides of this issue and we want to help them resolve it.
      • Mr. Gupta – We are willing to live by the same set of rules when applied to our patents and when we apply them to other patents
      • Mr. Armitage – The USPTO has never had the authority to adjudicate and now they do.  We must make sure they are consistent.

 

Rep. DelBene (D-WA)

  • Mr. Kappos, could you speak more about the implications of claim construction?
    • Mr. Kappos — When Congress put this in place, they knew they were using the Broadest Reasonable Interpretation (“BRI”) standard.  This standard allowed applicants to amend their claims, which was in the public’s best interest.  Moving to a Person of Ordinary Skill in the Art will change this.
    • What do you think the impact will be on small inventors?
      • Mr. Kappos – They will be concerned about access to enforcement, specifically being prevented from pursuing infringement because of rules against patent trolls. For this reason, we should ask responsibility of defendants also.
      • Mr. Gupta – They are more concerned about abusive litigation practices being used against them than being able to pursue infringement claims.

 

Rep. Poe (R-TX)

  • I would like to talk about TRIPS compliance.  Could expanding CBM invite other countries to discriminate against particular technologies?
    • Mr. Kappos – I enthusiastically agree with your concern. Expanding section 18 will invite our trade partners to sit up and take notice.  We should let the procedure run forward and not expand it.
    • Mr. Armitage – There is no need for the transitional program to be made permanent.
    • Is it too soon to expand CBM?
      • Mr. Kappos – Yes.
      • Mr. Gupta – Yes.
      • Mr. Armitage – Yes.
      • Mr. Kramer – No, we should expand it.

 

Rep. Jeffries (D-NY)

  • Mr. Gupta, you testified that you were sued a significant number of times by patent trolls that were lacking in merit. Were you awarded fees?
    • Mr. Gupta – We were awarded fees only in one case.
    • Mr. Kramer, would you say that patent troll behavior is anchored in the idea that cost of discovery is so huge?
      • Mr. Kramer – It is anchored in the idea that the cost of litigation as a whole is so huge.  This encourages settlement.  Genuine notice pleading would be a tremendous step.

 

About the Authors

Marla Grossman is a partner at American Continental Group. Grossman is one of the nation’s preeminent IP and technology lobbyists. Through her wide network of contacts in the Washington community and across the country, she has worked with a diverse portfolio of clients, including associations and Fortune 500® technology, health care, financial and traditional manufacturing companies.


Chris Israel is a partner at American Continental Group. Israel is an accomplished public and private sector executive with an extensive record of leadership, including senior-level appointments by the President of the United States, service on Capitol Hill and holding a senior-level position within a Fortune 50 company. He is an expert in developing and executing effective policy and communications strategies.


Stephen Pinkos is a partner at American Continental Group. Pinkos has nearly 15 years of experience working in senior government positions on Capitol Hill and in the Administration. From January 2011 to June 2013, Steve served as Policy Director and General Counsel to House Majority Whip Kevin McCarthy. He worked with the Offices of the Speaker and Majority Leader to devise and pass all major legislation considered by the House of Representatives. He also worked with the Office of the Speaker and the House General Counsel on broad legal matters affecting the House of Representations.


3 comments
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  1. How is it that a hearing like this can happen without the presence of a single individual representing the interests of independent inventors? How is it that the American Patent System can be radically changed without considering the interests of independent inventors?

    The traditional American Patent System, that enabled America to become the greatest innovator and greatest economy in the world, was created with great consideration for enabling the independent inventor to protect and defend that which he created. The American Patent System, by not favoring vested interests, was radically different than the patent systems of the rest of the world, and that is why it worked so well in promoting innovation. Independent inventors and vested interests have always been at odds, but only recently have our politicians been totally blind to the importance of independent inventors to America.

    Often, the greatest innovations come from individuals without significant financial resources. Consider the Wright Brothers. So, if the invention is willfully infringed, what choice does the inventor have? He can sell to an entity that does have resources and will fight legally or, if he has a strong case, he can hire an attorney on contingency. If these options are eliminated, an absolute cornerstone of America will have been destroyed.

    Now I know that some of you agree with this viewpoint, but there are many who are just sitting back and spectating while the system is being dismantled. If idealism doesn’t motivate you, consider the practical – how the public views patents. There has always been a percentage of individuals who think that patents have no value because “the little guy can’t fight the corporations.” When patent law changes finally cause that viewpoint to prevail, there will be a huge drop in the demand for patents. And this is precisely what the multinationals pushing the legislation want.

    Best,
    Randy Landreneau

  2. Randy-

    The sad truth is Congress doesn’t listen to individuals. Getting an audience with a decision maker on Capitol Hill is largely a pay to play game. Even if it isn’t nefarious, it takes money to run in the circles where you will bump into staffers and Members of Congress, so those with the funding get be around and be heard.

    Now more than ever we need everyone with an interest in strong patents to stand up. Write Members of Congress at the very least. If you can do more that is better, but every little bit has to help. I know it feels like shoveling water into the ocean, but if even the small steps are too much all is lost.

    More to come later this week in an article on the Hidden Agenda of patent reformers.

    -Gene

  3. There were two people at the hearing urging caution – David Kappos, head of the USPTO until he resigned earlier this year (he’s at Cravath now), and John Conyers, the ranking minority (Democratic) member of the committee. I’ve been in touch with Judiciary Committee staffers on the Democratic side. This came out of nowhere for them; they didn’t hear much about it until Goodlatte introduced it.

    HR 3309, like the previous “SHIELD Act”, is supposed to stop “patent trolls”. But it’s much broader. It makes “loser pays winner’s legal costs” the standard. For a small entity to sue a big company with expensive lawyers becomes financial suicide. The SHIELD act had something similar, but it exempted the original patent holder, someone manufacturing the invention, and universities. HR 3309 doesn’t do any of that. It allows big infringers to crush small companies and inventors beneath their boots.

    This bill is a triumph of effective lobbying by the American Association of Advertising Agencies and the Direct Marketing Association (the junk-mail lobby). This is a surprising source of opposition to patent enforcement, but there’s a specific reason for their interest. There are four patents related to targeted advertising which cause advertising agencies problems. To get rid of those patents, the advertising industry has convinced other ad-supported companies to support a huge change in patent law. The changes all favor big companies over little ones by making litigation more expensive.

    None of the PR supporting HR 3309 mentions specific patents. Past complaints about patents were typically about ones involving picture or video compression (the GIF patent, the JPEG and MPEG-LA patent family) or communications protocols (the classic Hayes modem patent). Not this time. It’s all about making litigation tougher for the patent holder.

    The A4s (what the American Association of Advertising Agencies calls itself) has a list on their web site of patents they are concerned about:

    6,628,314 and 6,771,290 (relates to targeted advertising),
    5,251,294 (“Accessing, assembling, and using bodies of information” – rather vague),
    5,930,474 (store locators)

    That’s the source of the push behind this bill. Other companies have signed on, but the ones behind it are all involved heavily in online and mobile advertising.

    This bill isn’t about “bad patents”. There’s nothing in this bill about increasing patent quality by raising the “obviousness” bar. That’s because of opposition from the pharmaceutical industry, where many drugs are “me-too” drugs, very similar to existing drugs. (Ref: http://community.seattletimes.nwsource.com/archive/?date=20020416&slug=clarinex16) As the A4s wrote in their letter to the FTC (http://www.ftc.gov/os/comments/pae/pae-0035.pdf)

    “What seems like a bizarre and wasteful tactic in the high-tech industry can be a basic good practice in the pharmaceutical industry.”

    They thus advocate a double standard so as not to antagonize a group of heavy advertisers.

    The patent troll industry exists because, in the last decade, it’s become much tougher for inventors to enforce patent rights. Four changes in law did this:

    (2006) “eBay v. MercExchange ” The patent holder can’t get an injunction against infringement any more, except in extreme cases. This destroyed the concept of a patent as property that only the patent holder could use.

    (2007) “In re Seagate” The patent holder can’t get triple damages unless there is “reckless infringement”, which means the worst that can happen to an infringer is that they have to pay a royalty, the same royalty they might have negotiated. So infringement by a big company is risk-free.

    (2007) MedImmune, Inc. v. Genentech, Inc. If a patent holder writes to an infringer asking them to pay royalties, they can be sued for a judgement that the patent is invalid, in a court of the infringer’s choosing. So, as a patent holder, you have to file suit before you can negotiate. This is why “patent trolling” became necessary.

    (2011) The “America Invents Act” The “America Invents Act” added “post-grant opposition” proceedings, so now infringers can harass patent owners and stall infringement claims in multiple forums. Note that one of the “features” of HR 3309 is to limit estoppel so that similar issues can be raised once in a post-grant opposition and then re-raised in an infringement case. This makes it clear it’s all about raising the cost of enforcing a patent by wearing down the patent holder.)

    Because of those changes, enforcing a single patent is no longer financially feasible in most cases. A big patent portfolio is needed. You either have to be a big patent holder like IBM or Google, or you have to deal with a company that aggregates patents to monetize them. This created the “patent troll” industry.

    One effect of all this anti-patent effort is a shortage of new ideas. The Silicon Valley venture capital community, which had been profitable since the 1970s, has been losing money as a group since 2001. Most “new ideas” presented to VCs today are rather banal. VCs complain about this. Everyone seems to want to do a “app”. Without strong intellectual property laws, what matters is time to market and promotion, not innovation.

    So, to save innovation, write your Congressional rep and ask them to oppose HR 3309. Send them the facts above. Many people don’t know what’s really going on here.

    Meanwhile, some of us are working on amendments to narrow this thing. More on that later.

    John Nagle
    Animats
    http://www.animats.com