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Why ‘Patent Reform’ Harms Innovative Small Businesses – Summary


Written by Schmidt, Jacobus & Glover
Posted: April 30, 2014 @ 10:00 am
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The purpose of the U.S. patent system has been to promote innovation. The various “Patent Reform” bills will in fact retard innovation and cost America jobs. They are contrary to the Founding Fathers’ intent in Article 1, Section 8, Clause 8 of the Constitution, contrary to the policies of over 220 years of patent law, contrary to the advice of the Office of Advocacy of the Small Business Administration,[i] and contrary to prior statements of President Obama.[ii]  We urge every small business inventor to contact their Senators and urge them to strongly oppose S.1013 (Cornyn), S. 866 (Schumer), and S.1612 (Hatch).  Although the current version of S.1720 (Leahy) is not as horrific as the other bills, it is problematic and should also be opposed as it does not fix the Troll problem, but does harm independent and small business inventors. If your Senator is not on the Judiciary committee, please ask him or her to contact their colleagues on Judiciary to let them know they are uncomfortable with the above proposed bills. We also encourage you to contact your Congressmen and ask them to oppose HR 3309 should it ever come back to the House.  Finally, we suggest you contact the White House  and let them know that the Patent Troll bills don’t fix the patent troll problem, but do harm the innovation ecosystem in America, and will be bad for your business.

So, what can we support?  First, we suggest you tell your legislators to vote FOR S.2146, Senator Feinstein’s “Patent Fee Integrity Act.”  This bill allows the Patent Office to keep our fees to use them as they were intended, processing your patents.  It will end the $1.7 Billion “Invention Tax” which has diverted your fees to other Government uses.

Second, the Small Business Administration’s Office of Advocacy’s (OA) report required by the America Invents Act (AIA) to evaluate the effects of that law on small business is more than 18 months overdue, and is likely more than a year away from completion.  Please ask your Senators to encourage their colleagues that prior to the completion of the OA report that any new patent reform bill should deal solely and strictly with Bad Faith Patent Demand Letters, and not with the issues discussed in the previous four parts of this paper, and as listed below.  The ‘‘Transparency in Assertion of Patents Act’’ S.2049 (McCaskill) deals with these bad faith demand letters.  But, as currently written is overbroad and should be opposed. A very narrow law could be supported, but there is no such bill introduced.  However, there is language proposed by the Innovation Alliance (unpublished) that, to my knowledge, will help solve the patent troll issue and not be harmful to honest inventors.

Another area that has not been addressed is the effective loss of the one year grace period resulting from the passage of the AIA.  This has been particularly onerous on small company inventors as it hinders both market testing and fund raising by not allowing details of the invention to be disclosed or the product to be manufactured or sold prior to patent application.  This shift in the patent law needs to be evaluated as required by the AIA.  Completion of the OA Report needs to be accelerated, as it is already 18 months late.

To summarize the concerns with the House and Senate proposed bills, please let your legislators know you oppose the following provisions of the draft legislation:

  • Loser Pays:   Inventors will be discouraged from enforcing their rights and that invention and resulting jobs will dwindle.  It is anti-small business, anti-technology development, and anti-US jobs.
  • Pay to Play provisions require the inventor plaintiff to post a bond or certify that they can pay the alleged infringers legal fees should they not prevail.  This puts enforcing a patent beyond the financial capability of all but the largest of small businesses and will discourage invention.
  • Fee Shifting “Joinder” makes investors and others personally liable.  This provision makes patents a “toxic asset” and will curtail investment in new growing companies.
  • Covered Business Methods (CBM) provisions will devalue many software patents, thus hurting the economy.  CBM provisions will adversely affect the fastest growing segment of our economy.
  • Elimination of Post Grant Review Estoppel –This will allow an infringer to bring multiple actions to defeat the patent holder by burning the inventor’s financial resources and time with effectively perpetual litigation.  It will be fatal to most inventors by allowing multiple “bites at the apple” by infringers to cloud patent title and frustrate legitimate inventors, denying them justice and making fundraising even more difficult.
  • Disclosure of All Plaintiff Interested Parties will discourage commerce by requiring Angel investors to tell the world who they are, and will dampen licensing activities by forcing the licensee to disclose their business plans.
  • Enhanced Pleadings and Limiting Discovery requires inventors, but not infringers to plead specifically, before discovery.  This will allow many legitimate patent suits to be dismissed, before they even get started. The changes affect the inventor negatively and the infringer positively, thus stacking the deck even further against the inventor. Further, it will cause delays in filing suit, add additional costs, and delay resolution to the disadvantage of patent owner even with meritorious claims.
  • Customer Stays present a problem for patents that focus on “use” rather than manufacture.  The inventor is left with no way to enforce her patent when she can’t sue a manufacturer as the manufacturer is not violating any claims of the patent, and they can’t sue the end users (“Customers”) until she prevails against the manufacturer.  This may put the inventors in a Catch-22, where they will have no remedy.  It also encourages foreign manufactures to collude to receive a “get out of jail card” and infringe with impunity.

These are the major problems with the current legislation.  All of these terms act in favor of large corporations and to the disadvantage of individual inventors and their small firms.  Patent Reform is yet another example of Congressional favoritism for Wall Street over Main Street.  It is important that every inventor, patent attorney, and others involved in the innovation ecosystem let their legislators know how much they oppose the Hatch, Cornyn, Schumer, Leahy, and McCaskill bills.  If your legislator is not on the Judiciary, please ask them to talk to their colleagues and express their concerns with supporting these bills, as they will hurt individual inventors and inventing small companies in their state.



[ii] Rebecca M. Blank and David J. Kappos Forward to the Intellectual Property and the U.S. Economy: Industries in Focus Report, Economics and Statistics Administration and the US Patent and Trademark Office, March 2012.

 


About the Authors

Robert N. Schmidt is Chairman and CEO of Cleveland Medical Devices, Inc., a company that develops, manufactures and markets sleep disorder products. Schmidt is also the National Co-Chair of the Small Business Technology Counsel (SBTC), which is a Council of the National Small Business Association (NSBA).

Heidi Jacobus is Chairman and CEO of Cybernet Systems Corporation, which is a leader in American research and development in the medical and defense fields and is one of the country’s largest Small Business Innovative Research (SBIR) contract winners. Jacobus is also the National Co-Chair of the Small Business Technology Counsel (SBTC), which is a Council of the National Small Business Association (NSBA).

Jere W. Glover is Of Counsel to the Washington, DC, firm of Seidman & Associates. Glover is also the Executive Director of the Small Business Technology Counsel (SBTC), which is a Council of the National Small Business Association (NSBA).


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4 comments
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  1. Regulations are driven by the regulated. Big business which can afford lobby groups influences and directs government policies. This is the way it is in America. It’s not just IP policy, it’s everything, like trade agreements, and foreign policy.

  2. OK, a troll is an ugly disgusting little man at the river crossing who makes the maiden surrender her innocence in order to cross the river to be with her sick mother. It s a great degrading word for the campaign.
    Now lets look at the world of patent lawsuits by organizations that come into ownership of patents for the purpose of suing.
    In the beginning an individual patent owner would seek a contingent fee arrangement with lawyers who would take on the lawsuit. But that got rarer and rarer because the desired potential for early settlement went away, the cost was years of time and huge amounts of money. Also, the chance of a bad result is about 50/50, after one or two times up to the Fed Circuit. So, some entrepreneurs came up with making it like an investment, getting inventors to a company that would make a business of asserting patents. Now entrepreneurship is normally considered a good idea, but not by the big companies that would be faced with an even playing field in patent litigation. It has even gotten pretty sophisticated such as finding a group of patents for a single lawsuit, making the risks to the defendant greater. Thus comes the “troll” designation. Yes it has been aided by unseemly litigation actions on the part of a few of these plaintiff companies. But in general, the NPEs serve a very beneficial need and there is no reason to cripple them. Keep in mind, the Courts have plenty of power to cut down miscreants in litigation, and they do.
    Is there a chance that these new proposed laws can be avoided or diminished in their damaging effect-I don’t know, its up to people like Schmidt, Jacobus and Glover and the organizations they represent. They are competing against a single resource, money. And I wish I could object that principle would reign over money, but it just isn’t so, politicians are the most hypocritical class in our society-they will articulate some rationale which will ring true to the uninformed and will of course be fully unfair.

  3. As a small business owner focused in the field of managed networks, I take issue with your position. Our relatively new business is being threaten (Cease and Desist letter) by one large organization (and major Japanese carrier), and being sued by another group, an official patent troll. Their claims are very different but cover broadly aspects of network services delivery. In the late 1990’s the USPO issued vague patents describing various methods for accessing the Internet via a local area network. As a growing company in this field, we are already spending way too much time,,effort and money defending ourselves from these poachers. Clearly they are looking for “something for nothing”, using US patents and high court costs to ply settlements. They can afford these weapons, but we cannot.

    We have taken nothing from anyone. Should it cost us $2 million plus to prove our it in court? Face it, the system is broken and America jobs are being wiped out. If you want details, email me back. Glad to share. And, wake up! You are on the wrong side of this argument if you really care about American small business.

  4. Ron-

    I’m sorry to hear about your situation. It is an all too common story that we hear. I know what you say happens.

    The trouble is the so-called patent reforms will cripple small businesses that innovate and need patents, while not offering you any relief whatsoever. Even if the fee-shifting provisions were enacted for you to get relief you would need to spend the hundreds of thousands of dollars (or millions of dollars) fighting and ultimately win in court before the district court could order the patent owner to pay your fees. My guess is you don’t have the money to pay attorneys to prevail in the first place, and even if you did you would have to worry about whether the patent owner would declare bankruptcy and never pay your fees anyway.

    The problem is that Congress is not pursuing any reforms that would make the system better, or which would address any of the abusive activity that we all know goes on in the system. In fact, all that would happen would be that patents would be devalued, which means acquiring patents would become less expensive, which leads to more well funded trolls buying patents and engaging in bad behavior.

    -Gene