Earlier today the Senate Judiciary Committee held a hearing on patent reform. The hearing was titled The Impact of Abusive Patent Litigation Practices on the American Economy. There was a variety of diverse views presented by the witnesses, including one witness, Krish Gupta, who continued to cite the bogus and thoroughly debunked Bessen-Meurer “study” that erroneously claims that patent trolls cost American businesses $29 billion annually. That estimate erroneously and egregiously reached by the hopeless flawed Bessen-Meurer study continues to be the primary evidence used by those who want to destroy the patent system. Sadly, continued reliance on this near fraudulent study is commonplace despite the fact that the authors themselves have retreated from their own conclusions. Still, Gupta’s reliance on the debunked Bessen-Meurer study suggests that he is either completely unknowledgeable or that he is pushing flawed data in an effort to mislead. Hopefully the Senators and their staff will see through the charade.
Aside from Gupta, everyone else seemed to largely be in agreement. The problem is with fraudulent and misleading demand letters, not with innovators who legitimately seek to enforce valid patent rights. For some time I have felt that we will see some type of patent reform this year, but that it would be largely limited to demand letter reform, perhaps with a smattering of litigation reforms relating to requiring more informative federal complaints.
If the statements of Judiciary Chairman Senator Chuck Grassley (R-IA) and Judiciary Ranking Member Senator Patrick Leahy (D-VT) are any indication it would seem that efforts in the Senate will be focused most directly on demand letters and nebulous federal complaints while trying to make sure that innovators are still able to obtain and enforce valid patent rights. Even Senator Chuck Schumer (D-NY), who has been one of the strongest supporters of patent reform in the Senate, recognized the need to fix the abuse problem without creating unintended consequences that would harm innovators, which could potentially be more harmful.
Senator Grassley lead off the hearing with prepared remarks, which initially sounded as if he was ready to buy the “patents are weapons of mass destruction” argument, but then he cooled and recognized that it is not his intent to make it difficult for innovators to enforce their patent rights, which is an important concession that has been missing over the last several years whenever the issue of patent trolls arises. Also significant was Grassley recognizing that “licensing one’s patents is not in and of itself a bad thing.”
In part, Senator Grassley said:
This practice of patent trolling has hit businesses both big and small across all industries, and it’s having a harmful effect on the economy. Patent litigation abuse imposes high costs on American businesses. It wastes resources that could instead be utilized for research, development, job creation and economic growth. It undermines the innovation and creativity that patents are supposed to protect.
Patent assertion entities focus on buying and asserting patents, rather than on developing or commercializing patented inventions. Now I want to make clear that licensing one’s patent is not in itself a bad thing. Inventors and patent owners, including universities, often aren’t in a position to commercialize their patented inventions – but they certainly have the right to protect their intellectual property against infringers.
Patent trolls, however, are entities that engage in abusive and deceptive tactics to assert poor quality patents against businesses already utilizing technologies as common as wireless email, digital video streaming and the internet. They use overly broad patents to allege infringement against companies that are simply engaging in normal business activities or have bought a technology, product or service from a vendor, many times right off the shelf. They send out intentionally evasive and misleading blanket demand letters, and employ overly aggressive litigation practices to extort settlements. They frequently hide behind patent holding subsidiaries, affiliates and shells of operating companies in order to escape scrutiny.
Frivolous patent lawsuit filings have increased over the years, and they rarely have merit. But the extent of the problem is actually much worse because most cases don’t reach merits judgment stage. Patent trolls strategically set their royalty demands below litigation costs to entice companies to settle rather than run the risk of expensive and risky patent litigation. Many companies don’t have the expertise or resources to litigate these cases, so most of the time they have no choice but to submit to this patent extortion. This, in turn, drives up costs which many times are passed on to consumers.
In his prepared remarks Senator Leahy also struck a more conciliatory tone than he has in the past, recognizing that balance is needed to ensure that innovators are able to enforce legitimate patent rights. In part Senator Leahy said:
America’s patent system fuels our Nation’s greatest innovations. It promotes investment in new products and designs that benefit us all. In recent years, however, some bad actors have abused the patent system in ways that detract from its purpose. Small businesses in Vermont have been threatened with patent suits simply for using office equipment they purchased off the shelf. Website owners have faced costly litigation for using basic software in e-commerce. Instead of using patents to drive new creation, bad actors have held up main street businesses and innovative companies to extort financial settlements.
Last Congress, the Senate Judiciary Committee dedicated months of work to develop bipartisan solutions for such behavior. These solutions include: promoting transparency to hold bad actors accountable; curbing misleading demand letters; and protecting customers who are targeted simply for using a product, when the manufacturer should defend the suit instead.
We also considered measures relating to patent litigation, to address concerns that it is unusually difficult to defend against frivolous patent suits. These concerns include the extreme cost of discovery, and the fact that today, patent holders can file a lawsuit with only minimal information, so a defendant cannot even assess whether they are liable…
Many have raised concerns that, if taken too far, litigation reforms like those in the House-passed Innovation Act would harm legitimate patent holders when they enforce their rights in court. I agree we must find a balance, which is why we worked for months last Congress on legislative text. Although the Committee was not able to complete its work, we made significant progress on comprehensive draft legislation. I hope we can build on that work now to pass meaningful legislation into law.
Leahy would also told the story of a Credit Union in Vermont plagued by patent trolls. He explained that due to lack of transparency it was impossible to know whether they were being repeatedly targeted by the same real party, the claims they faced were nebulous as best, and the demand letters asserted that patents were being infringed when the Federal Circuit had already declared the claims of those patents to be invalid.
During his allotted time Senator John Cornyn (R-TX) talked about balance, saying:
This is an important part of the table setting for consideration of patent reform legislation. We got close last year, but it didn’t happen. I’m optimistic that we will be able to make progress this year.
If there is one word that I guess I’ve heard all of you use it is “balance.” We need to recognize that there are certainly legitimate rights that should be litigated and decided in Court, but on the other hand there is also legal extortion, shaking down people who can’t defend themselves and using that money to file other frivolous litigation.
Cornyn then went into discussing the legislation that he submitted in the last Congress, which would require heightened pleading requirements and fee-shifting. Cornyn then said: “I’m personally of the view that if we don’t have an adequate fee shifting mechanism in the legislation it isn’t worth doing.” While I am not a fan of fee-shifting, it is worth noting that the Cornyn proposal would not be a presumptive fee-shifting as is in the Innovation Act in the House, but a more permissive standard giving district courts more discretion.
During his time Senator Schumer also struck a more conciliatory tone than once upon a time. He focused his ire to those who engage in extortion, particularly those who seek to extort high-tech start-up companies. Schumer did recognize the need to take into consideration the needs of inventors and innovators that need a robust patent system.
It is not the first time we have come together to discuss the problem of patent trolls, I’m sure it won’t be the last. Last Spring our Committee spent several months in heated and bipartisan negotiations, but our goal remains the same — that would help us club the patent trolls once and for all without harming legitimate inventors and innovators who rely on a robust patent system. Although he deal was elusive at the time I am confident that with renewed bipartisan effort an energy we will get this done.
Schumer also acknowledged that it is very hard to balance the needs of those who are the target of extortion-like activity with the needs of legitimate innovators who absolutely require strong patent protections and who are not the problem. “Patent troll legislation is in many ways… like a Rubik’s Cube,” Schumer explained. “You need to turn and twist all the parts properly so we are really fixing the problem, but also protect those who are not a part of the problem… very hard to do and why it has taken a long. It is not ideological as much as it is trying to solve the problem with creating negatives that might outweigh the benefit of solving the problem.”
What will happen is anyone’s guess, but there does seem to be a coalescing around sensible, balanced reforms that will thoughtfully target the abusive practices seen in the industry. If that happens it would be in contrast to the Innovation Act in the House, which many believe goes too far and would not meaningfully target abusive practices. The question remains, however, whether the rhetoric spoken by Senators in support of innovators and the need for strong patent rights will ultimately coincide with the legislative language that moves forward.