Judge Michel says Congress stuck in a time warp on patent reform

Chief Judge Paul Michel (right) with Bernie Knight (right).

Yesterday I co-hosted a discussion on patent reform with Bernie Knight, former USPTO General Counsel and current partner with McDermott, Will & Emery. The event was hosted at the Washington, DC, offices of McDermott. Chief Judge Paul Michel (CAFC, ret.) was on our panel of speakers, joined by David Ruschke (Medtronic), Louis Foreman (Inventors Digest and Everyday Edisons), Phil Harstein (Finjan), Hans Sauer (BIO), Dean John Whealan (George Washington Law School) and John Thomas (Georgetown Law School).

Over the next several days I will be publishing articles about the event, our discussions and my impressions. For photographs of the event please see our Facebook page.

What follows is a transcript of Chief Judge Michel’s opening remarks.

I left the court, which I really enjoyed, primarily to be free to speak out on issues of public controversy, public policy, to be free as sitting judges are not to criticize the Congress and the Supreme Court. Now we don’t have time for the later, so I’ll confine myself to the former. The problem facing the country as embodied in Congressional proposals to change the patent system is that it’s stuck in a time warp. Congress acts as if the landscape today was exactly the way it looked in 2010 or 2011, but in fact it has totally turned upside down in the last two years.

We used to have, for the most part in this country, what I’ll call an honor system where companies that were using technologies patented by others willingly took licenses without being forced by court orders to do so. The honor system now is largely gone.

Dave Kappos and I had a very interesting birds-eye view of this rapid change by being involved in an attempt to create a stock market for patent rights. It was called Intellectual Property Exchange International. And it went out of business in April because no one would take a license, because in every case, and these are very high quality portfolios, standard essential patents sponsored by major wonderful companies that you all know, nobody would take a license to any of these portfolios. In every case the business people wanted to and in every case there outside counsel told them don’t do it. Don’t take a license, don’t negotiate, don’t respond. If you get sued call us and we’ll file an [inter partes review], we’ll defend you in court. You’ll probably win. We can drag it out and make it so punitive for the owner that they’ll probably lose the war of attrition. So that was just one example but I think there’s much evidence that the patent licensing market is collapsing in many business sectors and many technologies and that obviously undermines the incentive system for investing in not only research and development but even more expensive commercialization where you actually build factories, hire workers, and put products on the shelf.

So in the environment where the honor system is gone what really is a patent? It’s a ticket to file a lawsuit. That’s all it is. So then patent values follow enforceability. The less enforceable the patent is in various ways, the lower the value of the patent for the whole portfolio.

What determines enforceability? Well, a lot of things, but I suggest primarily affordability. A huge portion of patent owners are being shut out of the process because it’s become too expensive. It was too expensive before the [America Invents Act]. The AIA made it much more expensive. It was too slow before the AIA. The AIA made it much slower. It was too uncertain before the AIA and the AIA made it more uncertain and so on. Now with the new bills that process will multiply again. The cost will go up, the delay will go up, the uncertainty will go up, the disruption will go up, the value will go down, the investment incentives will go down. So there is a lot at stake here, very important for Congress to get it right.

Now, I don’t want to get into which bills I like or which specific provisions I would change because that is too granular. What we really need to focus on initially is can we have a process in the Congress that is fact based, that is accurate, that is able to hear all viewpoints, that is able to sort of conflicting claims, that is able to vet assertions because some of the things that have been said in hearings I’m quite sure are highly exaggerated and some other things are flat out false. But no one seems to point that out or call the witnesses on what they’re saying. So we need a process for accuracy because we can’t get a good policy resolve and we can’t get improvements if the process for crafting new legislation is defective in the ways that I mentioned.

Now the other problem that the Congress faces besides the time warp problem where they think it’s still 2010, but it’s really a totally different world, is that the Congress seems to assume that most patent suits are frivolous. And that most non-practicing entities are trolls, are abusers who are filing frivolous lawsuits. Now I don’t know that there are totally comprehensive or reliable statistics but my impression is that most patent suits are not frivolous. Certainly the 2,000 patent suits I saw in two decades on the Federal Circuit may not be representative of everything that’s ever filed, because of course most don’t get litigated and only half that get litigated get appealed, but of the subset I saw I can confidently tell you that less than 1% could be fairly termed frivolous. So the assumption by Congress that most suits are frivolous I think is highly questionable and probably flat wrong and the same thing with the assumption that most NPEs are abusive trolls. So the importance is for Congress to get the facts straight before it decides what the cure is for the alleged disease.

Now, with respect to the process I find that it’s very disturbing that in the Senate hearing held just last week the number of investment community people who appeared as witnesses, or called as witnesses allowed to testify was zero. The number of inventors allowed to call to testify was zero. The number of university representatives, the great research universities and the ultimate backbone along with the federal government probably the finest research in this country forever, zero. The number of startups or small and middle innovative companies called to testify, zero. The number of trial judges called to testify, zero. So how can they get the facts straight when they aren’t calling many of the prime witnesses that they need to call?

The process itself has to change if the outcome is going to be beneficial to the country and fair to all the different stakeholders. Look, we have a choice in this country. We can either have a system that would be the dream system for 10 to 20 Silicon Valley giant companies, I’ll just use Google as an example, but you know all the companies. We all buy their products. They’re fabulous companies. We can either have their dream view of a patent system by which they would save marginal litigation costs, or we could have a patent system that works for all the other players large and small, all technologies, all size companies, all points in the lifeline of companies as they grow and evolve and change. So we have a choice, it’s an important choice, it’s not easy to make but unless the process is reformed we can’t possibly be assured of good outcome.

I’m hoping that the Senate, the House also but I think the primary action is probably in the Senate will have more hearings, will call a much broader array of people representing other viewpoints and other interests.

I’ll close by telling you a funny story. I testified on patent reform only once. It was in early 2011 and it was in the House subcommittee. I was on a bench of three witnesses with a representative of the old Fairness Coalition, which has changed its name but is still around, and the 21^st Century Coalition, which has not changed its name and is still around. I was the third witness of course. I tried to stress to Chairman Goodlatte that while the other two witnesses were brilliant, well-informed people who had very thorough, careful knowledge and prepared testimony that I was the only one at the table who was objective, neutral, didn’t have an axe to grind, wasn’t a servant of the bottom line of a particular company or a group of companies. And the attitude of the House was, well then why should we listen to you?

[Laughter]