PATENT Act Still Ominous For Startups and Small Inventors

Although the latest version of the PATENT Act (S.1137) represents an improvement over previous versions of the legislation, it would still make all U.S. patents less enforceable and cast an ominous cloud over startups and small inventors.

Without strong enforceable patents, larger companies can ignore the rights of smaller companies and imitate their ideas without paying for them. We see this phenomenon in countries like China, where patent rights are not enforced and therefore not effective to prevent copying. For young, quickly growing startups—the primary job creators in our country—unduly burdening the ability to protect their inventions from infringers would be devastating or fatal. Aside from having to compete against infringing products, venture capital and other investors will not take the risk of investing in companies whose value is based on technology that is difficult to protect under U.S. patent law.

The latest version of the PATENT Act notably fails to address the critical overbreadth problems of the customer stay, heightened pleadings, and discovery provisions. Together these provisions place an undue burden on the enforcement rights of legitimate patent owners.

The customer stay provision as drafted is so broad that it invites further abuse. The Committee’s section-by-section of the customer stay provision states that “the customer stay is available only to those at the end of the supply chain.” The Committee’s short summary further states that “[t]he bill protect [sic] customers who are targeted for patent infringement based on a product they simply purchased from a manufacturer or off the shelf.” The legislative text, on the other hand, makes a stay of litigation widely available to many more entities than innocent end-user “mom and pop” stores and retailers, including companies in the Fortune 10 and beyond. The bill fails to close this large-company loophole and makes no changes whatsoever to narrow the protections to small businesses. Instead, a stay would remain available to shield large companies who profit most from patent infringement. The provision’s effect would be to allow these large company infringers to delay litigation proceedings for years in some cases, running out the clock on small patent holders, waiting for them to exhaust their resources or go out of business.

The pleadings and discovery sections similarly create threshold barriers to all U.S. patent owners’ ability to enter the courthouse door and to gain access to critical information needed to defend their patent rights.

Under the current pleadings language, for example, a patent owner asserting their patent rights would be required to identify with particularity “each” claim and “each” accused product — down to the product model. This would be extremely burdensome. Imagine if there were 20 product models alleged to infringe 5 patents, each with 10 claims. A patent holder would have to do heightened pleading on 1,000 categories of information (20 products x 50 claims) and patent complaints could easily run over 100 pages long.

These pleadings requirements would massively increase up-front cost, expense, and delay, which would be particularly worrisome for small businesses, including startups and venture capital-backed portfolio companies who have limited resources. Patent cases will become mired in months-long delays over the sufficiency of pleadings, with endless cycles of defendants filing successive motions to dismiss complaints and amended complaints.

In her April 15 testimony before the House Judiciary Committee, USPTO Director Michelle Lee expressed concern about this provision and advocated for a fix. She stated: “A concern we have is that requiring the pleading of additional claims with greater specificity at the beginning of the litigation might unduly burden a patent owner, might encourage needless and early procedural motions in the form of motions to dismiss, and not materially advance the case, when all that is required is an appropriately plead single claim in order for the case to move forward.” The bill’s authors have not adopted her suggestion.

The PATENT Act also fails to correct the well-documented unfairness and imbalance in the inter partes review procedure (IPR) at the USPTO that is allowing abuse of the IPR system, an unintended consequence of the America Invents Act. Since the IPR program was implemented in September 2012, more than 2,700 requests for IPRs have been made at USPTO, and 78 percent have been decided against the patent holder.

Although the latest version of the bill makes some changes to the IPR process, they do not go far enough in reining in the potential for abuse of the IPR system. Changes to the IPR system that aim to end abuse should impose a standing requirement for filing IPR petitions, ensure that patent owners have the right to amend their patent claims to preserve patentability, and grant patent owners a true presumption of validity in IPR proceedings by requiring petitioners to prove their case by clear and convincing evidence. Model language for these reforms can be found in the bipartisan STRONG Patents Act, cosponsored by Senators Durbin, Coons, Hirono, Vitter, and Cotton.

The overbroad changes in the PATENT Act and its House counterpart, the Innovation Act, would stack the deck against our nation’s most innovative enterprises. As Congress considers measures to target abuse, it should tread carefully to ensure that it is keeping our patent system strong and continuing to incentivize innovation and job creation across the economy for generations to come.

[Patent-Reform]