In Patent Reform, Less May Be More

In Patent Reform, Less May Be More

Early this month, Representative Bob Goodlatte, House Judiciary Committee chairman, introduced the Innovation Act. The House had passed the very same bill in December 2013 with a bipartisan vote of 325 to 91. The Senate never passed the bill, but the chamber's current majority whip, John Cornyn (R., Texas), announced last November that Congress would "absolutely" pass a comprehensive patent-reform bill this year.

The act is an attempt to address some of the more egregious behaviors of patent assertion entities (PAEs), or "patent trolls," and build upon patent reforms passed in the America Invents Act of 2011. According to the Federal Trade Commission, a PAE is "a business model that focuses on purchasing and asserting patents against manufacturers already using the technology, rather than developing and transferring technology" to licensees. Critics often charge that the patents these entities acquire -- and threaten litigation based on -- are dubious at best.

Reining in patent abuse is a legitimate goal, but Congress must carefully consider the potential for unintended consequences here. For example, among the Innovation Act's numerous provisions is a "loser pays" system: Judges must award attorneys' fees to the losing party of a patent lawsuit, unless the loser's case was "reasonably justified in law and fact or ... special circumstances (such as severe economic hardship to a named inventor) make an award unjust." This vague language could have a chilling effect on entrepreneurial ventures attempting to enforce their patents. Congress needs to develop practical guidelines that establish more forcefully the distinction between a credible patent-infringement lawsuit and one that lacks merit.

Congress also must consider a number of developments that have occurred since the last time it considered the bill. For example:

• Five key patent cases decided in 2014 -- Alice Corporation v. CLS Bank, Nautilus v. Biosig Instruments, Limelight Networks v. Akami Technologies, Octane Fitness v. ICON Health Fitness, and Hallmark Inc. v. Allcare Health Management Systems -- are now making it easier to defeat PAEs and discouraging the litigation of meritless claims.

• Under the America Invents Act, new procedures were created to allow anyone to challenge patents in a fast, relatively inexpensive proceeding before the Patent Trial and Appeals Board. In the two years since the U.S. Patent and Trademark Office implemented the new procedures in late 2012, petitioners have challenged more than 2,300 patents. In concluded proceedings, 75 percent of the involved claims have been found not patentable and only about 20 percent of patents have survived the proceedings with no changes.

• In October 2014, the Judicial Conference of the United States adopted changes to the Federal Rules of Civil Procedure that will ensure that patent cases meet the heightened pleading standards required of all other federal cases. The changes will reduce the ability of patent plaintiffs to use unnecessary discovery requests to drive up costs for defendants in an effort to force unwarranted settlements.

• The Federal Trade Commission and state attorneys general are aggressively using their authority to combat abusive patent demand letters and protect small businesses and consumers from unscrupulous practices.

A careful vetting of these recent trends may result in a culling or alteration of major provisions in the Innovation Act -- or perhaps it will show that a more targeted approach is in order. An example of such an approach is the Targeting Rogue and Opaque Letters ("TROL") Act of 2014, which was approved by a bipartisan vote of 13-6 in the House Subcommittee on Commerce, Manufacturing and Trade in July of 2014 but died before passage. The purpose of the TROL Act was singular: to rein in PAEs' abusive demand letters threatening civil litigation.

Congress must take great care when undertaking comprehensive patent reform, as the unintended consequences of a poorly considered law could take years to emerge, and then years to "cure" through more legislation. Further harm to the U.S. patent system is in no one's best interest.

Thomas A. Hemphill is an associate professor of strategy, innovation, and public policy in the University of Michigan-Flint School of Management.

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