Congress Scurries to Take 11th-Hour Patent Reform Action

Virtually all IT companies favor measures to curb patent abuses, especially those generated by so-called patent trolls. However, the IT community is split on the best way to approach the abuse problem. Patent trolls, otherwise known as “patent assertion entities,” or PAEs, generally obtain patents from parties that do not intend to commercialize an innovation.

The PAEs have no such ambition either — but they aggressively look for parties that have infringed patents held by PAEs and then either extract a fee from the alleged infringer or initiate a lawsuit. Lawmakers including Rep. Bob Goodlatte, R-Va., who chairs the House Judiciary Committee, have likened such activity to extortion.

The House Judiciary committee on Nov. 20 approved The Innovation Act (H.R. 3309), sponsored by Goodlatte, who introduced a reform proposal earlier this year. Just before the committee took final action, however, Goodlatte withdrew a key section of his original proposal, apparently in response to objections raised by a coalition of IT companies including IBM and Microsoft.

Legal Leverage

That section would have expanded a current provision that allows defendants in a patent infringement case to petition the U.S. Patent and Trademark Office to determine if the patent at issue was approved properly in the first place. Court litigation would be suspended while the review was in process.

Results of the review could permanently stymie infringement actions — not only by patent trolls, but also by other large IT companies that aggressively enforce huge bodies of patents. At the least, the review provision would temporarily block litigation. As a legal tool, the review is a far less expensive defense weapon than court litigation.

Currently, the review provision applies to business practice innovations known as “covered business methods,” or CBMs, but it is limited in scope to financial practice innovations. Goodlatte’s original proposal would have allowed it to be used for a wide range of business practice and related software patents.

IBM, Microsoft and other firms objected strongly to the expansion in a September letter to Goodlatte. Then, on the eve of Judiciary Committee action, IBM contacted Goodlatte to express appreciation for the lawmaker’s decision to remove the expanded CBM provision from the bill. If the provision had remained in the bill, it “would have harmed software innovation and diminished U.S. competitiveness,” IBM Vice President for Technology Policy Timothy Sheehy said in a Nov. 18 letter to Goodlatte obtained by the E-Commerce Times.

The Business Software Alliance agreed. “We supported the removal of that provision and were pleased to see that it was deleted in the proposal which came out of the House Judiciary committee,” Tim Molino, director of government relations at BSA, told the E-Commerce Times.

Retail establishments — smaller businesses as well as large chains — are frequent targets of infringement suits. The National Retail Federation supported the original Goodlatte proposal but was not fully satisfied with the revised measure.

“While the bill is a step in the right direction, NRF will continue to work to refine the measure to address the grievances of Main Street merchants, online retailers, and others who suffer at the hands of patent trolls’ frivolous claims and costly lawsuits,” said NRF Senior Vice President David French.

“We are advocating for further demand letter transparency, customer stay exception language and the expansion of the CBM to non-financial services patents,” Stephen Schatz, senior director of communications at NRF, told the E-Commerce Times.

The Internet Association, which represents Amazon, Google and Yahoo, among others, also applauded Goodlatte’s original proposal to expand the CBM provision. Regarding the revised House bill and proposals in the Senate, Michael Beckerman, president and CEO of the business group, welcomed various reform measures while refraining from specifically mentioning the CBM issue. However, he held out the possibility for further work on the legislation.

As the House bill moves to the floor and companion legislation is considered in the Senate, “we will work with Republicans and Democrats in Congress and the White House to make the necessary improvements to ensure abusive litigation fueled by bad patents ends,” Beckerman noted.

Senate Proposal

The House bill was not the only recent action drawing the attention of IT firms. Sen. Patrick Leahy, D-Vt., chairman of the Senate Judiciary Committee, introduced his own patent reform bill on Nov. 18. The Leahy proposal (S.1720), does not address the CBM issue.

Both the Goodlatte and Leahy proposals include additional provisions dealing with patent litigation abuse. Each bill requires greater transparency by the party that initiates an infringement suit, including disclosure of information about other entities that may have a beneficial interest in the proceeding.

The Goodlatte bill includes a “loser pays” provision — designed to deter aggressive patent holders that would risk paying the defendant’s fees if the defendant should win the case. The Senate measure does not offer a similar ‘fee shifting’ proposal. “We are hoping to work with the Senate staff to address the fee structure,” Molino said.

Some PAEs are notorious for sending intimidating “demand letters” to potential infringers — including large retailers as well as hundreds of small businesses. The Leahy proposal would give the Federal Trade Commission power to oversee the “widespread practice of sending fraudulent or materially misleading demand letters in connection with the assertion of a patent.”

Silicon Valley Patent Office

The House may approve a final bill before the New Year, but approval of legislation in the Senate is unlikely by year-end.

As lawmakers and IT representatives engaged in legislative maneuvering, the Obama administration took a major step to assist the IT community by locating a federal patent office in San Jose, Calif.

“A permanent USPTO office in Silicon Valley will help grow the regional innovation ecosystem by empowering entrepreneurs to more readily navigate the nation’s intellectual property system,” said U.S. Secretary of Commerce Penny Pritzker. The USPTO operates within the Commerce Department.

A temporary patent office opened in April 2013 in Menlo Park, but establishing a permanent site was held up by budget considerations and the effect of the federal sequestration. To facilitate the opening of a permanent office, the city of San Jose is providing 40,000 square feet at its city hall location on a rent-free basis for two years. In addition, the California State Assembly is contributing US$500,000 to USPTO for education and outreach activities.

The USPTO aims to staff the permanent office with at least 60 patent examiner hires and approximately 20 patent judges in its first year of operation. Meanwhile, the local officer director and nine patent appeal judges will continue working at the Menlo Park site.