IT Firms Squabble Over Patent Reform Bill

Companies across the IT sector are in favor of improving the U.S. patent system and generally support efforts in Congress to improve patent protection. However, not all IT companies are in favor of specific proposals to improve the patent process. A current example is a patent reform bill recently introduced to the U.S. House of Representatives.

A major update of the patent system came in late 2011 through enactment of the America Invents Act. The current proposal, introduced last month, is called simply “The Innovation Act.” The bill is designed to fill in some gaps in the AIA — mainly the issue of patent law abuse and the actions of entities known as “patent trolls.”

“Abusive patent litigation is a drag on our economy. Everyone from independent inventors, to startups, to mid- and large-sized businesses face this constant threat,” said Rep. Bob Goodlatte, R-Va., the chief sponsor of the bill.

“The tens of billions of dollars spent on settlements and litigation expenses associated with abusive patent suits represent truly wasted capital. The bipartisan Innovation Act is designed to eliminate the abuses of our patent system, discourage frivolous patent litigation, and keep U.S. patent laws up to date,” he maintained.

In general, the abuse involves the acquisition of patents from parties that hold intellectual property licensing rights but never intend to produce a product or provide a service covered by the patents they hold.

The patents are acquired by so-called trolls, also known as “patent assertion entities” or PAEs, which exist exclusively for the purpose of collecting the rights to such patents. The PAEs also have no intention of marketing the patented product or service.

Setting a Level Playing Field

The PAEs search for organizations that have engaged in activities covered by the acquired patents and seek to recover licensing fees — sometimes by threatening to file infringement lawsuits. Often the alleged infringer will simply pay the PAE a substantial settlement to avoid the even more costly process of litigation. The settlement process amounts to nothing less than abusive extortion in the view of many parties seeking to enact reforms.

The Innovation Act proposes to lessen the expense and legal burden on defendants in PAE-initiated lawsuits. Among the provisions of the act that are designed to curb abuses:

• Fee shifting:

The act would allow courts to force PAEs to pay the attorney fees and other litigation costs of their infringement targets if the PAE should lose the case, as a deterrent to filing such suits.

• Transparency:

The act compels PAEs to provide much more detail in court filings, including a full description of the patent, as well as specifics about the alleged infringement and the alleged infringers for each supposed violation of the patent.

Also, PAEs would be required to specifically identify all parties with an interest in the involved patent. Currently, a defendant “often does not know, beyond the name of a shell corporation plaintiff, who has an interest in the litigation and the patent at issue,” said Kevin Kramer, vice president and deputy general counsel of Yahoo, at a recent Congressional hearing.

• Limited Discovery:

The bill would limit the legal discovery required in infringement cases so that defendants would not be intimidated by the prospect of paying unnecessary and costly legal fees.

While virtually all IT companies and their trade groups support these reforms, one provision of the Innovation Act has caused a split in the commercial IT sector.

Just 1 Thing

Historically, many patents covering new business practice methods and related software, especially involving use of the Internet and WiFi, have been issued by the U.S. Patent and Trademark Office. Since these covered business methods, or CBMs, typically are general in nature and broadly defined — in contrast to mechanical or physical innovations — questions have arisen as to whether they are truly worthy of protection and are truly valid as property rights.

Many PAE cases involve broadly described innovations that can affect hundreds or even thousands of alleged infringers since the covered business method has been absorbed into the routine conduct of businesses. The AIA set up a method for curbing such litigation by allowing defendants the option of petitioning the USPTO to review the patent to ensure that it was validly issued in the first place.

The AIA provided that a review could be conducted only after a lawsuit was initiated, and further declared that a court case could be suspended while the review was under way. The cost of a review at the USPTO is about US$30,000 — far less expensive than the high cost of defending a lawsuit. The idea is that these provisions would make it harder for a PAE to succeed in a court case and cause the PAEs to think twice before launching into litigation.

“In sum, CBM review is an important litigation tool. If CBM review finds the patent invalid, this could lead to dismissal of parallel district court litigation, or even relief from an earlier district court judgment,” said Matthew Blackburn, a partner at Locke Lord, in a May 2013 report on the current CBM program.

However, the AIA limited the scope of the CBM review essentially to financial services applications and set it up as a temporary program, expiring in 2020.

The legislation introduced by Rep. Goodlatte would expand the scope of CBM patent validity reviews to cover almost the full range of business methods and related software, and make the program permanent.

The CBM expansion proposal was supported by more than 40 companies in a July 2013 letter to key lawmakers in the House and Senate.

“The CBM program provides an innovative, carefully tailored means to address a particularly heinous abuse: manipulating the patent litigation system through aggressive use of unclear and overly broad business method patents by patent aggression entities,” said Mark Bohannon, vice president for corporate affairs at Red Hat, one of the companies in the group. Others include Yahoo, Amazon, Walmart and Safeway.

“This proposal isn’t all that radical and fits in with needed reforms. It certainly touches on the issue of patent quality and validity, but there is also a definite litigation context to its use,” Bohannon told the E-Commerce Times.

Not So Fast

A second coalition of more than 100 major companies objected to the expansion of the CBM mechanism in a September letter also sent to members of Congress. The Business Software Alliance, whose members include Apple, Oracle, Microsoft and IBM, co-signed the letter.

The expanded use of the CBM validity tool “discriminates against one field of technology over another,” the letter contends, and is a departure from traditional patent law practice.

“Congress has consistently taken the view that patents in all fields of technology should be subject to the same rules and requirements, and that it is inappropriate to single out a particular industry or field of technology for discriminatory treatment under U.S patent law,” it says.

Since the existing CBM program was established in 2011 only as a pilot effort, additional time — at the least — is needed to assess its workability, BSA and others have argued.

“Expanding the transitional program for covered business method patents would be premature and unwise. Right now, we have no idea whether the current limited program is effective or harmful to innovation,” Graham Gerst, a partner with theGlobal IP Law Group, told the E-Commerce Times.

“The program is so new that only one patent has made it through the process. We need to give this program time before determining whether it should be expanded,” he said.

“Moreover, we know from a recent report by the Government Accountability Office, which studied the patent litigation environment, that there is no crisis or reason for panic. Our patent system is a delicate balance, and we should take great care before making any changes that could put its benefits at risk,” Gerst cautioned.

“I don’t think enough time has passed to know whether CBM is a good thing or a bad thing. More time should pass before making such a change,” Locke Lord’s Blackburn told the E-Commerce Times.

The proposal is likely to get a further airing in Congress.

“This is an issue on which Chairman Goodlatte and I share a common goal,” said Sen. Patrick Leahy, D-Vt., chairman of the Senate Judiciary Committee, which oversees patent issues. Leahy is working on similar legislation.