Patent Troll Reforms Crash and Burn

Information technology groups and a wide range of other businesses are so divided on proposed changes to U.S. patent law that a key U.S. lawmaker abruptly terminated work on patent reform legislation last week. The legislation addresses intellectual property protection practices, informally known as “patent trolling,” that overwhelmingly affect computer software and IT components.

Sen. Patrick Leahy, D-Vt., chairman of the Senate Judiciary Committee, removed patent law reform legislation from the committee’s calendar “because there is not sufficient support behind any comprehensive deal.” While he held out hope for a resolution, industry sources conceded that removing the issue from the prime Senate committee of jurisdiction effectively killed the measure for this year.

For IT groups favoring reform, the move came as a major setback. The U.S. House already had approved a reform bill with broad bipartisan support, and several senators from both parties had worked out what they felt was an acceptable proposal.

Matthew Tanielian, executive director of the pro-reform Coalition for Patent Fairness, said group members were “stunned and deeply disappointed” by Leahy’s decision. Coalition members include Cisco, Google, Oracle, and SAP.

Leahy’s move was “deeply disappointing,” said Michael Beckerman, president and CEO of the Internet Association. “Every day that reform is delayed is a win for patent trolls.”

Patent Trolling: the Legal Impasse

The proposed reforms stem from the perception that the process of trolling is relatively easy, inexpensive and risk-free for patent-assertion entities, also known as “trolls.” In general, the practice involves the acquisition of patents from parties that hold licensing rights but never intend to produce a product or provide a service covered by the patents they hold. The acquiring PAEs also have no intention of marketing the patented product or service — but aim to benefit financially from enforcing licenses associated with the acquired patents.

PAEs then search for organizations that allegedly have infringed the acquired patents and seek to recover licensing fees — or financial settlements from lawsuits. The practice amounts to nothing less than abusive extortion in the view of many parties seeking to enact reforms. PAEs recently have expanded their target group to end users, such as major retailers, that may be unaware that portions of the operating software systems they employ are even related to licensing conditions asserted by PAEs.

Reformers favor several measures that would make it harder for PAEs to operate. One change would be a “loser pays” or “fee shifting” rule that transfers the cost of litigation back to PAEs for meritless or unsuccessful lawsuits. Under the rule, PAEs would have to shoulder all attorney costs — even those of the alleged infringing party — if the PAE should lose in court. Another would be an “enhanced pleading” rule that would require plaintiff PAEs to provide extremely detailed documentation of alleged infringement by a defendant, such as product serial numbers, precise descriptions of the occurrence of each claim, and other data.

Advocates for reform also want more complete disclosure of the identity of parties associated with a PAE, as well as rules that would limit the legal discovery process, which can impose expensive front-end legal costs on defendants accused of infringement. Leahy also has proposed that the Federal Trade Commission monitor the issuance of infringement notices, or “demand letters” — that is, letters issued by PAEs to suspected violators.

Legislative Drama

Despite efforts by involved senators to resolve differences and garner bipartisan support, it became clear last week that even those efforts would not satisfy opponents. After months of negotiating, the Senate Judiciary Committee was about to consider a final draft, or markup, of the patent reform bill that seemingly had garnered bipartisan support. The draft was crafted from an amalgam of proposals from both parties.

Stakeholder sources tuned in to the process told the E-Commerce Times they were made aware of the bill’s status both the night before and morning of the markup session. “We were told we had a deal,” one said. However, before noon on the day of the scheduled markup, the bill was dead.

Senate President Harry Reid, D-Nev., had informed Leahy the morning of the markup that the working draft would fail in a full Senate vote, according to media reports, and Leahy then removed the bill from consideration.

Reid was acting on opposition from several quarters, including the biotech community and trial lawyers, according to several pro-reform sources.

Leahy’s statement did not directly address the allegations regarding Reid. However, Sen. Charles Grassley, R-Ia., the ranking Republican on the Judiciary Committee, said, “I am surprised and disappointed that the Senate Democrat leadership is not willing to move forward on a bill that we’ve worked on so hard and were ready and expecting to mark up.”

Sources contacted by the E-Commerce Times could not speak on the record regarding Reid’s involvement, and the American Association for Justice, which represents the trial lawyer community, did not respond to several queries.

However the backroom drama played out, there was ample public evidence of mounting opposition to the proposed reforms. Just before the markup was scheduled, opponents including the Association of University Technology Managers, the Biotechnology Industry Organization, and the Innovation Alliance, told the committee in a letter that they were opposed to the proposed patent reforms that “we understand Judiciary Committee members are being asked to agree to.”

A key objection for opponents of reform is the loser pay proposal.

“I don’t think it’s any secret that fee shifting is still a major issue with the patent bar,” Gina Woodworth, vice president of public policy at the Internet Association, told the E-Commerce Times.

The AAJ, for example, told the House Judiciary Committee in a letter last November that it was totally opposed to fee shifting.

“Inventors and small businesses should not be discouraged from legitimately protecting their patents” for fear of loser pay provisions, said Linda Lipsen, CEO of the AAJ.

Other reforms also trouble opponents.

“The requirement to document every instance of every patent violation in a complaint is a lot to ask for and is overly burdensome,” Brian Pomper, executive director of the Innovation Alliance, told the E-Commerce Times.

Also, some patent reform provisions unnecessarily interfere with standard case management authorities exercised by judges, the alliance told the Senate Judiciary committee last month.

For opponents of patent reform efforts, Leahy’s decision to shelve the issue was far from the stunning development cited by IT groups. Rather, it was a prudent pause to facilitate a workable solution.

“Patent abuse is clearly a problem, and we are willing work with others to put down some speed bumps to curb the abuses. But the current proposals are too burdensome. They are more like checkpoints that discourage innovation,” Pomper said.

Supporters of reform legislation, who may have been overly optimistic, will continue their efforts.

“I think there’s almost always a calculus for advancing legislation in Congress. We just have to reset and find what that is,” Mike McGeary, cofounder and political director of Engine Advocacy, told the E-Commerce Times.

“That said, certainly there are many voices at play here, and it’s incumbent on us to continue to engage and work on gathering support,” he added.

Some piecemeal approaches might still be available, suggested McGeary, such as legislation that is limited to the demand letter issue.