Risk & Compliance

Will Congress Tilt Patent Law in the Right Direction?

There's a wave of support behind patent reform bills in Congress, but some say the changes could hurt small firms and inventors.
Marielle SegarraJanuary 22, 2014
Will Congress Tilt Patent Law in the Right Direction?

Over the two years since the last patent reform legislation passed Congress, the fight against companies that misuse patents as a business strategy has kicked up. Several bills pending in Congress would protect small firms targeted by these so-called “patent trolls.” Lobbying for new patent reform are a number of trade organizations, including the National Restaurant Association, the Consumer Electronics Association, and the National Retail Federation, along with big businesses like Yelp and organizations like the Credit Union National Association.

But the legislation proposed so far is controversial. Opponents say in their current forms the bills may hurt the businesses they are designed to help.

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Patent trolls are individuals or shell companies that buy patents on broad technologies (often from bankrupt firms) and demand licensing fees, but never manufacturer a product related to the patent themselves. Often, a patent troll (also known as “non-practicing entity,” or NPE) will send threatening form letters to businesses that allegedly infringe on its patents. Rather than threatening to sue the manufacturers of equipment that violate the patent (for instance, a tech company that makes scanners), NPEs will often bring cases against small-business users (a company that uses the scanners in its office).

“My clients, and other small companies in Vermont, were getting these demand letters and they felt like they had to hire a lawyer to respond to them,” says Peter Kunin, deputy managing partner at law firm Downs Rachlin Martin PLLC. Kunin does pro bono work representing small and midsize firms sued by patent trolls.

Small and midsize companies could simply ignore the letter and toss it in the trash. But not if they’re trying to attract investors, Kunin says. “You have to disclose to your investors — angels, private capital — what the threats of litigation are, and that you aren’t being sued or being threatened with a lawsuit.” As a result, many small companies agree to pay licensing fees just to get trolls off their back, Kunin says.

And some letters do progress to a lawsuit. A 2012 paper from the Boston University School of Law found that 59 percent of the defendants in cases brought by patent trolls were small or medium-size firms.

Congress’s Solutions
As CFO reported last week, the House of Representatives recently passed a patent reform bill called The Innovation Act, by a vote of 325 to 91. The White House has signaled its support for the legislation. Among the changes the bill makes are requiring more specific lawsuits from patent plaintiffs (who are sometimes trolls). Plaintiffs would have to name the parent company of a patent owner, along with any person who has a financial interest in the patent, so they couldn’t hide behind shell companies. In addition, technology vendors would be able to fight lawsuits against patent plaintiffs on behalf of their customers (as long as they are being sued for infringing the same patents). The bill would also require the losing party in patent lawsuits to pay the winner’s fees (except in certain cases, at the discretion of the court).

Sen. Claire McCaskill (D-MO) speaks to the U.S. Senate about patent trolls in November 2013. Courtesy of Senator Claire McCaskill on Flickr

Senator Claire McCaskill (D-MO) speaks to the U.S. Senate about patent trolls in November 2013. Courtesy of Senator Claire McCaskill on Flickr

Several bills in the United States Senate also address patent reform. One of them, introduced by Democratic Senator Patrick Leahy of Vermont (author of the 2011 America Invents Act) in November 2013, has been referred to committee. It’s more limited than the House version of the The Innovation Act, but it has similarities. For instance, it would require plaintiffs to name any person with a financial interest in the lawsuit or in either party. It would also allow manufacturers to fight patent lawsuits on behalf of their customers.

A second bill, introduced by Republican Senator Orrin Hatch of Utah last October, has been referred to committee. Like the House bill, it would require the losing party to pay the winner’s fees. Before litigation, the plaintiff would have to post a bond that would cover the fees, though the court would be able make exceptions for nonprofit companies, universities, original inventors (not patent trolls) or businesses that make or sell products related to the patent (again, not patent trolls).

Another bill, introduced by Senator John Cornyn, a Republican from Texas, would require plaintiffs to be much more specific in their lawsuits and to disclose any party that has a financial interest in the lawsuit.

Inventors: Winners or Losers?
Some worry that patent reform legislation that limits trolls would also make it harder for small inventors and businesses to enforce their patent rights. For instance, if a small firm knows it will have to pay the defendant’s legal fees if it loses a case, it may never bring a lawsuit to begin with.

Professor James Bessen, one of the authors of the Boston University paper, acknowledges this concern, but adds that the success of the fee-shifting provision will depend on how it is designed. Currently, it’s next to impossible to get the losing party to pay the fees. “It’s very clear that right now the standard to get fees shifted is extremely high,” Bessen says. “It happens maybe 10 times a year.” Ideally, there would be more of a balance.

Patent trolls argue that they work to assert the patent rights of small inventors against big companies. But in the Boston University paper, researchers found that only 5 percent of the out-of-pocket payments made by defendants in cases brought by publicly listed NPEs ends up going to small inventors.

“One of the things with patent law is you always hear a complaint that this will make patents weaker,” says Bessen. “The reality is that small inventors are helped by having a healthy patent system, not necessarily one that’s rigged in their favor. I would say the [current] patent system is much more tilted towards large firms than small ones. By making it more restrained you’re actually helping small inventors.”

Are you in favor of the current patent reform legislation, or do you think it will hurt small inventors? Have you ever been targeted by a patent troll? Tell us in the comments section.