March 31, 2014 | By Adi Kamdar

The Patent Reform We Need to See from the Senate

This is a big week in the world of patents. The Supreme Court heard oral arguments today in Alice Corp. v. CLS Bank, a case about the eligibility of computer-implemented inventions. The outcome of this case has big implications on the future of software patents, the often broad and vague patents stockpiled by trolls and tech companies alike.

And yet such fundamental questions of patent quality seem to be missing from the current debate in the Senate around patent reform—the second reason why this week is such a hot week for patents. The Senate Judiciary Committee is slated to mark up Senator Patrick Leahy's Patent Transparency and Improvements Act this Thursday, a bill that proposed a few solutions to the patent troll problem and is likely to feature more when discussed this week. Following on the heels of the House's bipartisan 325-91 vote in favor of the Innovation Act, the Senate hopes to offer its own fixes to a patent system that has allowed for patent trolls to run free. Patent quality—the underlying reason why trolls are able to target companies and individuals with dubious claims—is very unfortunately missing from the discussion.

The Innovation Act offered important changes: heightened pleading, fee shifting, transparency, ending discovery abuse, and end-user protections. The first draft of the Patent Transparency and Improvements Act only covers transparency and end-user protections, though it adds important standards for patent demand letters, which are highly abused.

This isn't enough. Here's what we want to see in the Senate's legislation:

1. Patent Quality

Overbroad and vague software patents are the root cause of most problems in the patent system. And yet very few lawmakers feel the need to address this issue. Senator Chuck Schumer's patent reform proposal included broadening what is known as the Covered Business Method (CBM) review, a way of challenging certain finance-related patents. Schumer's proposal—as well as a section of the Innovation Act that was removed before the final vote—would expand CBM review to all business method patents, including software-type patents. This could provide a cheaper and quicker way to deal with bad patents that have already been issued. Unfortunately, it appears that expanding CBM will not be part of Senate's bill. It should be.

While expanding CBM review is a good idea, we need even more fundamental reform at the Patent Office to slow the flood of bad patents. This could include limiting patent continuations (the endless do-overs of patent applications), cutting down on overbroad functional claims (a feature of almost all bad software patents), and improving the quality of review.

2. Fee Shifting

The idea of fee shifting—when the losing party pays the winning party's fees—is already a part of patent law. Section 285 states: "The court in exceptional cases may award reasonable attorney fees to the prevailing party." Unfortunately, the Federal Circuit has narrowly interpreted "exceptional cases" to make such fee shifting nearly impossible for defendants who defeat bad patent troll claims (which is the subject of the current Supreme Court case, Octane v. ICON).

Since patent trolls often use the high costs of litigation to pressure their targets into settlements, a likelihood that the losing party (which, in cases litigated all the way to a final judgment, is most often the troll) will pay the other side’s fees could put a serious damper on trolls filing lawsuits in the first place. The Innovation Act includes fee shifting language, and we'd like to see the Senate's bill feature it too. We think tying fees with a joinder provision, as the Innovation Act does, is effective as well. (Joinder allows a prevailing defendant to rope in a patent trolls' parent company into the suit to make sure proper fees are awarded. Often, trolls are shell companies with no assets yet ties to a larger, wealthier entity.)

3. Protecting End-Users

Part of the reason why the patent troll problem seems so dire is because end users are being targeted: hotels and restaurants that offer Wi-Fi, offices that use networked scanners, podcasters. Both the Innovation Act and the Patent Transparency and Improvements Act have "customer stay" provisions. This means that if, for example, a cafe is sued by a troll for running Wi-Fi, the wireless router manufacturer can intervene, and the cafe's case will be temporarily put on hold. While these provisions are very good, we believe that stronger protections for an end user—such as immunity for customers using off-the-shelf equipment—are needed.

4. Transparency in Ownership

It is all-but-impossible to know who owns a patent. This lack of transparency has allowed patent trolls to hide behind shell companies and feed financial gains back to obfuscated parent companies. (One notable example is Oasis Research, which "bought" a patent from Intellectual Ventures and happens to give 90% of its profits back to the company.) Knowing the web of ownership could, for example, allow a defendant to recognize previously agreed-upon licenses on the patents at hand.

Both the Innovation Act and the Patent Transparency and Improvements Act have language to bring much-needed transparency to patent ownership. Both bills make patent owners—including trolls—disclose to the Patent Office and the court any changes in ownership or any entities with financial interests in the asserted patents. We think such changes are crucial to shining a light on the true nature of patent trolls, while giving defendants the knowledge they need to pursue a case thoroughly.

5. Heightened Pleading

Too often, complaints and demand letters feature vague claims of infringement that scare receivers into submission. One provision the Innovation Act has is a heightened pleading requirement. Basically, this means that any party asserting a patent has to be very clear about a few things: what patents and claims are being infringed; what processes or machines are infringing such claims; how the infringement is happening; and any previous complaint that has been filed about the asserted patents. We want to see similar language in the Senate proposal.

6. Ending Discovery Abuse

The discovery process during a patent trial is often egregiously expensive. Defendants have to produce and review reams of documents, while patent trolls—often shell companies with few (if any) employees—don't have nearly as many. This burden feeds into the threat of expensive litigation that trolls take advantage of.

The Innovation Act features a provision that helps end discovery abuse. First, it delays discovery until after "claim construction," which is when courts interpret relevant patent claims. Plenty of cases are thrown out after this period when a court find that no infringement has occurred. Second, the bill's provisions limit discovery to "core documents"—only those documents likely to be relevant to the specific litigation at hand.

The financial burden that discovery brings upon defendants is a powerful weapon for trolls. We want the Senate proposal to tackle this problem.

7. Demand Letter Crackdown

The biggest area where the current Senate proposal excels and the Innovation Act falls short is when it comes to demand letters. These are letters that patent owners send out to individuals and companies, alleging infringement. Many of the largest patent demand letter campaigns have included misleading and deceptive language (such as failing to disclose that patents have expired or targeting end-users already protected by a manufacturer’s license). Folks receiving these misleading demand letters sometimes settle immediately by licensing the patents they supposedly infringe, especially when the other apparent option is to engage in a multi-million dollar lawsuit. These licensing agreements usually come with gags, silencing the victims while the troll approaches their next target with more spurious claims.

This tactic is nothing but extortionate. The Patent Transparency and Improvements Act labels such widespread sending of unreasonable letters as an unfair, deceptive trade practice, allowing the Federal Trade Commission to crack down on such bad actors.

It's Time for Reform

Who knows when patent reform will be brought to the tables of Congress again? We happen to be at a special point in time when every branch of government is itching for patent reform. Patent trolls have risen to be one of the biggest enemies of not just the tech world, but the business world in general. While underlying patent quality reform may be a long shot—and one we will keep aiming for—if we are going to try and surgically fix the patent troll problem, let's at least do it right.

Tell your Senators today to pass the patent reform we need.

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