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Patent reform: Supporting or stifling U.S. innovation?

Published On: Jun 17 2013 10:56:19 AM CDT   Updated On: Jun 17 2013 11:21:00 AM CDT
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By Mitch Strohm, THELAW.TV

On June 4, the Obama Administration issued five executive actions and seven legislative recommendations to improve incentives for high tech patents and to curb abusive litigation by patent assertion entities (PAEs), or "patent trolls," as they are commonly called.

PAEs are often shell companies that assert patents on existing products as a business model, using litigation as their tool.

In Obama's words, these companies "don't actually produce anything themselves" and instead develop a business model "to essentially leverage and hijack somebody else's idea and see if they can extort some money out of them."

For example, one company threatened to sue 8,000 coffee shops, hotels and retailers for patent infringement because they had set up Wi-Fi networks for their customers, according to the New York Times.

The number of lawsuits brought by PAEs has almost tripled in the last two years, accounting for 62 percent of all patent lawsuits in America.

Of course, some of that surge in lawsuits can be traced back to the America Invents Act, which was signed into law in 2011.

"A big driver in that big increase in the number of patent suits filed, is the America Invents Act just a few years ago, which worked to try to improve the patent system," said Graham Gerst, patent attorney at Global IP Law Group.

One of the provisions in the law eliminated a long-standing practice of allowing a single patentee to file suit against several defendants that infringed a patent in the same way, he noted.

After that, patentees were required to file multiple lawsuits instead of a single suit, increasing the amount and overall cost of litigation.

According to the Obama Administration, the new actions and recommendations are designed to "protect innovators from frivolous litigation and ensure the highest-quality patents in our system."

Patents and the economy

Some say that rampant litigation is stifling innovation. Many major companies like Google and Apple spend more on litigation than on research and development.

But start-ups are feeling the pressure from PAEs as well.

"In some instances, they put start-ups out of business," said Julie Samuels, an intellectual-property specialist and staff attorney at the Electronic Frontier Foundation, a San Francisco–based digital-advocacy group.

PAEs can also incentivize start-ups to change their business models, because many start-ups don't want to pay the litigation fees associated with a patent infringement case, she noted.

That can slow down the growth of the economy and the introduction of new technologies.

Will the proposals work?

"We definitely are encouraged to see the proposals," Samuels said. Still, like everyone else, the Electronic Frontier Foundation is awaiting specifics.

In regard to a broken patent system, the legislative priorities and executive actions would make it harder to be a patent troll, and make it a less attractive business model, Samuels said.

"Right now, part of the problem is it's really easy to be a patent troll," she said.

Being a PAE is legal and has high returns, so, frankly, it makes good business sense. But it's important to note that the proposals are targeted toward leveling the playing field and not eliminating non-practicing entities, said Peter A. Koziol, patent attorney for Assouline & Berlowe.

The new actions and recommendations put out by the Obama administration recognize the importance of having intermediaries in the patent system, Koziol said.

A lot of inventors or patent holders don't have the resources to make the inventions themselves.

"Having companies out there that can force the patents or bring that to a manufacturer to capitalize on the inventions does encourage innovation and disclosure of the inventions, because inventors wouldn't otherwise have a way of monetizing their inventions," Koziol said.

BSA: The Software Alliance, a company that represents software companies, commended some of the proposals, such as improving transparency and giving courts more discretion to shift fees. But the company also warned that some of them could be problematic.

"Singling out computer-enabled inventions as (a) class could inadvertently put at risk innovation for many industries that rely on software, from manufacturing to biotech," BSA Senior Vice President for External Affairs Matt Reid said in a statement.

"The America Invents Act includes business-method provisions that have been in effect for only six months. Rushing to broaden them before we see the results doesn’t make sense," Reid said.

Unfortunately, the actions and recommendations could have the opposite effect the Obama administration is looking for, increasing litigation instead of suppressing it, notes Gerst.

Specifically, two of the legislative proposals related to demand letters try to regulate what needs to be included in them, which could make them more complex. Patent owners typically use demand letters to initiate contact with infringers and inform them of the potential infringement.

In an effort to settle the dispute without litigation, the letter typically requests cessation of the infringing activity or asks for the license to be paid. Gerst said that patentees are more likely to just file suit than go through a potentially onerous process of sending demand letters. That could increase the amount of litigation.

Understandably, some of the details of these proposals need to be hashed out.

"This is such an important area to the American economy, we need to make sure that what we're doing is actually going to be constructive and is well thought through," Gerst said.