A Divided Congress Debates How To Curb Frivolous Lawsuits Over Patents

Through an aggressive lobbying campaign, major technology and retail companies are seeking to quickly push legislation through Congress to thwart litigious “patent trolls.” But they’ve hit a roadblock—strong opposition by drugmakers, universities, independent inventors, and others that depend on strong patent rights.

Legislators and stakeholders seem to agree on the need to halt abusive practices by firms—often derided as patent trolls—that acquire vaguely worded patents for the sole purpose of suing other companies for allegedly infringing on their rights. Such businesses aim to extract fees and financial settlements or win hefty court judgments. Critics say these firms often target end users of everyday products with patented components, such as Wi-Fi or bar code scanning technology, and pressure them into paying licensing fees instead of risking crushing legal bills and potential damage awards.

The pharmaceutical industry supports the effort to curb abusive practices that can arise in patent litigation and enforcement. But like universities, it wants to ensure that any changes to the legal system do not diminish the ability of legitimate patent holders to protect and assert their rights.

“Strong intellectual property protections are crucially important to the biopharmaceutical industry and the patients we serve,” says John J. Castellani, chief executive officer of the Pharmaceutical Research & Manufacturers of America. The trade association lobbies on behalf of brand-name drug manufacturers.

In recent months, lawmakers on Capitol Hill have introduced two bills that aim to halt abusive ligitation practices. Congress’s overarching goal is to “club the trolls once and for all without harming legitimate inventors and innovators who rely on a robust patent system,” says Sen. Charles Schumer (D-N.Y.), a senior member of the Senate Judiciary Committee.

But the rival bills diverge radically in the scope of proposed reforms. The first, more sweeping bill comes from Rep. Robert Goodlatte (R-Va.), chairman of the Judiciary Committee in the House of Representatives, along with a group of 19 bipartisan cosponsors. They have reintroduced the Innovation Act (H.R. 9). The legislation, which aims to make it more difficult and costly to sue companies for patent infringement, sailed through the House last year but stalled in the Senate.

The bill would make litigation more burdensome for those bringing patent infringement suits. It would require plaintiffs to disclose who the owner of a patent is before they file a case and force them to explain why they are suing a particular defendant in their court pleadings.

Goodlatte says these heightened requirements “will ensure that patent trolls cannot hide behind a web of shell companies to avoid accountability for bringing frivolous litigation.”

In addition, the legislation would require courts to decide whether a patent is valid or invalid early in the litigation process. The goal is to discourage plaintiffs from prolonging lawsuits in an attempt to compel settlements.

Arguably the most significant—and contentious—section of the bill concerns the shifting of litigation fees. Currently, if a patent holder is unsuccessful in a lawsuit against an alleged infringer, the holder of the patent is rarely required to pay the fees of the winning party. Under the bill’s “loser pays” provision, plaintiffs would have to pay defendants’ legal fees if a judge determines that the infringement suit was not “reasonably justified in law and fact.”

Reform proponents say these changes are needed because businesses are spending billions of dollars a year to defend themselves in court against frivolous lawsuits. Retailers who challenge a patent infringement suit generally face, on average, an 18-month legal battle at a cost of roughly $2 million, according to the National Retail Federation, a trade group.

“Patent trolls are a scourge on every sector of the American economy and all types of American businesses,” says Matthew Shay, the federation’s CEO and a leader of United for Patent Reform, a broad coalition formed earlier this year to advocate for the Goodlatte bill.

Members include tech giants such as Google, Facebook, and Cisco, as well as major retailers such as JCPenney and Macy’s—companies that use technology to operate and promote their businesses. “Patent trolls produce no goods or services. All they do is extort money from good, productive businesses,” Shay says. “The Innovation Act is a strong first step in changing that.”

But opponents of the Innovation Act worry that the sweeping legislation could unintentionally weaken patents and make it difficult for innovators to protect their intellectual property. Pharmaceutical and biotech firms, which are often plaintiffs in patent disputes, fear the bill would treat every patent holder like a troll.

Strong patents are the lifeblood of the biotechnology sector, says James C. Greenwood, CEO of the Biotechnology Industry Organization (BIO), a trade association that represents more than 1,000 firms. “They are critical in ensuring a steady stream of capital to biotechnology companies, and they are essential to the technology transfer process that leads from inventions in the lab to products on the shelves,” he says.

A study commissioned by BIO and released last month found that between 1996 and 2013, inventions and products licensed by academic institutions contributed more than $1 trillion to the U.S. economy.

“We cannot take tech transfer, or the U.S. patent system upon which it is based, for granted, particularly in the current economy and in light of the continuing attacks by some on our patent system,” Greenwood says. “Preserving this system is critical to ensuring continued U.S. economic revival and spurring the next wave of American innovation in the life sciences.”

The Innovation Act, he says, would “undermine the ability of legitimate patent owners to commercialize their inventions and enforce their patent rights against infringers.”

Companies that are heavily involved in patent licensing, such as IBM, Dolby Laboratories, and Qualcomm, have similar concerns. There is an “antipatent lobby” that has caught the attention of Congress, says Mark Ringes, vice president and assistant general counsel at IBM. The fear is that lawmakers “will do something that tips the balance against patent strength,” he says.

The Association of American Universities and other higher education organizations also object to the Goodlatte bill. They say it would go far beyond what is necessary or desirable to combat abusive litigation.

Proposals such as requiring unsuccessful plaintiffs to pay defendants’ fees “are especially troubling to the university community because they would make the legitimate defense of patent rights excessively risky,” 145 university presidents warned in a recent letter to the leaders of the House and Senate Judiciary Committees.

They argued that a “loser pays” system would discourage technology transfer offices with small legal budgets from suing for patent infringement. The increased risk would also “deter potential licensees and venture capitalists from investing in university discoveries,” they noted. This, in turn, would “reduce the number of research discoveries that advance to the marketplace.”

Secure patent rights are especially critical for small, often undercapitalized start-up companies that are built upon university discoveries, suggests Michael R. Crum, vice president of economic development and business engagement at Iowa State University. “To be able to gain a foothold in often well-developed markets, such companies must be able to assert their patent rights effectively,” Crum says.

Despite the intense criticism, Goodlatte insists his legislation “strikes the right balance.” The Innovation Act, he maintains, is narrowly tailored to stamp out abusive behavior and doesn’t diminish or devalue patent rights.
“The patent system was never intended to be a playground for litigation extortion and frivolous claims,” Goodlatte says. “It is integral to U.S. competitiveness, and we must ensure that any legislative measure does not weaken the overall patent system.”

Hoping to see more-targeted patent reform, BIO and six university associations have endorsed alternative legislation introduced in the Senate (S. 632) last month.

The proposed STRONG (Support Technology & Research for Our Nation’s Growth) Patents Act seeks to narrowly target abusive litigation practices while not undermining the ability of patent owners to defend their inventions against infringement, according to Sen. Christopher A. Coons (D-Del.), the bill’s lead sponsor.

“America’s patent system needs to work for all inventors, and it shouldn’t be carved up to benefit certain industries over others,” Coons says. “Congress should have a real debate over the best way to fight against patent trolls while protecting the inventors our economy relies on.”

Among other things, Coons’s legislation would make it harder to invalidate patents. And it would make it more difficult for businesses to be targeted with frivolous lawsuits by empowering the Federal Trade Commission to go after those who send fraudulent or misleading “demand” letters.

Critics say patent trolls send these letters to dozens, hundreds, or even thousands of businesses, claiming patent infringement. To avoid a lengthy and expensive lawsuit, they demand an up-front payment for past damages and royalties on future sales. Under Coons’s proposal, firms that send “bad faith” demand letters could be penalized up to $5 million for violating the Federal Trade Commission Act.

The top Republican and Democrat on the Senate Judiciary Committee agree that the crackdown on patent trolls shouldn’t harm responsible patent owners.

“I don’t dispute that we should preserve patent rights and valid patent enforcement tools,” says Sen. Charles Grassley (R-Iowa), the committee’s chairman. “We do need to strike the right balance.” But Congress should act decisively if it wants to alleviate the problems that are hurting both big and small businesses, he adds.

Sen. Patrick Leahy (D-Vt.), who chaired the committee last year when an effort to draft antitroll legislation derailed after months of work, says, “Abusive practices by bad actors are a discredit to our strong patent system, and it is in no one’s interest that they continue.”

But Leahy urges caution. “Many have raised concerns that, if taken too far, litigation reforms like those in the Innovation Act would harm legitimate patent holders when they enforce their rights in court,” he notes. “We must find a balance.”

Leahy acknowledges that crafting a reform bill that addresses concerns raised by all sides is not going to be easy and will require compromise by stakeholders. “Nobody is going to get everything they want, but we can get a better situation than what we have today,” he says. “I think we can find a solution.”