Supreme Court’s Latest Patent Decision Reins-in Federal Circuit, Again

Today, the Supreme Court issued its latest  9-0 opinion, once again reining in the Federal Circuit’s consistently overbroad interpretations of patent law. The ruling, in Alice v. CLS Bank, deals with the question of what can and cannot be patented. Put simply, the Court held that unpatentable “abstract ideas” do not miraculously become patentable when they are merely tied to general purpose computers or generic hardware. Our patent laws already do not allow the government to issue patents on laws of nature, natural phemonen, and these so-called abstract ideas because we do not want to grant monopolies on things that belong to everyone. This concept is incredibly important because it deals directly with whether or not software is an unpatentable “abstract idea”. Is software an abstract mathematical algorithm? Or is it more?

Traditionally, software was always unpatentable. But that changed in the mid-1990s when the Federal Circuit issued a string of rulings allowing for software patents. In this 20-year experiment, we’ve seen serious abuses of the patent system, starting with poor quality patents, leading directly to the patent troll problem. Armed with these low-quality software patents, trolls have been able to wage a war on small businesses and individuals, costing our economy billions of dollars a year.

Despite this, the Federal Circuit (the appellate court that has jurisdiction of all patent cases), has been unwilling and unable to fix the quality problem with software patents. Which brings us to today’s ruling. Alice v. CLS Bank involved patents covering a computer system that helps with closing financial transactions by avoiding settlement risk (the risk that comes with any financial transaction if one party cannot uphold its end of the bargain). During the case’s tortured history, the Federal Circuit upheld those patents, and then later invalidated them. The last Federal Circuit opinion was 135 pages long, and the judges could only agree on 55 words.

So the Supreme Court took the case (along with five other patent cases this term -- an unprecedented number), and today, all nine justices invalidated the patents. Invalidating them wasn’t a surprise -- these patents were of particularly poor quality -- but the Court did make some important statements about patents and abstract ideas that should reign in the worst software patents.

First, it unequivocally stated that if you have an idea so abstract that it cannot be patented, simply tying it to a “generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention."

Second, it stated that tying an abstract idea to “purely functional and generic” hardware similarly will not make the idea patentable.

This legalese is important. Most of the worst software patents do exactly what the Court said they can’t: present a general idea (e.g., hedging risk, one-click shopping, etc.) and say, because this idea is done on a computer, or a generic piece of hardware, it is not just an idea anymore. As computers play an ever-growing part in our everyday lives, you can understand the flaws in this logic. Today, the Supreme Court stopped it in its tracks.

Now, it’s true that the Court didn’t comment directly on “software” patents. But it did say that if you’re going to patent a software invention, it must be tied to something more specific than a general purpose computer or a generic piece of hardware. You can’t just run a generic piece of software on a general purpose computer and then stop everyone else in the world from doing the same for 20 years. Because, as we said at the outset, these types of ideas belong to everyone. They are fundamental building blocks of today’s technology, and society benefits when everyone can use them.

So we applaud the Court’s decision today, along with five others this term, for reminding the Federal Circuit Court that owning a patent monopoly is not an inherent right. Instead, patent law must be a delicate balance between granting patent owners limited and worthy monopolies, while leaving the rest of us with a vibrant public domain of ideas and technology on which to build.

We Didn’t Fail on Patent Reform: An Open Letter to the Media, Congress and Tech

This post originally appeared in re/code

Last month, Sen. Patrick Leahy unceremoniously pulled patent reform off the Senate Judiciary calendar -- denying a good piece of compromise legislation a vote -- reportedly under pressure from Sen. Harry Reid, who was reportedly under pressure from the trial lawyers’ lobbying arm. This took many of us who have been working hard to fix a dangerous patent troll problem by surprise. And not a pleasant one.

I’ve taken some time to reflect in the aftermath of this failed bill. I’ve looked for a lesson, a single take-away. None exists. But some points must be made, to the media, who I think have largely missed the point; to D.C. insiders, whose failure to make patent reform happen will have real consequences; and to the tech community, whose hard work has paid off but who still faces an uphill battle in navigating policy and politics.

First, to the media who report that tech is “D.C.’s biggest loser” and highlight “Silicon Valley's lost year in Washington”: you’ve got your story wrong. For starters, if you’re living in the same political universe that I am, it should be clear that this Congress is notorious for getting nothing done. It should come as no surprise that tech’s causes are not miraculously turning into legislation. No one’s are.

Still, so-called tech issues are driving political debates at all levels of government. The movement for patent reform has already had a serious chilling effect on patent trolls, and it’s far from over, as courts and states keep chipping away at the troll “business model”. And other issues that tech traditionally cares about -- immigration, privacy reform like an update to ECPA, government surveillance, and net neutrality -- dominate headlines. Many have turned into social movements that are not at all limited to the “tech community,” and each will continue to shape policy in this do-nothing Congress, and hopefully in the more productive ones that come next.

Second, to D.C. policymakers: when you failed to even put patent reform to a vote in the Senate you taught many proponents of reform what all too many knew already, that politics is “pay-to-play” and that deep, entrenched interests make it nearly impossible to get anything meaningful done in D.C. What many of you failed to recognize, however, is that the so-called “tech community” is actually becoming the American electorate at large. Soon, there will be no distinction between the “tech community” and the rest of the country. As today’s digital natives turn 18, they all become tech voters. The politicians who understand that, and work to legislate policies that help technologies and the startups who create them thrive, will be the future of this country.

Finally, to tech. Two messages: the work you did and the community you built to support patent reform did help. But we need to do more.

The Difference A Year Can Make: A Court Grants FindTheBest Attorneys’ Fees

For those of you who thought patent reform is dead: it’s not.

Sure, the comprehensive piece of legislation we need to put an end to a dangerous patent troll trend has stalled, but the fight against those trolls continues.

Remember when startup FindTheBest found itself facing a patent troll threat a year ago? A “company” called Lumen View Technology claimed that its patent covered a “computer implemented method to match the preference data inputted by at least two parties who input preference data into the website.” Lumen went on to sue FindTheBest, along with about 20 other companies, claiming that they all infringed that patent. There are a couple of big problems here. First, FindTheBest’s website undisputedly does not use match preference data. Second, it turns out the patent itself was invalid.

Late on Friday, a federal judge in New York ruled that Lumen will be on the hook to pay FindTheBest’s legal fees and costs, calling this case a “prototypical” one for making the loser pay. What’s interesting is that it’s also a prototypical patent troll case. For instance:

• Lumen continually threatened FindTheBest with expensive litigation if it did not agree to pay Lumen a licensing fee.
• Lumen threatened to raise the cost of settlement the longer FindTheBest continued to defend itself.
• Lumen did not conduct even a basic pre-suit investigation before it sued FindTheBest.
• As the Court found, “Lumen’s motivation in this litigation was to extract a nuisance settlement from [FindTheBest] on the theory that [FindTheBest] would rather pay an unjustified fee than bear the costs of the threatened expensive litigation.”
• The Court also found that Lumen’s tactics were “part of a predatory strategy aimed at reaping financial advantage from the inability or unwillingness of defendants to engage in litigation against even frivolous patent lawsuits.”

And this all brings us back to patent reform. Even as recently as a few months ago, courts very rarely granted attorneys’ fees in patent cases -- in fact, it happened so infrequently that it really wasn’t even considered a possibility. But the Supreme Court recently changed that in a case called Octane Fitness v. ICON Health & Fitness. There, the Court held that a losing party in a patent case might be forced to pay the other sides fees and costs (which can easily stretch into the millions of dollars range) in certain cases where a party either brings a particularly bad case, or acts unreasonably when litigating it.

Last week’s ruling was one of the first tests of the Supreme Court’s Octane ruling. And it showed that typical troll behavior -- like Lumen’s -- is enough to trigger fee-shifting. So, finally, the trolls can be held responsible for their actions.

This outcome was a direct result of all the hard work our community did on patent reform. We raised awareness of a dangerous problem that led the Supreme Court take an unprecedented five patent cases this term, and undoubtedly to this ruling.

This country still needs comprehensive patent reform legislation, and we’re going to keep fighting for it. And that legislation will still need a stronger fee-shifting provision than currently exists to make sure that it’s applied evenly across the country. But, in the meantime, parties facing patent trolls have a powerful new tool to fight back.

Congress Must Not Abandon Meaningful Patent Reform

This post originally appeared in Roll Call. 

The Senate’s decision to pull the plug on meaningful patent reform legislation leaves a serious, costly problem unsolved.

Patent litigation abuse is rampant and it’s getting worse. According to the first annual “2013 Patent Litigation Year in Review,” by the respected legal data analytics firm Lex Machina, patent cases hit record levels last year with 6,092 such lawsuits filed in U.S. District Courts, a 12.4 percent increase over 2012. Meanwhile, the average damages awarded increased by 28 percent to $34.7 million.

Most new patent cases were filed by ten plaintiffs that purchase patents — not to commercialize them — but to file lawsuits against companies that make use of these so-called inventions.

Known as “patent trolls” — or more politely, as “non-practicing entities,” patent assertion entities,” and “patent monetizers” — these perpetual plaintiffs buy up broad, vague patents and then claim their wide-ranging applications.

Armed with these patents, these entities sue operating companies that make and sell things, arguing that their patents cover those products and services, and demanding that the companies pay up. These companies can range from the most innovative major corporations to the small businesses that are end-users of basic technologies, such as shopping cart software or Wi-Fi routers.

The patent trolls’ not-so-secret strategy? Because of the high costs and great risks of a lawsuit, many companies will simply settle, paying them to go away. This is especially true for startups and small businesses that cannot afford to fight the trolls in federal court. In short, the trolls always win.

Carefully targeting where as well as who they sue, the patent trolls file their legal actions in the U.S. District Courts where they have reason to believe they stand the best chance of winning large judgments. In fact, patent trolls filed a growing number of their new cases in just two district courts: the Eastern District of Texas, with 1,495 cases, 20 percent more than in 2012, and the District of Delaware, with 1,366 cases, 33 percent more than in 2012.

These trolls tend to rely on old patents with questionable applicability to modern technology. A patent lasts for 20 years, but we all know that technology moves much more quickly than that. So it should come as no surprise that of the 4,917 patents at issue last year, 61 percent — 3,032 — had not been the subject of lawsuits over the past decade or more.

Not surprisingly, all of the top ten filers of patent cases in 2013 were patent trolls. In fact, the top three — ArrivalStar, Wynncom and Thermolife — each filed more than 100 cases. And six of the ten most frequently asserted patents — the subject of lawsuits by ArrivalStar — covered systems for tracking and monitoring vehicles. In many instances, ArrivalStar’s targets weren’t the companies who pioneered those systems, but the small municipalities who try to provide their citizens bus-tracking software, or the U.S. government for U.S.P.S.’s package tracking software.

These litigation tactics — using old and vague patents, and focusing on certain courts — do not add any value to the economy. Instead, they extract valuable resources from companies that could, and should, be commercializing new products and services, building their businesses, creating new jobs, hiring new workers, and otherwise contributing to American competitiveness and prosperity.

That is why it is so important that Congress not abandon efforts to pass comprehensive patent reform legislation that will protect productive businesses and rein in the patent trolls.

As this study of patent litigation reveals, the America Invents Act — passed just a few years ago — simply was not effective enough. Since 2011, we have seen a record number of patent lawsuits filed, and the average damages awarded have reached a new high.

Every day that goes by without reform costs our economy money. Annually, that number stretches into the billions. And every day, American businesses are targeted with spurious claims of infringement, requiring that they shift their focus away from growing their businesses.

Once and for all, it’s time to stop the patent trolls from taking their toll on American innovation, American businesses, and American jobs. Congress should not give up on patent reform. The cost of inaction is simply too high.

Hacking the Patent System

See the new white paper.

For many startups, the patent system is a necessary evil. Getting a patent can easily cost tens of thousands of dollars, and getting sued by a patent troll can cost millions. Despite these costs, and the other lost resources that come with them (lost employee and engineer time, stress, etc.), many startups find themselves feeling like it’s good business to file for patents. Traditionally, this was for a couple of reasons: 1) to use defensively if another company threatened a lawsuit (e.g., you sue me? I’ll sue you right back); or 2) to secure investment.

Over time, both of those rationales have proved to be false. First, owning a patent is no defense for a patent troll suit. Since a patent troll usually neither makes nor sells anything, it can’t be threatened with a lawsuit. Second, more and more investors report that they don’t care about their portfolio companies owning patents.

We think these broken rationales are proof of a patent system that has become unmoored. And recently we’ve been working hard to fix that through legislation -- you might have heard the news yesterday that the latest attempt at comprehensive patent reform died in the Senate.

This now leaves startups with a few bad choices: participate in the patent system and spend tens or hundreds of thousands of dollars (excluding the cost of enforcing those patents!), or don’t, but still find yourself facing lawsuits and other threats that come with sitting the system out.

So, together with EFF and OIN, we’re releasing a white paper prepared by Marta Belcher and John Casey from the Juelsgaard Intellectual Property Clinic at Stanford Law School. The paper is for startups and small businesses that want to understand some of their non-traditional licensing options. As we say in the paper:

“The traditional model of patent licensing—whereby a company pays a patent owner to license an invention that the company legitimately uses—has been hijacked by non-practicing entities (“patent trolls”) and other aggressive patent holders who assert overbroad patents that never should have been granted in the first place. Within this broken patent regime, companies are increasingly hacking the system—that is, finding alternatives to the traditional patent licensing model in order to both promote open innovation and protect the companies themselves. These patent system hacks can be organized into two broad categories: (1) defensive patent aggregators, which pool member companies’ resources to defensively purchase patents for the group and to fight patent trolls, and (2) patent pledges, whereby companies opt to openly and defensively license their patents to others.”

One example of an alternative is Twitter’s Innovators Patent Agreement (IPA). The IPA is simple: like most companies, Twitter asks its employees to assign their patents to the company. But, in exchange, Twitter promises it won’t use that patent to sue anyone, except for defensive purposes. Importantly, this promise travels with the patent, so even if Twitter sells it, the new owner cannot offensively sue without the permission of the original inventor. This kind of deal helps in hiring, since many software engineers scoff at software patents. It also helps Twitter’s brand, as a company that has taken a strong stand against a broken patent system.

This paper is intended as a guide to more solutions like this. Some might work for you, and some might not, but we think any commitment to patent defense is a step in the right direction.

Patent Reform off the Table For Now. What’s Next?

Yesterday, Chairman Leahy effectively ended our best hope of real patent reform by taking strong compromise legislation off the calendar. According to his statement, “there has been no agreement on how to combat the scourge of patent trolls on our economy without burdening the companies and universities who rely on the patent system every day to protect their inventions.” We disagree. There was agreement between stakeholders -- especially those for whom reform is most needed.

This news is devastating to the welfare of startups who will continue to face the threat of patent trolls. That no agreement could be reached, especially in light of the efforts being made across the committee to find common ground, is also bad news for the economy where annual losses from patent troll litigation are billions of dollars.

While this is certainly a step backwards, it’s worth noting all the progress we have made.

The fact that we have reached this point at all can be attributed in large measure to the actions of the tech community and the work of Sens. Charles Schumer (D-NY) and John Cornyn (R-TX). These two senators, who often find themselves ideologically opposed, put their differences aside and worked together to defend the startups and small business being crushed by the scurrilous practices of patent trolls. We are thankful for their work.

And, while we might not see caps on discovery costs, transparency of ownership, or fee shifting this year, we will not stop fighting to empower startups against patent trolls. Bills are still alive in the House and Senate that would curb deceptive demand letter practices. Right now, we have a good Senate bill and a weaker, but workable, House bill that are moving forward. We’ll also continue to work with the Patent Office in its efforts to modernize and improve its internal processes; with the Federal Trade Commission in its efforts to investigate patent trolls and protect consumers from the trolls’ worst behaviors; and with the states that are working hard to keep their local economies troll-free and business-friendly. This is not to say that we don’t still need comprehensive reform; it is to say, however, that we have made progress.

Thanks also goes to all of you for being a part of this conversation, and making this issue such an important one. The fact that all of these government bodies -- along with the Supreme Court, who heard five patent cases this term -- are involved in fixing the problem is really something. The intellectual property system is not easy to understand, but you still took a stand because you saw the toll patent litigation abuse was taking on your businesses. And in standing up to patent trolls, you made a difference.

You got the Innovation Act through a rancorous and partisan House of Representatives on this issue with a 325-91 vote. You forced the hands of trolls themselves and pushed them further than they have been pushed before with your efforts in the Senate. And, perhaps most importantly, you changed the conversation from a wonky, back room discussion of legal tenets, to real world examples of harm. With your continued support, and the support of our friends in Congress, we can be on the winning side.

Is This Our Last Chance For Patent Reform?

Over the last few years I have written about how badly we need patent reform more times than I care to recall. Here I am in September 2011, upon passage of the America Invents Act, stating that it "wholly fails to address many of the biggest problems plaguing the patent system, especially the problem of patent trolls." Or last year, when I called on the tech community to “strike while the iron is hot” to get patent reform done. I’ve explained time and again how the system doesn’t work and why we need to fix it, and I have been joined by so many other leaders in the tech community: founders, investors, and policymakers.

Many of us have been watching Capitol Hill closely since August 2012 when Reps. Peter DeFazio and Jason Chaffetz introduced the first SHIELD Act, the first bill to take on the troll problem. Since then, the President has compared the patent troll business model to extortion and called for reform in his most recent State of the Union address; the House passed the Innovation Act, which the White House publicly supported; the Federal Trade Commission has said it will undertake an in-depth investigation into the patent troll business model; and 42 states’ attorneys general have called for legislative reform.

Every day that goes by without reform costs our economy money. Annually, that number stretches into the billions. And every day, startups are targeted with spurious claims of infringement, requiring that they shift their focus away from growing their businesses.

So why haven’t we passed patent reform yet?

The answer depends on who you ask. Some blame Senate Democrats on the Judiciary Committee, who, under Chairman Patrick Leahy, hold the power to make it happen. (Sen. Leahy is responsible for deciding what bills the committee votes on, and up until now, no comprehensive patent reform bill has made it to a vote.) Others claim that certain provisions -- like fee shifting -- have made a deal impossible.

The truth is, it doesn’t matter. The Senate goes on recess after this week, and then we’re into the summer when things in D.C. notoriously slow down. And after Labor Day, congressional members will be distracted with the November midterm elections. All this adds up to a short window to get this done. We have been waiting long enough. The pieces are all in place. The time for patent reform is now.

Want to help? Go to fixpatents.org and call your senators today. Let them know that you’re watching, that you care, and that you expect them to finish the job and pass patent reform.

SCOTUS Decision in Octane Fitness: A Good Step But Fee Shifting Legislation Still Needed

With today’s decision in Octane Fitness v. Icon, and a companion case, the Supreme Court became the latest branch of government to state unanimously that abusive patent litigation and patent trolling needs to be curtailed. The White House and a large bipartisan majority in the House of Representatives have also been unequivocal on this point. Patent litigation abuse is a complex problem requiring a multi-pronged solution that must include legislation as well as administrative and judicial action.

The Supreme Court’s unanimous decision recognized the burden that abusive patent litigation places on productive U.S. companies and the need to address the problem. It also took an important step in articulating what advocates of reform have been saying all along: the litigation playing field is tilted in favor of plaintiffs and has enabled patent litigation abuse.

The Court’s decision will make it easier to shift fees to the loser in “exceptional” cases, but that is only one part of the solution. Courts must have the discretion to fee shift not only in “exceptional “ cases, but also in cases where the Court determines the conduct or position of the non-prevailing party was objectively unreasonable. Legislation to this effect is essential if we are to discourage abusive litigation in any meaningful way.

The Innovation Act passed by the House establishes a rebuttable presumption of fee shifting in favor of the non-prevailing party whose conduct or behavior was found to be unreasonable. Now the Senate must act too. The heavily negotiated Schumer-Cornyn compromise is a balanced bill after years of discussion about how to address the patent troll problem. It strikes the right balance on fee shifting. It’s time for a markup of this bill.

Every day that goes by without legislation hurts innovation and costs the economy millions of dollars, as evidenced by the news reports of trolls launching a flurry of suits last week in anticipation of legislation.

The Court is to be commended for lowering the very high bar that previously existed for awarding fees in exceptional cases, and for recognizing the important role that fee shifting must play in deterring patent litigation abuse. The Senate must act to empower the Courts to fee shift in all cases where the non-prevailing party’s conduct or position was unreasonable – not only in “exceptional cases” which is all that the current law allows.

Setting the Record Straight on Patent Reform

I’ve been involved in the debate about patent reform for a long time, and I’m thrilled to see that we are close to finally passing real legislation that will combat the patent troll problem. A Senate compromise is imminent, and we cannot let those who benefit financially from a broken system derail these efforts. Now is the time for real reform to curb the impact of patent trolls on America’s startups and our economy.

The widely reported Schumer-Cornyn compromise would provide a clear path forward against behavior that costs small businesses and the U.S. economy at least $29 billion a year (or more) in lost capital. These shadowy entities make nothing, provide no benefit to the wider economy, and do not advance America’s innovative, entrepreneurial spirit.

Claims that the current Senate compromise would gut the ability of “small inventors” to assert their rights as patent holders lack a fundamental basis in fact, but they are being levied loudly and distractingly by groups backed by large-scale assertion entities and multinational corporations with large patent portfolios. To be clear, there is nothing in the current proposal that would stop a legitimate patent holder from bringing a meritorious case for infringement. More than 6,000 patent holders and allies agreed by signing a letter; making it harder to patent owners to assert their legitimate claims for infringement is counterintuitive and not something our organization would fight for. Assertions to the contrary, made by those seeking to retain their rights to make offensive use of their patent portfolios, are wholly without merit.

Let there be no doubt: the startup community needs real patent reform. As a whole, it endorses the kind of strong reforms found in the Schumer-Cornyn compromise. Small, innovative startups bear the brunt of the patent trolling trend.Those startups who are targeted often have less than $10 million in revenues, and they are in no position to hire a patent lawyer to understand the scope of the threat they face — let alone pay the millions of dollars it would cost to take case to court. Even worse, startups are too often short on talent, so they do not have the luxury of using their current employees to read and understand vague patents with “fuzzy boundaries”.

We are asking the United States Senate to seize this opportunity. Let’s make this the week we beat back patent trolling. We are looking at serious, well-ordered compromise legislation -- worked out tirelessly by staff and Senators. We urge you to pass it on to the President, and let American innovation continue to lead the charge in rebuilding our economy.

The Senate and Patent Reform: The Time Is Now

This post originally appeared in RollCall.

Recently, word from the Senate Judiciary Committee is that negotiators have reached a bipartisan agreement in principle on the key elements of a comprehensive patent reform bill. They are reportedly vetting and nailing down language and preparing the package for mark-up when the Senate returns. A deal appears close to being done, and it’s looking more like the House’s Innovation Act, which bodes well for final passage.

Yet time is of the essence as the clock is ticking on this Congress. Patent litigation abuse by trolls, entities that acquire patents for the sole purpose of shaking down actual inventors with dubious infringement claims, is a very real tax on innovation. A New York Times editorial calling on the Senate to move forward with robust legislation made it clear that abusive patent litigation costs the US economy billions of dollars a year. And, although we can debate the exact scope of the problem, there is no question that the patent trolling phenomenon is growing, and that it now targets retailers, small businesses, independent inventors,start-ups and consumers. Moreover, it has tarnished the reputation of the patent system at a time when innovation is such a critical driver of economic growth and global competitiveness.

Recognizing that patent trolls leverage the high risk and high cost of litigation to extract nuisance settlements, the House passed the Innovation Act by a lopsided 325-91 margin in December.

As the Senate Judiciary committee struggles to come to terms on some thorny provisions, they should bear in mind what Chairman Leahy said just last week: Patents are government-issued monopolies and the abuse of patents in litigation is qualitatively different and consequently warrants a higher level of congressional scrutiny. When bad actors send demand letters or file suits without any real basis for believing that their patent is infringed, they are abusing the system. This problem is exacerbated when many of the patents being asserted by trolls are vague or abstract software and business method patents that should not have been issued in the first place.

Current law and practice stack the deck in favor of trolls, who typically send out scores of form demand letters which make vague and unspecified assertions of infringement and request “licensing fees” while threatening litigation. The troll renders itself litigation-proof by creating shell companies with no assets, but a threatened start-up is faced with a dire choice: give in to what President Obama aptly called ‘extortion” or risk litigation, which would drain critical energy and resources from a fledgling business which can ill afford the cost or distraction of litigation.

To stem this tide, the committee should press ahead to finalize a package that will redress the existing imbalances in the patent litigation system. The bill must include provisions for:

• Transparency of ownership post-issuance and throughout the life of the patent
• Specificity in demand letters
• Heightened pleading standards that require the identification of claims asserted to be infringed. Any bona fide claim of infringement should be able to meet these reasonable standards, which even provide an exception in cases where the plaintiff is unable to access all the information
• Capping discovery costs by enabling the court to determine what the disputed patent covers and the scope of the claims before allowing broad-ranging, expensive, and potentially irrelevant discovery. This will prevent trolls from driving up costs in order to gain leverage in litigation
• End-of-case fee shifting in favor of a prevailing party while maintaining the court’s discretion to deny fee shifting if the losing party’s actions and conduct were objectively reasonable
• Provisions that enable the real party in interest to be held liable for any costs assigned to shell entities.

To be sure, infringement is also a very real threat to inventors and startups, so the Senate should take care to ensure that nothing in the legislation prejudices the ability of patent holders to commercialize patents or assert legitimate claims. The proposals that have been reportedly agreed upon reflect a keen sensitivity to balancing these interests and the bipartisan negotiators should be commended for taking such care in walking that fine line.

This legislation needs to be balanced but it also needs to be effective, so potential unintended consequences should not be exaggerated in an effort to water down or derail the bill. The bill, like any legislation, should be evaluated by its intended and likely effects, not by reference to potential consequences which are exceptional or unlikely.

It is clear that the current state of affairs enables abuse and is tilted too far in favor of litigation plaintiffs, who can essentially sue on a wholesale basis with impunity. The fulcrum needs to be restored to a position of balance so that the patent playing field is level for all innovators. The Senate Judiciary negotiators appear to have arrived at a fair and balanced set of reforms. Let’s hope the Senate seizes this chance to improve and strengthen the patent system.

Pushing Patent Reform Through Senate Recess

We found out late last week that the Senate is pushing back a key vote on patent reform for the third time in a row. Early reports decried this as the beginning of the end of patent reform, but in fact the opposite is true. From everything we’re hearing, the Senators have reached a deal on the key provisions of comprehensive reform and plan to use their upcoming recess to smooth everything out.

Good news first: the bill looks likely to include the following strong provisions that generally align with the House Innovation Act:

Fee shifting: Meaningful fee shifting will discourage the most egregious actors — those without meritorious cases — from suing in the first place; and joinder provisions are necessary to make sure that the real party in interest — the one that really owns the patent — can be held liable for the trolling activities of shell entities are also essential. In other words, no more hiding behind shell companies.

Heightened pleading: Patent trolls benefit from asymmetry of information. They can file suits with vague and limited information, leaving companies with no choice but to consult a lawyer about the scope of the threat they face. Most startups don’t have an in-house lawyer at all, let alone one who specializes in patents.

Those bringing suits should set forth the basic framework of their case — who owns the patent, what product allegedly infringes the patent, and what parts of the patent are at issue. This would, at minimum, give startups a basic and common-sense understanding surrounding the threat, allowing them to make more informed decisions on how to proceed.

Discovery reform: Discovery is one of the most onerous and expensive parts of patent litigation. Reasonable limits on initial discovery will help incentivize startups to fight the trolls in court. This will, by default, incentive those trolls to only bring meritorious suits.

Demand letter reform: Patent trolls can legally send vague licensing demands, full of threatening legalese, and startups are again left with no information to understand the scope of the threat they face. Demand letters should include concrete information on the patent holder’s claim to give recipients needed information; and demand letters sent in bad faith should be actionable. 

Customer stay exception: Startups can sometimes find themselves facing expensive litigation for a product they obtained from someone else, or they might find their customers facing suits for using their products. In either instance, startups need tools — like robust stays — so manufacturers and suppliers can step in and join the defense.

So far, so good. The not-so-great-news, however, is that the Senate is now out on a two-week recess — and two weeks is a lot of time for opponents derail what appears to be a really good deal.

Most opponents can be clustered into two groups: D.C. insiders who oftentimes know their way around the legislative process much better than the small businesses and innovators who are being targeted by trolls; and large, well-resourced businesses (including the trolls themselves!) that have invested significant resources in the current broken patent system and fear losing some of that investment value.

So,  those of us who care about ending the reign of the patent troll need to speak up. Go to fixpatents.org, call your Senators NOW and tell them it’s time for real patent reform.

Finally, a word of caution: we’re reasonably optimistic that the bill we’ll see after recess will be a good one. But the process has been largely opaque and until we see final language we don’t know for sure what this deal will look like. We’ll be watching closely, however, and will keep you up to date in this space and on social media (Follow us on Twitter and Facebook).

Thanks to your help, we're closer than we’ve been in years to fixing a broken patent system that has been hurting inventors, startups, and the promise of technology. Now is the time to get this done.

Meet Peter Pappas, Engine Advisor on IP

I’m really excited to launch Engine’s Senior Fellows Program. Starting with Peter Pappas as our Senior Advisor on intellectual property and other policy issues, we plan to expand the program with fellows on net neutrality, women in tech, and other relevant areas that affect the startup community.

Peter, who made his first public appearance with us at a patent reform panel in San Francisco, and then joined us in DC for Startup Day on the Hill, is the former chief of staff at the USPTO where he worked with Director Kappos and the White House on policy initiatives. In this position, Peter was intimately involved in the formulation, and passage, of the 2011 America Invents Act. And since then, he has been working with the USPTO and the White House on additional patent reform legislation that targets patent litigation abuse and fills in the gaps that were not addressed by the AIA.

Having advisors is essential for us as we continue to conduct existing policy work, and enter into new debates. Peter’s experience and expertise are particularly crucial right now, as we push the Senate to pass comprehensive patent reform.

Speaking of which, here is Peter's first op-ed for us on why we need to restore a patent system that support true innovation.

Watch Peter introduce himself and tell us why he’s excited to be here!

The Biggest Threat to Patent Reform: The Apple/IBM/Microsoft Coalition

This article originally appeared in VentureBeat

There’s a new coalition in D.C., and big players like Apple, DuPont, Ford, GE, IBM, Microsoft, and Pfizer have all signed up. Unfortunately, launched on the day the Senate was supposed to take up the latest effort to reform the patent system, the coalition’s sole purpose appears to be an effort to derail the important strides we’ve made toward fixing the patent troll problem via the proposed Innovation Act legislation.

So what is it about the Innovation Act (and other legislative proposals being discussed in the Senate) that this coalition thinks will harm both their businesses and ability to build innovative products?

These companies were all startups themselves once, and protecting startups that cannot afford to protect themselves from patent trolls is at the heart of the Innovation Act. The startups being targeted by patent trolls have less than $10 million in revenues. They are in no position to hire a patent lawyer to understand the scope of the threat they face — let alone pay the millions of dollars it would cost to take case to court. Even worse, startups are too often short on talent, so they do not have the luxury of using their current employees to read and understand vague patents with “fuzzy boundaries”.

Today’s trolls send out scores of demand letters that make vague assertions of patent infringement while requesting “licensing fees” of $100,000 or more.

The cost of trolling, on the other hand, is minimal. Trolls also typically render themselves litigation-proof by creating shell companies with no assets, should they fall into legal trouble from a wrongful suit.

We need real reform that will stem the tide of the troll epidemic, while maintaining protection for patent holders to enforce their legal rights. This is precisely what the current proposals would do.

Fee shifting

It is nearly impossible for a startup to find the resources to fight a patent suit. The promise of seeing some of that money back at the end makes securing the resources easier.

Meaningful fee shifting will discourage the most egregious actors — those without meritorious cases — from suing in the first place; and joinder provisions are necessary to make sure that the real party in interest — the one that really owns the patent — can be held liable for the trolling activities of shell entities are also essential. In other words, no more hiding behind shell companies.

Heightened pleading

Patent trolls benefit greatly from asymmetry of information. They are able to file suits with vague and limited information, leaving companies with no choice but to consult a lawyer about the scope of the threat they face. Most startups don’t have an in-house lawyer at all, let alone one who specializes in patents.

Those bringing suits should set forth the basic framework of their case — who owns the patent, what product allegedly infringes the patent, and what parts of the patent are at issue. This would, at minimum, give startups a basic and common-sense understanding surrounding the threat, allowing them to make more informed decisions on how to proceed.

Discovery reform

Discovery is one of the most onerous and expensive parts of patent litigation. When startups face companies solely in the business of licensing and litigation (e.g., oftentimes a patent troll), they find themselves facing outrageously expensive motion practice that has little to no impact on their adversary.

Reasonable limits on initial discovery will help incentivize startups to fight the trolls in court. This will, by default, incentive those trolls to only bring meritorious suits.

Demand letter reform

Patent trolls are legally able to send vague licensing demands, full of threatening legalese, and startups are again left with no information to understand the scope of the threat they face.

Demand letters should include concrete information on the patent holder’s claim to give recipients needed information; and demand letters sent in bad faith should be actionable. Those senders should not be able to take advantage of the patent system and extort money from high-growth companies that are rebuilding the economy.

Customer stay exception

Startups can sometimes find themselves facing expensive litigation for a product they obtained from someone else, or they might find their customers facing suits for using their products. In either instance, startups need tools — like robust stays — so manufacturers and suppliers can step in and join the defense.

The harm resulting from the patent troll epidemic does not just impact startups; it creates an environment where startups have a negative impression of the patent system and are therefore significantly less likely to positively engage. A recent study from the National Sciences Foundation found that in the information sector (which includes software, Internet, and Data processing) only 10 percent of companies found utility patents either “very” or even “somewhat” important.

We need comprehensive patent reform to level the playing field for all innovators so they are no longer victimized by a litigation system stacked in favor of trolls. The legislation must realign the patent system with its founding principles — to incentivize innovation and the progress of technology. This includes protecting patent owners’ rights along with the rights of those facing patent threats. To be clear, there is nothing in the Innovation Act, or other proposed legislation, that would stop a legitimate patent holder from bringing a meritorious case for infringement.

To wit: our government grants patent holders a 20-year monopoly. Asking those who benefit from such monopolies to do basic minimal research before filing or threatening a lawsuit, or to actually inform the public about who really owns a patent is not onerous — it is part of a fundamental bargain between a patent holder and the public, and is probably something every responsible patent holder is already doing.

So why are companies like Microsoft, IBM, GE, and Ford trying to slow down this legislative process? Simply put, spending millions of dollars on patent resources has proved a good way to make money and to shut out their competition — high-growth, disruptive, and nimble startups. We must not let these entrenched interests get in the way of fixing a broken system.

Supporting Aereo Means Supporting Innovation Over Entrenched Interests

Today, we joined EFF, Public Knowledge, and CEA in filing a brief at the Supreme Court in favor of Aereo–the innovative company that allows you to watch television at any time, on any internet-enabled device.

Aereo’s product is thousands of dime-sized antennas, each one assigned to a customer who can use it to watch over-the-air television on-demand through the cloud. This Barry Diller-backed service has proven to be a good idea, and one that consumers want.

But enter the broadcasters who can’t stand the threat to their business model. Instead of competing with Aereo in the marketplace, they took the company to court, accusing Aereo of copyright infringement.

The argument is as follows: copyright law gives a copyright holder the exclusive right to “publicly perform” its content, so in retransmitting the broadcasters’ signals, Aereo is infringing the broadcasters’ copyrights. This is wrong. As a lower court already found, Aereo’s system of personal antennas and video streams allows individuals to make non-public transmissions of free broadcast channels that they may already access in their private homes independent of anything Aereo does. As such, no copyright violation.

The stakes here are high: if Aereo loses, it will likely have to shut its doors -- bad news for Aereo, bad news for its customers, bad news for innovative companies that want to follow in its steps, and I’d argue even bad news for the broadcasters--companies that can’t figure out how to deliver a product customers really want.

History should be a guide. In the early 1980s when the VCR first entered the market, the movie studios were less than pleased. At the time, the president of the Motion Picture Association of America famously told Congress: "I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone." There, like here, the movie studios sued for copyright infringement, and the case ended up before the Supreme Court. In a 5-4 vote, the Court found the VCR legal. That’s right--we were only one vote away from no VCR.

And, of course, the VCR not only proved to be an incredibly popular product, it was also good news for the movie industry. In fact, once VCRs were found in homes across the country, the market for home movies exploded and the industry found itself reaping the benefits.

It’s important to any entrepreneurial ecosystem that we allow innovative and disruptive products into the marketplace--whether it’s the VCR, Aereo, or who knows what else. Incumbent players that are often slow to innovate (anyone remember how long it took the record labels to realize people wanted digital music?) do everyone a disservice when they chose to fight in court instead of in the market.

Aereo has significant backing so it’s able to fight back. But litigation battles easily cost millions of dollars, and taking on a fight like this would be incredibly difficult for a smaller startup. So, we support Aereo and have asked the Supreme Court to keep the doors to competitive innovation open in the over-the-air television space, and in doing so set a precedent for more innovation generally.

This case is just the latest in a long history of entrenched interests trying to expand the scope of copyright law to shut down competition. The VCR case was another example, and so was the proposed SOPA bill we successfully shut down. As this case and others progress, we’ll be watching closely and working hard to stem this dangerous trend. Congress has indicated plans to overhaul U.S. copyright laws in the next few years--we hope they do it in a way that protects the interest of entrepreneurs nationwide.

It's Time To Fix Patents

Patent trolls, armed with low-quality patents, have been harming small innovative companies for years. Their time is up.

This week, the Senate Judiciary Committee is slated to take up patent reform -- Senate action is the important last step in an ongoing battle to fix a broken patent system. That’s why, today, we’re launching Fixpatents.org -- a simple campaign that allows you tell your Senator directly, on the phone or through Twitter, that we need real patent troll reform passed now. Personally contacting your representatives on the Hill is by far the best way to affect policy. Call your senator today and urge real patent reform.

Last December, the House passed an impressive bill of reforms, the Innovation Act, in a 325-91 vote, and the President has promised he'd sign it. We need to Senate to follow suit. This is the time to make our stand.

Patent reform matters to the recovering economy, to innovation policy, and mostly to small and growing startups who face the worst of the troll threats. Here’s why:

1. Startups are responsible for all net job growth over the last 30 years and the rise of the patent troll model threatens that continued growth.
2. The majority of companies targeted by patent trolls have less than $10 million in revenue. When small businesses face dubious multimillion dollar lawsuits, our innovation economy suffers.
3. Non-practicing entities -- or patent trolls --- filed 3,608 new suits in 2013, up almost 20% from 2012. And these types of lawsuits are expensive, costing defendants $1 trillion in lost wealth from 1990 - 2010 alone.
4. Patent troll suits accounted for 67% of all new patent cases filed last year, and 63% of all new patent defendants. This is a perversion of the justice system.

We are facing an epidemic and American businesses are paying the price. We need leadership, and action, now.

It’s time for Congress to pass legislation that puts an end to the dangerous business of patent trolling. Specifically, we need legislation that will:

1. Promote meaningful fee shifting
2. Shift the financial burden of burdensome litigation tactics, like discovery
3. Provide fair notice to accused infringers
4. Curb deceptive demand letters
5. Protect customers in patent litigation

The Senate must act, and with your help we can make patent reform a reality. Visit Fixpatents.org now, make the call, and urge your Senator to pass patent reform.

Please feel free to share this content on your own blogs, and share away on social media! 

Critical Mass Supports Timely Patent Reform

This morning, we -- and 5600 other people -- sent a letter to the Senate urging real patent reform. Those people include 1507 entrepreneurs, 758 investors, and 1006 inventors -- at least 150 of whom own their own patents. This should serve as yet another reminder of the critical mass of job-creating entrepreneurs and businesses that support patent reform; the Senate should take note and act swiftly.

This letter is in addition to a letter the Senate Judiciary Committee received from U.S. Senators Mark Udall (D-Colo.), Rob Portman (R-Ohio) and 15 others  late last week. Signed by a broad coalition of Democratic and Republican senators, the letter cites widespread support across the county and in Congress for reforming the U.S. patent system to protect America's most innovative industries, as well as Main Street businesses and entrepreneurs across the nation, from abusive lawsuits and costly settlements.

As the Senate receives this letter, over 100 people will meet at Stripe’s office space tonight to talk about patent reform, listen to a panel of experts -- including former USPTO Chief of Staff and Engine Fellow Peter Pappas -- and formulate a plan of action for passing meaningful reform this year.

With the majority of patent troll targets making under $10 million in revenue, this is an issue so important to our community, and the economy as a whole, that we cannot afford to wait for action. When small businesses face dubious multimillion dollar lawsuits, our innovation economy suffers.

With the Senate poised to take up this debate in earnest early next month, we are entering the final, and most important, stretch of this battle. And we need you more than ever.

If you signed today’s letter and want to do more, or if you're just joining this coalition, stay tuned for the launch of fixpatents.org, a site that will help you call your Senators directly. A number of Senators and Representatives in Austin last week confirmed that making a phone call is the single most influential action you can take to encourage action in return, so we hope you’ll join us.

As we celebrate today’s actions, we also know there is still a lot more to do. Don’t stop here. Help us see this through.

The Importance of Copyright Notice and Takedown

Today, the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet held a hearing on copyright law’s notice and takedown procedure -- an important section that strikes a delicate balance between the rights of copyright holders and the freedom of online service providers. This hearing is part of a longer process undertaken by Judiciary Chairman Robert Goodlatte to reexamine copyright law, but today’s proceeding is of particular interest to startup companies, many of whom are directly affected by copyright law and who have a vested interest in seeing that law updated for modern technology.

Paul Sieminski, general counsel of Engine member company Automattic, testified today, and this is how he laid out the case notice and takedown procedures matter:

“From our perspective, the [law’s] notice and takedown system generally works in practice. The safe harbor provisions of the law are very important to us, and we, like hundreds of other internet service providers, rely on them in publishing the huge amount of online content that our users create. The [law] provides important certainty that our hosting of user generated content will not lead to costly and crippling copyright infringement lawsuits.”

Before the takedown and notice procedure was passed in the late 1990s, great legal uncertainty existed for any company providing online services that allowed for third parties to post content. At worst, these companies could find themselves liable if a third party posted content that infringed a copyright -- and that’s no small deal. Infringing a single copyright can result in damages of up to $150,000. With potential damages like that, it’s hard to imagine that sites like YouTube, Facebook, and WordPress would even exist today.

Under the Digital Millenium Copyright Act (DMCA), the notice and takedown procedure requires that:

• Copyright holders notify service providers when they find infringing work on the provider’s site;
• The service provider notify the poster of that work that it will be taken down; and
• The poster has the option to fight back if they believe the post was not infringing.

When this process is followed, service providers find themselves in a safe harbor where they will not personally be liable for potential findings of copyright infringement.

This safe harbor has been instrumental to the growth of startup internet companies. Again, according to Paul:

“When the DMCA originally passed In 1998, it wasn’t possible to create a Facebook page, Twitter account or your own website, for free, in minutes like you can do on WordPress.com. These innovative tools allow anyone to communicate their vacation photos to the world, build a business as an independent publisher, or even organize a democratic, grass roots overthrow of an oppressive regime in the Middle East. The internet’s communication and sharing tools are used by millions of people, and all grew up under the DMCA. For the most part, the statute has worked to encourage the growth of innovative platforms and businesses. The United States is now home to the most thriving and advanced internet companies in the world.”

Traditionally, copyright was meant to incentivize artists to create, but more recently we’ve seen abuses of the system where incumbent industries attempt to rely on it to squelch competition (remember SOPA?). As this debate continues over the next few years, we’ll work hard to keep those abuses from happening, and ensure that artists and entrepreneurs are protected equally under the law.

New Bill Takes Aim at Patent Demand Letter Abuses

Since the end of last year when the House passed the Innovation Act with a resounding bipartisan majority, the President has announced his intention to sign the bill, and he made a strong statement in support of reform in this year's State of the Union address. But we've still spent the early months of 2014 working with Senators, and urging the Senate to act on pending legislation. Today, a new bill was added to the list. The Transparency in Assertion of Patents Act, introduced by Senators McCaskill (D-MO) and Rockefeller (D-WV), is an important bill that would protect consumers and small businesses by curbing the patent demand letter problem.

While the Innovation Act brought great gains to our community by squaring-up against patent trolls, the demand letter problem, which for jurisdictional reasons was left out of the House package, remains a grave concern. Last year, when we launched the demand letter database, Trolling Effects, with EFF and a coalition of tech advocacy organizations, we wrote:

The letters demanding these payments are often evasive, failing to include details about the patents, who owns those patents, and the products or services that allegedly infringe. They fail to give recipients the information to make rational decisions, such as whether they should pay the troll, ignore the letter, or go to court to fight it. Just hiring a lawyer to ascertain that seemingly simple information can easily cost well into the tens of thousands of dollars.

The letters raise even more fundamental concerns, too. Because they happen before a legal complaint is ever filed, they are not part of the public record. And once a settlement or license is signed, it will likely include a non-disclosure provision, prohibiting the letter's recipient from talking publicly about its contents. This means that the scope of the problem is often underreported, making it harder for policymakers to understand the true scale of the patent troll problem.

Here is what Sen. McCaskill and Sen. Rockefeller's bill would do:

• Require that demand letters contain certain basic information, such as a description of the patent at issue, a description of the product or service that allegedly infringes it, contact information for the patent's owners, and disclosures of ongoing reexaminations or litigations involving that patent.
• Define as an illegal, unfair, or deceptive practice certain egregious behaviors, such as sending letters threatening litigation without a real intent to file litigation, or sending letters that lack a reasonable basis in the law.
• Give state attorneys general explicit power to to target similar bad behavior in their own states.
• Allow the Federal Trade Commission to enforce these rules by levying penalties of $16,000 per each violation.

Signing this bill into law would go a long way to stopping some of the worst demand-letter abuses. We applaud Senators McCaskill and Rockefeller, and look forward to supporting this piece of legislation as it works its way through the Senate.

Speaking of which, urge the Senate to take action on this bill, and other essential patent reform measures, here.