Startup News Digest 8/21/15

Welcome to the Startup News Digest, our weekly take on some of the biggest stories in startup and tech policy. Here's what we've been tracking the week ending August 21st, 2015:

• Venue Reform. 44.4% of all patent cases are filed in the Eastern District of Texas. And that’s no accident. Our friends at EFF took a close look at the numbers, and found that the “probability is so vanishingly small that you’d be more likely to win the Powerball jackpot 200 times in a row”. So why are so many cases filed there? Because the Eastern District is notoriously friendly to plaintiffs, making this an ideal location for patent trolls to operate. More on the numbers, and the need for venue reform, here. And read our recent take on the problem here.

• Copyright Law and Creativity. Copyright law's principal purpose is to encourage creativity: giving creators exclusive control over their content, the argument goes, will allow them to earn enough money to sustain further creativity. The trajectory of copyright policy in the past few decades seems to operate on the reductio ad absurdum that if exclusive control over content leads to more creativity, maximum control must lead to maximum creativity. It is no surprise, then, that content industries reacted so strongly to digital technologies that could weaken control over the distribution of their work, arguing that the Internet will ultimately destroy creative industries. But, as the New York Times highlights, this argument doesn't hold up all that well in practice. On the contrary, creative production has exploded with the rise of digital distribution technologies. The findings should give policymakers pause about further ratcheting up copyright protections like term lengths and infringement penalties that already likely diminish rather than promote creativity. We wrote more about the negative impact of punitive copyright law here.

• Diversity in Tech. The Verge took a close look at the diversity numbers at some of the largest tech companies.  And while the numbers aren’t good, they also point to some of the problems with the ways employment data gets reported to the federal government. If we’re going to make progress in diversifying the tech sector, we need data that accurately reflects the problem and the way it responds to various efforts from both the private and public sector. Check out some of Engine’s work on diversifying tech here.

• Taxing the Digital Economy. The Wall Street Journal looks at ways different states are trying to collect taxes from new technologies to offset losses in sales tax and other traditional sources of revenue. While states are reasonable to want to collect funds they are due, this kind of piecemeal approach creates serious regulatory issues for startups that operate nationally or globally. And it has the potential to push entrepreneurs out of states with particularly onerous policies. More here on the dangers of trying to apply old tax and regulatory schema to new technologies.

• Drones. As drones (or unmanned aerial vehicles, UAVs) go mainstream, and some disrupt air traffic, policymakers are looking to apply rules that would limit their ability to cause danger or invade privacy. Sen. Chuck Schumer (NY) is pushing to require dronemakers to develop technology that would keep drones from entering restricted airspace. This sort of geo-fencing provision will likely find its way into negotiations over the extension of the FAA reauthorization bill next month. Meanwhile, researchers at UC Berkeley are testing a license plate for drones consisting of multicolored lights on the bottom of an aircraft. The unique pattern of blinks assigned to each drone could be identified in a database by law enforcement.

• Decoding the On-Demand Economy. Policymakers (and presidential candidates, too) are grappling with how to interpret the emerging on-demand economy and too often, as Devin Findler of Institute for the Future points out, this industry is wholly categorized as either good or bad. The conversation among regulators, policymakers and even media critics should instead seek to understand the underlying technologies transforming sectors of our economy and how new platforms built on top of those technologies can be "intentionally designed to maximize the benefits for everyone connected to them." IFTF recently sat down with the Department of Labor to share these more nuanced insights about the future of work - we need more of these conversations happening at every level of government.

Will 2015 Be Our Last Real Best Chance for Patent Reform?

Earlier this month, the White House hosted its first ever Demo Day, inviting startups from all over the country to celebrate entrepreneurship. At that event, the President eloquently pointed out just how important the startup community is for our nation:

"Startups, young firms account for almost 40 percent of new hires.  And as we’ve fought back from the worst economic crisis of our lifetimes, those firms have helped our private sector create more than 12.8 million jobs over the last 64 straight months, which is the longest streak of private sector job growth on record."

With numbers like those, you would think all elected leaders would be racing to support pro-entrepreneurship policies. Yet Congress continually fails to move patent reform legislation, threatening the future of the startup community and the good jobs it creates.

The patent troll threat is not an abstract problem. And it’s not a problem that’s getting better. In fact, abusive patent litigation is becoming more prevalent: patent lawsuit filings are on track to break a new record this year (with a forecast of more than 6,000 suits) and 68 percent of suits so far have been filed by trolls. Furthermore, 82 percent of troll activity targets small and medium­-sized businesses, and 55 percent of troll suits are filed against companies with revenues of less than $10 million.

This fall presents an important opportunity—maybe our last—for patent reform to become law.

Where are we?

In June, the Senate Judiciary Committee voted 16-4 to move the PATENT Act to the full Senate floor; later that same month the House Judiciary Committee likewise voted, 24-8, to move the Innovation Act to the full House floor. Both bills represent comprehensive solutions that would address a dangerous patent troll problem; neither is perfect, but both would go a long way to fix a broken system. You can read more about the House bill here and the Senate bill here.

We were very excited when both bills were introduced. Since then, however, provisions in each have been watered down. Compromise and revisions are inherent to the political process, so to some extent this was expected. Questions remain, however, about how much is too much.

There are four primary issues that remain open to debate: venue, pleadings, discovery, and inter partes review (IPR). For political watchers, the last—inter partes review—is the most important. All of the other provisions of the House and Senate bills deal with litigation reforms, but inter partes review is a Patent Office procedure that allows for efficient and effective review of patents outside of federal court. That means the process is particularly good at weeding out bad patents and addressing patent quality, a huge problem that patent trolls have been able to exploit. Originally, the House and Senate bills barely addressed inter partes review, which we were glad about, since by and large the process has been quite successful.

Enter Kyle Bass. The well-known hedge fund manager’s most recent enterprise involves using the IPR process to challenge weak pharmaceutical patents and then short the stock of the company that owns the patent. The pharmaceutical industry, which relies heavily on patent rights, is far from pleased. And despite the fact that the IPR process contains significant protections for patent holders and the fact that Mr. Bass’ actions can already be addressed by the SEC, the pharmaceutical industry has been able to shoehorn its issue into the larger reform efforts.

As a practical matter, this means that long-standing Capitol Hill players, like PhRMA and BIO, are holding up patent reform efforts unless changes are made to weaken the IPR process. (We explain in more detail here why those changes are not only unnecessary, but in fact quite dangerous.) Senators Schumer, Cornyn, Grassley, and Leahy—the primary authors of the Senate bill—are still hammering out a so-called deal on IPR, details of which we should see soon. Even with such a deal, it’s unclear if PhRMA and BIO will decide to support reform efforts.

In the meantime, the House originally planned to move forward with a full vote on its bill in July, but at the last minute, Republican leadership pulled it from the calendar, claiming they needed more time to get the deal done. There is no real way to sugarcoat what happened: the delay shows a slowing of support and momentum for an important bill and we were disappointed that it happened.

Is there a path forward?

There is still a path forward. In September, when Congress comes back, the Senate is slated to pick up its efforts. We understand that Senate reform champions are close to a deal on IPR and that such a deal could create a framework for the bill to pass out of the full Senate. (This would be a particularly interesting turn of events, because in 2013 a strong patent reform bill passed the House 325-91 and then languished in the Senate in 2014.)

Using the momentum from the Senate, the House would be in a good position to revive its own efforts. Given the fact that the House did pass a bill in 2013 with a wide, bipartisan majority, we are confident that the bill would make its way through that chamber easily.

The White House has made clear its support of patent reform and we have every reason to believe that President Obama would happily sign a strong piece of patent reform legislation into law.

Is that path worth it?

Probably. There are two things to watch closely: IPR (see above) and venue (see more here). Right now, the House bill includes a strong venue provision that would help prevent trolls from filing so many cases in the notoriously plaintiff-friendly Eastern District of Texas. This would in turn make it easier for patent troll targets to fight back.

So, to simplify: anything that weakens IPR is bad (this should play itself out first in the Senate bill). Efforts to fix venue are good (see the House bill for this). Some combination of the two is probably liveable, though—as always—the devil is in the details, details we will be watching very closely over the next couple of months.

We’ll continue fighting to make sure that startups and inventors see legislation that will actually protect them from patent trolls and will need to call on you to help make our case. So watch this space closely and stay tuned.

Patent Reform: Keeping Inter Partes Review Strong

As you probably know, patent reform legislation is moving again. Bills in both the House and Senate have been passed out of committee with bipartisan support and are moving to their respective chamber floors. We are cautiously optimistic we could see a patent reform bill signed into law in 2015. However, some issues remain unsettled and they must be addressed in order for patent reform legislation to be effective in fighting the patent troll problem. We’ll be breaking down these issue areas for you in separate blog posts - they concern Inter-Partes Review (or “preserving the ability to more affordably challenge the validity of a patent outside the court”), venue (or “dealing with the Eastern District of Texas”), pleadings (or “including basic information in the plaintiff's initial complaint”), and discovery (or “limit unnecessary fishing expeditions for evidence before the validity and scope of the case has been determined”).

Patent trolls rely on two tools: low-quality, impossible-to-understand patents and the outrageous costs of patent litigation. Proposed legislation in the House (Innovation Act) and Senate (PATENT Act) would address the second problem by leveling the playing field and giving defendants a meaningful chance to defend themselves. Yet, throughout the legislative process, we have expressed concern that the bills fail to do anything to improve patent quality. In an unwelcome development, certain proposed legislative changes would actually further weaken patent quality.   

As part of the last update to patent law, 2011’s America Invents Act, Congress created a procedure called inter partes review (IPR). IPRs allow a party to challenge a patent’s validity at the Patent Office instead of in court. These proceedings were designed to move quickly, within a year, and are considerably cheaper than litigation. While IPRs remain too expensive for most small startups (with legal fees, an IPR can easily cost upward of $250,000), they represent smart policy that helps rid the system of bad patents. So far the procedure has been successful.

Despite this, reform opponents—the biotechnology and pharmaceutical industries, in particular—are demanding major changes that would upend the IPR program in exchange for their support for patent reform legislation. They allege that IPR proceedings are unfair to patent holders. They wrongly allege that the program has resulted in “overly high” invalidation rates, and that these rates reflect underlying defects in the proceedings.       

But as Professor (and former White House advisor) Colleen Chien recently noted the bogeyman of overly high invalidation rates is wildly exaggerated.  

To understand this numbers game, you first have to understand a bit about how patents work. The heart of any patent is a series of claims. Patent claims should spell out exactly what a patent covers and the claims–usually at least upwards of 10, sometimes more than 100 per patent–are what define the metes and bounds of the patent. When a patent owner alleges that its patent is infringed, it is essentially saying that certain claims are infringed. Likewise, when a patent’s validity is challenged either in court or at the Patent Office (where IPRs take place), the party challenging the patent is asserting that certain claims are invalid.

Next you need to understand a bit about the Patent Office’s IPR process. First, it was specifically designed  to protect a patent holder from frivolous attacks. A party challenging a patent’s validity needs to put forward its entire case at the very outset and essentially ask the Patent Office to take up the challenge. (This is the opposite of litigation, where a party claiming infringement or challenging a patent can actually use the legal system to prove out its case as the litigation progresses.) In fact, the law requires that the Patent Office only institute IPRs when a “reasonable likelihood” that one or more of a patent’s claims are invalid. This weeds out frivolous claims and weak challenges at the outset. The process also uses an “estoppel provision” that prevents a patent challenger from later making arguments in a court appeal that it made—or could have made—at the Patent Office. In other words, the challenger can’t get two bites at the apple. If the litigation system likewise protected startups and other defendants from frivolous challenges in the same way that IPR does for patent holders, we would not have the huge patent troll problem we have today.

Now, back to the numbers. Certain groups—again, largely the pharmaceutical and biotechnology industries—have claimed that IPRs are “patent death squads,” citing data that purport to show that patents are invalidated by IPRs at an overly high rate. And while it might be true that about about 80 percent of patent challenges that result in a full IPR proceeding (up to and including a final ruling) have at least one claim invalidated, that statistic is seriously misleading. For starters, this statistic excludes the very large number of cases that the Patent Office has declined to hear. The Patent Office has instituted IPRs in only approximately 47 percent of patent challenges to date, meaning about 53 percent of patent challenges were not instituted, dismissed, or settled. By declining to institute a proceeding, the Patent Office gold-plates a patent and renders it basically immune from any further challenge.

First, about half of the claims that the Patent Office actually reviews are settled or dropped by the parties. Moreover, of all claims that the Patent Office reviews, only 24 percent are invalidated (again, these are claims, not entire patents). And most of these patents are still partially—or largely—valid, even if some claims have been thrown out. And all the others have been “gold-plated.” So the Patent Office has actually gold-plated far more patent claims than it has invalidated.    

IPRs are good for the patent system and there’s no evidence that they are unfair. To the contrary, the Patent Office has been widely praised for the quality and timeliness of its work. And nearly every decision by the PTO Board has been affirmed when appealed in the courts.

In sum, it is clear that the IPR process is working; in fact, it’s working quite well. And, notably, it’s being used very effectively by the tech industry, the industry that faces the biggest patent troll threats. In fact, over 60 percent of petitions are being filed on computer or electrical based patents, while less than 10 percent are on biotechnology and pharmaceutical patents.

Congress has worked hard to balance the needs of all industries that use the patent system, and proposed language in the House and Senate has been narrowly tailored to address only the worst actors and behavior (specifically, abusive litigation by patent trolls) while preserving the rights of patent holders to enforce valid claims. That balance is now threatened by the insistence of certain industry sectors that changes be made to the IPR process. These proposals would change the claim construction standard that has been used by the Patent Office for decades in order to make it harder to invalidate claims. The Senate bill goes even further: it would establish a presumption of validity for patents that are challenged in IPR that does not currently exist. Those changes threaten to severely weaken the effectiveness of IPR proceedings for everyone.

We should not further open up negotiations that weaken IPR—or carve out whole industries from using the procedure at all—merely to appease opponents of patent reform. Successful patent reform legislation must be comprehensive in scope and must produce a level playing field for all innovators. It must also do nothing to weaken patent quality. So it must ensure that the Patent Office’s IPR proceedings remain a viable, efficient, and effective tool to rid the system of bad patents.

Patent Reform: Addressing Discovery Abuse

As you probably know, patent reform legislation is moving again. Bills in both the House and Senate have been passed out of committee with bipartisan support and are moving to their respective chamber floors. We are cautiously optimistic we could see a patent reform bill signed into law in 2015. However, some issues remain unsettled and they must be addressed in order for patent reform legislation to be effective in fighting the patent troll problem. We’ll be breaking down these issue areas for you in separate blog posts - they concern Inter-Partes Review (or “preserving the ability to more affordably challenge the validity of a patent outside the court”), venue (or “dealing with the Eastern District of Texas”), pleadings (or “including basic information in the plaintiff's initial complaint”), and discovery (or “limit unnecessary fishing expeditions for evidence before the validity and scope of the case has been determined”).

Discovery reform may be the kind of subject that makes non-lawyers’ eyes glaze over, but it is a crucial element of comprehensive patent reform. One might ask, what is discovery? Why does it matter? Why does it need to be fixed? Good questions. Let’s take them in turn.

Discovery is the phase of litigation where parties obtain information from the other side so they can build their cases. In the best of circumstances, it is often the most expensive and burdensome part of litigation. In a patent troll case, it is unmanageable. A patent troll may sue a startup and allege that the startup’s “website” infringes its patent(s) with no more specific information. The troll can then spend months requiring the startup to turn over all the information on its “website”—including by requiring that engineers and management sit down for day-long depositions and demanding that thousands, if not millions of emails, be turned over. Even worse, the troll, being in the business of patent litigation, has these discovery costs baked into its business model, so discovery for them is no great burden.

Currently, there are few limits in place to prevent a bad actor from requesting large amounts of irrelevant information just to drive up the cost of litigation early in the case. When costs balloon out of control, startups and small businesses have little choice but to give in, settle, and encourage the troll to continue its suing spree. While this kind of cost can be detrimental to a small startup’s product development, hiring goals, and market-entry, for a patent troll who doesn’t make or sell anything, the cost of discovery is next to nothing.  

This is why any real patent reform must also include reforms to the discovery process.

In their current forms, the House and Senate bills curb some of the worst of these practices by delaying discovery until a party has had a chance to make certain early motions, like an effort to get a case dismissed (we would like this these fishing expeditions delayed even longer, until the point at which the court determines the boundaries of the patent). If this were the case, discovery would be inherently narrowed and less wasteful. As such, these reforms are also good for patent holders who want to efficiently move their cases through the system, too.

Only with a more streamlined the discovery process can small companies and startups afford to litigate. Furthermore, these changes would lead to earlier, more informed settlements as well as relieve some of the burden in the courts confronting the flood of patent cases. Greater transparency and fairness are essential for a well-functioning patent system - and discovery reform is an essential step to achieve this.

Patent Reform: The Need for Better Pleading Standards

As you probably know, patent reform legislation is moving again. Bills in both the House and Senate have been passed out of committee with bipartisan support and are moving to their respective chamber floors. We are cautiously optimistic we could see a patent reform bill signed into law in 2015. However, some issues remain unsettled and they must be addressed in order for patent reform legislation to be effective in fighting the patent troll problem. We’ll be breaking down these issue areas for you in separate blog posts - they concern Inter-Partes Review (or “preserving the ability to more affordably challenge the validity of a patent outside the court”), venue (or “dealing with the Eastern District of Texas”), pleadings (or “including basic information in the plaintiff's initial complaint”), and discovery (or “limit unnecessary fishing expeditions for evidence before the validity and scope of the case has been determined”).

If a patent troll wants to sue, it first needs to file a written complaint (part of a party’s “pleadings”) in federal court, which costs approximately $350 in filing fees. In theory, that complaint should contain enough information about the suit so a defendant can understand the charge it faces and make informed decisions about the best way to proceed.

But in practice, a plaintiff can file a patent suit without providing some of the most basic information: how a patent is infringed, what products allegedly infringe, and even who owns that patent. A recent study by LexMachina found that:

• Less than half of patent infringement complaints identify which part of the patent was actually allegedly infringed; and

• More than 40 percent of patent infringement cases don’t identify the infringing function or feature.

Without this information, a defendant is left to guess whether it’s worth hiring a lawyer to challenge the accusation, or easier to just pay the plaintiff to go away.

This information is not difficult to come by. In fact, one would consider finding such information basic due diligence before filing a lawsuit in federal court to begin with. Unfortunately, current patent law allows bad actors to file these complaints without conducting that due diligence—which has led directly to today’s patent troll problem.

Trolls conduct their business behind a veil of secrecy; they take advantage of these very low standards for pleadings to intimidate those who don’t have the resources, let alone an understanding of patent law, to stop them from moving the case forward. It would likely cost a defendant at least tens of thousands of dollars to hire a lawyer and determine basic details of the suit it faces. Trolls use this to their advantage, frequently offering a settlement that hovers a few thousand dollars below average legal costs.

This is why we have long argued that any meaningful patent reform must fix this loophole by addressing abusive pleading practices and providing greater transparency for defendants. The Senate’s PATENT Act requires patent holders to provide basic information at the outset of litigation, while allowing a plaintiff who is unable to find any of this required information, after “reasonable inquiry,” to still file the suit.  The Senate bill also requires patent holders to tell the Patent Office when they sell or assign a patent to another party (the Patent Office must then make that information publicly accessible).

Unfortunately, the version of the House’s Innovation Act that passed out of committee would not meaningfully address this problem. However, the bill’s drafter, Representative Goodlatte, promised to work further on the pleading language - and we have been made aware that this language has been fixed. We’ll look forward to supporting the Innovation Act as it comes to the House floor with stronger pleading standards.

Any legitimate complainant should have no fear of greater transparency. Our system should be based on public notice at all stages of the life of a patent, which is especially critical at the outset of litigation when parties are trying to understand their options. Heightened pleading standards provides an obvious and easy fix that would disincentivize the troll business model by limiting their ability to use vague lawsuits as an intimidation tactic.

Patent Reform: Getting Trolls out of Eastern Texas

As you probably know, patent reform legislation is moving again. Bills in both the House and Senate have been passed out of committee with bipartisan support and are moving to their respective chamber floors. We are cautiously optimistic we could see a patent reform bill signed into law in 2015. However, some issues remain unsettled and they must be addressed in order for patent reform legislation to be effective in fighting the patent troll problem. We’ll be breaking down these issue areas for you in separate blog posts - they concern Inter-Partes Review (or “preserving the ability to more affordably challenge the validity of a patent outside the court”), venue (or “dealing with the Eastern District of Texas”), pleadings (or “including basic information in the plaintiff's initial complaint”), and discovery (or “limit unnecessary fishing expeditions for evidence before the validity and scope of the case has been determined”).

The Eastern District of Texas is known for being not just the epicenter of the patent troll problem, but, in many ways, the face of a broken patent system. Simply put, trolls cherry-pick the location for filing suits because it is well known that, once in the Eastern District, they have a higher chance of success. (John Oliver humorously explains here.)

Some background: according to the US Government Accountability Office Report, 40 percent of troll cases were brought in the Eastern District of Texas. So it’s no surprise that these small town economies (that have become host, or the “venue,” for patent troll suits) are booming with upscale hotels and restaurants catering to hundreds of patent lawyers who now regularly fly there.

For many startups, especially those that rely on the Internet to reach users (and what startup doesn’t?), the law currently makes it easy for a troll to drag its patent infringement case to a plaintiff-friendly court. In those courts, startup defendants are already at a disadvantage. But the vast majority of defendants aren’t even based in these districts and small, resource-strapped startups cannot afford to litigate there, let alone even travel there. Which is why litigation in the Eastern District of Texas is but one more tool at a patent troll’s disposal to effectively threaten startups and other productive businesses and innovators.

We need to get these cases out of Texas to give defendants a real chance to fight back in a fairer forum to which a startup has reasonable access. Fortunately, the latest version of the Innovation Act addresses this venue abuse. The bill would limit bringing patent infringement suits where the patent inventor conducted research or a party operates a physical facility. It would effectively shut down countless offices in Texas that are nothing more than an empty room with no employees and force cases to courts that are convenient and fair. Successful and comprehensive patent reform requires venue reform.

Statement on House Judiciary Committee Passage of Innovation Act

Engine was pleased to see the House Judiciary Committee pass the Innovation Act this afternoon; we’re glad to see the process move forward and the commitment from members to patent reform. While there are still open questions regarding the pleading provision that need to be addressed, today’s amendment process left us in a much stronger place on several key provisions including venue and discovery. As this bill moves to the House floor, however, we cannot afford to have legislation weakened further.

Since 55% of troll targets are small businesses, comprehensive patent reform remains critical for the startup community. We look forward to working with the committee towards final legislation that truly protects startups from abusive litigation and gives them the tools necessary to defend themselves in court.

Patent Reform: Where We Are and Where We’re Going (House Version)

Last week, the Senate Judiciary Committee voted 16-4 to move the PATENT Act to the full Senate floor, a big step toward making patent reform a reality. This morning, the House Judiciary Committee will take its turn marking up the Innovation Act. Unfortunately, that bill’s fate remains unclear.

When Rep. Goodlatte introduced his Innovation Act earlier this year (in the same form as it was overwhelmingly passed in December 2013), we, along with many others, applauded it as a strong piece of comprehensive legislation that would do much to fix a broken patent system. So were feeling very optimistic last week when the Senate moved its bill, because last year it was the Senate that held up reform. That sense of optimism lasted until earlier this week, when we saw the latest version of the Innovation Act.

Simply put, some of the most important provisions—those surrounding discovery, pleading, and venue—had been watered down, in some cases beyond recognition. As we write this post on the eve of the bill’s markup, we understand negotiations are ongoing, so we remain hopeful that the bill language we see today will indeed provide meaningful reform.

More details on what we’ll be watching:

• Discovery: Currently, discovery is by far the most expensive part of litigation for any party facing suit. For a patent troll who doesn’t make or sell anything, the cost of discovery is next to nothing. However, it can use abusive discovery practices to drive the costs of litigation even higher than they already are. The Senate bill would curb some of the worst of these practices by staying discovery until a party has had a chance to try to have a case dismissed. Unfortunately, the House bill would undermine that reform by limiting this important stay. We’re closely watching and supporting an amendment being introduced by Reps. Collins and Farenthold that would fix this.
• Pleading: Right now someone can file a patent suit without providing almost any basic details about his or her case, information like how a patent is infringed, what products allegedly infringe, and even who owns that patent. This information is easily known to any patent holder at the outset of a case, especially those who engage in a responsible amount of due diligence prior to filing a case. However, getting this information can cost the defendant tens or even hundreds of thousands of dollars. Fixing these pleading practices has long been a cornerstone of meaningful patent reform. The current version of the House bill, however, will not provide that fix. Frankly, the current legislative language is confusing and hard-to-follow, making it impossible to support it in its current form. We’re closely watching for an amendment, hopefully one that would more closely mirror the language in the Senate’s PATENT Act, an effort we would support.
• Venue: The majority of patent troll cases take place in small towns in the Eastern District of Texas. (Watch John Oliver explain it much more hysterically than we can here.) That’s because the Eastern District of Texas is notoriously friendly to patent holders (including trolls) and is hard and expensive to get to, making it even more difficult for startups to defend themselves. We’re glad to see the House bill take on this issue, but the language as it stands has so many  loopholes that it wouldn’t be effective. We are closely watching and supporting an amendment that would fix this being introduced this morning by Reps. Issa, Goodlatte, Nadler, Lofgren, Forbes, Chu, Farenthold, DelBene, and Walters.

The good news is that, as stated above, many members look ready to introduce amendments that would fix these shortcomings.

The bad news is that the process has, to put it mildly, gone awry.

We remain optimistic that the bill that comes out of the House Judiciary Committee tomorrow will meaningfully address the patent troll problem, but—until we see today’s vote—we cannot be sure.

Patent Reform: Where We Are and Where We’re Going (Senate Version)

Tomorrow morning, the Senate Judiciary Committee will markup the PATENT Act, a comprehensive piece of legislation that seeks to address the patent troll problem. We explained what we liked about that bill here when it was first introduced. In short, the most important provisions of the bill rein in an out-of-control patent litigation system that allow bad actors (trolls) to force startups to pay up by threatening expensive lawsuits.

This is a key political moment for patent reform: in fact, it was exactly at this time last year—on the eve of markup in the Senate—when efforts to fix the system fell apart. “Marking up” a bill is a crucial step toward making law; tomorrow, senators on the Judiciary Committee will debate and rewrite the legislative language and then, if everything goes according to plan, vote the bill out of committee and send it to the Senate floor for a full vote.

At the same time, debate continues in the House on a similar but slightly different piece of legislation, the Innovation Act. That bill should be marked up next week and we’ll of course be watching it closely.

At this point in the process, things are moving quickly. There’s a chance that by the time you’re reading this post, some real changes might have happened (if they did, we’ll update you!).

Post Grant Review

This is probably the most important issue that remains up in the air. As part of the last update to patent law, 2011’s America Invents Act, Congress created a procedure called inter partes review (IPR). IPRs allow a party to challenge a patent’s validity at the Patent Office instead of in court. They move quickly, within a year, and are considerably cheaper than litigation. While IPRs remain too expensive for most small startups (with legal fees, an IPR can easily cost upward of $250,000), they represent smart policy that helps rid the world of bad patents. So far the procedure has been successful.

Significant changes to IPR were not originally part of the Senate’s PATENT Act. We wish that were still the case. Yet it appears that IPR is now on the table (more of our thoughts on that here) as some reform opponents from the pharmaceutical industry have conditioned their support on this issue.This is where the process gets a bit strange. Senators who support litigation reform are hard at work trying to hammer out a compromise on IPR that will get the PATENT Act out of committee tomorrow with a wide vote margin, which we support. But, in the meantime, they have left a “placeholder” in the bill to clean up the language around IPR. This might explain why many of us who have long supported reform are not cheerleading as much as usual—not because we don’t support the PATENT Act per se (we still do), but because we actually haven’t seen the final language and, until we do, it’s hard to know whether this will be a full win for startups.

In the meantime, we will keep working to ensure IPR remains a strong and viable option to clear the system of low-quality patents while not ceding ground on the litigation reforms at the heart of the PATENT Act. Those reforms, of course, are the core of what will protect startups and successfully address a patent troll problem that has grown out of control.

Check us out on Twitter where we'll be following the situation closely and updating accordingly. 

#fixpatents: On the Hill with Startups, CEA, and Engine

By CEA and Engine

On Tuesday, Engine and CEA held a startup fly-in to advocate in support of the the Innovation Act and PATENT Act, which would bring critical reforms to the nation’s patent system. We were joined in DC by founders and executives from TMSoft, MapBox, Smart Ride, Jump Rope, Meetup, Kickstarter, and Etsy. Before the jam-packed day of meetings, CEA and Engine hosted these startups from across the U.S. at the Association’s Innovation House on Capitol Hill. The #fixpatents team shared their own stories about battling trolls before conveying to lawmakers how devastating this legalized extortion is to small companies.

Photo courtesy of the Consumer Electronics Association

The day was a great success as we went from office to office, between the House, Senate, and Capitol, for meetings with members of the Judiciary Committees of each house. We used the occasion to disseminate Engine’s latest booklet of stories from startups that have been targeted by patent trolls.

The #fixpatents team came out of meetings optimistic that legislators are committed to passing bills that will fix the current state of abusive patent litigation. Members and their staff were highly engaged, and many were surprised to hear the stories of those startups in attendance. The startups’ experiences very clearly underscored the impact of the patent troll problem and the extortion that happens behind the closed doors of settlement.

Photo courtesy of the Consumer Electronics Association

Jump Rope discussed their inability to recover fees, despite winning their case against a troll that claimed its patent covered reserving the future purchase of goods. And then there was TMSoft who estimated their troll case costing $190,000 in legal work before even setting foot in the courtroom. We reiterated the need for a more level playing field that would afford defendants the chance to fight back.

We’d like to thank Franklin Square Group and TwinLogic Strategies, as well as our Congressional co-hosts for their assistance in coordinating the event. You can see what the #fixpatents team had to say and hear their personal stories about fighting for innovation in the face of troll attacks. Check here for forthcoming videos from CEA and Engine’s Patent Reform Day.

Here’s to getting patent reform across the finish line!

Patent Reform is Good for Startups and Investors

 By Ron Conway and Julie Samuels

This piece was originally published in The Hill: http://bit.ly/1Hv8uXM

The debate over patent trolls rages on, getting some pretty high-profile (and hilarious) attention from John Oliver and action in the Senate, where the PATENT Act, the long-awaited companion bill to the House’s Innovation Act, was recently introduced. This legislation can’t move fast enough—and we are hopeful that the House Judiciary Committee will take the first step this week in passing meaningful reform. Every day without patent reform is another day of trolls targeting additional businesses and individuals. And unfortunately, those who suffer the most are the startups and small companies with whom we work. These are the companies that create jobs, build new technology, and have carried the laboring oar in helping our economy recover.

Which is why the investor community should wholeheartedly support these reform efforts. And most investors do. A survey of 200 VCs and their portfolio companies found “venture capitalists overwhelmingly believe that patent demands have a negative impact on the venture-backed community, with all or most of those assertions coming from” so-called patent trolls. And it’s beenestimated that were it not for troll threats, VC investment in startups would have been $8 billion higher over the last five years alone.

Even more, VCs nationwide, particularly those investing in high-tech companies, by and large support reforming the patent system. In fact, more than 140 of them signed a letter to Congress in support of the very type of reforms in the Patent Act and its companion in the House, the Innovation Act.

This makes all the more confounding a so-called “disagreement” in the venture community surrounding patent reform. Why would any VCs oppose reforms like those in the Patent Act or, the Innovation Act? Let’s look at some of the claims the National Venture Capitalists Association (“NVCA”) has made in testimony and in writing.

First, NVCA’s Scott Sandell expresses concern about the Innovation Act’s fee-shifting provision, claiming that it “effectively mandates the payment of legal expenses by the non-prevailing party in almost all cases.” Put mildly, that is a serious misreading of the current bill. In fact, members of Congress led by Rep. Hakeem Jeffries (D-N.Y.) reached a carefully negotiated compromise that would give courts discretion over when to award fees to a winning party—and said those fees should not be granted when a party’s “position and conduct … were reasonably justified in law and fact.” In English: bring a reasonable case and even if you lose, you won’t be stuck paying the winning party’s legal fees.

Sandell goes on to complain that fee-shifting “means that any entrepreneur who seeks to defend their patent will have to take into account the risk that losing in court could bankrupt their company.” Again, that is not the case. The only entrepreneurs who should in fact face such a risk are those who bring an unreasonable case—the exact type of litigation we are trying to discourage.

Perhaps even more troubling, Sandell claims that investors should not support this provision because it allows for investors to find themselves on the hook for a losing party’s fees. Again, not the case. Both bills carve out investors whose “sole financial interest” in the patent(s) is one who has an equity interest in the company. The Senate bill goes even farther, only applying in cases where the “primary business” party suing is “assertion and enforcement of patents,” e.g., is not making or selling anything based on the underlying technology. Even more, both bills allow for an investor to renounce his or her interest in a patent (and not the company that owns it).

Perhaps what’s most troubling, though, is NVCA’s blanket denunciation of these efforts and apparent unwillingness to come to the table to craft language that would accomplish the bills’ goals, which are not to target venture capitalists but to end the dangerous practice of trolls using shell companies to hide their identities and their assets.

Without fee-shifting, startups facing patent troll litigation have little incentive to put up a defense: even if they win the suit, they are stuck paying as much as millions of dollars in legal fees. The potential promise of seeing some of that money back helps align proper incentives—giving defendants a tool to fight back and encouraging plaintiffs to only bring reasonable cases.

Even more, Sandell claims that the fee shifting will cause more big companies to attack startups because they might recoup attorneys’ fees at the end of a suit. We reject this reading of the bill, but more importantly the data does not support this claim. Big companies are not, generally, suing startups over patents. We do not believe that adding even a million dollars in fees in a victory will change behavior. Will big companies decide that a small change in the balance sheet is worth the time of management to pursue? We think not.   

Opponents of reform aren’t just making erroneous attacks on fee-shifting. Objections to other provisions of the Innovation Act and the PATENT Act similarly leave us scratching our heads.

Take heightened pleading. Reform opponents claim this creates too much work for patent owners, but what does it really require? Setting forth such basic information as who owns a patent, what product allegedly infringes the patent, and what parts of the patent are at issue. This is not rocket science —it’s the kind of basic information a party needs to decide whether to fight or settle. The same is true with discovery reform, which would streamline the process to get the most basic information about a case at the outset before costs balloon out of control, leaving startups and small companies with no choice but to feed the patent troll. The kind of goals we’re talking about—transparency and fairness—should apply to anyone bringing a lawsuit in federal court, small startup to Fortune 500 company.

So again we ask, why would anyone who supports entrepreneurship—especially those who invest in it—not support the level-headed, common-sense and carefully crafted reforms in the Innovation Act and the PATENT Act? Taken in conjunction with strong patent reexam provisions established under the America Invents Act, these bills represent an important package of incentives that would rebalance and restore faith in a broken system. They will level the playing field and give startups and those companies that investors like Mr. Sandell fund tools to fight back against patent trolls, while at the same time not burdening legitimate patent holders who want to defend their rights in court. Without them, patent trolls will continue to prey on the youngest and weakest companies. It’s well past time to put an end to this dangerous trend once and for all. We urge the members of the House Judiciary Committee who want to support the startup and venture capital community to vote in support of the Innovation and PATENT Acts.

Conway is an angel investor and philanthropist in San Francisco. Samuels is executive director of Engine, a non-profit organization that supports the growth of technology entrepreneurship.

 

 

Photos from PATENT Act Hearing

On Thursday May 7th, 2015 Engine Executive Director Julie Samuels testified at the Senate Judiciary Committee hearing on the PATENT Act. Check out these great photos from the hearing, and then go to fixpatents.org to get involved and help pass patent reform this year!

Patent Quality Comments Submitted to USPTO

On May 6, we responded to a request for comments from the US Patent Office (USPTO) about efforts to improve patent quality. Check out full comments here.

We not only emphasized our support for improving patent quality (by ensuring that issued patents satisfy the statutory requirements, do not impinge upon the public domain of prior art, are clear as to their scope, and have a fully developed record of proceedings in the file history) but the duty of the USPTO and every examiner to defend the public and to defend the future from the momentous external costs created by low quality patents, by diligently reviewing applications and weeding out invalid claims at the outset.

We urged the Office to focus its energy on creating data, training materials, and enhanced quality reviews targeted at reducing errors in allowances. 

Remarks from Senate Hearing on PATENT Act

Engine Executive Director Julie Samuels' Oral Testimony as Prepared, Senate Judiciary Committee Hearing on PATENT Act:

Chairman Grassley, Ranking Member Leahy, and members of the committee, I’m Julie Samuels, Executive Director of Engine, an organization started several years ago to help advocate for high-tech, high-growth entrepreneurship. Through a combination of policy analysis and economic research, we represent startups nationwide. It’s an honor to be here today. I look forward to discussing effective solutions to the patent troll problem, especially because this problem disproportionately harms the community of high-tech, high-growth startups I represent.

Today I’m going to tell you about what the startup community needs from a functioning patent system—balance and fairness—and why the PATENT Act would help ensure those things.

Patent trolls are armed with two weapons: low-quality, impossible-to-understand patents on the one hand and the outrageous costs—both in time and money—of patent litigation on the other. So imagine you are a small startup, cash-strapped and hungry, and you get a patent demand from a company you’ve never heard of, claiming to own some basic technology. Your choices are: hire a lawyer and spend valuable and limited resources fighting back, or pay the troll to go away.

Which is why I want to talk today about fairness and balance, two concepts that go together. Right now, we have a system that across-the-board favors patent holders who abuse that system. Those parties have exclusive access to all of the relevant information surrounding the patent—basic things, such as, who owns it? Who else has rights to it?—along with the ability to single-handedly drive up the costs of litigation through discovery and motion practice.

It’s a system that essentially allows for legalized extortion, and that leaves startups nearly powerless to fight back without great personal risk and expense.

Take the experience of Jump Rope, a Chicago startup founded by Peter Braxton. An Air Force veteran and former Combat Pilot, Peter found himself facing a troll suit less than one month after he launched Jump Rope. Peter’s lawyers advised him to settle, but he instead decided to fund the litigation himself. Ultimately the court found no infringement, and that the the plaintiff failed to conduct even due diligence before filing suit—but not before Peter was forced to spend more than $250,000 on his defense.

Or take Life360, an app that keeps over 55 million families safe and connected. After raising $50 million in capital early last year, the company was hit with a troll suit that it decided to fight. In spite of a jury finding the troll’s claims meritless, Life360 still had to spend over $1.5 million to defend itself, with no reasonable recourse to recover that money.

Many of the startups who support reform are also patent owners themselves. Like Foursquare, which currently faces four troll suits. This year’s legal budget set aside enough money for these cases alone that could otherwise have been used to hire between six and ten engineers—good jobs that now do not exist.

There are countless other companies in our network, too, who invest in the patent system yet still support strong reform. Many asked that I not use their names, because they’re so afraid of attracting more troll suits. One startup general counsel told me, and I quote, “The system is set up in such a way that pretty much guarantees that the troll gets paid. It has nothing to do with the patent’s claims, but with the litigation fees. We were bombarded with letters, emails, discovery requests, and motions. It was all meaningless paper, but we still had to spend time and money to respond.”

In each case, startups divert resources from innovating, growing their business, and creating new jobs to fight what are often meritless claims. To make matters worse, the bulk of this money never finds its way back to inventors or research and development departments.

For a small startup, even one troll suit can ruin its business and the mere threat can cause significant disruption. No small business owner should be forced to put her company at risk simply to defend what she knows is right.

Which is why we need the kind of comprehensive set of reforms that is the PATENT Act.

The PATENT Act would bring much needed transparency to the system through heightened pleading and demand letter reform; giving startups tools to understand the scope of the threat they face, helping them decide whether they should hire a lawyer and fight or take a settlement and walk away. The bill creates the appropriate incentives for startups facing meritless suits to fight back: by shifting fees and allowing for real recovery and by reforming discovery, the PATENT Act allows parties a fighting chance in court. Right now, a startup worried about its bottom line has almost no choice but to pay a troll to go away; the PATENT Act would dramatically change this calculation and keep the courthouse doors open to everyone.

Taken together with the strong post-grant review procedures from the America Invents Act, the PATENT Act represents an important package of incentives that would rebalance and restore faith in a broken system. To be clear, no single reform in the bill can accomplish this task alone. It is only when they are all taken together that we can find the missing balance and fairness.

Opponents of reform argue that the proposed changes in the law would have the unintended consequence of making it harder to assert valid claims. In fact, nothing in the PATENT Act would hinder an inventor from monetizing, asserting, or enforcing valid patents, or making claims that are substantially justified or objectively reasonable.

The freedom to innovate has always been a central part of the American dream. For the sake of our economy and our identity, we must not let innovation become a legal liability.

A patent should be valued for what it covers and how it incentivizes innovation, not for its litigation value. The PATENT Act would go a long way to making that the case.

Thank you, and I look forward to your questions.

 

Senate's PATENT Act is a Big Win for Startups

Today, Sens. Grassley, Leahy, Cornyn, Schumer, Lee, Hatch and Klobuchar introduced the PATENT Act, an important piece of legislation targeting a serious patent troll problem. Engine is proud to support that bill.

The PATENT Act, and the Innovation Act, its House counterpart, are effective because they are comprehensive in scope. Each contains a package of incentives that, taken together, insert balance back into patent litigation, giving troll targets the tools to fight back and ensuring that patent holders act responsibly. Importantly, they are carefully crafted to ensure that a patent holder with a high-quality patent and a legitimate claim of infringement will face no barriers to making that claim.

To understand the way these bills work, you have to understand a bit about the patent troll problem. Patent trolls are primarily armed with two weapons: low-quality, impossible-to-understand patents and the outrageous costs of patent litigation, which can easily cost a defendant well into the millions of dollars. So imagine you are a small startup, cash-strapped and hungry, and you get a patent demand from a company you’ve never heard of, claiming it owns some seemingly basic technology. (This really happens. Often. See here, here, here, and here, for example.) Your choices are: hire a lawyer and spend valuable time dealing with the problem or pay the troll to go away, usually for a sum far smaller than what it would cost to hire that lawyer or go to court.

The good news is that the Supreme Court has been busy trying to fix the problem of low-quality patents. The bad news is that we still have a long way to go. Patent litigation remains outrageously expensive and one-sided, giving a patent owner who is willing to take advantage of loopholes in the system the ability to run roughshod over defendants.

This is where Congress, and specifically today’s introduction of the PATENT Act, comes in. Its provisions help right the imbalance in patent litigation through a series of reforms:

• Transparency and Heightened Pleading: Currently, someone can file a patent suit without providing almost any basic details about his or her case, information like how a patent is infringed, what products allegedly infringe it, and even who owns that patent. This information is easily known to any patent holder at the outset of a case, especially those who engage in a responsible amount of due diligence prior to filing a case.  However, getting this information can cost a party being sued tens or even hundreds of thousands of dollars. The PATENT Act would fix that, requiring patent holders to provide this basic information at the outset of litigation and also require patent holders to tell the Patent Office when they transfer a patent. Only with this basic information can parties make informed decisions about how they should proceed. If a party legitimately cannot find some of this information after making a “reasonable inquiry”, it may still file a suit, an important caveat protecting the responsible patent holder.

• Fee-shifting: Currently, little incentive exists for a party to defend itself in court. After years and millions of dollars spent litigating, a successful party will often be sent on its way with nothing more than a Pyrrhic victory. The PATENT Act remedies this by awarding fees to a winning party when a court determines that a losing party’s position was not “objectively reasonable”. This provision carefully strikes a balance between deterring those who bring crappy, unsubstantiated lawsuits and those who bring reasonable, good-faith cases. It also includes important provisions that would effectively end the practice of using shell companies with little or no assets to avoid responsibility. Specifically, a party who doesn’t make or sell anything with its patents will have to show that it can pay for fees if they are awarded. Only with this incentive can many startups afford to take on a troll threat, discouraging those trolls from bringing frivolous cases.

• Demand Letter Reform: Currently, trolls send vague demand letters full of legalese, targeting small businesses and even individuals. Because this takes place before a lawsuit is even filed, there is no public record of how often it happens. We know it is common practice, so we also know that we can’t even properly understand the scope of the entire patent troll problem. The PATENT Act will help fix this by requiring that such letters include certain basic information about the infringement claim and that they do not make false claims about the patent holder’s rights with regard to the patent. Only with these requirements will startups be able to make informed decisions about whether they should respond to or ignore a demand letter and whether they should hire a lawyer.

• Discovery Reform: Currently, discovery is by far the most expensive part of litigation for any party facing suit. For a patent troll who doesn’t make or sell anything, the cost of discovery is next to nothing.  However, it can use abusive discovery practices to drive the costs of litigation even higher than they already are. The PATENT Act would curb some of the worst of these practices by staying discovery until a party has had a chance to try to have a case dismissed. It also makes further recommendations to shift some of the discovery burden from the party producing information to the party requesting it. Only with these reforms can small companies and startups afford to litigate.

• Customer Stay: Currently, trolls love to target a company’s customers, claiming that by using off-the-shelf technology those customers are liable for infringement. This can put enormous pressure on companies that provide products and services (e.g., every company). The PATENT Act provides tools to both the customers and the companies in this dangerous situation, allowing the company to fight the litigation on behalf of its customers. Only with this provision will startups be able to protect their customers.

To be certain, the PATENT Act is not perfect. There are a number of areas where the bill could be made stronger. For instance, we wish the discovery reforms went farther, clearly providing in-statute limits on discovery to those documents directly related to the litigation and requiring a party seeking documents to cover the costs of getting those documents. We’d also like to see the bill more directly address venue and make it easier for parties to move a case out of the Eastern District of Texas, where so many cases are brought and where judges are notoriously plaintiff-friendly. Likewise, we remain concerned that the current customer stay provision only kicks in when the manufacturer is already involved in litigation.  We think improvements could be made to make it any easier for that manufacturer to actively step in on behalf of its customers. Finally, we think the bill could also make it easier and cheaper for parties to challenge low-quality patents at the Patent Office through a process called inter partes review (IPR).  For many parties, seeing a case all the way through to a final decision is not an economic reality, even with the above-discussed reforms. IPR provides a valuable means for a startup or party with limited financial resources to invalidate or narrow the scope of an otherwise overly broad patent.

All that said, we remain proud to support this bill. The heart of it—the litigation reform provisions—represent a hard-fought compromise, spearheaded by Sens. Schumer and Cornyn, who tirelessly worked to get this done. We will continue to work to improve the PATENT Act where we think it needs improvement, and fight off any efforts to water down its provisions. We look forward to seeing this become law.

Statement on Introduction of the PATENT Act

We applaud the introduction of the PATENT Act, an important piece of legislation that would create much-needed balance, fairness, and transparency in the patent system. The bill’s package of incentives directly target a patent troll problem that has, over the past decade, grown out of control, harming countless startups and our economy at large.

The patent troll epidemic has been well-documented by reporters, advocates, and even comedian John Oliver. It costs our economy at least $29 billion annually. But, worst of all, it disproportionately targets startups and small companies. Research shows that 55 percent of companies targeted by trolls have less than $10 million in annual revenue. And a survey of 200 VCs and their portfolio companies found “venture capitalists overwhelmingly believe that patent demands have a negative impact on the venture-backed community.” In fact, it’s been estimated that were it not for troll threats, VC investment in startups would have been $8 billion higher over the last five years alone.

The PATENT Act would give those threatened by patent trolls the tools they need to fight back, redistributing power and creating a more level playing field. These common-sense reforms would require patent owners to provide basic information, and would incentivize them to bring only those lawsuits that are based on high-quality patents and represent legitimate claims of infringement. As such, it creates no unnecessary burden on patent holders. And the bill effectively addresses the serious problem of out-of-control demand letters.

Patent reform enjoys broad bipartisan support in both houses and growing demand from the American people. In the weeks ahead, we'll be redoubling our efforts to ensure the passage of the PATENT Act, a bill that will strengthen the patent ecosystem for all innovators.

We commend the bill’s co-sponsors Sens. Grassley, Leahy, Cornyn, Schumer, Lee, Hatch and Klobuchar and look forward to the PATENT Act becoming law.

We Support the Demand Letter Transparency Act

Engine is encouraged to see that Reps. Jared Polis, Tom Marino, and Ted Deutch have reintroduced their Demand Letter Transparency Act. This bill will bring much needed transparency to ambiguous demand letters that are used as a tool for extortion, often targeting the country’s smallest businesses and startups. A strong patent system requires robust public notice; this bill will ensure such notice by giving the targets of patent trolls the information they need when facing the very real and very serious threat of spurious patent litigation.

This bill does three key things:

• Requires that those entities sending a certain number of demand letters submit information regarding the letter and the patent of interest to the Patent and Trademark Office (PTO).
• Establishes a demand letter database at the PTO that would make letters publically accessible and searchable.
• Requires demand letters include some basic information, such as identifying and explaining how each patent and claim has been infringed.

Any comprehensive patent reform solution needs to include language that addresses the growing demand letter problem. This issue has been particularly problematic for startups and individuals who can’t afford an attorney to review such letters, which often cost upwards of tens of thousands of dollars - and that’s before even entering the courtroom. The Demand Letter Transparency Act is the best bill introduced so far to address the demand letter problem. However, the FTC and states also have a role to play in protecting consumers, and federal legislation must not preempt their ability to do so.

And, of course, demand letter legislation is no substitute for robust patent litigation reform, which will challenge the patent troll business model of using the high cost of litigation to force settlements. The Innovation Act introduced in the House would provide that comprehensive litigation reform, especially when coupled with the Demand Letter Transparency Act. And we call on the Senate to introduce a companion bill NOW. Startups have waited long enough for real relief.

Bill text can be found here.

Despite the Negativity, Revised Patent Laws Improve the System

Procedures for challenging patents after they're granted have cut bogus claims.

This op-ed was originally published in the National Law Journal

When the America Invents Act was enacted in 2011, stakeholders cheered this major reform of the patent system. Negotiated and drafted with extensive involvement from patent holders and patent lawyers, the act established postgrant review proceedings to be conducted by expert administrative judges within the U.S. Patent and Trademark Office. These three new proceedings were touted as more cost-effective and quicker alternatives to litigation — making it easier to challenge, and invalidate, certain low-quality patents. Improperly issued patents are often used abusively by patent trolls against startups and others, and the America Invents Act created mechanisms for taking bad patents out of circulation.

But things have changed. These post­issuance proceedings are now under attack, often by the same entities that helped create them. The main target of criticism has been inter partes review, which allows an issued patent to be challenged, but only on the ground that it is not novel or nonobvious — in short, that it was not truly inventive.

'DEATH SQUAD' LABEL

These popular and effective proceedings have been labeled "death squads" of patent rights, and accused of bias against patent holders. Legislation has even been introduced to curtail these proceedings — all based on inaccurate and misleading statistics on invalidation rates, faulty inferences and conjecture.

Let's look at the facts. Some have ­complained that the inter partes review proceeding is more widely used than expected. Much has also been made of allegedly too high invalidation rates. It is sometimes wrongly asserted that 80 percent of patents are being invalidated. But the critics of inter partes review fail to point out that these proceedings were ­specifically designed to deter challenges to good patents.

First, the Patent Trial and Appeal Board only institutes proceedings if it has first determined that some of the challenged patents are "more likely than not" to be invalidated. Given this high bar, it should not be surprising that a high percentage of these patents are invalidated. If invalidation rates were low, that would indicate a real problem: It would reflect poorly on the board's decisions to institute proceedings, and would mean that too many good patents were being targeted for challenge.

These proceedings have a provision that discourages the filing of weak challenges. Once an inter partes review is instituted, the challenger is barred from seeking judicial review of any matter that could have been raised in the review. Filing an inter partes review without strong grounds will result in a denial of the petition, which effectively "gold plates" the challenged patent, rendering it very hard to attack in the future. In addition, the proceedings are designed to be costly and front-­loaded, another deterrent to weak challenges. Because these proceeding are engineered to take up only strong challenges, one would expect to see relatively high invalidation rates.

But the Patent Office's most recently published statistics do not support the meme of overly high invalidation rates. In reality, just more than 600 petitions (encompassing an aggregate 20,000 or so claims) have been concluded to date. The board has instituted proceedings against 68 percent of patent claims challenged, and declined to institute them against 32 percent. The board has invalidated 36 percent of these claims.

The invalidation rate of total claims challengers have sought to invalidate in these proceedings is even lower — 24 percent. So the board has actually "gold plated" far more patent claims than it has invalidated.

INVALIDATION OF BAD PATENTS

Lastly, the legal landscape has changed dramatically. Recent court decisions have significantly raised the bar for patentability in key areas, making it easier to invalidate bad patents.

And it is unreasonable to criticize the board for implementing the law. Moreover, as the board's decisions are appealable to the U.S. Court of Appeals for the Federal Circuit, time will tell whether anything is flawed about these proceedings. But thus far the court has upheld the board's decisions. None of this is to suggest that the inter partes review proceedings are perfect. From the time the Patent Office was charged with the huge task of implementing the law, Patent Office leadership acknowledged that it would not get everything right the first time. It conducted extensive outreach across the country to gather input from stakeholders, and its implementation of the America Invents Act has been a resounding success.

The board, too, has been widely praised for its professionalism and the quality — and timeliness — of its work. But neither the Patent Office nor the board are resting on their laurels. A change was recently made to the rules to raise the page limits for some filings, and other revisions are in the works. A rulemaking proceeding to address concerns about these proceedings is also pending

Despite that, critics are championing the STRONG Patents Act of 2015, which would upend these proceedings without much, if any, evidence that there is a real problem. This legislation is being presented as an alternative to patent reform, but it would do nothing to address the very real problem of patent-troll abuse. It would only make it much harder for startups and others to use these proceedings for their intended purpose.

We should wait for the Patent Office to conclude its rulemaking and make the changes it has indicated are in the works. In the meantime, we should just let the America Invents Act work.

***

Peter C. Pappas is a senior adviser to Engine Advocacy and the former chief of staff for the US Patent & Trademark Office, where he served from 2009 to 2013.

 

News from first-ever Patent Quality Summit

Last week the Patent Office (PTO) held its first-ever Patent Quality Summit – yet another indication of their focus on improving patent quality.  The two-day meeting was intended to take a hard look at patent quality, evaluate PTO proposals, and brainstorm other ways to address this significant problem.  This discussion is timely, as bad patents continue to stifle innovation. Startups have been victimized too often by patent trolls using low quality patents as fodder for sending baseless demand letters and threatening litigation to extort settlements.

At the conclusion of the summit, there was some general consensus among participants that:

1. Overly broad patent claims are extremely prevalent.  The former Chief Judge of the Federal Circuit went so far as to estimate that 70 to 90 percent of the patents he reviewed included at least some “grossly overbroad” claims, mixed in with solid and borderline claims. With about 3 million patents in force, this statistic underscores the extent of the patent quality problem.
2. Quality has to start with the application itself and the conduct of prosecuting the claims in it.   Patent prosecution lawyers are often overzealous in pressing for the broadest possible claims, even those that are clearly invalid.  The PTO allows for many opportunities to wear down the examiner into perhaps accepting borderline or weak claims.  
3. Poor and incomplete recording of the examiner interviews undermines patent quality.  Historically, the “record” has been lacking in sufficient detail. Patent lawyers press examiners into omitting things from the record so they can later claim that the patent covers more.  Examiners are at a disadvantage when arguing with trained, often aggressive patent counsel, and may too often give in to their demands as a path of least resistance.  As a result, startups -- and the public – are deprived of public notice of the specifics and scope of the patent that the law requires.
4. Claim clarity is essential to quality. A clear record is what enables a court to properly interpret the claims. But it is also essential to putting other innovators and the general public on notice about the scope of the patent. This has too often been overlooked.
5. Examiners need to make greater use of Section 112 - part of the law that ensures the “definiteness” requirement is met by the patent.  Section 112 has been historically underutilized, allowing too many vague and overly broad patents.                

Ultimately, examiners will need the strong support of the PTO’s leadership in order to effect any real change.  The patent prosecution bar is not necessarily keen to accept changes that may limit their room to maneuver around the system, and to pursue the broadest possible claims.  One speaker alluded to an “arms race of overly broad claims”. It is well past time to de-escalate this race, and shrink the often inflated scope of claims back to those that are valid.    

Though the PTO has proposed improving the quality of “customer service” provided to applicants, it must be emphasized that the ultimate customer is the innovation ecosystem and the public. An excessive focus on the applicant often works to undermine quality in obvious ways. Therefore, the PTO should be guided by a focus on the public interest in making new rules to improve quality.    

Report on Impact of Copyright Law on Investment

Engine, Fifth Era Release Report on Impact of Copyright Law on Investment

89% of investors said legal environment makes them less likely to invest

Engine and Fifth Era, an advisory and investment firm, today released a new report entitled "The Impact of Internet Regulation on Early Stage Investment". The report makes a compelling case for copyright reform, and will be used by Engine and other advocates to push Congress to enact reform legislation this session.

In 2014, Fifth Era surveyed 330 investors in eight countries around the world (Australia, France, Germany, India, Italy, Spain, the UK and the US) to assess the degree to which future legal environment might impact their willingness to invest in Digital Content Intermediaries (DCIs). These countries represent 56% of world GDP and 25 %of world population.

The survey found significant concerns among investors in all eight countries around a number of issues, including:

• Legal Environment - Globally investors view the legal environment as having the most negative impact on their investing activities with 89% of the investors surveyed saying it had a modest or strongly negative impact. A large majority of early stage investors around the world feel that the current legal environment has a more negative impact on their investing than either a weak economy or an increased competitive environment.
• Regulatory Ambiguity - When asked what it was about the legal environment that so concerns investors and impacts their investing behavior, the ambiguity in the current regulatory environment was identified as of significant concern. 88% of worldwide investors surveyed said they are uncomfortable investing in DCIs that offer user generated music and video given an ambiguous regulatory framework.
• Uncertain and Potentially Large Damages - In all eight countries surveyed, early stage investors view the risk of uncertain and potentially large damages as of significant concern as they look to invest in DCIs. 85% agree or strongly agree that this is a major factor in making them uncomfortable about investing in DCIs.
• Secondary Effects of IP Infringement Regulations - The second area of consistent concern worldwide was secondary liability. 78% of investors said they would be deterred from investing in DCI’s that offer user uploaded music or video should new anti-piracy regulations increase the risk that their investments would be exposed to secondary liability in IP infringement cases.
• These findings highlight the risk that problematic copyright regulations might greatly curtail or cut off capital from the early stage companies that are driving global innovation, GDP growth and new job formation.

The full report can be found at:

http://www.fifthera.com/perspectives-blog/2015/3/20/6enku92k815grtyz9vfpmn83lqhfsx