Congress Working On Bill Designed To Curb Patent Troll Abuses

12-5-2013 5-47-14 PM

In Washington today, members of the US House of Representatives voted on and passed HR 3309, The Innovation Act, with broad bi-partisan support. The bill was drafted and introduced by Rep. Bob Goodlatte (R-VA), Chairman of the House Judiciary Committee, and has since earned sixteen cosponsors from both sides of the isle.

Both the Senate and the House of Representatives are working on patent law reform efforts, at the request of President Obama who called for Congress to address a patent law environment that now famous U.S. Circuit Judge Richard Posne described as a fundamentally “dysfunctional system.”

Within the current patent system, patent trolls often set up shell companies with no assets so that they can sue small businesses without the risk of losing much if they are counter-sued. These shell companies will often send hundreds of demand notices to small businesses claiming made up patent infringements. In the current patent landscape, these patent trolls do not need to explain how exactly the accused is suspected of violating the patent, or even who owns the shell company being used to file the suit. These demand notices are intentionally sent to early-stage businesses with enough funding to settle, but not enough to defend themselves in court. The entire operation is designed to be expensive to fight and cheap to settle.

If a startup refuses to settle and tries to take the case to trial, it must first pass through another expensive litigation phase called the “discovery phase.” In a normal trial, the discover phase is a pre-trial phase used to facilitate the process of sharing evidence between the defense and prosecution. Patent trolls exploit this phase by filing overly complicated and expensive discovery requests – like requesting years worth of business documents in paper, to stall the legal process and drive up the defendants pre-trial costs,  hoping to avoid a trial and encourage a settlement. Compliance with these discovery requests is required before the startup can go to trial to attempt to defend itself. In the vast majority of cases, defendants chose to settle rather than see things through to a trial.

The House’s patent reform effort, HR 3309, attempts to correct some of these issues. First, it moves the discovery phase until far later in the process so that patent trolls cannot use it to strong arm small businesses the way that it is currently used.

Second, the bill allows manufacturers to step in and take over the lawsuit on behalf of its customers.  A perfect example within the healthcare IT arena that this may have applied is when MMRGlobal sent hundreds of letters to hospitals over the use of patient portals. In that case it was the customers – hospitals -  who were being pursued, rather than the manufacturers like Epic, Cerner, or McKesson who had made the patient portals, and would have been more likely defended themselves in court. The new law makes it possible for a manufacturer to halt the lawsuit against its customer, choosing to fight it on their behalf.

Finally, in the event that the trial makes it to court and the patent troll’s claims are found to be frivolous, the troll could be held financially responsible for all legal costs. This part won’t be easy to implement, because most of the time patent trolls sue from a shell entity that has no financial assets to pay these types of fees.

Some opponents of the law say that it stops short of addressing the central problem, that the US Patent Office has issued, and continues to issue, frivolous patents that describe nothing more than common business practices and are easily abused in the courtroom. An early version of the bill contained language that would have let defendants challenge the validity of these “business practice” patents, but lobbyists from IBM were able to convince Rep. Gottlieb to remove that language from the final bill. While the House bill and the Senate bill does not address the central issue of weak patents being issued, it does more to stop patent trolls and help tech startups than anything in recent memory.

The Senate is working on its own version of a patent law bill that adopts many of the same safeguards and adds additional language that will limit the ability to send demand notices en mass. It is expected that the two bills will be reconciled sometime in early January and then will be sent to the president for a signature.

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