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Why Congress Needs to Pass the Innovation Act This Time

In our business, patent searches are a regular part of our work.  The often vague language associated with patents can be frustrating to say the least.  Patent reform seems to be appearing in the media more and more often.  The question is, when will we see action.  Read the piece below and drop us line with your thoughts on patent reform.

By:  Larry Downes for Harvard Business Review

In 1939, the most notorious politician in notoriously corrupt Chicago was Alderman Mathias “Paddy” Bauler. When he managed to beat a reform-minded opponent by just 243 votes (four of which cast by ghost-voters purporting to live at the address of Bauler`s own tavern) he made a declaration that still lives today: “Chicago ain’t ready for reform.”

Looking at the current calls for patent law reform, are we in the same state of readiness? Our patent system, designed to protect inventors by granting them limited-term monopolies over their innovations, has over the last twenty years largely collapsed, buried under an avalanche of new and generously-granted patents for so-called “business methods” and for software-related inventions, which are doubly protected under copyright law.

Legal standards are also deteriorating, encouraging abusive lawsuits. Firms who buy up vast swaths of dubious patents and then use them to squeeze settlements out of deep-pocketed (or not) technology companies and their customers troll the federal courtrooms of the Eastern District of Texas, notorious for its excessive jury awards to plaintiffs. Elsewhere, judges are quick to grant injunctions banning infringing items from sale or importation, even in complex devices such as smartphones and tablets made up of thousands of components, in which the alleged infringement is for a trivial or obvious design element.

All told, according to the Consumer Electronics Association, a leading trade association, patent abuse is costing the U.S. economy $1.5 billion a week. Yes, a week.

If there’s consensus on anything in Washington these days, it’s on the need for some reform of the patent system. So what’s the holdup? Last year, a modest reform bill passed the House by a whopping 395 to 91 vote margin, only to die in the Senate, apparently at the behest of former Majority Leader Harry Reid (D-NV).

That bill, known as the Innovation Act, was reintroduced last month in the House by its author, Rep. Bob Goodlatte (R-VA), Chairman of the Judiciary Committee, along with a bi-partisan group of 20 co-sponsors. And this time, there’s no Majority Leader Reid to stop it in the Senate. So patent reformers are cautiously optimistic that real change may come this year.

The Innovation Act’s provisions would make an important dent in the worst excesses of the system. If passed, it would force plaintiffs to be more specific about the patents they are asserting as infringed. It would help unmask the true identity of companies who stand to benefit financially from the litigation of so-called non-practicing entities (NPEs), more frequently known as “patent trolls.” It would limit the extent of pre-trial discovery, which can cost millions and put pressure on innocent defendants to settle. And it would protect product users from being sued, allowing the manufacturer to take over the case.

The Act also includes an important provision that would permit trial judges to force a losing party to pay the legal fees of the winner, a further disincentive to what many see as frivolous lawsuits, often involving “junk” patents that never should have been granted in the first place.

Most of the provisions range from common sense to obvious.

But it’s still only a start. Even if the Innovation Act passes this time, structural defects in the patent system will be left unaddressed. The scourge of NPEs will be deterred, but hardly stopped. The Patent Office will still have incentives to err on the side of approving a tidal wave of applications, outsourcing to the more expensive, slower, and more random courts to work out which patents actually meet the stringent requirements for protection. Too many cases will still be left to lay juries, increasingly unable to make sense of the complex technical testimony with which they are bombarded.

The Innovation Act also does nothing to tighten loosening standards for granting injunctions that keep many valuable products out of the hands of consumers. That’s an increasingly serious problem. As the commercial life of high-technology products grows shorter than the term for patents that surround them, even leading innovators are leaning on the patent system as a crutch to protect their market position more than any particular product.

This week, for example, a federal appellate court in Washington, D.C. heard arguments in a case pitting Apple against Samsung, one of hundreds in the all-consuming patent war that has plagued the smartphone and tablet industries since the late Steve Jobs famously declared “thermonuclear war” over the release of Google’s Android operating system. Apple’s campaign, which eventually drew in every major manufacturer, has not only failed to stop Android, but has largely backfired against Apple, which has found itself sued for patent infringement by smaller manufacturers and NPEs. Last month, the company lost a case involving patents for downloading and paying for digital content on its devices, with the jury awarding NPE Smartflash over half a billion in damages.

Apple settled all of its remaining cases with Google and others last year, and ended its war with Samsung over Galaxy devices running Android, at least outside the U.S. In the last U.S. trial, which ended last year, federal judge Lucy Koh awarded Apple about $100 million for Samsung’s infringement of a handful of patents, including the design of Apple’s “slide to unlock” feature.  (In an earlier 2012 trial, also on appeal, the same judge awarded Apple close to a billion dollars for infringement found in earlier Samsung devices).

Last year’s victory was pyrrhic, to say the least. The $100 million award, offset by a verdict for Samsung on its claim that Apple violated one of Samsung’s patents, is probably less than Apple paid to litigate the case. And adding insult to injury, the judge refused to issue an injunction against sale of the infringing Galaxy devices in the U.S., the only major issue Apple is challenging on appeal and likely the real point of bringing the suit in the first place.

A 2006 U.S. Supreme Court case involving eBay requires courts to weigh several factors before deciding on the extraordinary remedy of a permanent injunction. But Apple has challenged the application of that test on the novel theory that companies with a reputation for innovation deserve more deference. Consumers, they argue, are more confused by infringing products when the patent holder projects an image as the industry leader.

Whether or not that’s true, as Florian Mueller of the influential FOSS Patent blog notes, Apple didn’t actually invent the slide-to-unlock design in the first place. And other design patents in the Samsung case are being reexamined by the Patent Office, making application of the standard proposed by Apple inappropriate in any case. “In patent law, as Mueller writes, “it’s about who’s first to come up with something, not who’s first to convince millions of consumers to buy and use technologies that, for the most part, others created before Apple.”

So it isn’t just NPEs who take advantage of the quirks and inefficiencies of the patent system to secure in the courts what they can’t control in fast-evolving technology markets (markets characterized by fickle consumer tastes, or what Paul Nunes and I call “near perfect market information”). The most innovative companies in the world are likewise unable to resist the temptation to fight competition with litigation – even when it leaves them wide open to accusations of the same misconduct of which they say they are victims.

All the more reason for Congress to close as many as possible of the loopholes and yawning chasms that clever lawyers have introduced into the patent system – and to do so quickly. There will always be voices declaring we’re not ready for reform. It’s time to stop letting them win.

www.hbr.org/