IP Law Daily House subcommittee hears from witnesses on effects of ‘bad patents’ on businesses
Thursday, July 13, 2017

House subcommittee hears from witnesses on effects of ‘bad patents’ on businesses

By Thomas Long, J.D.

Three witnesses representing different business sectors, along with a former Chief Judge of the U.S. Court of Appeals for the Federal Circuit, testified before the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property, and the Internet today at a hearing titled "The Impact of Bad Patents on American Businesses." The three industry witnesses generally agreed that both startups and existing businesses faced problems from abusive enforcement of "bad" patents, especially by entities sometimes known as "patent trolls." They praised the post-issuance review procedures created by the America Invents Act, as well as recent Supreme Court decision limiting the scope of software patents. Former Chief Judge Paul R. Michel, however, opined that reform efforts, while grounded in good intentions, had damaged the reliability of U.S. patents and had driven research and development investment out of the country.

Testimony of Tom Lee, Mapbox. After introductory remarks by members of the subcommittee, Tom Lee, geocoding engineer at software company Mapbox, testified that meritless infringement lawsuits brought by non-practicing entities have placed a "substantial drag" on innovation in the software industry. Lee noted that patent trolls were highly sophisticated and had developed a routinized technique for extracting settlements from software companies. Lee also noted that patent trolls sought to pursue suits in sympathetic venues, raising the costs of defending against suits and limiting the choice of counsel. Third, Lee pointed out that patent trolls frequently asserted patents of "exceptionally low quality," often claiming basic techniques that had been in wide usage for many years. In Lee’s view, while inter partes review (IPR) was a valuable means for software companies of dealing with bad patents, it was still inaccessibly expensive for small businesses. Lee also noted that patent trolls often withdraw their claims at the first sign of any real resistance, but they face no real consequences, since attorney fees frequently cannot be practically recovered from them.

Lee’s written testimony is available here.

Testimony of former Chief Judge Paul Michel. Testifying next, former Chief Judge of the U.S. Court of Appeals for the Federal Circuit, Judge Paul R. Michel, offered praise for the intentions behind provisions of the America Invents Act (AIA) designed to "root out invalid patents, stem frivolous suits, and curb abusers of the patent system," but he noted that the current system, as implemented, has created uncertainty that has hindered investment. Judge Michel expressed the view that the Patent Trial and Appeal Board’s implementation of procedures governing the IPR departed from what the AIA appeared to intend, by giving the Patent Trial and Appeal Board too much influence over the policy-based decisions of whether to institute review of challenged claims. This, along with what Judge Michel considers overly aggressive and insufficiently clear Supreme Court holdings on subject-matter eligibility, has resulted in a shift of investment dollars away from research and development to "safer" bets like entertainment content, and caused R&D work to increasingly move outside the United States.

In particular, Judge Michel stated that IPR proceedings have not proven to be a less-expensive alternative to litigation, costing patent owners as much as $500,000 per challenge and adding up to two and a half years of delay in resolution of disputes. According to Judge Michel, patent owners cannot afford to defend against IPRs because they are so easy to instigate, or to enforce their rights in court due to the expense of litigation. In addition, Judge Michel criticized the Supreme Court’s recent decisions on subject-matter eligibility under Section 101 of the Patent Act. "Standards are too vague to provide fair and consistent results," Judge Michel stated. As a result, the U.S. system has dropped in reliability rankings, patent values have plummeted by as much as 60 percent, and start-ups are shrinking in number, Judge Michel testified.

In Judge Michel’s view, patents are neither "good" nor "bad"; they are either valid or invalid. Judge Michel disagreed with the view of many that "patent trolls" pose a major problem, and he opined that most infringement suits are not frivolous. With respect to the question of venue for infringement suits, Judge Michel expressed the opinion that shifting some cases from the Eastern District of Texas to other courts would be a good thing, but it was too soon to know what the practical effects of the Court’s recent TC Heartlanddecision would be. Judge Michel told the subcommittee that Congress could help matters by making it clearer how the district courts should interpret the statutory phrase "regular and established place of business."

In response to a question by Rep. John Conyers (D-Mich) about what the USPTO could do to improve patent quality, Judge Michel noted that USPTO examiners have more expertise in engineering than law. The USPTO needs to train examiners in claim construction law and the written description requirements provided in Section 112 of the Patent Act, Judge Michel said, and it needs to improve efforts to train examiners in order to make sure invalid patents are not issued.

In a discussion with Rep Darrell Issa (R-Calif), Judge Michel advocated the creation of an "offramp" from an IPR proceeding, taking a challenged patent back to the examination stage. This would allow for reissue of the patent with amended or rewritten claims, to account for new information learned about prior art after the original examination. Judge Michel noted that Patent Trial and Appeal Board members are not qualified or authorized to reexamine patent claims, and this offramp process would allow for issuance of "good" patents with narrowly defined claims.

Judge Michel’s written testimony is available here.

Testimony of Sean Reilly, The Clearing House Payments Company. Next, Sean Reilly, Senior Vice President and Associate General Counsel for The Clearing House Payments Company L.L.C., offered testimony on the impact the AIA’s temporary review process for covered business method (CBM) patents has affected the financial services sector. According to Reilly, that sector is particularly vulnerable to low-quality business method patents owned by patent assertion entities. In Reilly’s view, CBM review is necessary—including an extension of the program beyond its current sunset date—because its allows a challenger to raise nearly any invalidity argument that could be raised in court, unlike IPR, which only allows for challenges under Section 102 and 103 based on prior art.

Representative Nadler Jerrold Nadler (D-NY) asked Reilly whether the CBM review program should be extended. Reilly answered in the affirmative, stating that a method of challenging business method patents was required because "it is not a temporary problem," and the financial sector needed a viable alternative to district court. In response to a follow-up question from Rep. Nadler, Reilly stated that if IPR were expanded to allow all statutory grounds for challenging patent validity, including Section 101 eligibility issues, a separate CBM review process might not be needed.

Reilly’s written testimony is available here.

Testimony of Julie Samuels, Engine. Finally, the subcommittee heard testimony from Julie Samuels, President of the Board at Engine, a nonprofit focused on technology entrepreneurship. According to Samuels, the problem of bad patents disproportionately harms startups and small businesses. In Samuels’ view, the Supreme Court’s Alice decision limiting the scope of patent-eligible subject matter has been a lifesaver for many startups and small businesses. Samuels also praised IPR as means of eliminating egregious bad patents and to combat "patent trolls."

In response to a question from Rep. Andy Biggs (R-Ariz) about what else could be done to help entrepreneurs defend against unmeritorious infringement lawsuits, Samuels suggested raising the bar in regard to pleadings, and imposing a bond requirement to get past the problem of patent assertion entities (PAEs) frequently being "disposable" companies. Samuels echoed Tom Lee’s testimony that the fee-shifting provision of Section 285 can be ineffective at deterring PAEs from abusing the court system because of the ephemeral nature of these companies.

Samuels’ written testimony is here.

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