Patent reform efforts shouldn’t overlook patent quality

Zach Graves Digital Director and Tech Policy Fellow, R Street Institute"
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With the Senate Judiciary Committee set to take up legislation in the next several days that looks to combat so-called “patent trolls,” it’s imperative that lawmakers address the real underlying problem of low-quality patents, which give the trolls a platform to sue anyone and everyone.

There’s much to like about the Patent Transparency and Improvements Act, the primary bill under consideration in the Senate. Introduced by committee Chairman Patrick Leahy (D-VT) and cosponsored by Sen. Mike Lee (R-UT) the bill follows the path of the Innovation Act, which passed the U.S. House in December by an overwhelming 325-91 margin. Like the House bill, which has the support of the White House, it tackles a set of important litigation reforms, as well as addressing demand letters and transparency requirements for patent litigation and ownership.

But neither effort is comprehensive, especially when it comes to confronting bad patents. Notably, the worst offenders are software and business method patents. One study from George Mason University estimates 39 to 56 percent of software and business method patents would be found invalid if challenged. And when these kinds of infringement claims do go all the way to court, they almost always get shot down.  According to another study from the non-partisan Government Accountability Office, software-related patents are responsible for most of the increase in patent litigation in recent years (notably, the patentability of software is currently being considered by the Supreme Court).

Patent trolls have become a major economic drain, causing billions each year in economic damage. The targets are not just technology companies, but also many businesses you wouldn’t expect. For instance, one troll went after coffee shops, restaurants and hotels just for offering wireless Internet service. Another troll went after businesses for using scanners connected to an office network.

The list of dubious patents goes on and on. Complicating matters, non-disclosure requirements and lack of transparency for patent settlements make it difficult to assess the true scope of the problem.

Since litigation can cost millions per case, there’s often no practical way to challenge bogus infringement claims. This gives trolls a profitable racket extorting nuisance settlements from small businesses that can’t afford to fight back against bad patents. While litigation reforms like fee-shifting, customer-stay, and increased transparency will help mediate the trolls’ advantages in court, these changes won’t address the fundamental problem: that we need a better way to invalidate stupid patents.

During the markup process, we expect the Judiciary Committee to incorporate language from other proposals in the Senate, particularly a very strong bill put forward by Sen. John Cornyn, R-Texas. Of the half-dozen bills in the Senate, we recommend a close look at one sponsored by Sen. Schumer, D-N.Y., which is the only one that deals seriously with the underlying issue of patent quality.

Schumer’s idea goes back to the debate Congress had three years ago when it passed the America Invents Act, an earlier effort to reform the patent system. Coming only a decade after the federal circuit made “business methods” patentable, the law reflected the concern shared by many senators that we needed to curtail or eliminate these patents, as they allowed trolls set their sights on America’s financial institutions.

The final legislation included a provision from Schumer creating the covered business method (CBM) review program. This program offered a much cheaper alternative to litigation, making it practical to fight back against bad patents. But while the original debate was grander in scope, the final provision only covered a specific class of financial services patents, and had an expiration date in 2020.

Schumer’s current bill would expand the CBM program to other industries, and eliminate the sunset provision. While the original version of the House’s patent reform bill also had a provision expanding the CBM review program, large incumbent firms lobbied aggressively to remove it. Its opponents argued that it would unfairly subject them to an onslaught of challenges and delay their ability to shut down infringing competitors.

While they have real concerns, the systemic benefits of improving patent quality vastly outweigh them. Unfortunately, this may go down as a classic public choice failure, where those with concentrated benefits triumph over a multitude bearing dispersed costs.

In the end, our intellectual property system was created for the sole purpose of promoting innovation; for what the founders called “the Progress of Science and useful Arts.” The limited monopoly granted through the patent system is the means, not the end. And we should be very careful not to get those wires crossed if we want America to continue being the world’s technological leader.

Abusive patent litigation is a tax on innovation, not an incentive for it. In the final push for reform in Washington, lawmakers should address the root of the problem — not just treat the symptoms.

Zach Graves is Digital Director and Tech Policy Fellow at the R Street Institute.