Innovation Act will Curb Abusive Patent Litigation

On Tuesday, October 28th, the House Judiciary Committee held a hearing on the Innovation Act, H.R. 3309. This legislation is a commendable step toward reforming abusive litigation practices in patent cases.

Patents are intended to encourage and even stimulate innovation in a number of industries. However, in recent years there has been an upswing of patent litigation from so-called patent trolls; they purchase patents with the purpose of suing legitimate innovative companies. There are plenty of legitimate cases brought about by inventors who have been infringed upon, but the recent upswing in this trolling behavior warrants Congressional action.

The percentage of trolling cases has gone up considerably in the last few years. Of the 9,940 patent litigation cases filed in 2011 about 56 percent were filed by non-practicing companies. Indeed there is a need for a secondary market so that innovators can sell patents to companies wishing to produce their products, but that does not mean balanced reform that respects intellectual property rights should not be pursued.

Real patent trolls, not innovators, merely buy patents as they become available and start taking companies to court with the goal of getting cash through settlements. Their targets range from small-dollar startups to major retailers. Roughly 90 percent of the cases filed are settled rather than going to trial because of the enormous costs associated with taking a case to court. In 2011, the average total cost per case for patent litigation from discovery to trial was about $2.8 million. Reforms in the Innovation Act will curb abusive practices through heightened discovery, real parties in interest and fee shifting.

Under current law, there is no risk involved when trolls bring cases to court, so whether they win or lose there is little cost to the troll. The full burden is on the plaintiff.  For example, defendants often don’t know what patent they are accused of infringing upon. Defendants are often forced into pursuing expensive discovery before a judge rules on the scope of the patent and the infringement claims.  The cost of producing documents and supported arguments without knowing the exact terms of infringement are often cost prohibitive for defendants to enter into litigation.  As such, the threat of expensive discovery often leads to settlement by defendants, who may, in fact, not be infringing on the cited patent at all.

Another aspect of discovery that often forces defendants into settlement is additional discovery requirements that may have little to do with the case.  To eliminate this source of abuse, the Innovation Act would entitle parties only to "core" discovery for free.  If a party requests additional discovery beyond core documentary evidence, that party should be responsible for the costs of additional discovery of the non-requesting party.

One of the most important points of the Innovation Act is fee shifting. Unless the plaintiff filed an objectively justifiable claim, the court should award reasonable costs and fees (including attorney fees) of the prevailing party.  Plaintiffs pursuing cases on questionable ground should think twice about bringing other businesses and innovators to court.  The threat of bearing the costs, if an unsubstantiated claim is brought, will serve as an effective deterrent to abusive lawsuits.

While the Covered Business Method (CBM), provisions can serve a purpose in terms of a new avenue for smaller companies to challenge lawsuits and its very existence would be a threat to troll type activities, the possible harms that could result, outweigh the positives at this time.

Because the CBM review process is set at 18 months, it could open the door for infringers to continue their infringement and gain market share at the expense of the rightful inventor. In technological terms, 18 months is a lifetime and the damage of loosing market share and investors could already be done before legal proceedings even begin.

Further the CBM review was only initiated recently for a limited category of financial products, and the review has only taken on one case. The success and efficiency of the program has not been tested. It puts further strain on an already under staffed office, which opens up more channels for abuse for those with the deepest pockets. Already, it takes the PTO 3 years to grant a patent, with the CBM review process set at 18 months, one can only imagine that that will be drawn out.

Overall the Innovation Act is a huge step in the right direction.  The cost of litigation in these cases threatens innovation and can bankrupt smaller companies.  However, a number of the balanced reforms proposed in the Innovation Act can greatly deter these abusive practices.  Actions to reform patent litigation while respecting intellectual property are positive and we look forward to this bipartisan effort passing Congress sooner rather than later.