CQ Weekly: Small Inventors Fear Giants Behind Patent Bill

By Shawn Zeller in CQ Weekly

CQ WEEKLY – Features
June 1, 2015 – Page 31

“This is as close as you get to legislative shock and awe.”

So proclaimed Majority Whip John Cornyn of Texas as he looked around the dais at the six other senior senators from each party gathered in the Senate Press Gallery. They met at the end of April to showcase a new version of a bill to combat an alleged national scourge of “patent trolls” — shadowy legal entities that extort settlements in patent cases, particularly those involving technology.

It provided a rare show of unity in a chamber riven by partisanship. The group included the chairman and ranking Democrat from the Judiciary Committee, plus heavyweights such as New York Democrat Charles E. Schumer and Utah Republican Orrin G. Hatch. The House has its own bill, similar to a version it passed in December 2013 by 325-91. Since then, initial skeptics such as drugmakers, biotech companies and research universities have muted their criticism. President Barack Obama has called on Congress to address the issue, only four years after he signed into law another patent overhaul.

Up against this juggernaut stand a few lonely inventors, small fry who tinker at their workbenches and laboratories to come up with innovations that might, just might, hit the jackpot. They say the legislation is tilted in favor of big corporations who can afford to rent serious legal muscle.

“Congress is telling me: ‘Schmidt, you are too poor to invent, stop inventing,’” says Robert Schmidt, a Cleveland medical device maker who holds 31 patents and calls himself a “serial entrepreneur.” He co-chairs the Small Business Technology Council and testified against a House version of the patent legislation at a March hearing of the Senate Small Business and Entrepreneurship Committee.

Schmidt notes that the Senate bill would require inventors who sue for infringement to post a bond in advance to cover much of the defense’s discovery costs, should the suit be deemed frivolous. “When a big company says you have to pay $5 million for that thing, they take it out of petty cash,” he says. “For me, it’s I not only lose my company, they then take my house. When they take my house, they take my spouse and my children with it.

“I am betting my entire life on a patent.”

Schmidt’s group says the 2011 law, which took years of deliberation, remains largely untested, and that the volume of patent infringement lawsuits is falling, not rising.

But a broad coalition of big tech companies including Google, Dell, Adobe, Verizon and Samsung are determined to change court procedures to insulate themselves from patent infringement lawsuits. They say they are hamstrung by a cordon of so-called trolls, firms that buy up patents with no intent of making anything, but instead threaten to sue companies for infringement. The suits are often groundless, but defendants sometimes opt to settle rather than pay the high cost of patent defense in court.

The small inventors will have a tough time surviving Cornyn’s shock and awe. But they’re making headway. Louisiana Republican David Vitter, who chairs the Small Business Committee, came out against the Judiciary bill, and Republican Tom Cotton of Arkansas joined him to co-sponsor an alternative. On the other hand, ranking Judiciary Democrat Patrick J. Leahy of Vermont is working with Cornyn, along with party colleague Amy Klobuchar of Minnesota.

The 2011 Overhaul

When Congress enacted a new patent law in 2011, it was the result of years of deliberation. It was also fought by many small inventors. The Patent and Trademark Office had previously considered the first person to invent a new technology as the one entitled to the patent. The America Invents Act of 2011 harmonized the U.S. system with those of foreign countries, which grant the patent to the first inventor to file. That race to file, small inventors said, favors big firms.

The law also created a process for challenging patents after they’re issued at the Patent and Trademark Office. Previously, challengers had to go to federal court. Now, they can go either place, or both. For companies that rely on strong patent protection and for small inventors, it was another blow. They could no longer say to investors that a newly granted patent proved they were a safe investment.

The stated goal of the new review procedure was to reduce patent infringement litigation and improve the quality of patents issued by the PTO, which had been criticized for granting patents for vague ideas that inevitably wound up in court.

But pharmaceutical and biotechnology firms as well as others reliant on patent protections argue that the system the PTO set up is biased against patent holders and is ruling for challengers in more than three cases out of four.

The House bill (HR 9) to revise the 2011 system, introduced by Judiciary Chairman Robert W. Goodlatte of Virginia with co-sponsors from each party, maintains an aggressive approach to the so-called trolls, essentially rewriting parts of the civil litigation system to require plaintiffs in patent infringement cases to disclose more information about their own interests and spell out the specifics of their accusations, as well to assume financial risk if their suits fail.

Senators from both parties have spent months finding compromises designed to mute influential skeptics before introducing their bill, and they appear to have largely succeeded. The Senate measure (S 1137) was introduced April 29 by Judiciary Chairman Charles E. Grassley of Iowa with similar backers from each party.

The bipartisan chorus has prompted well-heeled opponents of the 2013 legislation, which died for lack of action in the Senate, to change their tune. Both the Pharmaceutical Research and Manufacturers of America, which represents drug companies, and the Biotechnology Industry Organization, which represents biotech firms, opposed the 2013 bill and the current House bill, but they find the Senate version more palatable. The industry groups hinted that they might even endorse it, if senators were to add a section making it more difficult to challenge patents after they’re granted through the Patent and Trademark Office’s review process. Grassley says he’s trying to find a way forward on the issue. “We’ve been getting input and trying to craft something that threads the needle to instill more confidence in the PTO’s proceedings,” he says, while adding that it was unlikely every interested party would be happy in the end.

The Association of American Universities, which wrote a letter to senators and representatives opposing Goodlatte’s bill, calls the Senate version “a substantial improvement.”

The change in the Senate bill was also designed to win over venture capitalists, who have opposed Goodlatte’s bill. Bobby Franklin, the president of the National Venture Capital Association, says it did not succeed in that intent. Venture capitalists fear that the bill will undermine the value of patents and startup firms.

The groups that have changed their views cite the recent changes to the legislation. Both bills would encourage judges to award attorney fees to more defendants who are hit with frivolous suits.

The House bill would make that fee-shifting mandatory in cases where a judge found a case was not “reasonably justified.” The Senate bill instructs judges to award fees if the plaintiff’s suit is not “objectively reasonable.” More importantly, the Senate bill would require the defendant to request the fees and make a case that it deserves them.

Second — and this is crucial to the universities — the Senate bill would make it harder to drag them into litigation that was brought by a company that has licensed one of their patents to make a product. Some patent trolls are shell companies with little or no assets, and the House bill would allow defendants to go after the trolls’ backers in order to recoup attorney fees.

The Senate bill would require plaintiffs to show they can afford to pay the defense’s fees, should they lose, or to notify financial backers that they might be held liable. Universities could then disclaim their interest in the suit and win immunity.

The Senate provisions, in Schmidt’s view, will make it next to impossible for small firms to go to court and makes the Senate version even worse for small firms than the House version, which requires no such testimonial.

‘Holding the Bag’

At a Senate Judiciary Committee hearing on the Grassley bill last month, the witnesses came mainly from big firms: Cisco Systems, 3M, JCPenney, Bristol-Myers Squibb. The lone voice for start-ups at the hearing, the advocacy group Engine, supports Grassley’s bill.

A more diverse panel could have had a spot for the Innovation Alliance, a lobbying group whose members include semiconductor maker Qualcomm and Dolby Laboratories, a maker of audio technologies. Its executive director, Brian Pomper, says that the Senate bill is an improvement but that a key problem remains. A provision in both it and the House bill would allow companies that don’t make a disputed product, but use it as a component in something they make, to ask that suits brought against them be stayed until the patent owner successfully sues the manufacturer.

Bryan Pate, co-founder and CEO of ElliptiGO, a California maker of elliptical bicycles, has a related problem. He told a House Judiciary panel earlier this year that the provision in the Goodlatte bill would make it difficult for him to get compensation from Chinese manufacturers that are mimicking his product and exporting their knockoffs to the United States.

Pate said he needs to be able to go after U.S. companies that profit on foreign knockoffs because it’s too difficult to go after Chinese companies whose ownership is murky and which are not subject to U.S. laws.

Jere Glover, who headed the Small Business Administration’s Office of Advocacy during Bill Clinton’s presidency, says both bills threaten to undermine U.S. innovation and competitiveness overseas. And Glover notes that his successor, Winslow Sargeant, who left the Office of Advocacy earlier this year, also was critical of Goodlatte’s bill. The Office of Advocacy, an independent arm of the Small Business Administration charged with representing the views of small businesses in government proceedings, has not detailed its views on the Senate version. Other small inventors’ groups, like the United Inventors Association of the USA, have spoken out in opposition.

Schmidt, whose firm, Cleveland Medical Devices, provides products and services for home sleep-apnea testing, is grandiose in his assessment of the consequences of rushing ahead with the House and Senate bills. “This is killing the American Dream.”

He says the groups that are now retreating have been good allies, but he figures they are speaking for larger firms or richer interests that can cope with the new regime, even if they don’t like it. “It’s the little guys left holding the bag,” he says.

A Middle Way

The small inventors do have some champions. Senate Democratic Whip Richard J. Durbin of Illinois was a strong opponent of the 2013 effort, and he is backing an alternative bill (S 632) that’s more to small inventors’ liking.

The bill from Durbin and Democratic Sen. Chris Coons of Delaware would set rules governing the content of demand letters that patent holders send to alleged infringers to request licensing fees; trolls sometimes use those letters to extort settlements. It would also make it more difficult to challenge a patent before the Patent and Trademark Office’s own review panel, and would bolster PTO operations by allowing the agency to keep all of the fees it collects from patent applicants.

Last month, Vitter became a co-sponsor of the Durbin-Coons bill. Cotton later joined him.

Pharmaceutical and biotechnology firms are making their support for the Grassley bill contingent on changes they say will make it fairer. To Coons, that’s just another example of how tough it is to tinker with the patent laws. “That experience should urge caution,” he says. “I think the best strategy here is to insist on us taking our time.”

The small businesses took heart in March when Vitter held a Small Business Committee hearing and invited critics of the Goodlatte bill to testify. They’re hoping that there might be more Republican skeptics out there — Cotton’s announcement last month hinted that there may be — and that it will be given time to develop.

Democrats are far from united in their views of the Judiciary bill. In addition to Coons’ and Durbin’s skepticism, Senate Minority Leader Harry Reid of Nevada has never made clear why he blocked a previous version in the last Congress. His spokesman declined to comment. But the Democrats’ losses in the 2014 election mean the decision instead is McConnell’s.

The proponents of an overhaul in corporate America are pushing for quick action. Earlier this year, companies including Google and Facebook, and the trade groups for retailers, home builders and hoteliers formed United for Patent Reform to support Goodlatte.

They still prefer his bill, but are willing to accept the Senate’s less far-reaching version. They focus their arguments on patent infringement claims that have strained credulity, such as challenging retailers for featuring store locators on their websites or coffee shops for offering wireless Internet access.

McConnell’s spokesman, Michael Brumas, makes it sound like the majority leader is planning to go ahead with the Judiciary version sooner rather than later. McConnell “is encouraged by the hard work on this bipartisan legislation and looks forward to reviewing the Judiciary Committee’s work on the bill in the near future,” he says.

A bipartisan victory offers a big inducement for the new majority leader: proof that Republicans can get things done — particularly for big business.

© 2015 CQ Roll Call. All Rights Reserved.