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Sometimes well-meaning legislation is passed that has unintended consequences that are harmful. This is the case for the Innovation Act, H.R. 3309, passed by a 325 – 91 vote in the House of Representatives on December 5, 2013, The next step is consideration by the U.S. Senate of four similar bills that have been proposed: S. 1720 (Leahy D-VT), S. 866 (Schumer D-NY), S. 1013 (Comyn R-TX), and S. 1612 (Hatch R-UT). What is the purpose of this new Act and how would it have harmful unintended consequences?

The intended purpose of the Innovation Act is to curb frivolous lawsuits for patent infringement by so-called “patent trolls,” a derogatory term defined by Wikipedia  as “a person or company who enforces patent rights against accused infringers in an attempt to collect licensing fees, but does not manufacture products or supply services based upon the patents in question, thus engaging in economic rent-seeking. Related, less pejorative terms include patent holding company (PHC) and non-practicing entity (NPE).”

However, the Patent Freedom organization states, “NPEs are not all cut from the same cloth. Some inventors choose not to pursue the development, manufacturing, and sales of their inventions. They may lack the resources to do so, or the interest, passion, and commitment that such an effort requires. Instead, they may seek to license their inventions to others who can use them to deliver better products and services, often with the assistance of those with experience in this area. Or they may choose to sell the patents outright…. some entities buy patents with the express purpose of licensing them aggressively. For instance, about 25% of “parent” NPEs tracked by Patent Freedom are enforcing only patents that they had acquired. Another 60% are asserting patents originally assigned to them, and the remaining 15% are asserting a blend of originally assigned and acquired patents”

The Innovation Act would create additional requirements as part of the legal process associated with patent infringement under United States law. Some of the provisions are paraphrased below:

• Requires specificity in patent lawsuits – requires specified details concerning each claim of each patent was allegedly infringed.
• Makes patent ownership more transparent with a “Joinder” clause requiring patent plaintiffs to name anyone who has a financial interest in the patent being litigated.
• Makes the loser pay – “if a losing plaintiff cannot pay, the bill would allow a judge to order others who had a financial stake in the plaintiff’s lawsuit to join the lawsuit and pay the costs of an unsuccessful patent lawsuit.”
• Delay discovery to keep costs down – gives time to allow the courts to address legal questions about the meaning of patent claims with the goal of reducing legal costs and allow more frivolous lawsuits to be resolved before defendants have incurred large legal bills.
• Protect end users – allows technology vendors to step into the shoes of their customers and fight lawsuits against trolls on their customers’ behalf in cases where restaurants, supermarkets, airlines, casinos, real estate agents and other brick-and-mortar businesses are being sued for using technology such as Wi-Fi instead of the manufacturers of the equipment.

Proponents say that” in the two years since the AIA was enacted, patent litigation has exploded. More and more firms are acquiring broad patents not to use the technology but rather to extract licensing fees from companies that infringe the patents accidentally…so a number of industry groups that weren’t traditionally involved in patent debates have begun agitating for patent reform.”

The proposal enjoys broad support from some in the technology sector. Internet companies such as Google have been a driving force behind the bill. Microsoft had opposed one of the provisions of the Bill, but is now expressing support for the legislation after that provision was removed.

Opposition to Innovation ACT

Opponents say that the Innovation Act as currently written weakens our patent system and will have unintended consequences on U.S. inventors. These additional changes to the patent system will result in a shift in the balance of patent ownership, favoring large and better financed companies over startups, investors and inventors who have been responsible for some of the most historic and groundbreaking discoveries in our nation’s history.

The Biotechnology Industry Group (BIO) did not support the Innovation Act because it believed that it would undermine biotech research and innovation. Daniel Seaton noted on BIO’s Patently Biotech blog, “the Act would ultimately make it more difficult for patent holders with legitimate claims to protect their intellectual property…Provisions in the legislation would erect unreasonable barriers to access justice for innovators, especially small start-ups that must be able to defend their businesses against patent infringement in a timely and cost-effective manner, and without needless and numerous procedural hurdles or other obstacles.”

Joe Panetta, President and CEO of Biocom, San Diego’s biotechnology organization, expressed similar sentiments, stating, “Not only does H.R.3309 fail to adequately address the abusive litigation practices it aims to curb, but it would place burdensome and unnecessary requirements and penalties on all patent holders. The bill is likely to inadvertently harm the world’s greatest innovation system by limiting legitimate patent holders’ ability to assert their rights.”

The Independent Inventors of America against Current Patent Legislation, representing independent inventors and small patent-based businesses across the country disputes the claim that patent infringement litigation has escalated. Their January 2014 petition states “The Government Accounting Office Report required by the America Invents Act finds that there is no ‘patent troll’ problem. Data supporting the claim of billions of dollars of reported cost cannot be verified and actually represent primarily voluntary and court directed license agreements for valid patents. In addition, analysis of patent litigation shows that the number of patent suits relative to the number of patents issued today remains consistent over the 200 plus year history of the patent system with the exception of a short period prior to the Civil War when the rate was higher than it is today. The reports supporting this latest round of legislation are simply not valid.”

They argue that “what is being characterized as a “patent troll,” and the target of the proposed legislation, is really an investor. As individual inventors and small patent-based businesses, we need investors to practice and protect our inventions. A patent is sometimes the sole asset we can leverage to attract that investment. Damaging investors therefore damages inventors.”

Their main reasons for objecting to the Act are:

Loser Pays – would significantly increase the risk and cost of defending a patent and “could be fatal to a large percentage of inventions.”

“Joinder” clause – allows investors to be personally liable for legal fees if inventor loses lawsuit, so this would severely limit investment in new technologies.

Patent Term Adjustment – eliminates a patent adjustment for a delay in patent issuance caused by the U. S. Patent Office (Note: Patents are granted for 17 years, but if it takes five years to get a patent, the patent term would be only 12 years instead of 17.)

The petition states, “This legislation will levy grave harm upon independent inventors and small patent-based businesses, as well as the investors we need to help commercialize new technologies and to protect our inventions.” They “stand firmly against the proposed legislation and any future legislation that would weaken the American Patent System.”

Members of the governing body of the San Diego Inventors Forum, of which I am a member, signed the petition. Adrian Pelkus, SDIF President, stated, “The Innovation Act (H.R. 3309) horrifies me with the path that allows corporations to beat up on small inventors…Financial ruin for inventors will be extremely easy due to the nature of startups, meaning most inventors could lose their fledgling businesses disputing challenges to issued Intellectual Property.

To dissuade investors by increasing risk that the IP in the project they are investing in will be challenged (perhaps even frivolously just to stop them from progressing to market) will grind innovation to a standstill.

At a time when we need American ingenuity and investors to rebuild our economy, taking steps to diminish our rights as inventors is un-American, economically dumb and intellectually suicidal. Stifling innovation in a technologically based society is a sure path to economic ruin which is why the USPTO system was originally designed to reward not punish the inventor. We must not allow big multinational corporations the ability to squash. Any and all actions to stop this bill must be enacted.”

Gary Klein, V. P. Public Policy, of San Diego’s CONNECT organization, stated why they oppose the Act:  “A startup company’s main asset is its intellectual property. Most investors’ first question to startups is about how their technology is protected. The Innovation Act that passed the House has several provisions – fee shifting, covered business methods, joinder rules, discovery and customer stay – that will have some very serious adverse consequences for small/startup companies, universities and research institutions, as well as companies who use licensing as a business model.”

Join us in signing the petition and contact your Senator to ask them to oppose all of the similar bills that have been introduced in the Senate.