On the morning of Thursday, July 13th, the U.S. House of Representatives Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet held a hearing titled The Impact of Bad Patents on American Businesses. The hearing, which included appearances from the highest ranking members of the full House Judiciary Committee, was ostensibly designed to focus on abuses of the U.S. patent system even as that system has itself been abused to the point that the U.S. is currently tied with Hungary in terms of the strength of patent rights in our nation.
House IP subcommittee chair Rep. Darrell Issa (R-CA) led off the hearing by discussing the large number of interests who are often on Capitol Hill to discuss their issues with “patent trolls,” including the “genius ones” which have only been developed in recent years. Despite the intent of the America Invents Act (AIA) of 2011 to weed bad patents out of the system, “patent trolls” remain active. Issa felt there were a few reasons for this, including the fact that such entities make money and that good patents could still be used to assert unreasonable claims. “Why innovate when it’s far easier and more profitable to simply purchase a patent, acquire one, acquire the rights to a patent, perhaps one that has never been licensed, bully businesses into writing a check, go away without ever seriously litigating,” Issa said. He said that 80 percent of “patent troll” litigation focuses on small business. “Simply put, we should not confuse ‘Making America Great Again’ with ‘Making American Patent Trolls Richer Again,’” Issa said. Although Issa was pleased with the U.S. Supreme Court’s recent decision on patent venue in TC Heartland v. Kraft Foods Group Brands, he recoiled at what he felt was an “overreach” by Judge Rodney Gilstrap from the Eastern District of Texas (E.D. Tex.); Issa felt that Gilstrap misinterpreted the Supreme Court’s decision in TC Heartland by denying a motion to transfer venue from E.D. Tex. in Raytheon v. Cray. “It is, in fact, an act that I find reprehensible by that judge,” Issa said.
Following Issa was the ranking Democrat on the House IP subcommittee, Rep. Jerrold Nadler (D-NY). Nadler noted that patent owners cannot protect against infringement without a strong patent system but he felt that poor patents sometimes “slip through the cracks,” which could be caused by pressure on examiners at the U.S. Patent and Trademark Office to process a large backlog of patent applications without clear guidance from the court system on what constitutes patent-eligible subject matter. “When bad patents are granted, it also encourages abusive litigation by bad actors known as ‘patent trolls’ who purchase these weak patents and use litigation or the threat of litigation as a weapon to extort settlements from innocent defendants,” Nadler said. He praised the Patent Quality Initiative program established at the USPTO as a good tool for ensuring that the patent office conducts its work effectively. He also mentioned that patentability standards should be harmonized between district court and the USPTO’s Patent Trial and Appeal Board (PTAB). “As we work to strip bad patents from the system, we must strike the proper balance to ensure that we do not inject uncertainty and unfairness into the marketplace by throwing away good patents along with the bad,” Nadler said.
Rep. Bob Goodlatte (R-VA), the chair of the full House Judiciary Committee, offered his remarks that litigation abuse should be opposed wherever it appears. “Unfortunately, a small number of bad patents that should never have been granted in the first place have been used by some to harass American businesses,” Goodlatte said. These “questionable patents for common technologies long in use” include those that cover podcasting, electronic shopping cart and document scanners, Goodlatte noted. After extorting a demand payment less than the cost of litigation, “the ‘patent trolls’… then move on to their next victim.” Although the Innovation Act, which Goodlatte sponsored, he was happy to see the Supreme Court step in and solve some problems despite the “defiance” of Judge Gilstrap. “Also unfortunate is that there are some now calling to undo much of the progress which has been made on patent litigation reform,” Goodlatte said. “Simply put, their efforts and their views on what makes a strong American patent system are misguided.”
It wasn’t until Rep. John Conyers (D-MI), ranking member of the full House Judiciary Committee, spoke that anyone brought up the issues hurting patent owners which have been caused by recent changes to the U.S. patent system. “We’ll examine the current state of patent law and to consider whether Congress should be doing more to promote innovation and protect inventors,” Conyers said. He noted that preventing the issuance of poor patents from the USPTO in the first place was one of the most effective steps that could be taken in weeding out bad patents. Conyers cited to a report from the U.S. Department of Commerce which showed that IP-intensive industries support 45 million jobs and 40 percent of the nation’s gross domestic product. “Congress must ensure that the [USPTO] has sufficient funding so that it can be truly effective in protecting the integrity of our intellectual property system,” Conyers said. Although he said that he supports reasonable reform efforts, Conyers evinced a strong sense of caution on further legislative proposals and said that he would reject any change that could undermine the patent system even indirectly. “Even well-intentioned proposals must be thoroughly analyzed to avoid unintended consequences that harm our patent system, discourage innovation, weaken patent rights or increase patent litigation,” he said.
The first panel witness to testify was Tom Lee who works in geocoding with Mapbox, a developer of custom designed mapping technology for websites; according to data pulled from the legal data analytics available through Lex Machina, Mapbox has faced one patent infringement case going back to January 1st, 2000. In Lee’s testimony, he said that Mapbox has had multiple run-ins with “patent trolls” which Lee defined as “non-practicing entities (NPEs) who file meritless lawsuits that are cheaper to settle than defend.” These NPEs “produce nothing other than legal demands,” he said. Lee voiced displeasure as to the sophisticated nature of the “troll” industry, their use of venue to bring Mapbox into cases outside of their home jurisdiction and the low quality of the patents asserted. “Digital mapping is a complex computer science problem, but the claims we’ve seen have purported to cover techniques as prosaic as looking for businesses on a map or dispatching vehicles from a central location,” Lee said. “It is not an exaggeration to say that these techniques have been in use for hundreds or even thousands of years…In general, the quality of software patents in our system seems to be very poor.” Lee further went on to state that he knew software engineers who would consider it “an embarrassment” to be listed as an inventor on a patent. Lee also found it “particularly galling” that there were efforts to weaken PTAB trials like inter partes review (IPR), “one of our most important tools for dealing with the many thousands of bad patents that should be invalidated in the wake of the Alice decision.”
Following Lee’s testimony was former Chief Judge Paul Michel, a panel witness with no organization affiliation who noted that he was testifying as a disinterested observer. In Judge Michel’s testimony, the former Chief Judge noted that, just in the past three years, the U.S. patent system has reached a crisis mode caused by various forces and reform efforts that it was no longer functioning effectively. Along with the current 10th place ranking of America’s patent system, “patent values have plummeted, by as much as 60 percent” and patent application filing is down as more firms turn to trade secrets. Although he supported AIA trial proceedings such as IPRs, Judge Michel argued that the USPTO seems to have deviated from Congressional intent in setting up the PTAB. “For example, you seem to contemplate amendments, they virtually never allow amendments,” Judge Michel said. “You seem to contemplate strong estoppel, they hardly ever estop anybody. And the statute as I read it suggests that the Director and his subordinates should make the institution decision and the Board only make the final written decision on the merits, but it was all sent to the Board in a massive delegation, so the Board does everything now, and that doesn’t seem consistent with the design that was put into the [AIA].” Further, recent SCOTUS decisions in Alice Corp. v. CLS Bank International and Mayo Collaborative Services v. Prometheus Laboratories have created patentability standards so vague that they’ve caused massive uncertainties. “Yes, there is a problem of invalid patents and overreach on infringement claims, but it’s a limited problem and I think it’s now under way better control than it was even a couple years ago,” Judge Michel said. He was hopeful that the subcommittee would work to get the USPTO to respect the original intent of the AIA while also suggesting that Congress could help by clarifying patentability in the 35 U.S.C. §101 statute.
Testifying next was Sean Reilly, senior VP and associate general counsel with The Clearing House banking association. To The Clearing House and its partners in the financial services industry, covered business method (CBM) review proceedings as a crucial tool for invalidating “spurious” patents. “The CBM program was a landmark effort by Congress to address abusive patent litigation around low quality business method patents,” Reilly said in his testimony. “Thus far, it has operated precisely as Congress has intended. 79 percent of the final written decisions issued in CBM proceedings have resulted in an invalid challenged patent, in whole or in part. The Federal Circuit has never found that any of those decisions were wrong when you look at the merits of whether those patents are invalid.” Unlike IPRs, parties petitioning for CBM review proceedings may challenge a wider degree of patentability issues including those under Section 101 as well as 35 U.S.C. §112 for definiteness. Not only should Congress make the CBM program permanent, Reilly argued, it should end the IPR carve-out and allow for petitioners to make any invalidity challenge and not just those under 35 U.S.C. §102 for novelty and 35 U.S.C. §103 for non-obviousness. Reilly noted that 75 percent of CBM petitioners are from industries other than banking and insurance. “The opponents of CBM have claimed that CBM review has undermined the perceived value of the assets,” Reilly said. “We don’t believe that this is the case.” Reilly stated that venture capital funding has increased year-over-year since the passage of the AIA. He further stated that only 5 percent of patents challenged through CBMs are in the software space.
“This problem [of bad patents] disproportionately harms the community of startups I represent,” said Julie Samuels, president of the board of directors for Engine, a policy and advocacy group for tech start-ups. Samuels’ testimony focused on the current political moment in which she believed that reform to rein in bad patents was possible. There are approximately 2.5 million patents in force today, Samuels said, and 40,000 patent grants related to software technologies. Many of those software patents were “often next to impossible” for engineers and lawyers to understand. “Many are simply bad,” she said. “Like a patent on filming a yoga class, using a computer to count calories, and, famously, exercising a cat using a laser pointer. Samuels testified that 82 percent of “troll” activity targets small- and medium-sized businesses and that 55 percent of “troll” suits are filed against companies with revenues of less than $10 million. “[These business] can least afford the $1 to $6 million it costs to litigate.” Samuels did see positive trends in two areas, one involving Supreme Court jurisprudence on patent eligibility especially in terms of Section 101 patentability in the wake of Alice. Of the 465 patents invalidated under Alice 101 challenges, 333 patents (more than 70 percent) were invalidated as abstract ideas implemented on a generic computer. The second positive trend was IPRs, which Samuels said have proven to be “an invaluable tool to clean the system of the most egregiously bad patents.” Samuels closed by saying she didn’t believe that Congress needed to act in the current moment to continue weeding out bad patents as “advances” such as Alice and IPRs were “doing important work to right the ship.”
In a second article we’ll be publishing on this House IP subcommittee hearing, we’ll analyze the questioning period, including some interesting suggestions from former Chief Judge Michel on how to modify the outcomes of IPRs while respecting the intent of the AIA, and provide further analysis on the panel witnesses appearing at the hearing.