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The Innovation Act: Good Start, but We Can Do More

It's easy to hate on trolls, but many respected companies are also taking advantage of U.S. patent law.


Most tech entrepreneurs would jump for joy if the U.S. abolished software patents, but since this isn’t happening anytime soon, I have two less radical requests.

First, Senators, do not water down the Innovation Act. Pass or bolster the bill that your colleagues in the House so wisely created. And most importantly, preserve the Innovation Act provisions on detailed pleading, demand letters, fee shifting and limiting discovery.

Second, let’s start a conversation about how to prevent ridiculous software patents from passing the U.S. Patent and Trademark Office approval process in the first place.

It’s about more than “trolls”

Most politicians, including Rep. Robert Goodlatte, who introduced the Innovation Act in October 2013, have turned their attention toward patent law to address the abuses committed by nonpracticing entities or “patent trolls,” which for years have damaged innovation by filing ridiculous patents, threatening “violators,” and pressuring them into settlements.

However, we also see “practicing entities” (PEs) like Apple, Samsung, Microsoft, Google, Nokia and Motorola dogfighting in the so-called “smartphone wars.” More alarmingly, many PEs now use patent law to bludgeon upstart competitors who threaten their dominance in a particular market.

NPEs vs. PEs: Who’s worse?

Patent-troll cases seem to be making more headlines, but both forms of predatory patent litigation are damaging to U.S. innovation and entrepreneurship.

“Trial Lawyers Inc.: Patent Trolls,” a report from the Manhattan Institute’s Center for Legal Policy, found that patent litigation initiated by trolls grew from 466 cases in 2006 to 2,914 cases in 2012; 55 percent of the defendants in 2012 cases were companies with revenue under $10 million. Depending on the amount of money at risk, patent litigation ranges from a median cost of $650,000 to $5 million. The most frustrating part is that 90 percent of patent-troll cases are actually won by the defendant, according to the report.

On the other hand, the Government Accountability Office found that PEs initiated far more than half of all patent litigation in 2011. The Electronic Frontier Foundation reports that in 2011 both Apple and Google spent more on patent litigation and buying patents than they did on actual research. It’s easy to hate on trolls, but many respected companies are also taking advantage of U.S. patent law. Depending on who’s suing your company and why, trolls and PEs can both be pretty bad.

Would the Innovation Act solve both problems?

The Innovation Act passed in the House with 325 to 91 votes on Dec. 5, 2013, and now this bill is in the hands of the Senate. Patrick Leahy, chairman of the Senate Judiciary Committee, and two co-sponsors have also introduced the Patent Transparency and Improvements Act, which some legal commentators are calling a similar but less aggressive version of the Innovation Act.

Regardless of which bill eventually passes, I think the tech world ought to worry only if the Senate tries to water down any one of four provisions that will make the most significant difference for innovators:

  • Detailed pleading

    Right now, a patent troll or bully competitor can file a demand letter claiming that a tech startup violates their patents — and they can use that startup’s brochures or marketing copy to justify the claim. The plaintiff doesn’t have to have any idea of how the startup’s software functionally operates. With detailed pleading, plaintiffs would have to identify the accused apparatus or process, model numbers for accused devices and theories of literal or equivalent infringement. In most cases, trolls and bullies can’t provide that information.

  • Demand letters

    Similarly, the Innovation Act stipulates that demand letters must include basic information about the patent in question, what is being infringed and how it is being infringed. In a nod to small retailers, restaurants and other end-user companies that have become easier targets for trolls, the Innovation Act would make purposely evasive demand letters to end users a fraudulent or deceptive practice, and an exceptional circumstance when considering whether the litigation is abusive.

  • Fee shifting

    It’s a simple concept: If a pompous PE or troll loses the case, the Innovation Act says they must pay the opponent’s attorney fees unless the litigation position was “reasonably justified.” This should reduce the number of extortive cases by a lot.

  • Limiting discovery

    Discovery — the process in which opponents can request and obtain information, documents and testimony relevant to the lawsuit — is far more expensive for the defendant than the plaintiff. Currently, a tech company has to begin discovery before any claim construction decision is made. The Innovation Act would limit discovery to the meaning of claim terms until a claim construction decision is issued so companies actually know what documentation they need to prepare.

Good start — now reform the USPTO

I commend the House for passing a bill that actually will discourage trolls and PEs from taking advantage of companies, but we need to consider further reforms.

The USPTO has approved thousands of absurd patents. PEs and trolls alike have demanded that other companies pay them a licensing fee or royalties for something as obvious as an online shopping cart or targeted banner ads. These patents remain on file, and I expect trolls and bullies will search for new ways to monetize them.

While the America Invents Act, signed into law in September 2011, gave companies new tools for challenging the validity of patents, it has also revealed two further problems.

First, Law360 found that one year after the new review processes were implemented, almost 70 percent of petitions were in the electronics or computer fields, with less than eight percent in the biological or pharmaceutical fields. For software, petition success rates stood at 80 percent.

Unlike drug patents, which require the filer to show a formula, software patents capture business concepts, not actual code and hardware. I can’t foresee the U.S. banning software patents like New Zealand did in August 2013, but many of us in the tech world who are dedicated to innovation see the need for a fundamental change in what we patent. It’s possible to write drastically different software programs that accomplish the same end result. If developers want to patent the code itself, fine, but the practice of monopolizing broad business concepts under the guise of a software patent should be stopped.

Second, once a patent is issued, challenging it is far too expensive and complicated, even with the AIA options in place. The fee for a post-grant or covered business method review fee is $18,000 for up to 15 claims (and more for additional claims). When you add lawyer’s fees to that minimum, challenging a patent becomes prohibitively expensive for startups and many small companies.

My hope is that the Senate strengthens and passes the Innovation Act, and that we take one more step toward ending the abuses of PEs and trolls. When trolls and PEs suddenly have to pay the defendant’s legal fees for frivolous patent litigation brought about by their own blackmail tactics, many of the trolls will return to their caves, and the PEs will go back to spending their money on smarter things — like R&D.

Afterward, I hope politicians will take on the challenging of redefining what we can and cannot patent in the software world. The long-term growth and progress of the global tech revolution depends on it.

Jeff Canter is president and CEO of Uptivity. Reach him @Uptivity.

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