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How Democrats and trial lawyers killed patent reform

Senate Majority Leader Harry Reid
Senate Majority Leader Harry Reid
Chip Somodevilla/Getty Images

For the last year, patent reform advocates have been pushing for legislation to deal with trolls, litigious patent holders that have imposed growing costs on the American economy. On Wednesday morning, they thought that they were on the verge of a bipartisan deal that would get the legislation out of the Senate Judiciary Committee.

That would have been a major breakthrough. For years, the patent reform debate has been a stalemate between pro-reform technology companies and pharmaceutical companies that favored the status quo. But over the last year, the pro-reform forces seemed to have momentum on their side. The House of Representatives has already passed companion legislation, and President Obama is also on board. So Senate approval was the last major roadblock.

But a little after noon, insiders were caught off guard by an email from Sen. Patrick Leahy (D-VT), the chairman of the Senate Judiciary Committee, announcing that he was shelving the legislation. While he expressed the hope that the legislation might be brought up again later in the year, the chances of Congress passing patent reform this year are starting to look bleak.

Who killed patent reform? And what does that mean for the future of the patent system? Read on to find out.

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Senate Judiciary Committee chairman Patrick Leahy (D-VT). (Win McNamee/Getty Images)

Who killed patent reform?

In his Wednesday statement, Leahy wrote that he "needed broad bipartisan support to get a bill through the Senate." Unfortunately, he said, "competing companies on both sides of this issue refused to come to agreement," so Leahy chose to shelve the bill rather than take the risk of introducing a bill that might pass the Senate Judiciary Committee narrowly — or not at all.

Republican supporters of the legislation immediately blamed Senate Majority Leader Harry Reid (D-NV). "This is the third time in three weeks the majority leader has blocked legislation with bipartisan support in the Senate," said Senator John Cornyn (R-TX). Sen. Chuck Grassley (R-IA) blamed "the Senate Democrat leadership" for the holdup.

Sen. Reid's office didn't respond to multiple requests for comment, but my own reporting confirms that pressure from Reid was a factor in Leahy's decision to shelve the bill. Senate leaders prefer legislation that is supported by the majority of their own caucus, and Leahy was struggling to get support from a majority of Democrats on the Judiciary Committee. If Leahy had been forced to rely heavily on Republicans to get his bill out of committee, it would have put Reid in the awkward position of putting forward legislation that a majority of his own party might not support.

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Sen. John Cornyn, left, with his fellow Texas Republican Sen. Ted Cruz. (Ron T. Ennis/Fort Worth Star-Telegram/MCT via Getty Images)

Why couldn't Leahy get more Democrats to support the patent bill?

There were dozens of industry groups lobbying on both sides of the bill, so no single group was wholly responsible. But several sources said that one of the most influential groups was trial lawyers, who have long been political allies of Democrats in general and Sen. Reid in particular.

Trial lawyers were concerned about a provision that would allow a defendant who defeats a frivolous patent lawsuit to recover their legal costs from defendants. This kind of "loser-pays" rule has long been popular with Republicans and their allies in the business community, but is vehemently opposed by trial lawyers.

Leahy's legislation only applied the loser-pays rule to patent litigation, so it wouldn't have directly affected non-patent trial attorneys. But trial lawyers' groups were worried about setting a precedent that would make it easier to enact loser-pays rules for other types of litigation in the future. So they lobbied their Democratic allies to oppose the provision. (The American Association for Justice, the leading trial lawyers' group, did not respond to requests for comment.)

Of course, partisan polarization over this issue cut both ways. Republicans, led by Sen. Cornyn, saw the loser-pays provision as one of the best features of the patent reform package. Stripping the language out would not only have reduced the bill's effectiveness as a troll-fighting measure, it also could have undermined Republican support for the legislation.

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The Berkeley campus of University of California, which once partnered with the patent troll Eolas to sue major internet companies. Universities have been a key opponent of patent reform. (Jay Cross)

Who else lobbied against the legislation?

Another influential group was pharmaceutical and biotechnology companies. These groups benefit from strong patent protections and they've traditionally been resistant to legislation that weakens patent rights. They  have close ties to members of Congress on both sides of the aisle.

Universities were also influential critics of the reform legislation. Universities are generally not defined as patent trolls, but some universities engage in patent-monetization behaviors that aren't so different from those of a classic patent troll. So legislation to rein in patent trolls could also reduce university licensing revenues.

It's notable who wasn't lobbying against the legislation: large, patent-rich technology companies such as Microsoft and IBM. These companies lobbied hard against a proposal to expand a patent office program to invalidate more low-quality software patents. But by this week, Senate negotiators had agreed to drop this provision, helping to unify the technology sector behind the emerging Senate proposal.

What would the legislation have done?

The details were still under negotiations, but provisions that were expected to make it into the final proposal included:

  • Require more transparency in patent ownership. Patent trolls are often structured as shell companies to hide their real owners from the embarrassment of public exposure. Leahy wanted to require trolls to disclose who had a financial stake in patent litigation.
  • Establish a loser-pays rule for frivolous patent lawsuits. Right now, there's little penalty for filing frivolous patent lawsuits. The Senate legislation would have made it easier for judges to award a winning defendant to recover its litigation costs from the plaintiff.
  • Allow manufacturers to defend their customers. A common troll tactic is to sue the users of allegedly infringing products rather than manufacturers. For example, trolls have threatened coffee shops for using wifi equipment rather than suing the manufacturers of the wifi gear. Senators were considering a proposal to allow a manufacturers, who often have the resources and knowledge to mount a more vigorous defense — to step into the shoes of their customers.
  • Reform the "discovery" process for patent litigation. Much of the costs of patent litigation occur during "discovery," the process in which each party seeks confidential documents from the other that might be needed in litigation. In practice, this has become a mechanism for trolls to harass defendants, demanding the latter to spend millions of dollars to hand over millions of pages of emails, internal memos, and other documents. Senators were working on language to limit discovery until later in the litigation process, making it easier for defendants to get the case dismissed before reaching this expensive phase of litigation.

Would these reforms have fixed the patent system?

No. Some of the most important reforms were not going to be included. In particular, there were no provisions to invalidate low-quality patents, which many people see as the root cause of the patent crisis.

But it would have been an important step toward reining in abusive troll litigation.

Can patent reform be resurrected?

Sen. Leahy says he "hopes we are able to return to this issue this year." But the odds of that happening don't look good.

Patent reform supporters have been pushing for action by the Senate since the beginning of the year. Sen. Leahy had originally scheduled a markup on the legislation for March, but had to repeatedly push the vote back to give negotiators more time to reach an agreement.

Yet that effort failed to reach a consensus. It's hard to imagine we'll get a better outcome later in the year, when there's less momentum and Senators are closer to election day.

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President Barack Obama. (Chip Somodevilla/Getty Images)

Could President Obama save patent reform?

This seems like a case where more active involvement from the president could be beneficial.

As my colleague Ezra Klein has noted, the president isn't omnipotent. Many of the president's legislative proposals have failed because House Republicans have refused to act on them, and there isn't much Obama can do to change their mind.

But the patent debate isn't like that. House Republicans have already enacted patent reform that contains several items on the White House wish list. And the package Leahy was putting together also has enough Republican supporters in the Senate to make a filibuster unlikely. The big problem seems to have been difficulty getting Senate Democrats to sign on. And the president should be able to persuade Senators from his own party to support White House legislative priorities.

White House spokesman Bobby Whithorne says that "the President has clearly stated that abusive patent litigation is a needless drag on our economy, and demands action. We are hopeful that all stakeholders will continue to work together to build the patent system that our innovators and our country deserve."

But if the president views patent reform as a priority, he might want to do more to encourage Democratic senators to sign on, despite the concerns of the patent bar.