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A bipartisan Senate bill seeks to rein in patent trolls. Here's how it works.

Sen. Chuck Schumer (D-NY) played a key role in drafting the PATENT Act.
Sen. Chuck Schumer (D-NY) played a key role in drafting the PATENT Act.
Andrew Burton/Getty Images

After months of negotiation, a bipartisan group of senators just released a new patent reform bill called the Protecting American Talent and Entrepreneurship (PATENT) Act. And unlike a lot of bills, this one has a good shot at actually getting approved by the Senate, as it's supported by some of the most influential senators from both parties.

The legislation is supported by Sen. Chuck Grassley (R-IA), the chairman of the House Judiciary Committee, and by Grassley's predecessor, ranking Judiciary Democrat Patrick Leahy (D-VT). Also supporting the bill are Sen. John Cornyn (R-TX) and Sen. Chuck Schumer (D-NY). They hold leadership positions in their respective parties, making it more likely that the legislation will be taken seriously.

The PATENT Act focuses on "trolls," fly-by-night companies that make their money by threatening patent lawsuits rather than by making useful products. Patent trolls exploit the fact that it's often cheaper to settle a meritless patent lawsuit than to fight it. The PATENT Act aims to change that dynamic by making it cheaper to defend against patent lawsuits — and by making trolls pay their targets' legal costs if the lawsuit turns out to be frivolous.

Here are five ways the PATENT Act would make the system less hospitable to patent trolls.

1) Give defendants a chance to defeat a lawsuit before the costly "discovery" process starts

Sen. Amy Klobuchar (D-MN) is a supporter of the PATENT Act. ( Bill Clark/CQ Roll Call)

One of the most expensive parts of a patent lawsuit is "discovery," the process where each party is required to turn over relevant documents to the other.

This process is particularly lopsided in troll cases. Trolls request thousands of pages of emails, internal memos, technical documentation, and other information demonstrating how a potentially patent-infringing product works. Defendants usually need to have a lawyer review each document before handing it over, racking up thousands of dollars in legal bills. By contrast, because trolls are often shell companies that do nothing but file lawsuits, they have few documents to turn over.

The PATENT Act tries to address this problem by delaying discovery until later in the process. Defendants would have the opportunity to file a motion to dismiss the lawsuit before the discovery process starts. They'd also have an opportunity to request a transfer to a different district — which would help defendants escape notoriously pro-patent jurisdictions like the Eastern District of Texas.

This is an area where we can expect a lot of wrangling in the coming months. The PATENT Act's discovery provisions are less ambitious than the ones in the patent reform bill the House of Representatives passed in 2013. That bill would have delayed discovery even later in the process, giving defendants more opportunities to get the lawsuit dismissed before the costs started rising. We can expect pro-reform groups to lobby for something more like the House legislation.

2) Force trolls to pay for filing lawsuits that are not "objectively reasonable"

Sen Orrin Hatch (R-UT) worked on language to ensure defendants could recover legal fees from plaintiffs. (Chip Somodevilla/Getty Images)

If you're targeted by a patent troll, you often have two choices. You can write a five- or six-figure check to the troll to get it to go away. Or you can spend hundreds of thousands — perhaps millions — of dollars defending yourself in court. And you're stuck with these high costs even if you win. It's no surprise that so many defendants settle even if they don't think a lawsuit has merit.

The PATENT Act aims to shift the balance of power by forcing trolls to pay defendants' legal costs if they file a groundless lawsuit. The PATENT Act requires a judge to award attorneys' fees to winning defendants if the lawsuit was not "objectively reasonable."

Plaintiff lawyer groups hate this provision because they fear it could set a precedent for similar legislation in other areas of the law. Sen. Harry Reid (D-NV), an ally of these groups, reportedly killed last year's patent reform legislation due to concerns about this idea. However, the Senate is now in the hands of Republicans who have no love for trial lawyers, so this is unlikely to happen again.

Of course, it does no good to order trolls to pay defendants' legal fees if the troll was organized as a shell corporation with no assets. To address this concern, the PATENT Act requires trolls to demonstrate at the beginning of a lawsuit that they have sufficient financial resources to cover the defendants' legal fees — or that they have financial backers who are prepared to do so.

3) Make it easier for manufacturers to defend their customers

(Squallwc)

Trolls sometimes use a divide-and-conquer strategy in which they target users of a product — who often lack the resources to fight back — rather than its manufacturer. For example, one troll owned patents related to wifi and started threatening hotels and coffee shops that offered wifi to their customers. Often, a troll can bully a lot of customers into settling before the manufacturer — in this case, networking companies like Cisco and Netgear — has a chance to challenge the patents in court.

The PATENT Act has an elegant solution to this problem: once a manufacturer is involved in litigation, customers can request that their lawsuits be put on hold until the manufacturer's lawsuit has concluded. If the manufacturer wins, then it's easy for the customers to get their own lawsuits dismissed, saving them a lot of money.

4) Rein in the abuse of demand letters

Tea Party Sen. Mike Lee (R-UT) is backing the PATENT Act. (Drew Angerer/Getty Images)

Patent trolling is a business that works best at scale; trolls threaten dozens, hundreds, or even thousands of companies, in the expectation that many will pay up without a fight. Often, trolls don't even bother to research the specifics of how each recipient has infringed a patent; they just include the same vague boilerplate in every demand letter, making it hard for recipients to figure out what they've allegedly done to infringe a patent.

The PATENT Act seeks to neuter the threat of demand letters by changing how patent damages are calculated. Right now, defendants can be forced to pay three times as much if a court finds they infringed a patent "willfully" — and ignoring a letter from a patent holder can be evidence of willfulness. The PATENT Act changes this, clarifying that unless a demand letter is clear and specific about how a patent has been infringed, it cannot be evidence of willful infringement.

5) Require patent lawsuits to be more specific

(Joe Raedle/Getty Images)

Right now, patent holders can file a lawsuit by providing not much more information than the number of the patent and the name of the product that allegedly infringes it. The PATENT Act requires patent holders to be specific, identifying which specific claims of the patent have been infringed and how the product infringes them.

The PATENT Act requires plaintiffs to disclose other information, too. Often patent lawsuits are filed by secretive shell companies; the PATENT Act would require these companies to identify anyone who has at least a 20 percent stake in the litigation, as well as information about who owns the patent and how it has been used in the past.

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