There's growing momentum to reform the patent system to deal with the problem of patent trolls. One study released last year estimated that litigation from trolls costs the economy $29 billion per year.
A number of members of Congress have proposed reforms to the system. But a bill isn't likely to pass Congress without the support of Rep. Bob Goodlatte (R-Va.). He's the chairman of the House Judiciary Committee, which has jurisdiction over patent issues. On Wednesday, Goodlatte introduced his vision for patent reform, dubbed the Innovation Act. The legislation is co-sponsored by Rep. Zoe Lofgren (D-Calif.), Rep. Howard Coble (R-N.C.) and Rep Peter DeFazio (D-Ore.).
The legislation takes a shotgun approach to the trolling problem, enacting several modest reforms that, taken together, could make it significantly harder for non-practicing firms to abuse the patent system. Here are the most important provisions:
Make losers pay. Traditionally, in a patent lawsuit each party pays its own litigation costs. That means that even if a defendant wins a legal battle against a meritless patent lawsuit, it can still be on the hook for hundreds of thousands of dollars in legal fees. Some trolls have taken advantage of this dynamic by demanding settlement payments that are less than the cost of mounting a defense in court.
The Innovation Act would make it easier for a victorious patent defendant to collect litigation costs from the plaintiff. That should make it more economical for a defendant who is threatened with a frivolous patent lawsuit to fight in court and win.
Let manufacturers defend their customers. Another tactic employed by trolls is to target a technology vendor's customers rather than the vendor itself. One troll demands payments from anyone who offers WiFi service to their customers. Another threatens businesses that use scanners with a "send to e-mail" function. The targets of these lawsuits don't manufacture wireless gear or scanners.
The threat of litigation can scare away potential customers, so many technology vendors would prefer to deal with these threats on their customers' behalf. The Innovation Act provides a mechanism for technology vendors to do that by stepping into their customers' shoes. That will make life more difficult for trolls that file frivolous lawsuits against customers in the hopes that the target won't have the resources and legal savvy to fight back.
Promote patent transparency. Patent trolls often obfuscate their ownership structure in order to hide the scope of their operations and shield their parent companies from bad publicity. Goodlatte's legislation would put an end to that. As soon as a patent holder filed a lawsuit, it would be required to disclose the names of everyone who has a financial interest in the affected patents.
Invalidate low-quality patents. For much of the past two decades, the Patent Office, at the behest of the courts, employed permissive rules about what could be patented. The courts have tightened up the rules somewhat in recent years. But there's still a huge backlog of low-quality patents, many of them related to software and business methods. While many of these patents might eventually be found invalid in court, getting a ruling on the subject can take millions of dollars in legal fees.
In the 2011 America Invents Act, at the behest of the banking industry, Congress created a new, streamlined process for the Patent Office to give a patent a second look to see if it might be invalid. The process was limited to patents related to the financial service industry. But earlier this year the U.S. Patent Office adopted a broad definition of "financial patent" that will allow challenges to many software and business method patents.
The Innovation Act would enshrine that decision in statute, ensuring that it won't be overturned by future court decisions. It also gives the director of the patent office the power to waive fees for challenging patents under what is known as the "covered business method" (CBM) program, which will make it easier for small firms that face threats from trolls to challenge their patents.
The expansion of the CBM program is likely to be the most significant flashpoint in the debate over Goodlatte's bill. On the one hand, technology companies that have been hardest hit by patent litigation believe the expansion doesn't go far enough.
"Ideally we'd like to see it expanded further to all business method patents," says Matt Levy, an attorney at the Computer and Communications Industry Association, which counts major software firms like Google and Yahoo as members. The group plans to push to broaden the program later in the legislative process.
On the other hand, the BSA, an industry group more aligned with software companies with large patent portfolios, opposes expanding the CBM program at all. The group, which counts Oracle, Microsoft and Apple as members, argues that expanding the CBM program "risks undermining innovation incentives by disrupting the patent system itself."
So while most provisions of the Innovation Act may fly through Congress without controversy, the expansion of the CBM program will be a source of tension. That's because the other provisions only target patent trolls, who have few friends in Washington. In contrast, if Congress expands the CBM program, companies with low-quality patents in their portfolios could lose millions of dollars in licensing revenue. They won't give up that revenue without a fight.