WASHINGTON (CN) - In their third year trying to address abusive patent-law practices, U.S. senators praised a new bill Thursday as "carefully crafted" to halt so-called patent trolls.
Patent trolls rarely invent anything; they instead buy patents and then sue other businesses for infringing on their patents, or sometimes sue just for using products that may be related to the troll's patent.
During a 2.5-hour hearing Thursday of the Senate Judiciary Committee, that body's chair, Sen. Chuck Grassley, cited estimates that abusive patent litigation costs the U.S. economy $80 billion annually.
"Bad actors are exploiting the high costs of patent litigation and using deceptive tactics to prey on businesses," said Grassley, an Iowa Republican.
Sen. Patrick Leahy, D-Vermont, and five others joined Grassley this week in introducing legislation they hope will finally curb the exponential increase of unreasonable patent lawsuits filed by companies more interested in making money than protecting legitimate patents.
Short for Protecting American Talent and Entrepreneurship, Leahy said Thursday that the bipartisan Patent Act of 2015 is not perfect yet, but that the committee is working hard to find the best balance for addressing concerns of both patent holders and patent users.
Grassley said the Patent Act establishes uniform pleading standards for patent-infringement lawsuits, and gives defendants clear notice of the claims against them.
Since patent trolls often use vague demand letters to scare defendants and make it more difficult to defend a case, the bill also establishes standards for such commucations.
For patent trolls that go after customers who use allegedly infringing products, the bill provides for customer stays, thus allowing customers to defer their case until the manufacturer has already fought its own case.
Another feature of the bill is empowering judges to award attorneys' fees to defendants faced with objectionably unreasonable lawsuits. To protect companies from having to invest in the expensive discovery process for a case that proves futile, the law would also stay discovery until the completion of preliminary motions.
Cisco Systems general counsel Mark Chandler said his company has stepped in to fight several costly lawsuits on behalf of itself and its customers. One entirely frivolous lawsuit cost Cisco $13 million to defend. While that money is a tiny fraction of Cisco's profits, as one senator pointed out, Chandler said that was $13 million that could have been used for research and development. For Cisco, building a defense took engineers away from innovating so they could explain their patents to the company's lawyers.
"It is incredibly frustrating to me to see our most valuable engineers being forced to stop inventing and innovating to make time to educate our lawyers and attend depositions and trials for cases that never should have been brought but for unwarranted leverage of the litigation system and the risks and costs it imposes," Chandler said.
Gamesmanship and abuse are business as usual in America's broken patent litigation system, Chandler said, but he and Cisco think the Patent Act has the right idea.
Kevin Rhodes, chief intellectual property counsel for 3M Co., agreed that the Patent Act is a positive step, but said the bill is not yet ready to leave the committee.
Representing the Coalition for 21st Century Patent Reform, Rhodes said any meaningful patent-reform legislation must also include provisions to ensure that the U.S. Patent and Trademark Office's Inter Partes Review (IPR) and Post-Grant Review (PGR) proceedings, enacted by the Leahy-Smith America Invents Act (AIA), are fair to both patent challengers and patent holders.
Rhodes said AIA reviews are often unfair because of a skew against patent owners in IPR and PGR proceedings.
Henry Hadad, deputy general counsel for Bristol-Myers Squibb, likewise called for better IPR and PGR standards in evaluating new patents. Because the fail rate of challenged patents is high, he said, hedge funds have turned the process into a financial scheme in which they file IPR petitions to invalidate patents, cause market anxiety over products and short the stock.
Speaking to the high stakes, Hadad said the trend of unreasonable patent litigation will lead pharmaceuticals and others to innovate less and employ fewer, creating a drain on medical advancements and jobs.
Diane Lettelleir, J.C. Penney's senior managing counsel, applauded the complementary nature of the Patent Act's provisions.
Patent trolls have started to go after regular businesses that simply use products with patented equipment, Lettelleir said.
Noting that J.C. Penney has been "ravaged" by the exponential growth of abusive patent litigation, Lettelleir said the company defended 30 such lawsuits over the last six years. The retailer also continuously receives threatening demand letters.
All of the claims relate to equipment or software J.C. Penney uses to run its business, Lettelleir said, and it makes the company hesitant to adopt innovative new technologies from small inventors. Historically, Lettelleir said J.C. Penney has been an early adopter of innovative new technologies and supporter of small businesses, but it is now shying away from technologies provided by small businesses because of the additional cost of defending lawsuits for patents owned by companies not big enough to fight litigation.
The committee also heard from Julie Samuels, executive director and president of Engine, a technology-advocacy organization that works with startups. Samuels said patent trolls disproportionately affect small companies, and that miring small startups and tech companies in litigation has ramifications for the economy.
One important feature of the Patent Act, she added, is that it targets the lack of due diligence patent trolls employ when filing indiscriminate lawsuits or sending out vague demand letters.
Poor-quality patents remain a problem, however, in patent litigation, Samuels said, adding that the issuance of vague patents give patent trolls leeway to make their unreasonable demands.
The freedom to innovate has always been part of the American dream, Samuels said, and it should not be a legal liability.
Sen. Dick Durbin, D-Illinois, quipped that the witnesses seemed to be divided by who loved the bill, and who really loved the bill. There is another side to the story, he noted, citing a letter the committee received from the National Venture Capitalist Association. The NVCA wrote about its concerns that the Patent Act will make it more expensive and riskier for startups to protect their intellectual property from larger incumbents, and will discourage investment into new companies.
Sen. Christopher Coons, D-Del., said he does not support the Patent Act because the bill targets all patent holders, rather than trying to weed out patent trolls.
"We can make that distinction, and we must," Coons said, adding that speed should not be the goal over accuracy.
Sen. Sheldon Whitehouse, D-R.I., asked each panelist to define a patent troll, but none could.
Samuels said the problem is trolling behavior, which cannot be confined to a certain type of party.
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