Senate Judiciary divided on PATENT Act even if it is a step in the right direction

Anyone who thinks that Congress doesn’t work should have watched the U.S. Senate Judiciary Committee meeting held on the morning of Thursday, May 8th. Years of work on behalf of representatives from both major parties have come together to develop meaningful legislation that, if and when it is passed, would provide a targeted answer to the solution of patent trolls. The verdict from Wednesday’s meeting, however: there is more work that has yet to be done.

The main subject of the nearly two-and-a-half hour hearing was the Protecting American Talent and Entrepreneurship Act of 2015, the PATENT Act, the most recent entrant into the collection of patent system reforms which seek to legislate into the American patent system effective means and methods for dealing with the issue of patent trolling behaviors. The bill as currently proposed covers, among other items, pleading requirements for patent infringement actions, abusive demand letters and requirements of clarity and specificity in demand letters, each of which are major aspects of the patent troll debate.

Seated on the witness panel were four lawyers representing a diversity of industries operating in America. Cisco Systems and the telecommunications industry was represented at this meeting by Mark Chandler, senior VP and general counsel for the company. In the afternoon’s greatest bit of irony, this senior official for a telecommunications development company had to be aided in turning on his microphone. Chandler’s testimony discussed the growing number of patent lawsuits and the fact that 40 percent of patent infringement suits filed last year were decided in two judicial districts which are home to a combined 1.5 percent of the American population. Interestingly, these are arguments that would be familiar to a wider audience that’s been regularly watching Last Week Tonight with John Oliver. Remember that part for later.

The other lawyers represented parties from manufacturing, retail and pharmaceuticals: Kevin Rhodes of 3M, also president of the Coalition for 21st Century Patent Reform; Diane Lettelleir of JCPenney; and Henry Hadad of Bristol-Myers Squibb, respectively. Ostensibly peaking for the small business technology community was Julie Samuels, executive director of Engine, an association of the smallest players in the intellectual property world.

Samuels formerly worked for the Electronic Frontier Foundation (EFF) where she was the Mark Cuban Chair Chair to Eliminate Stupid Patents. The fact that she would have held that position in the first place is ironic given that she has no technical training in science or engineering and she was a copyright attorney. Thus, to suggest that Samuels is unbiased and capable of fairly representing the interests of the small business technology community is practically laughable. Samuels and the EFF both have a decidedly anti-patent view of the world. They have a history of taking seemingly reasonable challenges to a particular patent and extrapolating that because one, or a few, patents are bad that means the entire system is bad and should be scrapped. For example, EFF believes no software should be patented, which is hardly a reasonable or thoughtful position. Over 50% of all innovation today is software related according to the Government Accountability Office (GAO), so the EFF position on patents has always lacked nuance and has been contrary to the best interests of innovative businesses, high-tech startups, university startups and independent inventors.

To put Samuels on this witness panel and prop her up as a representative of the small business technology community is insulting. Unfortunately, this isn’t surprising really. The witness panel was stacked, but that is not really news. A Congressional hearing on patent reform without the views of independent inventors and high-tech startup companies that require patents to survive has become the norm.

Given the collective bias of the witness panel, it is hardly surprising that on the issue of the PATENT Act there was a clear, positive consensus in the witness panel. Comments from all of the panel participants indicated that this bill reflected great compromises that had been made between disparate stakeholders in the debate. This can perhaps be most readily apparent in the customer stay provision of the PATENT Act which protects “covered customers,” defined as retailers and end-users, both parties that do not modify technology which they purchase in order to develop a product. A covered customer receiving a demand letter would be able to plead for a customer stay which, if approved, would essentially require the manufacturer to step in and handle the patent infringement proceedings. That seems like a pretty big gift from manufacturers like 3M to retailers like JCPenney, but if you look a the language of the bill there is legitimate question about whether even manufacturers would qualify as customers in many cases. Certainly, a company like Apple that has its products manufactured overseas by others would be a customer that could seek a litigation stay, which doesn’t seem to be within the spirit of the bill, but does seem to be what the language would allow.

But was there clear, positive consensus in the world outside of the walls of the Dirksen Senate Office Building? That answer was no and those voices were brought to the table by Sens. Dick Durbin (D-IL) and Chris Coons (D-DE), two of the sponsors of the STRONG Patents Act that has been debated in Senate committee as recently as March. Sen. Durbin, who pointed out that “this panel is divided between people who love the bill and people who really love the bill,” read part of a strongly worded letter submitted by the National Venture Capital Association who is worried that the PATENT Act, as worded currently, could hurt investment.

The recent patent reform debates have been all about how to protect the little guy, the small business, from evil “patent trolls” that have the resources and know-how to abuse the U.S. patent system. Given the stated concern about small businesses it would seem logical to conclude that anything that erodes the profitability of small business should be avoided. But the PATENT Act, although less bad than the Innovation Act, as Sen. Coons puts it, still has major problems. For example, the aforementioned customer stay provision that will put manufacturers on the hook instead of retailers and end users could provide such a large loophole that many manufacturers could qualify as customers because they buy components from manufacturers. Without going provision by provision suffice it to say that the major problem with this bill is that it will affect all patent holders and not just those “patent trolls” we keep getting told exist out there. “That means that the small investors, small inventors and startups taking the biggest risk will potentially be hit the hardest,” Coons said.

Back to Mr. Chandler. In his testimony, Chandler stated that “I am here on Cisco’s behalf, but the problems I am describing affect not only my industry but also start-ups, restaurants, hotels, retailers, realtors and auto manufacturers.” He may, however, be a poor representative of those groups for which he claims such good intentions. He may, in fact, be draping the mantle of Everyman onto his person while not truly understanding what those smaller start-ups actually want or need. Chandler testified about the $50 million spent by Cisco on legal fees last year as proof that patent lawsuits harm innovation, arguing that it was $50 million that he couldn’t spend on patenting. As Sen. Durbin very astutely pointed out, however, that $50 million figure is about 0.1 percent of Cisco’s 2014 revenues of $47 billion, a drop in the bucket. “That’s like a $1 million corporation making $20,000 each week having to spend $20 on legal bills,” Durbin said.

What should be most concerning to anyone lending credence to Chandler’s statements at the hearing is that he seems to have mislead Sen. Durbin in response to a question of the number of patent infringement cases filed by Cisco. Chandler responded unequivocally: One. But that doesn’t seem to be accurate. According to Innography’s patent portfolio data, Cisco is listed as the plaintiff on three patent infringement cases filed in U.S. district courts since December 2014. Between February and November of last year, the company also filed nearly 20 inter partes review (IPR) challenges on various patent holders. All of these may be legitimate litigation activities, but it hardly paints a comprehensive, or correct, picture. In any event, his voice will not be the one uttering the proper solution to the issue of patent trolling because Cisco is a Goliath, not a David, and again, this debate has been about protecting the underdog. Of course, larger companies like Cisco have continued to prop up the underdog in order to obtain the reforms they find desirable.

We learned a couple of things from this hearing. One of which is that the term “patent troll” is not the most useful term for describing those bad actors wrecking havoc to American companies and small start-ups with abusive demand letters. It’s a bad term because it cannot be adequately defined. See Who is a Patent Troll? The reality that there is no good, working definition for the term “patent troll” became clear later on in the proceedings when Sen. Sheldon Whitehouse (D-RI), who is officially in an “undecided mode” on the PATENT Act, asked the panel if anyone present could give a clear definition of a patent troll so as to delineate them from legitimate patent owners. Nobody present could do so and two panelists, Rhodes and Chandler, said they prefer not to use the term, indicating that the entire patent troll debate may be focusing on actors when it should be more tailored to curtailing actions. Samuels responded that it would be more useful to focus on trolling behaviors.

We learned that those targeted reforms are the best answer for the patent system because anything massively comprehensive can clear a path for new abuse, further damaging the U.S. patent system. Anyone who happened to watch some poor uninformed HBO screed about the need to pass patent reform legislation ASAP should know that the America Invents Act of 2011, just a few short years ago, created the IPR process that Cisco and many others have been using. Comments made at the hearing acknowledged that approximately 75 percent of patents challenged under IPR are invalidated. As was mentioned at this hearing and during the March 19th Senate Committee for Small Business and Entrepreneurship hearing that we covered here on IPWatchdog, there have been allegations made that hedge funds are abusing IPR for the purposes of driving down the value of pharmaceutical companies, whose medications often rely on one or two patents, by filing an IPR request and short selling the stock when it falls in price because of the high likelihood of patent invalidation. For any patent reform legislation to be effective for all of the patent system’s stakeholders, it must target abusive trolling behavior without creating new potential perils for companies who are legitimately trying to develop intellectual properties for commercialization.

Chuck Schumer (D-NY), the heir apparent to the mantle of Democratic Leader in the Senate, seemed off his game. At the start of his allotted questioning time, Schumer allowed a short repartee with Sen. Dianne Feinstein (D-CA) to develop into grandstanding on ISIS, equating them with a patent troll. If that was not bad enough, it seemed as if Schumer was rather distracted, calling Julie Samuels “Mr. Samuels” and mispronouncing Diane Lettellier’s last name. Sen. Schumer also mistook Hadad for Lettellier, introducing the pharmaceutical representative as a member of the retail industry.

Substantively, Schumer explained that his mind is on the “future Googles, the future Facebooks” of New York, but he seemed to completely discount the fact that the PATENT Act could make it harder to create new Googles and Facebooks, which would require generous funding from Venture Capitalists who as an organization do not support the PATENT Act. He also said that “I’ll not be able to support any deal on post-grant that does not preserve the viability of the process for these little start-ups.” This could become rather problematic. In fact, the Biotechnology Industry Organization (BIO) is on record saying that it will not support any legislation that does not contain an IPR fix. It is conceivable that the IPR issue could become a battle line akin to what damages became for years during the America Invents Act (AIA) debates.

In his opening remarks for the hearing, Sen. Grassley remarked that, as the committee moves forward with developing legislation, it will be “important to continue the collaborative process that characterized [the PATENT Act’s] creation.” Although legislation can be a funny thing, and Washington a funny place, it seemed clear after this hearing that much more collaboration is required if there is to be a consensus that develops. That is worth noting here in particular because generally speaking when a non-political issue such as patent reform arises the Senate greatly prefers to achieve a consensus.

Much more work needs to be done if the Senate Judiciary Committee is going to realize a consensus that solves litigation abuse while preserving the system for the benefit of American innovation and businesses.