Bill has some upsides, but could also help big firms troll smaller competitors

House Republican Rep. Robert William "Bob" Goodlatte's (R-Virginia, 6th District) H.R. 3309 Innovation Act of 2013 [PDF] passed [Reddit] the U.S. House of Representatives by a 325-91 vote, with some in both parties supporting the measure.
I. Meet the Trolls
What started as a relatively controversial bill that could impact patent abuse by entities big and small alike, ended up substantially neutered with one of its most important provisions stripped away by the bill's sponsor, after receiving contributions from Microsoft Corp. (MSFT) lobbyists.  Following the change, Microsoft and others reportedly quietly backed the bill, as was seen in's last minute endorsement (TechNet represents a diverse set of interests including Microsoft, Google Inc. (GOOG), and Oracle Corp. (ORCL)).
The bill had a number of provisions designed to curb patent abuse at a time when U.S. federal courts and trade courts are seeing a record number of lawsuits.  To understand the bill and how it changed, you have to first understand the two major categories of patent abuse.
One major class of offenders are the so-called "patent trolls".  This term is generally applied to patent assertion entities (PAEs) or non-practicing entities (NPEs) -- companies that don't actually produce a product, but subsist by suing other companies.
There are a few subclasses of patent troll.  In some cases a PAE/NPE is formed by the original "inventor" of the patent(s) in question (e.g. MicroUnity Systems Engineering) and is typically a small firm that seems to overstate a handful of ambiguous patents, hiring high priced lawyers to target big firms.
A second class of troll is the former producer -- a company that once had product, but today exists primarily by suing others.  The most infamous example of this kind of firm is arguably Rambus, Inc. (RMBS) -- formerly a memory chipmaker, turned mass litigator.  Another well-known example includes NTP -- a firm founded by the inventor of push email.

Rambus sign
Rambus was once a proud innovator, but turned to litigation amid market failure.
[Image Source: Hector Mata/Bloomberg]

Then there's the fallen giant -- a company that still produces, but subsists heavily on litigation.  Eastman Kodak Comp. (KODK), the firm that invented digital photography, is one example of this.  Nokia Oyj. (HEX:NOK1V) is also arguably also going in this direction, having exited the smartphone market (with the sale of its devices unit to Microsoft), but continuing to sue firms that actually compete in the space.
Last, but not least there's the patent pool firm, perhaps the most novel form of troll.  This type of company never even thought about making product, and was from day one focused solely on collecting patents and seeking damages or licensing fees.  Arguably the most famous company in this class is Intellectual Ventures, the brainchild of former Microsoft CTO Nathan Myhrvold).  IV is paid by hundreds of companies for "protection" from its potential lawsuits backed by its portfolio of thousands of patents.  Another famous patent pool is MOSAID.

Nathan Myrhvold
Ex-Microsoft CTO Nathan Myrvhold insists that "patent trolling" is a myth propogated by anti-intellectual property activists. [Image Source: ZUMA Press]

Mr. Myrhvold and others have contended that PAEs/NPEs are beneficial as they help small inventors monetize their inventions and avoid get crushed by big players in court.  This sounds good on paper, but the trouble is that in many cases the PAE/NPE appears to pocket the profit from lawsuits, not the inventor.  Further, many PAEs/NPEs have use their libraries in questionable ways, exploiting the fact that it's costly to fight an infringement claim to try to squeeze settlement offers from thousands of businesses.  In such campaigns the NPE/PAE often uses patents that are ambiguously worded so as to cast as wide a net as possible.

II. The Patent Bullies

While it's clear that some firms have no intent on producing product, where the line between troll and innovation blurs is in the case of large firms who actually do produce product, but who are accused of abusing the intellectual property system.

Apple, Inc. (AAPL), Microsoft Corp. (MSFT), Oracle Corp. (ORCL), and Samsung Electronics Comp., Ltd. (KSC:005930) are just a few of the companies that have been accused of (often by each other) of patent abuse or "bullying".  All of these companies control a dominant position in at least one market -- but that hasn't stopped them from trying to stifle smaller competitors with patents.

A key part of the problem is a lack of screening during the patent grant process.  As a result large companies can "spam" the U.S. Patent and Trademark Office (USPTO), filing thousands of claimed "inventions, on things as seemingly trivial as a GUI animation or design detail.

Was a multi-touch gesture already patented using inductive displays?  No problem, just repatent it for a capacitive display and say you invented it.  Is a circuit widely published in college textbooks?  Just tweak its voltages to your particular use and patent it.

Unlocking the iPhoneUnlock n1m
[Image Source: YouTube]

Invariably in such cases there is prior art if you look hard enough, but the problem is that often it's missed by an overworked USPTO.  Once in place, it's an uphill battle to try to invalidate these patents, as invalidations must be approved several times in order to be finalized.
Unlike the trolls, the bullies actually compete in the markets they hold patents in, lending an air of credibility to their claims.  Typically the bullies battle it out amongst themselves to establish a pecking order, but at the end of the day they all cooperate together, to an extent, to exclude or at least stifle smaller players.
Patent bullies are a much more sympathetic figure most of the time as they often produce (or at one time produced) beloved consumer products.  And typically their patents -- even the ambiguous ones or ones that might be covered by prior art -- typically actually do cover features on their devices.
No one denies that companies have the right to own and protect true, novel inventions.  But there's a great debate of what represents novelty, and how to balance the needs of patents holders with the need for competition.  
An example of this can be seen in the recent legal/financial struggles of HTC Corp. (TPE:2498).  HTC was threatened by Microsoft and agreed to pay it a fee on every phone it sells.  It was sued by Apple, and briefly banned in the U.S., so it agreed to pay Apple a fee on every phone it sells, as well.
Now Nokia is winning bans and HTC may be forced to pay a third fee on every device, a financial burden which will likely be tantamount to market exclusion for an OEM already bleeding money from the first two settlements.

HTC is on the verge of being effectively disallowed to compete after it was forced it into settlements with Microsoft, Apple, and (likely soon) Nokia.

The problem is that when a certain complex electronics device is covered by tens of thousands of patents owned collectively by a handful of firms, it becomes virtually impossible to "design around" existing intellectual property.  It's hard enough for a new entrant to design a device from scratch that consumers want, much less reinvent the wheel, designing around tens of thousands of ambiguous and/or ubiquitous patents.

As a result new entrants are quickly smacked with patents suits when they start to show success.  For the first few companies to arrive in a sector, they can always start filing patents and then turn around and sue subsequent new firms.  Apple, for example, after being sued by Nokia practiced this approach.

But that strategy only works for a handful of entrants to a maturing market.  Soon the ever-growing legion of firms demanding licensing overwhelms the ability to find licensing targets of your own.

In some ways this form of patent abuse is as insidious as trolling, in that trolls generally want their targets to survive in order to sustain licensing fees.  By contrast, large patent abusers are indifferent at best because if their targets become financially insolvent that's one less firm to compete with.  Thus where trolls would often settle for smaller licensing fees, large patent abusers are often emboldened to seek billions from their victims.

The Giving Tree
Market newcomers often agree to overly generous settlements with large competitors to make patent suits go away.  But quickly they find themselves with nothing left to give.
[Image Source: Shel Silverstein]

One is reminded of Shel Silverstein story, The Giving Tree.  Large patent holders take and take from young vibrant newcomers, in the form of large patent licensing settlements.  Newcomers are often eager to avoid trouble and comply.  But eventually they find themselves with nothing left to give and quickly fade away and are forgotten.
III. The Good
The proposed Innovation Act (H.R. 3309) is the House equivalent of the U.S. Senate's Patent Transparency and Improvements Act of 2013 (S.1720).  The bill would amend USC (U.S. Code [of Law]) Title 35 -- the section of the U.S. legal code that governs patent law -- and amend the "America Invents Act", which Obama signed into law in 2011.  If passed, it will be the biggest modification to U.S. intellectual property law since that 2011 measure.

Provisional patent
The Innovation Act does offer some positive patent reform. [Image Source: InvestorsEye]

The Innovation Act originally had provisions that could not only have limited the patent trolls abuses, but also -- perhaps unintentionally -- offered up measures that could have prevent large firms from bullying new market entrants to the extent the currently do.
One of the best provisions of the bill is that it requires patent holders to explain exactly what part of the defendant’s products infringes, and which claims in the patent apply to each infringement.  That does have the potential to clean up lawsuits filed both by patent bullies and patent trolls alike.
Under the "customer stay" provision, which survived, a company like Google could potentially opt to defend its customers (e.g. Android OEMs) from lawsuits from a rival (e.g. Apple).  The bill also forces the suing party to more clearly state the claimed IP theft.

And this positive reform was further strengthened by a tweak (H.Amdt.522) proposed by Rep. Jared Schutz Polis (D-Colo., 2nd District) which extended it not only to the main filing, but the preliminary filings as well, cutting the ability for trolls to threaten firms with ambiguous claims early in a federal or trade court case.  This change was approved by a voice vote.

The bill also offers a so-called "customer stay" amendment, which means that a vendor (say an OS developer like Google or a chipmaker like Qualcomm, Inc. (QCOM)) is allowed to "take over" infringement claims regarding its products, protecting smaller customers/clients.  

This could not only cut back on abuse, but could also prevent the most severe forms of trolling in which trolls have sent out threat letters to thousands of small businesses for doing something as ubiquitous as sending an email or fax.  This so-called "customer stay" measure survived a pair of proposals by Rep. Sheila Jackson Lee (D-Texas, 18th District) (H.Amdt.524) and Rep. Thomas Harold Massie (R-Kent., 4th District) (H.Amdt.523) which would have scrapped or scaled it back.

A couple other changes to the bill boiled down largely to fringe scenarios.

Specifically, an amendment proposed (H.Amdt.526) by Rep. Daniel Tyrone "Dan" Rohrabacher (R-Calif., 48th District) passed by a 260-156 margin, preserving the ability to sue in a district court to try to obtain a patent if a filer feels they were wrong rejected by the USPTO (a procedure spelled out in 35 U.S.C. § 145).  The Innovation Act initially would have banned this route, but this rarely used tactic was preserved by the amendment.

Lightbulb Patent Law
A tweak to the act institutes an impact study to make sure small businesses aren't being harmed by the changes. [Image Source: Philadelphia News]

Another approved amendment -- passed by an unspecified voice vote margin -- was put forth by Rep. Jackson (D-Texas, 18th District).  It institutes a study to examine the impact of the bill's anti-trolling measures on small businesses, a seemingly sensible idea.
IV. The Bad
Arguably the bill’s sponsor, Rep. Goodlatte, proposed the biggest change to the bill.  Speaking on Dec. 5, the Virginian Congressman proposed (H.Amdt.520) scrapping a major initiative of the bill -- a faster review track.  Such a review track was already put in place in the financial sector as part of the America Invents Act.
Rep. Goodlatte initially argued that the high-tech sector and other litigation prone sectors could benefit from a similar expedited review of controversial patents.  Such a provision could have brought the smartphone wars to a grinding halt, encouraged fair licensing rates, and eliminated a number of patents (e.g. Apple's pinch to zoom patent) that have drawn criticism on the grounds of prior art.
Early multitouch devices
Pinch-to-zoom touch gestures were developed in the 1980s, by Myron Krueger and others, yet Apple was somehow granted ownership of the technology a decade ago. [Image Source: Bill Buxton]
The bill's author instead abruptly changed his tune.  That shift reportedly may have come in part due to strong opposition from large litigious tech giants such as Apple, Microsoft, and Oracle.  A trade group led by Microsoft and Apple wrote the Representative asking him to change his mind, as did International Business Machines Corp.'s (IBM) government affairs VP.  But the real breakthrough appeared to come after a $5,500+ USD campaign donation from Microsoft's lobbyists, which "helped" the author "rethink" his proposal.
Of course you can't "prove" the donation changed his mind, but it's hard to escape the cause and effect view that this was yet one more example of Congress people daily selling small favors and tweaks to legislation in exchange for special interest funds.  $5,000 USD on its own is nothing.  But hand out a few hundred such favors while you're in office and suddenly you have the financial firepower to hold off opponents, should your next race prove competitive.
Microsoft also paid about a dozen more small payments of $5,000 to $1,000 USD to various other House Republicans and Democrats on Nov. 1.  Perhaps lubricated by that green grease, the fast track for reviewing bad patents was chopped and Microsoft flipped from critic to enthusiast, passing by a resounding 341-73 vote.

Payroll tax cut
After Microsoft paid out tens of thousands to various members of Congress, a proposal to fast-track reviews of controversial software patents was scrapped. [Image Source: CNBC]

It's rather heartbreaking to see one of the bill's best provisions fall victim to apparent cronyism, particularly after the proposed measure has already proven effective.  As mentioned, it's already in place in the financial sector and by all measures has been a great success.  A similar measure could clear out the deluge of "junk" software patents in the tech industry -- but then again firms like Apple, Oracle, and Microsoft don't necessarily want that to happen.

V. The Ugly

With the pivotal review provision scrapped, other parts of the bill have the potential to create ugly messes of their own.

At least one of the proposed changes could actually make the problem of patent bullying worse, even if it is aimed at fighting troll tactics.  Specifically, under the new law the loser now can be forced to pay more of the winner's fees.  In the case of NPEs/PAEs "trolling" a big company like Google Inc. (GOOG) or Microsoft, this could be a deterrent, by encouraging the defendant to fight and shoot down bad claims, rather than settle.

Bill Gates -- The Simpsons
The provisions favor large firms like Microsoft -- who heavily lobbied to obtain the bill in its current form, rather than more balanced early iterations. [Image Source: Matt Groening/Fox]

But for a large company like Microsoft or Apple that stands to gain from stifling competition, these fees represent yet another small mechanism to utilize against new market entrants like HTC that lack the patent portfolios and legal sophistication to defend themselves.
It should be noted that the bill does contain an exception for firms that appear "substantially justified" in a judge's opinion, but that arbitrary allowance won't necessary preclude abuse.  The Electronic Frontier Foundation (EFF) has backed the shifting of fees, but it's a double-edged sword that should be watched carefully.

Companies like HTC could be forced to pay new fees under the act, if they lose and a judge feels their defense was weak. [Image Source: Reuters]

Rep. Melvin Luther "Mel" Watt (D-N.Caro., 12th District) actually proposed an amendment to the Innovation Act which would have stripped this provision.  But that proposed change was narrowly defeated by a 199-213 vote.  This was the only major case where voting on the bill was largely confined to party lines; Democrats in the House largely supported this change, arguing it would help smaller entities, Republicans opposed it.
Given the loss of the critical review provision and the potential abuse of the loser-pays-the-fees provision, one must wonder if it would have been better to scrap the whole act. This is what an amendment proposed (H.Amdt.527) by Rep. John James Conyers, Jr. (D-Mich, 13th District) would have done.  But the bill stood after Rep. Conyers' proposal was defeated 157-258.
Innovation Act
Blessed by large special interests like Apple and Microsoft, the bill slid through Congress with a resounding majority. [Image Source: GovTrack]

That left the mixed package free to advance to the floor vote, where it passed in 325-91.  The majority of opposition came from Democrats, but some Republicans, e.g. Libertarian-leaning Rep. Justin A. Amash (R-Mich., 3rd District) voted no as well.

VI. Reaction

Some nonprofit backers like the EFF feel the bill still does more good than evil.  The advocacy comments on the revised bill's shortcomings and its passage in a statement, writing:

The Innovation Act isn't perfect. It doesn't go nearly far enough to reform the demand letter problem. Its provisions protecting consumers and end-users, while present, aren't as robust aswe would hope. And it dropped expanded covered business method review, a provision that would have helped ensure that the Patent Office issues fewer patents for "inventions" that aren't particularly inventive.

But the Innovation Act is nonetheless a huge step in the right direction. It gives defendants tools to fight back, makes ligitation cheaper and includes an important fee-shifting provision, so companies that stand up to the trolls have a chance to recover their fees and costs at the end of litigation. It requires trolls to make their case up front by providing basic information about their patents and the supposed infringement.  And it prohibits trolls from hiding behind shell companies. 

Double edged sword
Fee shifting could prove a double-edged sword, legally. [Image Source: Bob Larson]

Others aren't so happy with the bill.  John Vaughn, executive vice president of the Association of American Universities, says that in favoring large patent-holders and defendants, the bill will hurt research colleges.  He commented, "[The Act] is good for people who don't like patents and would like them all to go away.  The impact of H.R. 3309 would run exactly counter to the collaborative efforts of universities, industry, and government to increase the breadth and pace of the commercialization of university research."
Apple patent
The final version of the bill arguably favors large patent holders like Apple. [Image Source: USPTO]

The bill also drew predictable criticisms from intellectual property lawyers, particularly those associated with so-called "troll" companies.  However, the criticism wasn't as harsh as expected, given that many business attorneys were pleased with the changes that favor big interests in court, hopefuly that they could bend the ambiguous portions (e.g. the fees provision) to their advantage.

President Barack Obama (D) had previously praised the bill:

The Administration looks forward to working with the Congress to advance this important bipartisan legislation and to include additional provisions that the Administration recommended to help protect innovators, including transparency of demand letters and pre-litigation patent ownership. 

Given that and other indications of support, if the bill can clear the hurdle of Senate passage (and possibly unificaiton with S.1720) it looks poised to become law -- for better or worse.

Sources: GovTrack, Association of American Universities, EFF

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