BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:   May 5, 2015


                           ASSEMBLY COMMITTEE ON JUDICIARY


                                  Mark Stone, Chair


          AJR 9  
          (Chang) - As Introduced February 25, 2015


                    PROPOSED CONSENT (As Proposed to be Amended)


          SUBJECT:  PATENT PROTECTION


          KEY ISSUE:  SHOULD THE LEGISLATURE URGE THE FEDERAL GOVERNMENT  
          TO CRAFT A BALANCED AND WORKABLE APPROACH TO MINIMIZE MERITLESS  
          PATENT LITIGATION WHILE ENSURING THAT LEGIMATE PATENT  
          ENFORCEMENT RIGHTS ARE PROTECTED AND MAINTAINED?  


                                      SYNOPSIS


          In this non-controversial resolution, the Legislature calls upon  
          Congress and the president to support the principle of  
          intellectual property as ratified in the United States  
          Constitution, by crafting a balanced and workable approach to  
          reduce incentives for patent assertion entities (PAEs) to  
          initiate meritless patent lawsuits.  These entities exploit the  
          legal system by filing meritless patent infringement lawsuits,  
          mainly directed at information technology and hospital equipment  
          patents.  Federal legislation is necessary to reduce unnecessary  
          patent litigation while ensuring that legitimate patent  
          enforcement rights are protected and maintained.  There is no  








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          known opposition to this resolution.       


          SUMMARY:  Urges Congress and the President to protect patent  
          rights.  Specifically, this measure (as proposed to be amended)  
          makes the following findings:


          1)The principle of intellectual property is enshrined in the  
            United States Constitution, which empowers Congress to  
            "promote the Progress of Science and useful Arts, by securing  
            for limited Times to Authors and Inventors the exclusive Right  
            to their respective Writings and Discoveries." 
          2)A robust patent system is critical to promote economic growth  
            and innovation and ensure just compensation for the labor and  
            proliferation of beneficial ideas and innovations; 
          3)California accounts for 25 percent of the nation's patents; 
          4)The state recognizes and respects the importance of patent  
            protections and patent enforcement rights to driving continued  
            research, investment, technological innovation, and job  
            creation across multiple sectors of our economy; 


          5)Small businesses depend on patents to secure investments, and  
            firms with fewer than 25 employees hold nearly one-quarter of  
            United States-held patents in innovative emerging  
            technologies; 


          6)Enforcement of legitimate patent rights is essential to  
            promoting an innovation environment that fuels economic  
            growth; 


          7)There is increasing concern about litigation by PAEs, built on  
            a rent-seeking business model that exploits the patent legal  
            system for financial gain without producing or manufacturing  
            anything of value for society; 









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          8)Many PAEs attain ambiguous patents with the sole intent of  
            filing patent infringement lawsuits.  PAEs assert these  
            patents against businesses of all sizes and in all industries,  
            often years after the product has become standard and widely  
            used; 


          9)PAEs rarely earn successful judgments in court, underscoring  
            the questionable merits of these patent cases.  However, given  
            the high cost and risks associated with patent litigation,  
            most defendants settle to avoid further financial loss.  Many  
            PAEs will offer royalty settlements below market value to  
            encourage settlement and avoid trial;


          10)PAEs have a detrimental impact on the economy and innovation.  
             PAE activities cost businesses $29 billion directly, mostly  
            borne by small and medium-sized businesses; 


          11)The growth of patent litigation is directly tied to  
            aggressive PAEs in recent years.  In 2010, PAEs were  
            responsible for 29 percent of patent litigation, and by 2012  
            PAEs represented 62 percent of all patent suits;


          12)The California economy is especially vulnerable to lawsuits  
            directed at information technology patents; and


          13)Federal legislation is necessary to prevent and deter patent  
            litigation. 


          14)Resolves that the Legislature calls upon Congress and the  
            president to craft a balanced and workable approach to reduce  
            incentives for and minimize unnecessary patent litigation  
            while ensuring that legitimate patent enforcement rights are  








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            protected and maintained. 




          EXISTING LAW: 



          1)Provides that Congress is empowered to promote Progress of  
            Science and useful Arts, by securing for limited times to  
            authors and inventors the exclusive right to their respective  
            writings and discoveries.  (United States Constitution,  
            Article I, Section 8, Clause 8.)



          2)Provides that a patent grants the patent holder the exclusive  
            right to exclude others from making, using, importing, and  
            selling the patented innovation for a limited period of time.   
            (United States Patent Act, 35 U.S.C. 1 et seq.)



          3)Requires that the inventor who first files a patent  
            application with the U.S. Patent Office for an invention must  
            be named in the patent application.  (Leahy-Smith America  
            Invents Act (2011).)

          FISCAL EFFECT:  As currently in print this measure is keyed  
          non-fiscal.


          COMMENTS:  According to the author:


               Intellectual property and its practical application under  
               the U.S. patent system serve as a catalyst for modern  
               advancements and ensure just compensation for the labor and  








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               proliferation of beneficial ideas and innovations.  This  
               concept is enshrined in the U.S. Constitution which  
               empowers Congress to "promote the Progress of Science and  
               useful Arts, by securing for limited Times to Authors and  
               Inventors the exclusive Right to their respective Writings  
               and Discoveries."


               There has been a marked increase in PAEs in recent years  
               that have no purpose other than to file patent lawsuits,  
               particularly focusing on technology and software.  PAEs  
               have abused this system for financial gain in a way that is  
               an affront to the spirit and intent of the protections set  
               up under patent laws.  Victims of PAEs are mostly small to  
               medium-sized businesses that cannot afford the costs of  
               defending a patent lawsuit, which are expensive due to the  
               cost expert witnesses that are necessary in order to lodge  
               an adequate defense.  While technological patents are most  
               often abused, PAEs threaten lawsuits on any number of  
               businesses including restaurants, hospitals, small offices  
               or podcasts for using standard technology like Wi-Fi, or  
               copier machines.


               Abusive patent lawsuits have grown in recent years at  
               jarring rates. In 2009 PAEs accounted for 27% of patent  
               lawsuits but by 2012 they made up 62% of all patent  
               lawsuits.  Together these lawsuits cost businesses $29  
               billion per year.  The result of these opportunistic  
               schemes to extract money from employers is less innovation  
               and slower job growth. 


          Background.  The United States Patent and Trademark Office was  
          established by Congress, is  subject to the policy direction of  
          the Secretary of Commerce, and is responsible for the granting  
          and issuing of patents and the registration of trademarks; and  
          for disseminating to the public information regarding patents  
          and trademarks.  Therefore, patents are under the exclusive  








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          authority of federal law and states are preempted from  
          regulating them.  (United States Patent Act, 35 U.S.C. Section 1  
          et seq.)


          Need for this Measure.  The author's office notes that  
          California accounts for 25 percent of the nation's patents,  
          mainly due to the large technology industry in California.  The  
          state recognizes the importance of patent protections and patent  
          enforcement rights to research, investment, technological  
          innovation and job creation across multiple sectors of our  
          economy.  According to the California Small Business Profile,  
          published in 2014, California's small businesses employed half  
          or 6.3 million of the state's private workforce in 2011.  Almost  
          all firms with employees are small, making 99.2 percent of all  
          employers in the state.  According to the author, small  
          businesses depend on patents to secure investments and firms  
          with fewer than 25 employees hold nearly-one-quarter of the  
          patents held in the United States.  These statistics support the  
          need for California to encourage the enforcement of legitimate  
          patent rights, to ensure the promotion of an innovative  
          environment that fuels economic growth.  (U.S. Small Business  
          Administration, Office of Advocacy, California Small Business  
          Profile, (2014).)


          How the Federal Government is Addressing Concerns Regarding  
          PAEs.  According to a September 2013 news release from the  
          Federal Trade Commission (FTC), FTC Seeks to Examine Patent  
          Assertion Entities and Their Impact on Innovation, Competition,  
          there is increasing concern about litigation by PAEs with a  
          business model based primarily on purchasing patents and then  
          attempting to generate revenue by asserting the intellectual  
          property rights against persons already practicing the patented  
          technologies.  The FTC voted to conduct a study of PAE behavior.  
           Earlier studies had focused primarily on publicly available  
          litigation data and concluded that PAE litigation activity is on  
          the rise.  The Commission, however, has unique authority to  
          collect nonpublic information, such as licensing agreements,  








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          patent acquisition information, and cost and revenue data, which  
          will provide a more complete picture of PAE activity.  The FTC  
          study is ongoing.  


          A report prepared by the President's Council of Economic  
          Advisers, the National Economic Council, and the Office of  
          Science & Technology Policy in June of 2013, revealed:


               PAEs "focus on aggressive litigation, using such tactics  
               as: threatening to sue thousands of companies at once,  
               without specific evidence of infringement against any of  
               them; creating shell companies that make it difficult for  
               defendants to know who is suing them; and asserting that  
               their patents cover inventions not imagined at the time  
               they were granted.  Suits brought by PAEs have tripled in  
               just the last two years, rising from 29 percent of all  
               infringement suits to 62 percent of all infringement suits.  
                Estimates suggest that PAEs may have threatened over  
               100,000 companies with patent infringement in 2012. (Patent  
               Assertion And U.S. Innovation, President's Council of  
               Economic Advisers, the National Economic Council, and the  
               Office of Science & Technology Policy (2013).)  


          Pending Federal Legislation.  To address abusive litigation by  
          PAEs, H.R. 9, The Innovation Act was introduced on February 5,  
          2015, seeking to require a party alleging patent infringement in  
          a civil action to include the following information in the court  
          pleadings, if the information is reasonably accessible:


             a)   each claim of each patent allegedly infringed;
             b)   for each claim of indirect infringement, the acts of the  
               alleged indirect infringer that contribute to, or are  
               inducing, a direct infringement;
             c)   the principal business of the party alleging  
               infringement;








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             d)   the authority of the party alleging infringement to  
               assert each patent and the grounds for the court's  
               jurisdiction;
             e)   each complaint filed that asserts any of the same  
               patents; and
             f)   whether the patent is essential or has potential to  
               become essential to a standard-setting body, and whether  
               the United States or a foreign government has imposed any  
               specific licensing requirements.


          While the regulation of patents and trademarks is solely within  
          the federal government's jurisdiction, California has a vested  
          interest in ensuring that the aggressive litigation tactics of  
          PAEs do not negatively affect California businesses or the  
          California economy.  It is within the power of the Legislature  
          to weigh in and urge Congress to take action to protect  
          innovation, research, small businesses, job creation and the  
          technology sector.  


          Author's Amendments:  Proposed author amendments delete  
          disparaging terms regarding litigation and lawsuits to clarify  
          that while valid claims have a right to be pursued and  
          litigated, these patent lawsuits are meritless and need to be  
          addressed at the federal level.


          ARGUMENTS IN SUPPORT:  Writing in support of the bill, the  
          California Hotel 7 Lodging Association states:


               The business model of a PAE is simple: they purchase  
               patents with the sole intention to sue businesses for  
               infringement.  Patent trolls (another name for PAEs)  
               threaten businesses with lawsuits that will cost millions  
               of dollars to defend but are quick to offer a smaller  
               settlement amount.  The cost of litigating and even just  
               settling can cripple a small business and negatively affect  








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               their day-to-day operations.  Many in our industry have  
               been attacked over common business practices like using a  
               3-in-1 print, copy, and fax machine, offering an online  
               store locator, printing receipts at a cash register,  
               providing comparison online shopping, etc.  


          REGISTERED SUPPORT / OPPOSITION:




          Support


          California Healthcare Institute
          California Hotel & Lodging Association
          California Restaurant Association
          Electronic Frontier Foundation
          Internet Association
          TechNet


          Opposition


          None on file




          Analysis Prepared by:Khadijah Hargett / JUD. / (916) 319-2334















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