BILL ANALYSIS Ó
AJR 9
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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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