BILL ANALYSIS Ó AJR 9 Page 1 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 AJR 9 Page 2 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; AJR 9 Page 3 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 AJR 9 Page 4 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 AJR 9 Page 5 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 AJR 9 Page 6 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, AJR 9 Page 7 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; AJR 9 Page 8 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 AJR 9 Page 9 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 AJR 9 Page 10