BILL ANALYSIS Ó AJR 9 Page 1 ASSEMBLY THIRD READING AJR 9 (Chang) As Amended May 7, 2015 Majority vote ------------------------------------------------------------------- |Committee |Votes |Ayes |Noes | | | | | | | | | | | |----------------+------+--------------------+----------------------| |Judiciary |10-0 |Mark Stone, Wagner, | | | | |Alejo, Chau, Chiu, | | | | |Gallagher, Cristina | | | | |Garcia, Holden, | | | | |Maienschein, | | | | |O'Donnell | | | | | | | | | | | | ------------------------------------------------------------------- SUMMARY: Urges the United States (U.S.) Congress (Congress) and the U.S. President (President) to protect patent rights. Specifically, this measure 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 AJR 9 Page 2 proliferation of beneficial ideas and innovations; 3)California accounts for 25% 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 patent assertion entities (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; 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 AJR 9 Page 3 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% of patent litigation, and by 2012 PAEs represented 62% 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 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 AJR 9 Page 4 right to exclude others from making, using, importing, and selling the patented innovation for a limited period of time. (United States Patent Act, 35 United States Code 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: None 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 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 AJR 9 Page 5 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. The author's office notes that California accounts for 25% 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% 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).) 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: AJR 9 Page 6 1)Each claim of each patent allegedly infringed; 2)For each claim of indirect infringement, the acts of the alleged indirect infringer that contribute to, or are inducing, a direct infringement; 3)The principal business of the party alleging infringement; 4)The authority of the party alleging infringement to assert each patent and the grounds for the court's jurisdiction; 5)Each complaint filed that asserts any of the same patents; and 6)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 California Legislature to weigh in and urge Congress to take action to protect innovation, research, small businesses, job creation and the technology sector. Analysis Prepared by: Khadijah Hargett / JUD. / (916) 319-2334 FN: 0000369 AJR 9 Page 7