BILL ANALYSIS                                                                                                                                                                                                    



                                                                        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