BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AJR 9 (Chang)
Version: May 18, 2015
Hearing Date: June 16, 2015
Fiscal: No
Urgency: No
TH
SUBJECT
Patent Reform
DESCRIPTION
This measure would urge the President and the Congress of the
United States 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.
BACKGROUND
In recent years, much attention has been focused on the business
model practiced by certain firms that make money not by
producing goods, but by licensing patent use or asserting patent
claims against other companies that produce goods using patented
technologies and methods. The activities of these so-called
"patent trolls," "non-practicing entities," or "patent assertion
entities" are thought by some to be harming innovation and
causing the market as a whole to reduce venture investing and
research and development spending. Whether or not these
entities actually harm the market is a hotly debated topic, as
is the nature of what - if anything - should be done about it.
Indeed, even the definition of who constitutes a non-practicing
entity is contentious, with some commentators pointing out that
the concept may include universities that license use of their
patents.
This resolution would make specified findings about the
detrimental impact predatory patent assertion entities are
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having on the economy and innovation, and would urge the federal
government to enact federal legislation to prevent and deter
abusive patent litigation while ensuring that legitimate patent
enforcement rights are protected and maintained.
CHANGES TO EXISTING LAW
Existing federal law , the United States Constitution, reserves
to Congress the power "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." (U.S. Const., art. I, Sec. 8.)
Existing federal law , the Patent Act, provides for the issuance
of patents to any person who invents or discovers any new and
useful process, machine, manufacture, or composition of matter,
or any new and useful improvement thereof. (35 U.S.C. Sec.
101.)
Existing law , the Unfair Competition Law, renders an individual
liable for any unlawful, unfair or fraudulent business act or
practice and any unfair, deceptive, untrue or misleading
advertising. (Bus. Prof. Code Sec. 17200.)
Existing law provides that one who willfully deceives another
with intent to induce him to alter his position to his injury or
risk, is liable for any damage which he thereby suffers. (Civ.
Code Sec. 1709.)
This measure would make the following statements:
the principle of intellectual property is enshrined in the
United States Constitution, specifically under clause 8 of
Section 8 of Article I of 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;"
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;
California accounts for 25 percent of the nation's patents;
the state recognizes and respects the importance of patent
protections and patent enforcement rights to driving continued
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research, investment, technological innovation, and job
creation across multiple sectors of our economy;
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; and
enforcement of legitimate patent rights is essential to
promoting an innovation environment that fuels economic
growth.
This measure would make the following additional statements:
there is increasing concern about litigation by predatory
Patent Assertion Entities (PAEs), which are 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;
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;
PAEs rarely earn successful judgments in court, underscoring
the questionable merits of these particular patent cases.
However, given the high cost and risks associated with patent
litigation, most defendants choose to settle in order to avoid
further financial loss. Indeed, many PAEs will offer royalty
settlements below market value in order to encourage
settlement and avoid trial;
predatory 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;
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;
the California economy is especially vulnerable to lawsuits
directed at information technology patents; and
federal legislation is necessary to prevent and deter abusive
patent litigation.
This measure would urge the President and the Congress of the
United States 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.
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COMMENT
1.Stated need for the bill
The author writes:
In recent years there have been efforts to abuse the US patent
system for financial gain in a way that is an affront to the
spirit and intent of the protections set up under patent laws.
The US has seen a marked increase in Patent Assertion
Entities (PAEs) which have no other purpose than to file
predatory patent lawsuits, with a particular focus on
technology and software. PAEs do not manufacture or create
anything. Their only purpose is to acquire patents and assert
them against entrepreneurs.
Victims of PAEs are mostly small to medium sized businesses
that cannot afford the costs of defending a lawsuit. While
technological patents are most often abused, PAEs threaten
lawsuits on any number of businesses including restaurants,
small offices or podcasts for using standard technology like
WiFi or copier machines.
Abusive patent lawsuits have grown in recent years at jarring
rates. In 2009 PAEs accounted for 27 [percent] of patent
lawsuits but by 2012 they made up 62 [percent] 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.
Current federal law does not provide protections for victims
of patent lawsuit abuse and struggles to distinguish between
legitimate efforts to protect patents and [PAEs]. Reform is
needed on a federal level to address this rapidly growing
problem that threatens economic growth and innovation . . .
AJR 9 urges the President and the Congress of the United
States 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.
2.Evidence of Problematic Behavior
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This resolution is premised on the proposition that
non-producing patent holders who make money by licensing their
patents (non-practicing entities) are harmful to the
marketplace, and that some who engage in this business model
carry out their activities in a manner that borders upon fraud.
As noted above, these premises are highly contested among
scholars and commentators. For example, one recent opinion
piece in the Wall Street Journal states:
Patent-reform activists point out that the number of patent
lawsuits has increased by about 60 [percent] since 2000, which
they cite as evidence that there is a serious problem with the
patent system. But does the uptick in lawsuits actually
indicate such a problem?
In short, no. It might instead reflect a healthy, dynamic
economy. Rapid technological advances have spurred more
innovation and patents, and courts are now clarifying the
nature and boundaries of intellectual property and contract
rights. (Stephen Haber and Ross Levine, The Myth Of the
Wicked Patent Troll (June 29, 2014) <
http://www.wsj.com/articles/stephen-haber-and-ross-levine-the-m
yth-of-the-wicked-patent-troll-1404085391> [as of Apr. 16,
2015].)
A counterpoint piece in the Harvard Business Review illustrates
the opposing position, stating:
But there is evidence of significant harm. The White House
and the Congressional Research Service both cited many
research studies suggesting that patent litigation harms
innovation. And three new empirical studies provide strong
confirmation that patent litigation is reducing venture
capital investment in startups and is reducing R&D spending,
especially in small firms.
. . .
The economic burden of today's patent lawsuits is, in fact,
historically unprecedented. Research shows that patent trolls
cost defendant firms $29 billion per year in direct
out-of-pocket costs; in aggregate, patent litigation destroys
over $60 billion in firm wealth each year.
. . .
[A]cross a significant number of studies using different
methodologies and performed by different researchers, a
consistent picture is emerging about the effects of patent
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litigation: it costs innovators money; many innovators and
venture capitalists report that it significantly impacts their
businesses; innovators respond by investing less in [research
and development] and venture capitalists respond by investing
less in startups. (James Bessen, The Evidence Is In: Patent
Trolls Do Hurt Innovation, Harvard Business Report (Nov. 2014)
<
https://hbr.org/2014/07/the-evidence-is-in-patent-trolls-do-hur
t-innovation> [as of Apr. 16, 2015].)
Yet a third article takes a more nuanced view:
One common criticism of [non-practicing entities] (however
that term is defined) is that they initiate patent
infringement lawsuits seeking to enforce patents of dubious
quality or with questionable infringement claims, and then
settling for amounts far less than the defendants' litigation
costs. The story is that NPEs (non-practicing entities) take
strategic advantage of the notoriously high cost of patent
litigation, which requires several million dollars in
attorneys' fees to litigate through the close of discovery.
There is a little firm empirical evidence supporting this
scenario of the combination of dubious patent assertions with
low settlement demands. There is evidence that NPEs settle
more quickly compared to other patent holders, which could
indicate the possibility of nuisance settlements. But there
is also evidence that the patents asserted by NPEs are similar
to patents asserted by practicing entities. There is some
evidence that the most litigious NPEs lose more often when the
cases are taken to a final judgment, but like other types of
complex civil litigation, the vast majority of patent cases
settle before judgment. (David Schwartz and Jay Kesan,
Analyzing the Role of NPEs in the Patent System <
http://patentlyo.com/patent/2012/08/
analyzing-the-role-of-npes-in-the-patent-system.html> [as of
Apr. 16, 2015].)
Some commentators suggest that the reason such diametrically
opposed viewpoints on the issue of patent litigation abuse have
emerged is because "patent litigators appear to be polarizing
into a plaintiffs' bar and a defense bar." (Id.) Others
suggest the debate is more about gaining a competitive advantage
in the marketplace:
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There is one basic reason behind the attacks on [patent]
trolls: Big Money. Many patent-intensive products . . . are
produced by big corporations that license many patents. . . .
These corporations can make higher profits the less they pay
to use patented technology they do not own, and higher profits
still by paying nothing at all. . . . some corporations are
looking to gain a competitive edge by changing the rules of
the game. The strategy is to pass patent-reform legislation
that weakens the negotiating position of patent holders.
Corporations that pay large sums for patented technologies
will point to lawsuits, trolls and anything else that will
encourage lawmakers to pass such reforms. (Haber and Levine,
The Myth Of the Wicked Patent Troll.)
Given the significant disagreement over whether abusive patent
lawsuits are, indeed, a problem, the Committee may wish to study
this issue in more depth before weighing resolutions seeking
curative legislation.
3.Existing Legal Remedies
According to the California Restaurant Association, demand
letters sent by Patent Assertion Entities (PAEs):
. . . are often vague, uninformative and lack sufficient
information for restaurants to determine the potential
liability. Restaurants report numerous egregious practices
involving the demand letters from PAEs. They are frequently
vague and make broad claims without providing an adequate
basis to assess those claims. They demand broad licensees
while refusing to disclose what patents are involved and what
patents are infringed. This puts our industry in a very
difficult position to determine liability or respond to the
claims.
Staff notes that this sort of conduct may already be prohibited
under California's robust consumer protection laws. The Unfair
Competition Law (UCL), as an example, renders an individual
liable for any unlawful, unfair or fraudulent business act or
practice and any unfair, deceptive, untrue or misleading
advertising. (Bus. Prof. Code Sec. 17200.) In describing the
unfair competition law's broad scope, the Supreme Court
explained "it does not proscribe specific practices. Rather . .
. it defines unfair competition to include any unlawful, unfair
or fraudulent business act or practice. Its coverage is
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sweeping, embracing anything that can properly be called a
business practice and that at the same time is forbidden by
law." (Cel-Tech Communications, Inc. v. Los Angeles Cellular
Telephone Co. (1999) 20 Cal.4th 163, 180 (internal quotation
marks and citations omitted).) Importantly, the UCL's
"statutory language referring to any unlawful, unfair or
fraudulent practice makes clear that a practice may be deemed
unfair even if not specifically proscribed by some other law."
(Id.) "[T]he Legislature . . . intended by this sweeping
language to permit tribunals to enjoin on-going wrongful
business conduct in whatever context such activity might occur.
Indeed, . . . the section was intentionally framed in its broad,
sweeping language, precisely to enable judicial tribunals to
deal with the innumerable new schemes which the fertility of
man's invention would contrive." (Id.)
On its face, the UCL would appear to already prohibit the sort
of dishonest business practice this resolution seeks to address.
(See e.g. Patent Trust v. Microsoft Corp. (2007, SD Cal) 525
F.Supp.2d 1200 (upholding defendant's fraudulent act or practice
UCL counterclaim against patent assertion entity).) Similarly,
other existing California law may also provide remedies for
businesses and individuals harmed by bad faith patent demands.
To the extent a patent assertion entity's bad faith patent
demands constitute willful efforts to deceive others with an
intent to induce them to alter their position to their
detriment, California's civil fraud statute may already provide
adequate relief. (See Civ. Code Sec. 1709.) While these
existing remedies in California law may not preclude the need
for federal patent reform, the Committee may wish to study
whether aggrieved parties are taking advantage of these
remedies, as well as ways to reduce barriers that may keep
parties from asserting their rights under California's consumer
protection statutes.
Support : California Citizens Against Lawsuit Abuse; California
Healthcare Institute; California Hotel & Lodging Association;
California Restaurant Association; Electronic Frontier
Foundation; Greater Santa Barbara Lodging & Restaurant
Association; Internet Association; TechNet
Opposition : None Known
HISTORY
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Source : Author
Related Pending Legislation : SB 681 (Hill, 2015) would make it
unlawful to send a written communication stating that the
recipient may have infringed on a United States patent if, in
bad faith, the sender makes specified statements, seeks
compensation for specified conduct, or fails to include
specified information in the communication. This bill would
also provide specific remedies for sending such unlawful
communications, and would specify that those remedies may only
be obtained by the Attorney General or an attorney acting on
behalf of the state. This bill is pending on the Senate Floor.
Prior Legislation : None Known
Prior Vote :
Assembly Floor (Ayes 76, Noes 0)
Assembly Judiciary Committee (Ayes 10, Noes 0)
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