BILL ANALYSIS                                                                                                                                                                                                    





                             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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