Finally, a bill to end patent trolling

The chairman of the House Judiciary Committee, Rep. Bob Goodlatte (R-VA), has introduced a bill [PDF] that directly attacks the business model of "patent trolls." The bill has a real chance at passing, with wide backing from leadership in both parties.

The proposal integrates most of the ideas from earlier patent reform bills introduced by Sens. Chuck Schumer (D-NY) and John Cornyn (R-TX), as well as the SHIELD Act introduced by Reps. Pete DeFazio (D-OR) and Jason Chaffetz (R-UT). DeFazio and Chaffetz are co-sponsors, along with several other House members.

Lawyers from three groups that are deeply concerned about patent trolling had universal praise for the bill in a press call earlier today. (Those groups are the Computer and Communications Industry Association, the Electronic Frontier Foundation, and Public Knowledge.) It's not perfect, but if passed, it's a giant step forward that couldn't have been foreseen even a year ago.

The bill would require patent holders to lay out details about their infringement case early in a lawsuit, and would require the loser of a patent suit to pay legal fees unless they could show that the case was "substantially justified." It would expand a program to allow for the review of "business method" patents at the US Patent and Trademark Office, a key request by CCIA that has not been without controversy. And the bill would also allow customers or end users of a technology to stay a lawsuit while the patent holder and the manufacturer battle it out. That would prevent patent trolls from pulling moves like one last month, where a judge let Lodsys dodge Apple's lawyers— while it continues to threaten iOS developers.

"We're thrilled about the bill," said Matt Levy, chief patent counsel at CCIA.

EFF attorney Julie Samuels echoed the sentiment: "It's a broad, bipartisan coalition," she said. "We're incredibly excited about this draft."

Still, it's not a panacea. One thing reformers would like to see is some kind of defense against trolls that avoid filing actual lawsuits, instead sending out hundreds of demand letters to small or medium-sized businesses. But there's a lot to work with.

"This will make [patent trolling] a less attractive business model and give those who want to fight back tools to do that," said Samuels.

This bill has the best chance of passing of any bill yet introduced on this topic. Goodlatte is the chairman of the key committee and has integrated many suggestions from other patent reform-minded politicians in both parties. President Barack Obama has already voiced support for legislative action on this issue.

That doesn't make it a slam dunk. Congress is coming out of a period of unprecedented gridlock, and partisan rancor hangs in the air following the two-week government shutdown that just ended.

This bill wouldn't end patent trolling, but it could greatly increase the risks and costs to trolls. One type of troll that won't easily be killed off is the kind that goes after dozens of smaller businesses. It will remain prohibitively expensive for many businesses to spend the $1 million or more it can cost to see out a patent lawsuit. Taking a case through trial often costs more than $2 million.

But the landscape will have changed. Businesses will be able to challenge more patents at the PTO for a much lower cost of around $100,000. If they are forced to court, they'll have a decent chance of recouping that giant legal spend. That lowers the bar for defendants who want to fight back and speak out—currently a daunting proposition.

But opposition to some portions of the bill is already materializing. The Innovation Alliance, a group that includes heavy patent licensers like Dolby Labs, Qualcomm, Tessera, and InterDigital, has put out a statement opposing the bill, although it's not opposed to every part.

"[T]he bill’s provisions as drafted, taken together, will significantly shift the balance of patent ownership and licensing power from small companies and inventors to larger, better financed incumbent companies," stated Alliance Director Brian Pomper.

The breakdown

Here's a breakdown of the most important elements of the bill.

Pleading requirements. Patent holders filing suit will have to identify exactly what parts of a product infringe their patent claims, and how. That will allow defendants to better understand what's going on. It also will make patent holders actually do a little bit of work before they start demanding settlements.

It's hard to believe, but right now many patent cases—especially those filed by non-practicing entities (NPEs), or trolls—are bare-bones documents, as few as five pages long. While they usually name the infringing products or services, that's about all they do. It's as simple as saying the defendant infringes "one or more claims" of a patent.

The pleading requirements—assuming they are included in public documents and not unnecessarily sealed—will also make it easier for the media to report on the patents. It will become easier for the public to see what's going on and for other potential defendant companies to strategize even if they haven't (yet) been sued.

Fee shifting. If the bill becomes law, any "nonprevailing party" in a patent case will be liable for "reasonable fees and other expenses... unless the court finds that the position of the nonprevailing party or parties was substantially justified or that special circumstances make an award unjust."

It's hardly a 100 percent certain fee-shift, but that's probably for the best. It's important to note that competitor lawsuits still exist in the patent sphere, and this statute affects them as well. Small operating-company patent plaintiffs—not just trolls—will face increased risk when they head to court.

It isn't just HappyTroll LLC or whatever shell company was set up that week that's going to be on the hook for fees. The fees can be applied to any "interested party" in the case.

Joinder provisions. Speaking of those interested parties, the bill takes steps to make sure that NPEs that spin off new shell companies can be held to account. It makes clear that any person or company entitled to a cut of patent winnings is considered to have a "financial interest" in the patent case and can be liable for fees.

That's a direct jab at the business model of many trolling entities, including mega-NPE Intellectual Ventures. Intellectual Ventures sometimes litigates under its own name, but other times it hands off patents to shell companies and then insists that it "divested" those "patent assets." Meanwhile, it maintains contractual rights to a backend cut of any settlement cash. If the bill becomes law, Intellectual Ventures will be on the hook in those lawsuits, whether it likes it or not.

Limited discovery. Until the key "claim construction" phase of a patent trial is concluded, only discovery related to the patent claims will be permitted. Discovery often involves going through thousands—if not millions—of e-mails and documents being held by a defendant company, and it's a huge cost driver in litigation. It's also a lopsided burden, since patent trolls have no business beyond lawsuits, so the documents held by a troll can be held in a school child's backpack.

By delaying discovery, it should prevent patent holders from running up defendants' costs in early parts of a lawsuit. There are exceptions for discovery related to motion practice or when a patent is going to expire.

Transparency. Patent holders will have to disclose the assignees of a patent and any entities with rights to enforce the patent or with financial interest in the patent. They'll also have to disclose—on the record and to the patent office—the "ultimate parent entity" that is bringing the patent claim.

The duty of disclosure is ongoing. If the patent switches hands, the plaintiff has to report the change in ownership to the patent office.

Customer-suit exception. There's no question that one of the practices that has been seen by Congress as abusive is the tendency to use patents to go after end users of a technology rather than the company that created it. Under the Goodlatte bill as drafted, if a manufacturer and customer agree, litigation against a customer can be stayed while the patent holder and the manufacturer battle it out.

This only applies when the manufacturer is a party to the action or a separate action involving the same patents. So trolls that take deliberate steps to avoid a clash with a manufacturing company—like the scanner-trolls that gained wide attention this year with their $1,000-per-worker demands—might be able to sidestep this provision.

This section of the bill is already controversial. The Innovation Alliance has already called it too broad. The mandatory stay "will invite abuse by infringers who want to limit their damages, prevent patent holders from obtaining fair and efficient access to justice, and actually increase patent litigation," said the group.

Covered business method review. The bill extends a review program for "business method" patents and writes into law a fairly broad definition of what kind of patents are covered by that program. The definition was applied by the PTO in the first such review decision to come out of the patent office, SAP America v. Versata Development Group.

The review program was time-limited under the last patent bill that passed, the America Invents Act. Now the program is permanent, but it has an unusual backward-looking limitation; it only applies to patents that have filing dates before the Act went into effect.

The review program has been controversial. In addition to the Innovation Alliance, expanding the review program is strongly opposed by Microsoft, a major tech company that is on board with other anti-troll patent measures, such as fee-shifting. Putting a (somewhat arbitrary) time limit on this provision may be a compromise provision.