HR9 MIGHT DAMAGE THE INNOVATION ECOSYSTEM

By Dr. Rao Vepachedu, JD, PhD, LLM[1]

A patent owner – whether a non-practicing entity (NPE), troll or competing practicing entity – typically begins patent enforcement with either a demand letter or a lawsuit addressed to or naming the accused infringers. It may involve a single patent, a portfolio of patents or an entire industry in case of a method patent or a patent portfolio of methods and processes, e.g., a method for reading bar-codes, wireless communications, financial transactions, etc[2].

Before the enactment of the Declaratory Judgment Act in 1934, there was no opportunity for a potential infringer to sue a patent owner over patent validity or infringement, even when the owner was threatening the potential infringer and its customers with a lawsuit. Unbridled trolls would threaten to sue to push settlements or license agreements, without the fear of going to court over the patent. This became a problem for the threatened party when the potential infringer lost sales because of the threats, especially if there was a reason to believe that the patent was invalid or not infringed. This changed when Congress passed the Declaratory Judgment Act[3].

Therefore, demand letters are often deliberately vague in order to avoid drawing declaratory judgment lawsuits[4]. Such declaratory judgment suits assert that a genuine controversy exists because the plaintiff has been credibly threatened with suit for allegedly violating a specific patent. Beyond proper judicial jurisdiction and venue, a complaint for patent infringement need currently allege only ownership of a particular patent and that it has been infringed. A successful patent owner with the right portfolio of patents can therefore sometimes extract license fees for the life of the patents. A patent owner continues the collection of fees until the patents expire, even after the inventor is dead [5].

The above legitimate use of patent monopoly granted to an owner is the so-called “troll problem[6]” that Congress currently addresses under proposed so-called “anti-troll” legislation that has gone by various names including the “Innovation Act” and the “Patent Transparency and Improvements Act” and “HR 9[7].”

Under such so-called “Patent Transparency and Improvement” proposals, Congress requires 1) more particularity in demand letters and lawsuits, 2) shift both parties’ litigation fees to the losing side, 3) limit expensive and time-consuming discovery, 4) require disclosure of all beneficial owners of asserted patents, and 5) protect users and purchasers of alleged infringing products from suit unless the manufacturer had first been sued or if the manufacturer agreed to assume defense of the suit[7].

A non-practicing entity (NPE)[8] is someone who holds a patent for a product or process but has no intentions of developing it. Non-practicing entities include university research departments that discover processes with wide commercial application that can be monetized only through licensing to others, as well as micro-entities and inventors working their home garages and basements whose inventions are stolen by large manufacturers even with good patents in hand.

Treating all such non-practicing entities the same as the so-called ugly and unscrupulous trolls would discourage innovation and reward vested interests over entrepreneurship when exactly the opposite is needed to revive a still-struggling American economy[9]. The so-called ugly and unscrupulous trolls are hard to distinguish from the non-practicing entities that develop inventions with genuine R&D and severe budget constraints.

If passed in its current form and enacted into law, the bill would have the unintended consequences of weakening and devaluing U.S. Patents – resulting in less innovation, fewer start-up businesses based on those innovations, fewer patent filings, etc., the so-called trolls will find a loop hole in the law and continue their business as usual.

Please tell Congress to vote “no” on the Senate Patent Act and the House Innovation Act (HR 9), legislation that would weaken our patent system and harm the inventors it was designed to protect. Instead, join inventors in supporting the STRONG Patent Act, which ensures balance in post-grant proceedings, cracks down on abusive demand letters, and eliminates USPTO fee diversion[10].

Please contact your U.S. Representative [11] and send an e-mail to your Representative. A template letter[12] is provided below for your convenience.


Notes and References:

[1] Dr. Rao Vepachedu is a Managing Director at Cardinal Risk Management and registered patent attorney with extensive experience in the management of intellectual property and extensive experience in research and teaching. He currently works for Cardinal Intellectual Property (CIP), Cardinal Risk Management (CRM), and Cardinal Law Group (CLG). In addition, he is the president of Vepachedu Educational Foundation, an educational 501(c) (3) corporation. For more information visit: www.linkedin.com/in/vepachedu; http://www.avvo.com/attorneys/60201-il-sreenivasarao-vepachedu-764535.html, and http://www.crm-ip.com/vepachedu.html. Contact: svepachedu@yahoo.com or rao.vepachedu@cardinal-ip.com.

[2] A critique of HR9 in Forbes Magazine: http://www.forbes.com/sites/econostats/2015/05/29/who-are-patent-trolls-and-what-will-h-r-9-do-about-them/

[3] Borchard, Federal Declaratory Judgments Act, Yale Law School Yale Law School Legal Scholarship Repository, 1-1-1934: http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=4443&context=fss_papers

[4] A declaratory judgment is a binding judgment from a court defining the legal relationship between parties and their rights in the matter before the court. A declaratory judgment does not provide for any enforcement, however. In other words, it states the court’s authoritative opinion regarding the exact nature of the legal matter without requiring the parties to do anything.

The Federal Rules of Civil Procedure (Rule 57) and Title 28 of the U.S. Code govern declaratory judgments in federal court. For an example from case law, see Roe v. Wade 410 US 113 (1973).

A new standard for establishing declaratory judgment jurisdiction (the “all the circumstances” standard) handed down by the Supreme Court in MedImmune (MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007) (quoting Md. Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273 (1941))) and embraced by the Federal Circuit (SanDisk, Corp. v. STMicroelectronics, Inc., 480 F.3d 1372 (Fed. Cir. 2007)). This new standard dramatically lowered the threshold for such jurisdiction so that most patent demand letters, if drafted poorly, will create declaratory judgment jurisdiction.

The safest course of action for patent owners wishing to send a demand letter is to first file an infringement suit but not formally serve the alleged infringer (See Remington Arms Co., Inc. v. Alliant Techsystems, Inc., No. 1:03CV1051, 2004 WL 444574, at *3 (M.D.N.C. Feb. 25, 2004).

[5] 35 U.S.C. 261 Ownership; assignment.

Subject to the provisions of this title, patents shall have the attributes of personal property. Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing. The applicant, patentee, or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part of the United States.

35 U.S.C. 117: Death or incapacity of inventor. Legal representatives of deceased inventors and of those under legal incapacity may make application for patent upon compliance with the requirements and on the same terms and conditions applicable to the inventor.

[6] A patent troll is an individual or an organization that purchases and holds patents for unscrupulous purposes such as stifling competition or launching patent infringement suits. A patent troll’s business is acquiring patents with an intention to sue for patent infringement. They do not innovate by doing research and development, but they acquire patents legitimately by purchasing or licensing the patents of interest or value from inventors who have no interest or capability in developing and marketing the invention. Patent trolls have branched out from suing large businesses to suing everyone from retailers to grocers to individual software developers. Patent trolls rely on the enormous cost of defending against patent infringement to obtain settlements, taking advantage of legal rules intended to protect research investments as their means. The troll activity is high in computer and software industry.

Patent trolls usually obtain patents from a number of sources and collect them in volume. Most patents come from the auctions of bankrupt companies, from companies who don’t intend to act on a technology and from individuals without the funds to develop their inventions. The patent system vulnerable to abuse because patents frequently describe a general concept rather than a product or process and may not define what it protects in adequately precise terms. In 2011, for example, a patent assertion entity called Innovation threatened to sue 8,000 hotels, stores and coffee shops in the United States, claiming that the use of Wi-Fi infringed upon 17 of its patents. The company claimed that although household Wi-Fi also constituted an infringement, they would not sue individual homes. Many of the businesses paid settlement fees ranging from $2,300 to $5,000. Similar alleged patent infringement cases have targeted the aggregation of news stories into podcasts, sending photocopies to email, and using shopping carts on a website.

[7] Introduced: Feb 5, 2015; Status: Reported by Committee on Jun 11, 2015; Sponsor: Bob Goodlatte, Representative for Virginia’s 6th congressional district, https://www.govtrack.us/congress/bills/114/hr9#

https://www.govtrack.us/congress/bills/114/hr9/text:

Sections affected by the HR9 are Sections 281A, 285, 290, 296, 299, 316(a), 326(a) of Chapter 29 of title 35, section 106 of Chapter 10 of title 35, and Sections 365(n)(2), 1522 of title 11.

https://trackbill.com/bill/US/114/HR9/innovation-act;

[8] A non-practicing entity (NPE) is anyone who holds a patent for a product or process but has no intentions of developing it. NPEs include universities, research organizations and individual inventors lacking the resources to further develop something they have designed or created. the Federal Trade Commission (FTC) uses the term patent assertion entities (PAEs) to distinguish patent trolls from non-practicing entities that have different motives.

[9] “We’ve been Googled – H.R.9, The Innovation Act; Loser-Pay Kills Inventors, Feeds Trolls and Enriches Large Corporations;” Collecting Loser-Pay fees from Investors Ends Investment in Patent Related Startups; Shrinking Post Grant Review (PGR) Estoppel Perpetuates Litigation; Enhanced Pleadings and Limited Discovery Increase Risk and Cost; Patent Term Adjustment Devalues Patents: http://www.independentinventorsofamerica.org/wp-content/uploads/2015/02/Googled-HR9-V2-6-1.pdf;

[10]CONTACT CONGRESS TO SUPPORT A STRONG PATENT SYSTEM: http://www.savetheinventor.com/

[11]Visit: http://www.house.gov/representatives/find/ and enter your zip code. You will then find a link enabling you to email your letter. See below for a template letter.

[12]Template Letter:

Dear [[e.g. Ms. Schakowsky]],
I am a resident of [[e.g. Evanston, IL]] and a constituent of your congressional district. [[I voted for you in the last election.]] I am writing to ask you to vote NO on HR 9.
As a [[patent attorney/agent/professional]], I rely on the existence of a marketplace that encourages both obtaining and enforcing patents. If HR 9 is passed, I fear that this marketplace will weaken and my livelihood will be compromised.
Please take time to read the bill and see that HR 9 is not about promoting, but about stifling innovation.
HR 9 would enable large high-tech corporations to enforce their patents, but make it riskier and more expensive for everyone else to enforce their intellectual property rights. Passing HR 9 will lead to the unintended consequence of reducing the value of U.S. Patents – such reduced value will result in less innovation, fewer start-ups, fewer new jobs, and a significant reduction in the solo inventors whom pursue patent protection. The innovations of such solo inventors have offered some of the greatest technological advances in history. A vote in favor of HR 9 is a vote to effectively slow technological innovation as we know it.
Research will unveil that many patent experts, including former USPTO Director David Kappos, are opposed to HR 9, stating that it is an over-reaction to the “patent troll” issue. There are alternatives to HR 9 – specifically, other bills coming up for consideration that address the issue of “patent trolls” but do not weaken and devalue US Patents.
For these reasons, please vote NO on HR 9.
Please do not hesitate to contact me if you have any questions or concerns.
Sincerely,
[[your name]]

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