Patent Reform: The “Innovation Act” will stifle innovation, hurting inventors, start ups and small businesses.

The Congressional Testimony of Mr. Christopher Banys

as Submitted November 2013

 

The Goodlatte “Innovation Act,” while well-intentioned, will bar the courthouse doors to individual inventors and small companies leaving only large PAE’s and Corporations the practical ability to enforce their rights.

 

The Goodlatte “Innovation Act” makes radical and unnecessary changes to the Patent Act that undermine the very purpose of the Patent System as it has existed for over 200 years and will close the courthouse doors to all but the most well-funded, corporate litigants.

 

Strong Patents Are Essential To The American Way 

 

We should begin with the basic understanding that patents, provided for by the Framers of the Constitution themselves, have served this nation for centuries and helped make America the innovative envy of the world. Our patent system enabled Edison and the Wright Brothers to protect their inventions, and provided the security and incentive to invent by ensuring that, for a limited time, no one would steal their inventions or free-ride on their work without facing justice in court.

 

Importantly, unlike real property, which can be physically defended if necessary, an inventor has only the right granted in his patent to protect him against free-riders and thieves. The great bargain our nation has long struck with inventors is that, in exchange for publishing the details of their invention for the world to see, the nation provides the inventor with a patent right to exclude others from performing her invention without her permission.

 

Millions of U.S. patents have issued since the founding of this great Republic, for inventions great and small. In each patent is a guarantee to the inventor that, in exchange for publishing the invention, he will have the sole right to use the invention and can take violator to court.

 

It will come as no surprise that, like the turn of the 20th century, the last 20 years saw an explosion of new technology – this time focused largely in software and computer hardware. Life in the early 1990s – without Internet, home computers or cell phones – seems almost as antiquated as the Old West. In every instance, it was inventors who made possible the technological improvements we enjoy today.

 

Equally unsurprising is that the skills required to break with convention and come up with something radically new and innovative are most often borne by individuals outside the norm. Most inventive genius comes from inventors who – while brilliant in their fields – are unskilled in the unrelated areas of business deals, manufacturing, marketing and distribution. Many hi-tech inventors are lovingly referred to as “geeks” – with amazing minds but sometimes lacking the social skills needed for success in the business world.

 

Two salient points come from these observations: First, inventors create new technology, but sharper businessmen often take over the manufacturing part after the inventor has done her work. Second, much of the revolutionary innovation – one of the hallmarks of America – is done by individuals, not major corporations. Be they college professors or long-suffering dreamers and computer hackers, some of the very best innovations begin with the little guy. In a very real sense, this is the story of Silicon Valley.

 

Is it any wonder, then, that so many patents issued in the computer-science field in the 1990s and 2000s? During the Dot-Com boom, literally thousands of companies sprang up in the high tech space, many with great ideas but poor business plans. Importantly, the contributions these great innovators made to technology are not lessened by the fact that their start-ups failed – other more successful businesses were able to stand on their shoulders.

 

When these start-up companies went bust, many of their inventors went on with their patents intact. A few companies rose above the fray through amazing business skill, good timing and luck – and went on to become some of the most profitable corporations in history. Many of these companies now back the “Innovation Act.”

 

A Look At Corporate Infringement

 

Inventing is not for the faint of heart. An inventor has to be willing to risk years of toil in obscurity for the chance at a breakthrough. She then risks her finances spending tens of thousands of dollars and many years prosecuting her patent in the U.S. Patent and Trademark Office (“PTO”) where the invention is scrutinized by a technical expert before being issued. If the inventor is fortunate, she will ultimately obtain a U.S. Patent – a landmark event for most small inventors.

 

Unfortunately, success does not follow immediately. First, the inventor must find either the capital or a partner to commercialize the invention. This can be extremely daunting for an individual. The unequal bargaining power between an individual and a major corporation leads to all manner of advantage taking by the company – even with a strong patent in the inventor’s hands.

 

And the inventor must police the patent – if others are allowed to free-ride, no one will invest in her invention – they will simply use her invention without compensation. But that means litigation.

 

A patent owner considering litigation faces a daunting task. Patent litigation takes years and costs millions – for plaintiffs and defendants alike. The American Invents Act created new procedures in the PTO that force the inventor back into the patent office to fight off invalidity challenges before the case is heard in court. Importantly, while Congress has created a “faster/cheaper” option for corporate defendants to try to destroy asserted patents, it has done nothing to create a faster and cheaper process for meritorious inventors to stop infringers.

 

In fact the opposite is true – defendants have more options than ever, but there is precious little an inventor can do to quickly and cheaply resolve a case of clear infringement.

 

When a major company releases a new product on the market, it is literally filled with innovation. Many of the inventions contained in a new phone or a new “app” were conceived by the company itself. Many more were conceived by others – and often those inventions are protected by patents.

 

The question is, what is a company to do when it wants to release a product that it either knows, or at least ought to suspect, contains inventions owned by others and protected by patents? Well, patents are public, and they are published on the Patent and Trademark Office’s website for all to see. All major product manufacturers employ smart, capable in-house counsel with patent expertise. The PTO database is searchable. But do any major manufacturers search the patent database to see if their new product will infringe another inventors’ patent before they release the product? Do they reach out the inventor to see if the company can obtain a license?

 

The answer is almost always no. Instead, major manufacturers simply release their products on the marketplace – other inventors’ patents notwithstanding. Simple business principles motivate this behavior. First, many inventors will choose not to enforce their rights. Often, in my experience, small companies are afraid to enforce their patents against large infringers for fear of business retribution – even in cases where the larger company actively stole the technology. Only where a startup faces bankruptcy in the face of infringement will it bring suit. Likewise with individual inventors: They too have a difficult time finding counsel willing to take their case on contingent fee.

 

Patent litigation is extremely expensive – a financial burden that falls much harder on individual inventors and small startups – the very engine of innovation – than it does on the major corporations who complain so loudly in Washington. Time to trial is too long, expert witnesses are expensive, discovery grows more cumbersome and litigious – not less – every time a well- intentioned body limits discovery in a way that encourages corporate infringers to hide their confidential technical information from the inventor’s view.

 

The Rise Of PAEs

 

These costs drive small companies and individual inventors to sell their patents to Patent Assertion Entities (“PAEs”), rather than bring suit in their own name.

 

Just as they are not often businessmen, inventors are seldom professional litigators. Indeed, the PAE phenomenon is driven by the very fact that patent litigation is so expensive and uncertain that few small inventors have the stomach and the capital to see it through on their own.

 

PAEs come in all shapes and sizes. Some of the largest are formed by the very corporations backing this bill, in order to bring patent litigation against their rivals – the very same tactics they decry when suits are brought against them.

 

Other PAEs specialize in helping inventors navigate the court system to get justice against infringers who free-ride on inventor’s patents. Still others are actually owned by the inventors themselves and serve as a vehicle to license the patents, if possible, and litigate, if necessary. There is nothing inherently evil about a PAE.

 

Dealing With Frivolous Lawsuits

 

Much ado has been made of frivolous lawsuits and “demand letters.” To me, the demand letter issue seems overblown. While I almost never serve a demand letter in a patent case, I understand that some other law firms make it a standard practice for their clients.

 

A demand letter is just that, a letter. A written communication. It carries no weight or legal authority outside of whatever the reader may wish to give it. In my experience, clients of mine who come to me after they have sent out letters seeking a license from companies that appear to be infringing their patent rights are most often greeted with silence. For me, the biggest reason not to send them is that they seldom accomplish much. The fact that there has been such a hullaballoo about demand letters lately feels to me like an issue that has been created for the cameras.

 

In practice, if a company receives a truly frivolous demand letter, the overwhelming majority of lawyers would recommend ignoring the letter altogether. It seems to me that a recycle bin could resolve the issue of frivolous demand letters far more effectively than a bill from Congress – and without the unintended negative consequences a new patent bill will occasion.

 

Frivolous litigation is another matter – one that cannot be ignored. But here again, a measure of caution is needed. Arthur Miller famously said (after hearing lawyers complain for months): “a frivolous lawsuit is any case brought against your client and litigation abuse is anything the opposing lawyer is doing.” There is much wisdom in that.

 

The courts already have powerful tools at their disposal to combat truly frivolous litigation tactics – and are in the best position to determine when a case is frivolous and when it is not. There are two cases pending right now before the U.S. Supreme Court that will likely increase the frequency with which fees are awarded in patent cases.

 

Extreme caution is called for whenever Congress is called to intervene in the court system and tip the balance in favor of one party over the other. Here, there are two sides to the “frivolous litigation” story, and only one side – that of the accused infringer – is ever heard in Congress. In truth, all cases exist on a spectrum from the strongest case ever, to the most ridiculous. The overwhelming majority fall somewhere in the middle. Few are frivolous, and for good reason – no contingent fee lawyer will risk his own money pushing a bad case (he won’t be in business for long). And few lawyers want the reputational risk of pushing ridiculous cases. Those few that get reported are sensational precisely because they are outliers.

 

The proper course, in my view, is for Congress to proceed with great caution. Rebranding, through legislation, meritorious cases that may not ultimately prevail as “frivolous” devalues patents generally, by creating more uncertainly and still less willingness for small inventors in particular to stand up for their rights.

 

The courts are better situated to deal with the problem of frivolous lawsuits, and, given public statements by the Federal Circuit and the Supreme Court’s willingness to look at the issue, Congress should at least wait to see the judicial response before taking action that tips the playing field further against small inventors.

 

The Goodlatte Bill

 

If this bill passes as drafted, American inventors, like Edison, the Wright Brothers and their modern-day equivalents will be unable to enforce their rights. Without the ability to enforce their rights, individual inventors and small start-ups will have no recourse when a major corporation takes their inventions without just compensation. Ultimately, this bill undermines the very protections and incentives for inventors that have helped make America the great engine of innovation in the world.

 

This Bill threatens to breach the contract our nation made with the inventors who obtained valid patents by making enforcement so difficult, expensive and risky, that the patents are hardly worth enforcing at all.

 

Some Negative Repercussions From The Bill

 

The Bill would enact an un-American “loser pays” system, like that in Europe, that will all but bar the courthouse door to individual inventors and startups. Not every case that loses is “frivolous.” Large companies can afford loser pays – individuals and small companies risk bankruptcy with every decision by the judge and jury. Regardless of how strong his/her case, individual inventors and small startups will be afraid to assert their rights for fear of financial ruin if they do not prevail (and adding to this fear is the increased complexity and cost of litigation that the bill would create); corporations would have much less to worry about.

 

Under the Bill, the plaintiff must pay for discovery, including attorney fees, outside of “core discovery.” “Core discovery” is extremely limited (and likely insufficient in many cases); many corporations have begun using email to communicate important technical changes – keeping few records elsewhere – and these new rules would mean that an individual inventor would have no real chance of seeing this important evidence – she couldn’t afford to pay the defendants’ big- firm fees to get it.

 

The Bill creates dangerous perverse incentives for declaratory judgment actions. Under the Declaratory Judgment Act, a party can file a patent suit to obtain a declaration that a patent is invalid and/or not infringed by the party. In such cases, the inventor is the party being sued. Courts have allowed such cases to proceed where the patentee has done little more than send a letter offering a license to a potentially infringing party. Under the Bill, “loser pays” applies to these actions, creating unfair risk to patentees who never even file suit. Merely seeking a license outside of court could land a small inventor in a declaratory lawsuit with financial ruin hanging in the balance. In addition, the Bill does not require any heightened pleading requirements for plaintiffs who file a declaratory judgment action for patent invalidity or non-infringement.

 

The Bill places arbitrary and dramatic limits on discovery. It would essentially repeal the Federal Rules of Civil Procedure for patent cases, and replace them with limits so severe, many cases that could have been proven before will be unwinnable after – and to make matters worse, inventors will not always know ahead of time if the “core discovery” will be sufficient, leading to more uncertainty up-front and more risk downstream. Defendants would have a powerful incentive to claim that important documents and communications are not “core” leading to more litigation – not less.

 

The Bill eliminates notice pleading and Form 18. Elimination of notice pleading forces the courts to place form over substance. It would require detailed claim charts in the complaint, leading to new litigation battles before the case even gets off the ground – and before the facts are even in. Many meritorious cases risk dismissal merely because the defendant keeps evidence of its infringement a secret. This is why the courts abandoned fact pleading years ago. Making matters worse, under the Bill, defendants do not have to provide detailed invalidity contentions or even non-infringement contentions in their answers. This is one-sided and unfair and will lead to more – not less litigation costs.

 

The Bill creates unequal disclosure obligations. Individuals and small companies must list everyone with any financial interest in the litigation and put their own financial health at risk; corporations get a free pass.

 

The Bill stays all cases until claim construction is complete. The courts should be left to determine how to mange their own dockets. Long experience has shown that claim construction is most helpful when conducted in the middle of the case, not at the beginning. Placing it at the outset advantages defendants, who (with full knowledge of their own confidential information) craft their arguments to avoid infringement while depriving inventors of technical discovery.

 

The customer-suit exception gives fertile ground to major manufacturers to claim that they are in fact the “customer” of their suppliers, forcing inventors to proceed against smaller, usually foreign suppliers first – raising costs and reducing the likelihood that the inventor can collect a fair recovery. This dramatically undermines the purpose of the Patent Act – to allow the inventor to stop all infringers – not just the component makers. At a minimum, the Bill should be redrafted to exclude any manufacturer from the stay.

 

A Better Solution

 

First and foremost, Congress just recently passed a historic overhaul of the patent system. The effects of that overhaul will not be fully known for several more years. Congress should be very cautious about enacting still more changes until the effects of the America Invents Act are known. To act rashly is to risk overcorrection – to the detriment of our entire system of innovation.

 

Second, and equally important, is to fully fund the Patent and Trademark Office. If there is a concern about patents in America, the solution is to make sure the experts at the PTO have the tools they need to make sure that only quality patents issue in the first place. A better PTO will go very far towards addressing whatever problems the current system confronts.

 

Third, Congress should respect the courts and allow the Supreme Court to address the issue of fee shifting in truly frivolous cases, before rushing to pass an act with sweeping and likely detrimental effects on most inventors in America.

 

Fourth, if Congress must enact changes to the patent landscape, it should do so in the fairest way possible. Automatic fee shifting disproportionately affects individual inventors. Many cases that are objectively reasonable at the start do not end with victory for the plaintiff in large part due to the uncertainties of patent litigation. Large corporations can easily afford fee shifting. So too can many PAEs. Individual inventors – even those with very strong cases – will be afraid to bring cases if financial ruin lies behind every decision by the judge and jury. With their patents too hard to enforce, small inventors will be disincentivized to invent at all.

 

Finally, much of the cost of patent litigation is driven by the lengthy nature of the cases, and the side disputes that inevitably flow from the process. Unscrupulous large law firms can increase their billing by dragging cases out and engaging in needless stonewalling – all the while blaming plaintiffs. Congress should focus on legislation that will speed resolution of cases fairly, not bills that shift the financial burden of enforcing patent rights off of rich corporations and on to the backs of individual inventors.

 

Rather than making inventors pay for discovery, Congress should encourage the courts to resolve patent cases with 18 months, as it did with the PTO in the America Invents Act. Speedy trial is the best defense against high costs, frivolous litigation and unfair patent infringements.

 

Rather than applying one-sided solutions, like detailed fact pleading for inventors, but not for corporations, Congress should focus on fair solutions. Notice of infringement theories should indeed come early, as most courts now require – but it is unfair for defendants to demand detailed pleadings before technical discovery, when often the documents needed to prove a case are held confidential by defendants. And if inventors must notify accused infringers of their exact infringement theories, defendants – who have ready access to their own technical information – should be equally required to provide detailed non-infringement and invalidity theories in their responsive pleadings. That type of equality may indeed speed up resolution and, if properly implemented, could in fact reduce costs and litigation burdens.

 

In sum, the Goodlatte Bill, as drafted, will do more harm than good. The best course for Congress is to proceed lightly, and with fairness in mind for small inventors. The future of American innovation hangs precariously in the balance.

 

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Christopher Banys B&WAbout Mr. Banys

Christopher D. Banys is a trial lawyer who has earned a strong reputation for representing individual inventors and small, inventor-owned companies in patent-infringement suits against major corporate infringers across the country. Mr. Banys serves on the front lines of patent disputes every day, in a wide array of technical fields – everything from high-tech computer software, mobile technology, and medical devices to tennis shoes.

 

Mr. Banys founded Banys, P.C., a Palo Alto, California law firm dedicated to helping individual inventors and start-up companies to protect their inventions from infringement by major corporations. Mr. Banys has become well known for helping inventors stand up to patent infringers, regardless of their size, and has served as lead trial lawyer in scores of patent- infringement cases around the country. The National Trial Lawyers Association named Mr. Banys among the Top 100 Trial Lawyers in America in 2012 & 2013. The Recorder named Mr. Banys a “Lawyer On The Fast Track” in 2012, one of just 50 lawyers in California to receive that honor. And the SuperLawyers publication named Mr. Banys a Rising Star in 2011, 2012 and again in 2013.

 

Mr. Banys graduated with high honors and high distinction in general scholarship from the University of California, Berkeley. He attended law school at Boston University, where he was a Dean’s Scholar. And Mr. Banys finished law school at St. Catherine’s College, Oxford University in the United Kingdom, where he studied comparative intellectual property law and jurisprudence.

 

If you have further questions, contact Mr. Banys

 

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