Patent Tug-of-War Prompts Congress to Catch Up to Courts

U.S. lawmakers, influenced by companies including Cisco Systems Inc. (CSCO), Eli Lilly & Co. (LLY) and Qualcomm Inc., are considering the second set of patent-law changes in three years as the courts try to race ahead of Congress.

The goal is to rein in entities that buy patents and demand royalties from as many companies as possible. Often derided as “trolls,” such firms filed 19 percent of all patent lawsuits from 2007 to 2011, the Government Accountability Office found.

Finding a balance among protecting products from knockoff competition, rewarding inventors for making their ideas public and limiting nuisance suits has been debated for more than 200 years, even more so now that some lawsuits are targeting users of ubiquitous technology like e-mail and Wi-Fi.

“There’s just a lot of pressure being put on Congress and the courts to address the abusive practices,” said Tim Molino, head of government relations for BSA - the Software Alliance, based in Washington, whose members include Microsoft (MSFT) Corp. and Oracle Corp. (ORCL) “Both sides are trying to assert their authority where they can to move the dial.”

The U.S. Supreme Court is considering when to penalize patent owners for filing questionable claims, while the federal courts’ administrator has proposed disclosure rules that may lessen litigation costs.

The legislation Congress is considering would do some of the same things -- make patent companies pay the other side’s legal fees if they lose and tell the courts to change their discovery rules.

Three-Way Split

“You do not need Congress to mandate things courts are already willing to consider,” Circuit Judge Kathleen O’Malley of the U.S. Court of Appeals for the Federal Circuit, which handles all patent appeals, said in a Sept. 17 speech to the Intellectual Property Owners Association.

The struggle between the courts and Congress has divided companies along the lines of who gets sued more often.

Google Inc. (GOOG), Cisco and other technology companies in the Coalition for Patent Fairness back legislation introduced Oct. 23 by Representative Bob Goodlatte, a Virginia Republican who heads the House Judiciary Committee. It would allow collection of legal fees from licensing companies that lose at trial and require they provide more details about patents and how they were infringed.

Companies like Qualcomm Inc. (QCOM) that own many patents and make money from licensing them say weakening patents would hurt their business. The Qualcomm-backed Innovation Alliance seeks limited congressional action, and is pushing lawmakers to stop diverting money from the U.S. Patent and Trademark Office, which is funded entirely by user fees.

The Coalition for 21st Century Patent Reform -- made up of General Electric, Johnson & Johnson (JNJ), Eli Lilly and other patent holders -- says the Goodlatte bill takes some power from courts.

Venue Struggle

Industries reliant on patent protection for revenue, which include technology companies, drugmakers, and manufacturers, had 3.9 million jobs and accounted for $763 billion, or 5.3 percent of gross domestic product, in 2010, according to a 2012 Commerce Department report.

Patent litigation is expensive. The cost of defending a patent suit through trial, not including damages, starts at about $650,000 and can reach several million dollars, an American Intellectual Property Lawyers Association study found.

A Senate Commerce subcommittee will hold a hearing Nov. 7 on the impact of royalty demand letters on small businesses, consumers and innovators.

Goodlatte said at an Oct. 29 hearing his bill is the bailiwick of Congress and “the Supreme Court has long recognized that the prescription of court procedure falls within the legislative function.”

2011 Law

Some companies say Congress is getting it wrong.

“You’ve got this incredibly powerful organized lobby that wants to kill innovation because it’s a threat to them,” said Loudon Owen, chairman of I4i LP, a Canadian designer of software for drug companies that won a $200 million verdict against Microsoft in 2011.

A wide-ranging patent law passed in 2011, called the America Invents Act, started as a push by companies like Microsoft to make it easier to challenge patents and limit damage awards. Those provisions never made it in the final law - - because the courts addressed the issues.

Microsoft curtailed its push for legislation after winning three court rulings between 2007 and 2011 that limited damages in patent suits.

The public debate “leads to legislative changes where legislative change is needed,” said Horacio Gutierrez, Microsoft’s head of intellectual property. “It crystalizes issues that can be resolved by courts in a faster and more effective way.”

Sledgehammer, Scalpel

Companies are spending millions to influence lawmakers. In 2011, three groups alone spent $2.4 million lobbying on the America Invents Act. So far this year, they’ve spent more than $1.1 million, according to Senate disclosure records. That doesn’t include campaign contributions or media buys.

The Coalition for Patent Fairness and the National Retail Federation, a Washington trade group, paid for a newspaper advertising campaign deriding “patent trolls” this year. Innovation Alliance responded with “Who’s Trolling Who,” saying “fringe abuses” are being used to weaken patent rights.

The Supreme Court announced Oct. 1 it would hear two cases that would make it easier for targets of patent suits to collect attorneys’ fees, which could deter groundless lawsuits.

The Federal Circuit is considering whether patent owners can block competitors from selling products based on a finding of infringement of a feature of a complex device -- such as a way to scroll through pages on a smartphone.

The courts are limited because “they only can deal with the facts of the cases and legal questions presented before them,” said Mark Chandler, general counsel for San Jose, California-based Cisco.

While Goodlatte is pushing his committee to vote on the proposal quickly, the companies’ split over certain segments may give the courts time to tackle the so-called trolls.

“In general, courts are always a better way to fix things than Congress,” said Ron Laurie, managing director of Inflexion Point Strategy, which counsels companies on intellectual property. “Congress uses a sledgehammer and courts use a scalpel.”

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net.

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net.

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.