[Ip-health] Patent reform inches onwards but poison pill could kill it

Claire Cassedy claire.cassedy at keionline.org
Fri Jun 26 11:27:51 PDT 2015


Patent reform inches onwards but poison pill could kill it

by Jeff John Roberts

June 5, 2015, 2:22 PM EDT

Patent trolls remain a plague for tech and retail. A reform bill just took
a step forward in the Senate—but it contains a major catch.

Congress took new steps this week to reform the country’s dysfunctional
patent system but the price of progress was high. Even as a Senate
committee approved measures to curb some of the worst abuses by so-called
patent trolls, it also gave the trolls an unexpected gift that will help
their business model.

All of this raises the stakes for the end game in this year’s bipartisan
patent reform push, which comes after a similar effort last year was
smothered unexpectedly by former Senate majority leader Harry Reid
(D-Nevada). According to people close to the issue, patent reform remains
possible, but this week’s Senate surprise as well as a tight political
clock could cause it to fail once again.
Tech and retailers take it to the trolls

The business of patent trolling is an ugly one. Shell firms, often owned by
lawyers and private equity, acquire old patents and then threaten
productive companies with expensive litigation until they pay for a
“technology” license they don’t need. The troll model has been wildly
successful thanks to a giant supply of suspect patents, and because of an
economic asymmetry that makes it cheap for trolls to attack but ruinously
expensive for defendants to fight them in court.

The trolls have filed thousands of lawsuits in recent years, and extracted
an untold number of quiet payments (troll settlements typically require
victims to stay mum) from a wide sector of the American economy: startups,
big banks, major retailers, and even mom-and-pop stores and coffee shops.

Tech companies have tried to fix the system for years, but keep coming up
short. This year, however, the prospects for patent reform improved thanks
to an unusually broad coalition that included not just the usual suspects
(Google, Facebook, et al.), but also main street outfits like Macy’s, JC
Penney, restaurants, and the National Retail Federation. Startups and small
businesses have also joined in through trade groups like Engine.

To strike at the trolls, the coalition landed on a series of measures
intended to undercut the economic incentives for patent trolling. These
include heightened pleading standards for legal complaints (existing rules
don’t require trolls to explain how their targets violate a patent) and
changes to the legal discovery process—under current discovery rules,
trolls can force companies to spend hundreds of hours in document searches
and executive depositions without even showing a serious case. Other
measures include stopping abusive “demand letters,” fee-shifting, and a
“real party in interest” rule that would force the trolls, who hide behind
trumped up tech-sounding names like “Innova,” to reveal who is bankrolling

Taken together, the proposed reforms would make patent trolling less of a
no-risk, high reward endeavor. But despite their seemingly commonsense
appeal, such reforms have foundered twice before. In 2011, President Obama
signed a patent reform bill known as the America Invents Act into law, but
the substance of it was largely gutted by the time it reached his desk. And
last year, a bill similar to the current offering sailed through the House
of Representatives, only to be killed at the 11th hour in the Senate by
Sen. Reid.

Currently, patent reform is still alive but on a knife edge. Supporters
this week were heartened by a 16-4 vote in the Senate Judiciary Committee
in favor of a reform bill, and by the role of Committee Chairman, Sen.
Chuck Grassley (R-Iowa), who, unlike his predecessor Reid, has proved a big
supporter of the measure. Meanwhile, the bill is still being championed by
the powerful, odd-bedfellows duo of Senators Charles Schumer (D-N.Y.) and
John Cornyn (R-Texas).

So far, so good. But the whole thing could unravel by July.

Pharma's Poison Pill

The pharmaceutical industry wields vast power in Washington and is
suspicious of patent reform. Unlike the junky software patents that are the
trolls’ stock in trade, pharma patents are often obtained only after
companies invest huge amounts of money in bio-chemistry research and
clinical trials. That’s why the pharma lobby will rush to stamp out any
measure that could weaken intellectual property.

The current slate of reforms—ending discovery abuse, heightened pleading
and so on—was designed to strike at trolls without affecting the pharma
industry. And all appeared to be going as planned until a recent event gave
the pharma industry, which had stayed on sidelines, the jitters.

That event came in the form of a challenge to a biotech patent, filed by
hedge-fund manager Kyle Bass, who hoped the challenge would spook the share
price of Jazz Pharmaceuticals JAZZ -2.38% , and allow him to profit from
shorting the stock. (In an ironic twist, Bass’s gambit involved teaming up
with Eric Spangenberg, whose previous act was as a notorious patent troll
who once bragged to the New York Times that he liked to “go thug” on patent

The Bass challenge does not appear to have dented Jazz’s stock, but just
the threat was enough for the pharma lobby to stick its very long nose into
the patent reform effort underway in Congress. The concession it asked was
an enormous one: The industry demanded that Congress effectively cripple
the process at the Patent Office where Bass had challenged the Jazz patent.

That process, known as inter partes review, is one of the few successes to
emerge from the America Invents Act of 2011. The process allows the public
a relatively quick way to ask officials at the Patent Office to take a
second look at patents that should not have been issued in the first place.
In its short existence, it has proved effective at weeding out some
notorious software patents (including a patent on all podcasts) that are
the troll industry’s favorite weapon.

But despite evidence from scholars that the process has invalidated a
relatively small number of patents, the pharma industry has persuaded
Grassley in the Senate to adopt an amendment that would effectively
sabotage the challenge system.

According to Krish Gupta, counsel for cloud storage giant EMC, the
amendment changes the evidence and pleading rules for the inter partes
review process. According to Gupta, this will make the challenge process
akin to full-blown patent litigation, and eliminate the incentive for
companies to use it. For companies like EMC, which has been a frequent
target of patent trolls, this would be a major setback.

In Gupta’s view, the pharmaceutical industry is overreacting to the Bass
incident, especially as there is little evidence that inter partes process
poses a serious threat to the industry’s patents. But its reaction may be
enough to sink the larger push for patent reform once again.
The end game

The price of pharma’s poison pill may be too high for the tech and retail
coalition, according to a person familiar with the legislation. After
seeing patent reform fail twice in five years, the coalition may prefer to
walk away than to grant a concession that would amount to giving away as
much as it gets, said the person who spoke on condition of anonymity.

This doesn’t mean a final deal is out of reach, of course. In the course of
this week’s Judiciary Committee hearing, several Senators suggested the
final language of the bill is up for debate, raising the prospect of a
carve-out to placate the pharmaceutical industry. But to get there will
still require patent reform supporters to run a gauntlet of procedural
measures, and it’s not clear they have time to do so.

As it stands, the reform measures must go to a vote before the full House
and Senate, and then members of both chambers will have to reconcile the
two versions before voting again on a final bill. President Obama, who is a
longtime supporter of patent reform, is likely to sign a bill if it ever
reaches his desk.

In theory, patent reform could pass by August, but that leaves lots of time
for opponents, who also include trial lawyers and Sen. Dick Durbin
(D-Ill.), to find new ways to stymie the measure. If they are able to delay
the measure beyond late recess, the political window for action will likely
close and the trolls will be able to run free until at least 2017.

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