Tag Archives: innovation act

Weighing the Patent System

Here’s a brief excerpt of an op-ed by Adam Mossoff that was published in The Washington Times:

As the push for legislation making broad and wide-ranging revisions to the patent system has stalled, its advocates have shifted tactics. They have carved out the provision in H.R. 9 (the tendentiously named “Innovation Act”) that revises the rules for how patent owners can bring lawsuits and have introduced it as its own bill: the VENUE Act. This bill is proffered as a solution to the widely condemned practice of an unduly large number of patent lawsuits filed in a federal district court located in Marshall, Texas, a small town in eastern Texas. The problem is that this bill, just like the Innovation Act from which it was born, is neither balanced nor fair. It is time to directly confront the one-sided, biased rhetoric of the entire “reform” narrative that has gone almost unchecked inside the Beltway for several years.

To read the rest of this op-ed, please visit The Washington Times.

Changes to Patent Venue Rules Risk Collateral Damage to Innovators

Advocates for changing the patent venue rules, which dictate where patent owners can sue alleged infringers, have been arguing that their remedy will cure the supposed disease of abusive “trolls” filing suit after suit in the Eastern District of Texas. This is certainly true, but it’s only true in the sense that cyanide cures the common cold. What these advocates don’t mention is that their proposed changes will weaken patent rights across the board by severely limiting where all patent owners—even honest patentees that no one thinks are “trolls”—can sue for infringement. Instead of acknowledging the broad collateral damage their changes would cause to all patent owners, venue revision advocates invoke the talismanic “troll” narrative and hope that nobody will look closely at the details. The problem with their take on venue revision is that it’s neither fair nor balanced, and it continues the disheartening trend of equating “reform” with taking more sticks out every patent owner’s bundle of rights.

Those pushing for venue revision are working on two fronts, one judicial and the other legislative. On the judicial side, advocates have injected themselves into the TC Heartland case currently before the Federal Circuit. Though it has no direct connection to the Eastern District of Texas, advocates see it as a chance to shut plaintiffs out of that venue. Their argument in that case is so broad that it would drastically restrict where all patentees can sue for infringement—even making it impossible to sue infringing foreign defendants. Yet they don’t mention this collateral damage as they sell the “troll” narrative. On the legislative side, advocates have gotten behind the VENUE Act (S.2733), introduced in the Senate last Thursday. This bill leaves open a few more venues than TC Heartland, though it still significantly limits where all patent owners can sue. Advocates here also repeat the “troll” mantra instead of offering a single reason why it’s fair to change the rules for everyone else.

With both TC Heartland and the VENUE Act, venue revision advocates want to change the meaning of one word: “resides.” The specific patent venue statute, found in Section 1400(b) of Title 28, provides that patent infringement suits may be brought either (1) “in the judicial district where the defendant resides” or (2) “where the defendant has committed acts of infringement and has a regular and established place of business.” On its face, this seems fairly limited, but the key is the definition of the word “resides.” The general venue statute, found in Section 1391(c)(2) of Title 28, defines residency broadly: Any juridical entity, such as a corporation, “shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court’s personal jurisdiction with respect to the civil action in question.” Taken together, these venue statutes mean that patent owners can sue juridical entities for infringement anywhere the court has personal jurisdiction over the defendant.

The plaintiff in TC Heartland is Kraft Foods, a large manufacturer incorporated in Delaware and headquartered in Illinois that runs facilities and sells products in Delaware. The defendant is TC Heartland, a large manufacturer incorporated and headquartered in Indiana. TC Heartland manufactured the allegedly-infringing products in Indiana and then knowingly shipped a large number of them directly into Delaware. Kraft Foods sued TC Heartland in Delaware on the theory that these shipments established personal jurisdiction—and thus venue—in that district. TC Heartland argued that venue was improper in Delaware, but the district court rejected that argument (see here and here). TC Heartland has now petitioned the Federal Circuit for a writ of mandamus, arguing that the broad definition of “reside” in Section 1391(c)(2) does not apply to the word “resides” in Section 1400(b). On this reading, venue would not lie in Delaware simply because TC Heartland did business there.

TC Heartland mentions in passing that its narrow read of Section 1400(b) is favorable as a policy matter because it would prevent venue shopping “abuses,” such as those allegedly occurring in the Eastern District of Texas. Noticeably, TC Heartland doesn’t suggest any policy reasons why Kraft Foods should not be permitted to bring an infringement suit in Delaware, and neither do any of the amici supporting TC Heartland. The amicus brief by the Electronic Frontier Foundation (EFF) et al. argues that Congress could not have intended “to permit venue in just about any court of the patent owner’s choosing.” But why is this hard to believe? The rule generally for all juridical entities is that they can be sued in any district where they chose to do business over matters relating to that business. This rule has long been regarded as perfectly fair and reasonable since these entities get both the benefits and the burdens of the law wherever they do business.

The EFF brief goes on for pages bemoaning the perceived ills of forum shopping in the Eastern District of Texas without once explaining the relevancy to Kraft Foods. It asks the Federal Circuit to “restore balance in patent litigation,” but its vision of “balance” fails to account for the myriad honest patent owners like Kraft Foods that nobody considers to be “trolls.” The same holds true for the amicus brief filed by Google et al. that discusses the “harm forum shopping causes” without elucidating how it has anything to do with Kraft Foods. Worse still, the position being urged by these amici would leave no place for patent owners to sue foreign defendants. If the residency definitions in Section 1391(c) don’t apply to Section 1400(b), as they argue, then a foreign defendant that doesn’t reside or have a regular place of business in the United States can never be sued for patent infringement—an absurd result. But rather than acknowledge this collateral damage, the amici simply sweep it under the rug.

The simple fact is that there’s nothing untoward about Kraft Foods filing suit in Delaware. That’s where TC Heartland purposefully directed its conduct when it knowingly shipped the allegedly-infringing products there. It’s quite telling that venue revision advocates are using TC Heartland as a platform for changing the rules generally when they can’t even explain why the rules should be changed in that very case. And this is the problem: If there’s no good reason for keeping Kraft Foods out of Delaware, then they shouldn’t be advocating for changes that would do just that. Keeping patent owners from suing in the Eastern District of Texas is no reason to keep Kraft Foods out of Delaware, and it’s certainly no reason to make it impossible for all patent owners to sue foreign-based defendants that infringe in the United States. Advocates of venue revision tacitly admit as much when they say nothing about this collateral damage. This isn’t fair and balanced; it’s another huge turn of the anti-patent ratchet disguised as “reform.”

The same is true with the VENUE Act, which copies almost verbatim the venue provisions of the Innovation Act. This bill would also severely restrict where all patent owners can sue by making it so that a defendant doesn’t “reside” wherever a district court has personal jurisdiction arising from its allegedly-infringing conduct. To its credit, the VENUE Act does include new provisions allowing suit where an inventor conducted R&D that led to the application for the patent at issue. It also allows suit wherever either party “has a regular and established physical facility” and has engaged in R&D of the invention at issue, “manufactured a tangible product” that embodies that invention, or “implemented a manufacturing process for a tangible good” in which the claimed process is embodied. Furthermore, the bill makes the same venue rules applicable to patent owners suing for infringement and accused infringers filing for a declaratory judgment, and it solves the problem of foreign-based defendants by stating that the residency definition in Section 1391(c)(3) applies in that situation.

While the proposed changes in the VENUE Act aren’t as severe as those sought by venue revision advocates in TC Heartland, they nevertheless take numerous venues off of the table for patentees and accused infringers alike. But rather than acknowlede these wide-sweeping changes and offer reasons for implementing them, advocates of the VENUE Act simply harp on the narrative of “trolls” in Texas. For example, Julie Samuels at Engine argues that the “current situation in the Eastern District of Texas makes it exceedingly difficult for defendants” to enforce their rights and that we need to “level the playing field.” Likewise, Elliot Harmon at the EFF Blog suggests that the VENUE Act will “finally address the egregious forum shopping that dominates patent litigation” and “bring a modicum of fairness to a broken patent system.” Yet neither Samuels nor Harmon explains why we should change the rules for all patent owners and accused infringers—especially the ones that aren’t forum shopping in Texas.

The VENUE Act would simply take a system that is perceived to favor plaintiffs and replace it with one that definitely favors defendants. For instance, an alleged infringer with continuous and systematic contacts in the Eastern District of Virginia can currently be sued there, but the VENUE Act would take away this option since it’s based on mere general jurisdiction. Likewise, the current venue rules allow suits anywhere the court has specific jurisdiction over the defendant—potentially in every venue for a nationwide enterprise—yet the VENUE Act would make dozens of these venues improper. Furthermore, patentees can now bring suits against multiple defendants in a single forum, saving time and money for all involved, but the VENUE Act would make this possibility much less likely to occur.

The “troll” narrative employed by venue revision advocates may sound appealing on the surface, but it quickly becomes clear that they either haven’t considered or don’t care about how their proposed changes would affect everyone else. If we’re going to talk about abusive litigation practices in need of revision, we should talk about where they’re occurring across the entire patent system. This discussion should include the practices of both patent owners and alleged infringers, and we should directly confront the systemic collateral damage that any proposed changes would cause. As it stands, there’s little hope that the current myopic focus on “trolls” will lead to any true reform that’s fair and balanced for everyone.

No Consensus That Broad Patent ‘Reform’ is Necessary or Helpful

Here’s a brief excerpt of an op-ed by Adam Mossoff & Devlin Hartline that was published in The Hill:

Two recent op-eds published in The Hill argue that broad patent legislation—misleadingly labeled “reform”—is needed because the U.S. patent system is fundamentally broken. In the first, Timothy Lee contends that opponents “cannot with a straight face” argue that we don’t need wide-sweeping changes to our patent system. In the second, Michele Boldrin and David K. Levine maintain that there is “consensus among academic researchers” that the system is “failing.”

Both op-eds suggest that there are no principled reasons, whether legal or economic, to object to the overhaul of the patent system included in the Innovation Act. Both op-eds are wrong.

To read the rest of this op-ed, please visit The Hill.

It’s Time to Say “No” to Junk Science in the Patent Policy Debates

Last March, forty economists and law professors submitted a letter to Congress expressing “deep concerns with the many flawed, unreliable, or incomplete studies about the American patent system that have been provided to members of Congress.”  These concerns were confirmed again last week when Unified Patents released a report on patent litigation with the same kind of “highly exaggerated claims regarding patent trolls” that the professors were concerned about.

The Unified Patents report is another publication in a long line of “studies” that use absurdly expansive definitions of non-practicing entities (NPEs) or “patent trolls” to produce dramatic-sounding, inflated results. In this case, Unified Patents defines an NPE as a “Company which derives the majority of its total revenue from Patent Licensing activities.” Similar to past reports that have been repeatedly and consistently critiqued for being deeply flawed in both substance and methodology, this definition includes many individual inventors, universities, startups, small businesses, biotech companies, and countless other laudable innovators who are key drivers of the innovation economy in the U.S. It even includes venerable American inventors like Thomas Edison, Nikola Tesla, and Charles Goodyear, among many others. These are the people and companies Unified Patents is condemning as “patent trolls” and whom it is lobbying Congress to punish with patent legislation that would weaken their ability to obtain and to protect their innovation.

In sum, the core definition in Unified Patent’s report is so broad that it renders the results of its study completely uninteresting, unremarkable, and predictable – it’s like saying that 90% of people who sue over an auto accident own cars. Unfortunately, this report is not being touted so innocuously in D.C. at a moment when Congress is finally waking up to the realization that proposed bills like H.R. 9 (the so-called “Innovation Act”) will do more harm to the innovation economy than good.

At this late date, another junk science report hardly deserves yet another detailed analysis and critique. They didn’t care to heed previous critiques, so why expect that the proponents of this report would act with any more integrity now or in the future? In short, it is long past the time to simply say “no” to junk science reports like this.

Unintended Consequences of “Patent Reform”: The Customer Suit Exception

In the last two weeks, the House and Senate Judiciary Committees marked up wide-ranging patent legislation ostensibly aimed at combating frivolous litigation by so-called “patent trolls.” But while the stated purpose of the House and Senate bills—H.R. 9 (the “Innovation Act”) and S. 1137 (the “PATENT Act”), respectively—is to combat abusive litigation, a closer look at the actual language of the bills reveals broad provisions that go far beyond deterring frivolous lawsuits. This far-reaching language has raised concerns in the innovation industries that, instead of curbing ambulance-chasing patentees, Congress is preparing to fundamentally weaken the property rights of all inventors, emboldening patent infringers in the process.

The “customer suit exception” or “customer stay” provisions that appear in both bills are particularly troubling. These provisions direct courts to stay patent infringement suits against “retailers” and “end users” in favor of suits involving manufacturers higher up the supply chain. While the basic idea makes sense—we’ve all heard stories of coffee shops being sued for patent infringement because of the Wi-Fi routers they used—the provisions are drafted so broadly and inflexibly that they invite abuse and gamesmanship by infringers at the expense of legitimate patent owners.

Both the Innovation Act and the PATENT Act provide that “the court shall grant a motion to stay at least the portion of the action against a covered customer” that relates “to infringement of a patent involving a covered product or covered process” if certain conditions are met. The first condition in both bills is that the “covered manufacturer” must be a party to the same action or to a separate action “involving the same patent or patents” related to “the same covered product or covered process.” In other words, so long as the manufacturer is challenging the patentholder, the customer is off the hook.

The two main problems here are that (1) the definition of “covered customer” in both bills is exceedingly broad, such that almost any party can claim to be a “customer,” and (2) the provisions leave the courts no discretion in deciding whether to grant a stay, forcing them to halt proceedings even when it’s not warranted.

Both bills define “covered customer” as “a retailer or end user that is accused of infringing a patent or patents in dispute.” “Retailer,” in turn, is defined as “an entity that generates” its “revenues predominantly through the sale to the public of consumer goods and services,” and it explicitly excludes “an entity that manufactures” a “covered product or covered process” or “a relevant part thereof.” Thus, a “retailer” is a “customer,” but a “manufacturer” is not.

This language is far broader than necessary to achieve the stated purpose of protecting downstream retailers and end users. The Senate’s section-by-section breakdown of the PATENT Act claims that the “customer stay is available only to those at the end of the supply chain.” But the actual definitions in both bills are so broad that almost any entity in the supply chain would be eligible for a mandatory stay. This is so because almost all manufacturers are also retailers of other manufacturers; that is, almost all manufacturers could claim to be a “customer.”

Take, for example, a smartphone company that sources its components from a third-party manufacturer. If the smartphone company were sued for patent infringement over a component, it could claim to be a “covered customer” under both bills. Many smartphone companies generate “revenues predominantly through the sale to the public of consumer goods and services,” and they would not be considered “an entity that manufactures” the component. As a “retailer,” the smartphone company would be entitled to a mandatory stay, even though it’s nothing like the mom-and-pop coffee shop the customer stay provisions are designed to help. A district court would be forced to grant the stay, even if doing so hampered a legitimate patentholder’s ability to enforce its property right.

Against this backdrop, it’s important to keep in mind that the decision to stay proceedings has historically been left to the discretion of judges. Sometimes there are indeed good reasons to grant a stay, but each case is unique, and courts frequently weigh many factors in deciding whether a stay is appropriate. Instead of recognizing this dynamic, the Innovation Act and the PATENT Act mandate a one-size-fits-all solution to an issue that is best determined on a case-by-case basis. In effect, the bills tie the hands of district court judges, forcing them to stay suits even when the equities dictate otherwise.

While in some cases a manufacturer may be the more appropriate party to litigate a patent suit, it is not always true that efficiency or justice dictates staying a suit against a customer in favor of litigation involving the manufacturer. Courts generally balance several factors, such as convenience, availability of witnesses, jurisdiction over other parties, and the possibility of consolidation, when deciding whether to grant a stay. Courts consider whether the stay will lead to undue prejudice or tactical disadvantage, and they examine whether it will simplify the issues and streamline the trial. The decision to stay involves an extensive cost-benefit analysis for both the court itself and the litigants.

The Supreme Court has often emphasized the importance of judicial discretion in deciding whether a stay is warranted. As Justice Cardozo wrote for the Court in 1936, the decision to stay “calls for the exercise of judgment, which must weigh competing interests and maintain an even balance.” Justice Cardozo warned that the judiciary “must be on our guard against depriving the processes of justice of their suppleness of adaptation to varying conditions.” In the patent law context, Justice Frankfurter, writing for the Court in 1952, declared: “Necessarily, an ample degree of discretion, appropriate for disciplined and experienced judges, must be left to the lower courts.”

The problem with the House and the Senate bills is that they take away this important “exercise of judgment” and threaten to remove much-needed flexibility and adaptation from the litigation process. The customer stay provisions take the “ample degree of discretion,” which is “appropriate for disciplined and experienced judges,” and place it into the hands of the alleged infringers. Infringers are not likely to be motivated by important notions of efficiency or justice; they’re likely to be motivated by self-interested gamesmanship of the system to their own advantage.

The proponents of the customer stay provisions claim that they’re necessary to help the little guy, but the provisions in both bills just aren’t drafted like that. Instead, they’re drafted to tie the hands of judges in countless cases that have nothing to do with small-time retailers and end users. The courts already have the power to stay proceedings when the equities tip in that direction, but these bills disrupt the judicial discretion on which the patent system has long depended. Customer stays certainly have their place, and that place is in the hands of judges who can take into account the totality of the circumstances. Judges should not be forced to make the important decision of whether to grant a stay based on overbroad and inflexible statutory language that goes far beyond its stated purpose.