House passes Innovation Act by vote of 325-91: a small solution to a big patent problem

The U.S. House of Representatives on Thursday passed the Innovation Act, a bill to reform an American patent system now plagued by a glut of low quality patents and by “trolls,” which are shell companies that make a business of filing nuisance lawsuits against productive businesses.

The bill, which passed with bipartisan support, will now go to the Senate, where it is expected to pass and to the White House, which is also in favor. But if the Innovation Act becomes law, will it actually do anything to fix a patent system that a prominent judge has described as “dysfunctional?” Recall that Congress also passed “patent reform” in 2011 to  little practical effect.

Here’s an overview of what the Innovation Act does — and doesn’t do — to fix the patent mess.

New rules to reduce “smash-and-grab” patent trolling

Trolling is so attractive in the first place because it’s easy to do and because there’s little economic downside. That’s why there are so many stories of trolls like the one that sued coffee shops for offering Wi-Fi and the one using a 1998 patent from a Holocaust foundation to shake down the New York Times.

Stopping the trolls requires changing the economic incentives that inspire the shakedown campaigns, which is something the 2011 America Invents Act (AIA) failed to do. This time, it might be different.

“The AIA was stripped of most provisions that would have made a significant dent in the troll problem.  The Innovation Act, by contrast, specifically addresses certain abusive patent assertion activities.  It isn’t a complete solution, but it is a meaningful step in the right direction,” wrote Santa Clara University law professor and patent expert Brian Love, by email.

Love noted that trolls fall into one of two categories: the first are “smash-and-grab” nuisance trolls that seize on any patent they can find, and send out hundreds of letters to threaten small businesses with lawsuits. The victims pay up since it’s prohibitive to defend a patent suit, and because it’s not possible to counter-sue a troll (they have no assets). The second troll species, meanwhile, are more sophisticated operations like Intellectual Ventures that also go after big game like major tech companies or retailers.

Under the Innovation Act, a number of measures change the economic calculation for small time trolls:

  • Protection for customers: Right now, a troll can go after anyone using a router, a scanner or other basic technology it claims to own. The new law, however, allows the manufacturer of the technology — typically big companies like Cisco or Google — to step in and tangle with the troll. During this time, the troll’s lawsuits against the customer are halted (meaning an easy smash-and-grab is less possible).
  • Fee-shifting: A patent plaintiff will have to pay the defendant’s legal costs if they lose and if the lawsuit was “unreasonable.” That last part is not easy to establish, but the new rule will give second thoughts to some trolls, and will give some defendants an incentive to fight.
  • New discovery rules: right now, a troll can torment its victim with expensive discovery requests — requirements that the defendant produce emails, business records and other evidence. The troll, since it’s a shell company, doesn’t have anything to produce itself. The new rule moves the discovery phase down the road while a judge examines the patent claims, meaning that it’s harder for the troll to use discovery as blackmail weapon.

The Innovation Act also makes the shakedown process more cumbersome for the troll. Currently, the troll does not even have to identify who its real owners are (in many cases, law firms and private equity firms team up to start a trolling venture), and doesn’t have to tell its victims how exactly they’re infringing the troll’s patents. New rules require the troll to identify its masters and to include more details in the claims it files against defendants.

No end in sight for bad patents

While the Innovation Act may kill off some of the more egregious trolls, it does not, unfortunately address the root cause of the patent mess: the granting of too many low-quality patents.

An earlier version of the bill contained a provision that would let companies challenge suspicious “business method” patents — many of which cover basic software practices — at the U.S. Patent and Trademark Office, but a powerful lobby of old-guard firms (notably Microsoft(s msft) and IBM(s ibm)) lobbied to crush that part of the law.

As a result, there is still no efficient way to challenge the huge number of bad patents that are the lifeblood for the big trolls like Intellectual Ventures. As Love explains, this type of company looks for “old, broad patents–patents that mostly shouldn’t have issued in the first place–that it can enforce in high-stakes suits against large companies selling successful products.”

Without the rule to challenge the patents at the Patent Office, companies’ only other option often lies in persuading jury that the patent is obvious or the invention it describes is not new. A jury trial, however, often costs millions and defendant are often forced to litigate in troll-friendly jurisdictions like East Texas, which have built cottage industries around patent lawsuits.

What happens next

The debate will now shift to the Senate, where patent reform has strong support from influential figures like Senators Chuck Schumer (D-NY), Patrick Leahy (D-VT) and John Cornyn (R-TX). People close to the process predict that the Innovation Act will pass there and be signed into law as early as next spring. Others, however, are less confident.

“The easiest thing to do in Washington is to stop something. The opposition hasn’t even really begun and theres an awful lot of money in the troll world,” says Marshall Phelps, CEO of Article One Partners, a firm that helps companies research patents.

At the same time, however, the White House and executive agencies are looking at other ways to fix the patent problem. The FTC, for instance, is investigating whether large trolls are violating the country’s antitrust laws, while places like Vermont are using consumer protection laws to drive trolls out of their states. Meanwhile, the court system also has the power to make incremental changes to patent law.

Ultimately, though, it appears the country may be stuck with low-quality patents for the foreseeable future.

“Significantly improving patent quality is no easy task and would likely require fundamental changes to patent law, to the PTO, and to procedures for examining patent applications that aren’t politically feasible, at least at present,” said Love.