Year in Review: Patent Reform

This post is one in a series of reports on significant issues for startups in 2015. In the past year, the startup community’s voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world’s policy goals in 2015, such as immigration and patent reform, remain unfulfilled. Check back for more year-end updates and continue to watch this space in 2016 as we follow policy issues affecting the startup community.

Despite real strides made in the courts, patent trolls continue to be a serious drain on the startup economy. The number of patent cases filed by trolls in the first half of 2015 outnumbered filings in previous years. Historically, the majority of troll cases were filed against small companies with revenues of less than $100 million.

Recap: Patent trolls take advantage of loopholes in the patent system to leverage bad patents and expensive litigation to force companies (especially small ones) into costly settlements. Settlements that could cost several hires, derail products, challenge customer trust, or, worse, harm the whole company.

Back in January, the House reintroduced the Innovation Act and the Senate followed suit with the PATENT Act, reflecting strong commitments from congressional leaders to pass a bill that would put a stop to this tax on startups. These bills are both comprehensive in nature, addressing the trolls’ favorite loopholes. Some of the key provisions address pleading requirements, discovery procedures, and fee-shifting standards.

The House bill also includes a provision to address venue abuse, one that specifically would keep cases out of the now-infamous Eastern District of Texas. The provision would limit patent infringement suits to districts where the patent inventor conducted research or a party operates a physical facility. This will hopefully disincentivize those who cherry-pick venues based on where they are most likely to win -  i.e., the Eastern District of Texas, where nearly half of patent cases in the US were filed in the first half of 2015. Note: Thus far, the Senate bill does not include a similar provision.

Though voted out of their respective Judiciary Committees in June, we’ve seen both bills stalled, waiting to be scheduled for a vote by the entire Congress. Why? As Engine’s Executive Director Julie Samuels explained: competing interests operating in a one-size-fits-all system. The patent system, as it stands now, works for incumbents, like the pharmaceutical and manufacturing industries that have profited from it for decades. Unfortunately, this system does not work so well for technologies that rely on software, which represent an ever-increasing amount of economic activity. And not just from tech companies! Industries like retail, homebuilders, and realtors, for example, increasingly rely on software innovations to grow their business, only to find themselves facing a broken patent system, staring down the gun of a patent troll.

This year, we also saw non-comprehensive patent reform legislation introduced (again) that, while a good start, would not have gone nearly far enough to address the patent troll problem. And due to the lack of action from Congress, 2015 saw an increasing number of state legislators attempt to curb the patent troll problem. And there was also the evolution of the Pharmaceutical industry’s (PhRMA) own troll: Kyle Bass, the hedge fund manager who uses the Inter Partes Review (IPR) program at the Patent Office to challenge weak pharmaceutical patents and then short the stock of the company that owns the patent. In response, PhRMA has advocated for changes to the IPR process to limit Bass’ success. We hope these changes don’t happen; it’s important that we keep this program robust as an effective alternative to challenging bad patents without wasting the resources demanded in a courtroom.

Though patent reform was met with challenges in 2015, we remain confident that 2016 could bring about real and comprehensive legislation. Representative Goodlatte in the House and Senators Schumer, Cornyn, Grassley, and Leahy in the Senate remain committed to seeing legislation through. Coupled with court cases that help address low patent quality (like last year’s Alice v. CLS Bank decision, which has gone a long way to help get bad patents out of the system), the prospect for patent reform remains good. Engine will remain a firm supporter of comprehensive patent reform as we head into the new year.