Earlier this month, the White House hosted its first ever Demo Day, inviting startups from all over the country to celebrate entrepreneurship. At that event, the President eloquently pointed out just how important the startup community is for our nation:
"Startups, young firms account for almost 40 percent of new hires. And as we’ve fought back from the worst economic crisis of our lifetimes, those firms have helped our private sector create more than 12.8 million jobs over the last 64 straight months, which is the longest streak of private sector job growth on record."
With numbers like those, you would think all elected leaders would be racing to support pro-entrepreneurship policies. Yet Congress continually fails to move patent reform legislation, threatening the future of the startup community and the good jobs it creates.
The patent troll threat is not an abstract problem. And it’s not a problem that’s getting better. In fact, abusive patent litigation is becoming more prevalent: patent lawsuit filings are on track to break a new record this year (with a forecast of more than 6,000 suits) and 68 percent of suits so far have been filed by trolls. Furthermore, 82 percent of troll activity targets small and medium-sized businesses, and 55 percent of troll suits are filed against companies with revenues of less than $10 million.
This fall presents an important opportunity—maybe our last—for patent reform to become law.
Where are we?
In June, the Senate Judiciary Committee voted 16-4 to move the PATENT Act to the full Senate floor; later that same month the House Judiciary Committee likewise voted, 24-8, to move the Innovation Act to the full House floor. Both bills represent comprehensive solutions that would address a dangerous patent troll problem; neither is perfect, but both would go a long way to fix a broken system. You can read more about the House bill here and the Senate bill here.
We were very excited when both bills were introduced. Since then, however, provisions in each have been watered down. Compromise and revisions are inherent to the political process, so to some extent this was expected. Questions remain, however, about how much is too much.
There are four primary issues that remain open to debate: venue, pleadings, discovery, and inter partes review (IPR). For political watchers, the last—inter partes review—is the most important. All of the other provisions of the House and Senate bills deal with litigation reforms, but inter partes review is a Patent Office procedure that allows for efficient and effective review of patents outside of federal court. That means the process is particularly good at weeding out bad patents and addressing patent quality, a huge problem that patent trolls have been able to exploit. Originally, the House and Senate bills barely addressed inter partes review, which we were glad about, since by and large the process has been quite successful.
Enter Kyle Bass. The well-known hedge fund manager’s most recent enterprise involves using the IPR process to challenge weak pharmaceutical patents and then short the stock of the company that owns the patent. The pharmaceutical industry, which relies heavily on patent rights, is far from pleased. And despite the fact that the IPR process contains significant protections for patent holders and the fact that Mr. Bass’ actions can already be addressed by the SEC, the pharmaceutical industry has been able to shoehorn its issue into the larger reform efforts.
As a practical matter, this means that long-standing Capitol Hill players, like PhRMA and BIO, are holding up patent reform efforts unless changes are made to weaken the IPR process. (We explain in more detail here why those changes are not only unnecessary, but in fact quite dangerous.) Senators Schumer, Cornyn, Grassley, and Leahy—the primary authors of the Senate bill—are still hammering out a so-called deal on IPR, details of which we should see soon. Even with such a deal, it’s unclear if PhRMA and BIO will decide to support reform efforts.
In the meantime, the House originally planned to move forward with a full vote on its bill in July, but at the last minute, Republican leadership pulled it from the calendar, claiming they needed more time to get the deal done. There is no real way to sugarcoat what happened: the delay shows a slowing of support and momentum for an important bill and we were disappointed that it happened.
Is there a path forward?
There is still a path forward. In September, when Congress comes back, the Senate is slated to pick up its efforts. We understand that Senate reform champions are close to a deal on IPR and that such a deal could create a framework for the bill to pass out of the full Senate. (This would be a particularly interesting turn of events, because in 2013 a strong patent reform bill passed the House 325-91 and then languished in the Senate in 2014.)
Using the momentum from the Senate, the House would be in a good position to revive its own efforts. Given the fact that the House did pass a bill in 2013 with a wide, bipartisan majority, we are confident that the bill would make its way through that chamber easily.
The White House has made clear its support of patent reform and we have every reason to believe that President Obama would happily sign a strong piece of patent reform legislation into law.
Is that path worth it?
Probably. There are two things to watch closely: IPR (see above) and venue (see more here). Right now, the House bill includes a strong venue provision that would help prevent trolls from filing so many cases in the notoriously plaintiff-friendly Eastern District of Texas. This would in turn make it easier for patent troll targets to fight back.
So, to simplify: anything that weakens IPR is bad (this should play itself out first in the Senate bill). Efforts to fix venue are good (see the House bill for this). Some combination of the two is probably liveable, though—as always—the devil is in the details, details we will be watching very closely over the next couple of months.
We’ll continue fighting to make sure that startups and inventors see legislation that will actually protect them from patent trolls and will need to call on you to help make our case. So watch this space closely and stay tuned.