Patent reform should discourage patent trolls, not innovation

Congress is considering the Innovation Act, which would implement several significant reforms to the U.S. patent system. Unfortunately, the Innovation Act, as it exists, creates many troubling disincentives for innovation despite its well-placed intentions.

North Carolina has a strong interest in whether the Innovation Act passes due to the state’s thriving pharmaceutical sector. The pharmaceutical industry accounts for over 23 percent of all domestic R&D, annually generates $790 billion in economic activity, supports a total of 3.4 million jobs and pays its workers over $110,000 a year on average (more than double the U.S. average).

North Carolina is a major player in this vibrant sector. North Carolina is the third-largest biotechnology cluster in the nation, which includes Research Triangle Park, the largest research park in the nation. Between 2001 and 2012, the biotechnology sector created nearly 12,000 well-paying jobs in North Carolina.

While the biotechnology sector has been helping North Carolina thrive for many years, having the right to enforce well-designed patents is essential for this industry to thrive. Without it, pharmaceutical industry growth would stagnate, adversely affecting North Carolina.

Unfortunately, the Innovation Act, in its attempt to address the plague of abusive litigation initiated by “patent trolls,” could jeopardize the enforceability of patents.

Patent trolls are a clear threat to U.S. innovation. The business model of patent trolls, officially known as patent assertion entities, is not to develop or commercialize inventions.

Instead, patent trolls purchase patents (typically old patents) with the sole purpose of extracting revenues from firms that use a product that unknowingly contains the product, or developed the technology independently and were often unaware of the patent’s existence. Billions of dollars of wealth is destroyed each and every year due to patent lawsuits filed by these entities.

The patent troll problem is centered on industries such as smart phones. And the reason is simple. Smart phones are patent-intensive products – researchers have found that smartphones account for over 16 percent of all active U.S. patents. The large number of patents related to smartphone technology has created an indecipherable technology web ripe for abuse.

However, patent trolls do not threaten all patent holders equally; nor are all claims of patent violations abusive. Effective patents that confer known, and defensible, property rights to patent holders are necessary for many 21st century industries (including the biotechnology sector). And this is where the Innovation Act falls short.

Some of the proposed reforms of the Innovation Act – for instance, the provisions that increase the costs of the discovery process – make it more expensive to file legitimate claims against patent violators. These reforms would harm legitimate patent holders such as the pharmaceutical industry.

But it is not just the pharmaceutical industry that would suffer. Effective patents are also necessary if the cutting edge research that occurs at universities across the country is to continue. University research is responsible for many of the innovations that have transformed our lives – the roots of the Internet, for instance, were developed at America’s universities.

However, provisions of the Innovation Act, such as forcing inventors to pay damages for actions taken by other users of the invention, reduce the value of developing patented technologies for universities. Therefore, provisions of the Innovation Act could result in fewer innovations being developed in academia.

Recent events illustrate a better path for reform.

Due to the 2014 U.S. Supreme Court decisions in the Octane Fitness and Highmark cases, judges now have greater discretion to enforce legitimate patent rights and also are empowered to punish patent trolls through provisions that include requiring plaintiffs that filed abusive litigation to cover the defendants’ legal costs.

The patent troll problem has also been made worse through the issuance of low-quality patents by the U.S. Patent’s Office, as documented in an April report from the Office of the Inspector General. One of the consequences from low-quality patents is confusion regarding what technology is covered by the patent, enabling patent infringement claims that might otherwise have been avoided. If the OIG’s recommendations are followed, however, the power of patent trolls could be severely diminished through the issuance of higher quality patents.

Effective patent reform should reduce the incentive for patent trolls to extort revenues from productive researchers, without harming the ability of industries, university researchers, or other patent holders from having secure rights in their innovations. The Innovation Act, as currently written, fails this test.

Instead of passing the Innovation Act, Congress’ actions should be more circumspect. First, allow the courts to effectively implement the precedents set by the Octane Fitness and Highmark decisions. Second, ensure that the OIG’s recommendations are implemented to ensure that the quality of the patents issued improves.

Such congressional actions are the best path forward that will simultaneously address the patent troll problem while ensuring that the innovation economy remains vibrant.

This story was originally published May 12, 2015 at 12:19 PM with the headline "Patent reform should discourage patent trolls, not innovation."