Innovation Act is a Good Idea that Needs Work

Photo by Missy Schmidt

Patent law has existed in America since the beginning, spurring innovation in the market by, among other things, protecting the intellectual property rights of inventors against larger companies who might want to steal the idea or stamp out the competition.

Lawmakers are looking to strengthen patent law with a new piece of legislation called the Innovation Act (H.R. 9) but it may end up doing more harm than good.

The Innovation Act is meant to crack down on “patent trolls” who file lawsuits against legitimate businesses whose patents include vague language. Fortunately, most suits are thrown out as frivolous, but it only takes one to make a patent troll rich, as the average successful suit awards $1.3 million.

This could bankrupt small businesses and upstart inventors, discouraging them from bringing great new products and services to the market. H.R. 9 was drafted to put a stop to this practice by requiring more specific details about the patent, the infringing party and more.

Without a doubt, protecting property rights and spurring innovation are conservative principles. Chuck Muth, writing in Townhall, supports the act, writing:

“[H.R. 9] does not affect the patent process or legitimate patent litigation; it only guarantees that certain safeguards are implemented that place the burden on patent trolls to prove their claim before they can extort hard-working job creators.”

Sounds good so far, but let’s examine it further.

The term “patent troll” is often used interchangeably with the more legalese term “non-practicing entity.” Non-practicing entities a responsible for somewhere between two-thirds and 90 percent of the patent suits filed – depending on who you ask – and that percentage is rising.

That sounds like a huge problem, except that non-practicing entities and patent trolls are not really the same thing. To quote Darrell Issa, “a troll is impossible to define unless you’ve been mugged by one.”

As Bloomberg BNA noted:

“Generally, a non-practicing entity is recognized as a broad term referring to a company that owns patents but does not design or manufacture a product or process. By that definition, non-practicing entities may include universities, startups, technology transfer offices, and research institutions.”

Indeed, the Association of Public and Land-grant Universities doesn’t support the Innovation Act because it is too broad, the bill does not promote technology transfer.

Opponents of the bill acknowledge that an exemption was carved out for universities (at least in the Senate version), “but that carve-out itself may be too broad because some universities license patents to other non-practicing entities that then bring suits.”

The other potential victims of a poorly-written patent bill are, again, small businesses. As The Hill’s Robert N. Schmidt writes:

“Disclosure of all plaintiff interested parties requires both investors and licensors to be disclosed by small businesses.  This discourages commerce in two ways.  First, it will require…investors to break one of their major priorities: anonymity; discouraging early stage investing, when funding is hardest to obtain.  Secondly, it will dampen licensing activities.  Licensees need time to incorporate the licensed invention into their product.  H.R. 9 requires the disclosure of the license, showing the licensee is adding a new feature, alerting their competition of their business plans.  The licensee may also be liable for legal costs, adding significant risk to the cost of the license.  Both these features encourage potential licensees to illegally infringe, rather than doing the right thing and taking a license.”

The difficulty of this process is in making patents claims more burdensome for patent trolls without making them more burdensome for legitimate patent holders, particularly small businesses and universities. As the Innovation Act shows, that isn’t an easy needle to thread.

It’s a good idea that must be done right.