The latest move to kill bad patents divides tech industry

WASHINGTON -- Technology users -- retailers, in particular -- are being snared in patent infringement lawsuits for offering drop down menus, displaying catalog images or having search engines and other common online services. As a result, pressure is growing on Congress to reform the patent process.

The Nov. 20 House committee vote to send a patent reform measure, The Innovation Act., to the floor on a 33-5 vote is evidence of reform's bipartisan support. What the vote didn't show is the deep divide in the tech industry over it.

Stricken from the final version of the Innovation Act was a rule allowing a defendant in a business method infringement suit to challenge a patent's validity before the U.S. Patent and Trademark Office (USPTO). That administrative challenge, which deals with covered business methods (CBMs), can stop a lawsuit for up to 18 months and lead to the invalidation of low-quality patents if they're found to be too broad, vague or abstract.

Established as a pilot program in 2011, the challenge is limited for now to some financial applications. But proponents of patent reform want it expanded to cover most business software.

The CBM challenge has the potential to be a potent tool since it could invalidate problematic patents used by trolls. But it coud also be used to attack revenue-producing patents held by mainstream technology firms.

Without the challenge, the Innovation Act still has some weapons to help curtail infringement suits over commonly used processes. One provision could leave plaintiffs vulnerable to legal costs, another requires them to do more work upfront before bringing their demand. That would help defendants better understand what they're really up against.

But it's the CBM expansion that has been getting a lot of the attention. Small businesses and start-ups, in particular, might gain from a CBM process because 55% of companies fighting patent troll cases have annual revenues of $10 million or less, according to a recent New American Foundation study. These are infringement lawsuits brought by non-practicing entities (NPEs) or patent assertion entities (PAEs), firms that do little more than defend patents.

Other potential beneficiaries include retailers, grocers, airlines -- just about any business with a website. Groups representing these industries support the CBM expansion.

There is no upside for a defendant in a patent litigation suit, which has an average cost of $1.75 million, according to proponents of reform. Settling is often cheaper than fighting the lawsuit -- and that's what patent assertion entities count on. By contrast, the cost of a CBM administrative appeal could be about $350,000, according to one study.

CBM expansion opponents include IBM, Microsoft, General Electric, Adobe and many other firms. They have argued in a letter to lawmakers that an expansion would discourage investment, and give "infringers a new procedural loophole to delay enforcement." Companies with large patent holdings also appear more likely to oppose the CBM expansion.

Supporters of the expansion include Google, Amazon, Samsung, Walmart, Facebook and others. They said in their own letter to lawmakers that it offers an alternative to costly litigation "and provide[s] a targeted 'surgical strike' against the worst of these frequently abused patents." The White House supports a CBM process for software, as does Sen. Chuck Schumer, (D-NY), who is pushing the effort for it in the Senate.

While the push for reform is far from settled, problems created by patent infringement claims continue.

Peter Brann, an attorney who represents L.L. Bean in an infringement case and has represented other retailers in such cases, says many of the assertions can be boiled down to this: "I invented the Internet, please send me money."

A patent infringement case that some retailers now face involves a patent issued in 2000 called "Data display software with actions and links integrated with information" owned by a Texas firm called Select Retrieval. It describes a way of structuring information that applies to a seemingly common practice. ( See patent). Whether this patent is too broad or not doesn't matter. It's an approved patent, and the moment a demand letter arrives, a business is sent down a rabbit hole of legal costs and the financial calculus of settlement.

A patent is essentially a monopoly, and "if the patents are overly broad, then what happens is it prevents follow-on innovation," said Bernard Knight, a former general counsel at the USPTO who is now a partner at McDermott Will & Emery LLP. "Other parties don't know how to design around those claims to create a new software invention."

L.L. Bean is now fighting the data display patent. The case began with a five-page complaint and no explanation of how the retailers website infringes the patent. That's left to L.L. Bean to figure out.

There's ample sympathy for companies in L.L. Bean's position. Retailers often assemble their websites with module purchases, outside services and internal IT development. Even when sites are not core to the business, infringement cases can become a big financial drag.

J.C. Penny has been sued for infringement for allowing customers to activate a gift card at the point of sale, browsing a website on a mobile phone or enabling a customer to put purchases in an electronic shopping bag or cart. It also has faced multiple claims for providing information about store locations to a mobile phone, among other processes. All of these lawsuit arrived in the last four years, Janet Dhillon, the store's general counsel, said during a House hearing earlier this year.

The trolls have accomplished one thing. "You have lots of different companies and industries that are now behind the idea that they really need some patent reform," said Brann.

The Innovation Act creates risk for anyone who brings an infringement lawsuit, because they could end up paying the defendant's legal costs if a court determines the case wasn't justified. "Small businesses can take some comfort in knowing that if their positions are 'reasonably justified,' they should not be penalized," said Robert King, a partner at Hunton & Williams.

Patent assertion entities "are going to have to look long and hard at their cases before they just start sending out threat letters or filing complaints," he said.

But until the courts start making rulings it won't be clear just what a reasonably justified position is, he said.

The proposed law also requires that infringement lawsuits detail -- upfront -- the nature of the claim and specifics about what products and processes are infringing. That information usually comes out during discovery, but defendants may have already settled before legal bills get too steep.

Geoff Cohen, computer scientist at Elysium Digital, a litigation consulting company, said requiring someone to do more work before bringing a case shouldn't be a problem. "If you have a good hand you really don't care whether you have to put $10 down or $1 down because you're going to win and it doesn't bother you," said Cohen.

But patent reform will mean a series of trade-offs, warned Darren Donnelly, an attorney at Fenwick & West, who said that raising the bar too high on what's required to bring a suit could make it more difficult for a start-up to make a complaint against a large competitor.

The struggle for Congress and the courts is finding a way beforehand to determine what a meritorious or non-meritorious claim is, "and there is just no good way of doing that," said Donnelly.

Patrick Thibodeau covers cloud computing and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov or subscribe to Patrick's RSS feed. His e-mail address is pthibodeau@computerworld.com.

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