Patent troll legislation: a closer look (pt 5): Customer lawsuits

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CafeWiFi by Shutterstock

In this installment our patent litigation reform series, I examine the “customer lawsuit” aspects of the Innovation Act – provisions designed to tackle the challenge of patent trolls taking customer litigation to a new extreme.

Rep. Bob Goodlatte’s (R-Va.) “Innovation Act” was introduced in the House in October, where it won overwhelming passage, but has stalled in the Senate, where various members of the upper chamber, including Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.), have expressed skepticism and floated their own proposals. Recently, the American Bar Association weighed in on the various measures and expressed concern that they may “produce undesired and unintended negative consequences for both patent cases and federal litigation generally” including “balkanization in the administration of justice.”

Yet a renewed push for the bill has appeared on the horizon, as President Obama discussed improving the patent system during his State of the Union address.  “Let’s pass a patent reform bill that allows our businesses to stay focused on innovation, not costly, needless litigation,” the President urged Congress last month.

And indeed, provisions of the Innovation Act pertaining to businesses and their customers are among the more interesting and controversial portions of the bill. On top of changes to the pleading requirements, the standards for awarding attorney’s fees, discovery procedures, and the identification of all “real parties in interest,” the issue of customer lawsuits occupies an important portion of the bill.

Under current law, which protects patent-holders against anyone who “makes, uses, offers to sell, or sells” their invention without permission, patentees frequently sue both the manufacturer of a product they believe infringes their patent as well as the customers who buy that product—think of a software company and the businesses who purchase its programs.

Patent assertion entities, however, have recently begun extending this practice to its logical extreme, suing, among others, coffee shops unwittingly (allegedly) infringing their patents by offering WiFi to their patrons and homegrown podcasters using off-the-shelf technology to reach their audiences.

Retailers, software makers, and other activists have reacted furiously to this trend, blasting “trolls [who] go after consumers who use widely available products to conduct their businesses efficiently and effectively.” In a separate letter to Chairman Leahy, the head of the ABA’s Intellectual Property section lamented how customer “defendants succumb to extortionist demands for licensing fees or other settlements upon learning of the potential costs of defending against even a totally meritless claim.”

And so the Goodlatte bill aims to relieve customers from the burden of these suits. Specifically, the legislation would suspend or “stay” suits filed against a customer if the manufacturer is also sued and the customer agrees “to be bound by any judgment entered against the covered manufacturer.” The stay, however, could be lifted if the patent-holder could show that the suit against the manufacturer “will not resolve a major issue in suit against the covered customer.”

On balance, this provision is sensible. It will provide a needed reprieve for “mom-and-pop” businesses under threat from PAE’s, and it will discourage those PAEs from litigating against those businesses.

However, like many other provisions of the Goodlatte bill, the customer suit exception paints with too broad of a brush by including within its four corners various companies on a product supply chain, not just small, struggling end-users.  As David Kappos, the former director of the Patent Office, testified before the House Judiciary Committee:

“the stay provision permits all parties in the product channel downstream of the first component part maker to escape infringement liability, including large commercial actors such as manufacturers combining procured components into value-added completed devices, as well as assemblers, and others not operating in the roles of “mere retailers” or “mere end users,”’ and certainly not operating in the roles of “mom and pop shops.”

Thus, some further refinement is necessary to sort the coffee shops from the parts-assemblers. For instance, the ABA’s IP section recommends “limit[ing] eligibility of customer stays to retailers and end users who have not materially altered the product or process, or incorporated it into another product or process.” Alternatively, specific types of businesses that have received litigation threats, such as coffee shops or podcasters, could be called out explicitly in the legislation itself.

In the next installment, we’ll consider some of the remaining provisions in the bill.

 

 

 

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