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Concern expressed over latest push for patent reform

Members of Congress are currently considering more than 10 patent reform bills, most of which are designed to address the so-called "patent troll" problem.

Patent trolls, known less derisively as non-practicing entities, are companies that acquire intellectual property and use it to generate money through licensing fees rather than to create their own products.

Critics of patent trolls feel they can be a drain on innovation because they aren't developing any new products, but instead are taking money from inventors, who may be accidentally infringing, through costly litigation or settlements.

The most prominent bill attempting to tackle this issue is the Innovation Act (HR 3309), which recently passed the House of Representatives.

Local industry leaders, including the San Diego trade organization Connect, feel the legislation comes too soon after Congress passed its latest patent reform bill, the American Invents Act, in September 2011, and the proposed changes could end up harming America's innovation economy.

"A lot of people in the intellectual property field think it's a little too early to fix something that's only been in place for a couple of years," said San Diego's Antony Novom, who is an attorney with Sughrue Mion. "The (consensus) is kind of, 'Slow down Congress. Don't do anything rash, and make sure anything that's passed into law fixes any of the perceived problems."

Patent holders also are concerned about the unintended consequences.

"When you try to stop what 'patent trolls' are doing to industry segments, you may inadvertently stifle legitimate entrepreneurs and legitimate inventors," said Steve Korniczky, co-chair of Sheppard, Mullin, Richter & Hampton's intellectual property practice group and a partner in San Diego. "You have to be careful not to throw the baby out with the bathwater."

One of the most controversial aspects of the Innovation Act is the proposal to award attorneys' fees and expenses to the prevailing party. Currently, the law only allows for this action in "exceptional" cases.

Novom said the change to a "loser pays" system might cause smaller companies and universities to "think twice about trying to enforce their patents because they don't want to be on the hook for the attorneys' fees of the other guy."

The proposed bill also automatically joins all interested parties in a complaint -- even investors. The plaintiff would have to name all parties who have a financial interest in the complaint, and they all would be liable should the lawsuit fail.

The provision is meant to discourage plaintiffs from hiding behind shell corporations but could end up hurting entrepreneurs who depend on start-up money from angel investors.

"If an investor is potentially on the hook to pay litigation costs if they're on the losing side, then what's the incentive for them to invest," Novom said. "Some say this whole thing could put an end to angel investors and hurt innovation."

Another provision in the bill delays discovery, which could have the unintended consequence of driving up litigation costs. In some cases, an expanded discovery process before trial can get at the root of a dispute and solve it before the parties have to go to court.

"I'm happy folks are thinking about the patent system but I'm concerned about attempts to fix aspects of our patent system in piecemeal fashion," Sheppard Mullin's Korniczky said. "When you start changing one aspect of the statute, you invariably affect a different aspect of the statute. My concern is that the legislation may create other problems."

The Innovation Alliance, a trade group representing a variety of innovators and patent owners, has expressed concern of the recent bills as well.

In a letter to Senate Judiciary chairman Patrick Leahy (D-Vt.) and ranking member Charles Grassley (R-Iowa), the Innovation Alliance urged caution in making any legislative change.

"The America Invents Act was fully implemented less than a year ago, and its effect on our patent system has yet to be fully understood or appreciated," the letter read. "Any changes that are made should not undermine U.S. patents, their robust enforcement, or the existing economic incentives for companies of all sizes to invest in new jobs, research, and development."

The group said the American patent system is a driving engine of the economy.

"Weakening the protections of the patent system would surely result in the loss of America’s creative, technological, and economic edge," the letter read.

One provision that isn't getting much pushback is the proposal to require plaintiffs to be more specific about what infringement they claim is taking place.

The Innovation Act, however, does not address demand letters to the extent that other bills do.

Novom said demand letters can be really problematic. Currently, non-practicing entities can send out thousands of generic demand letters seeking payment, and they will get quick settlements simply because smaller companies are afraid to engage in litigation.

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