Restricting patent challenges will harm small businesses

After building momentum for weeks, congressional action on patent reform legislation is beginning to slow. The Senate Judiciary Committee has twice postponed markup of the bi-partisan PATENT Act in recent weeks.

Reportedly, one reason behind the pause is a push by the pharmaceutical industry to include amendments that would limit the Patent and Trademark Office’s (PTO) authority to reevaluate the validity of issued patents at the request of third-parties that haven’t themselves been accused of infringement.  A rival bill—the STRONG Patents Act, introduced in March by Sen. Chris Coons (D-Del.)—already includes such a provision. Adding a similar measure to the PATENT Act would be a mistake. Restricting access to PTO challenges would provide unwarranted protection to bad patents at the expense of the bill’s intended beneficiary: small businesses. 

{mosads}The present push for limitations on who can challenge a patent comes in response to a series of 14 challenges brought by investor Kyle Bass, who hopes to eliminate or weaken patent rights to lucrative pharmaceuticals and cash in by shorting drug companies’ stock. Pharmaceutical companies have deemed this practice an “abuse of the US patent system” that “exploit[s] the USPTO’s patent challenge proceeding.”  

Despite the rhetoric, it is difficult to view this development as the dire problem that industry reps claim it to be. Challenges like those initiated by Bass, who has publicly vowed not to settle, will be successful only if a panel of PTO experts decides that pharmaceutical companies’ patents were, in fact, wrongly issued in the first place. Eliminating rights that never should have been granted, particularly when those rights have earned their owners hundreds of millions in monopoly profits to date, isn’t abusive or exploitative. It’s a public service that promises to lower prices for, and expand access to, prescription drugs.   

Second, efforts to correct this “problem” will have unintended effects that undermine the very purpose of patent reform. Current reform efforts began in response to a sharp rise in questionable patent suits targeting small businesses. In recent years, tens of thousands of companies operating well outside the tech industry—restaurants, hotels, trucking companies, and real estate agents among them—have been sued or threatened with suit for using allegedly infringing technology they purchased from someone else.  Because companies like these generally lack the technical knowhow and resources to mount a defense, and thus will generally settle simply to avoid the cost of litigation, they make easy targets for unscrupulous patent owners. 

While legislative responses to this problem have slowly churned their way through Congress, asking the PTO to take a second look at asserted patents has emerged as a fast, cheap, and popular alternative to fighting weak infringement allegations in court.  In the last two years, thousands of challenges have been lodged and hundreds of problematic patents have been at least partially invalidated by the patent office. 

Unfortunately, small businesses and other companies that merely purchased the technology accused of infringement have so far been reluctant to take advantage of these procedures.  In a recent study, I found that both groups are substantially underrepresented among those bringing challenges.  Technology purchasers, for example, initiated less than 7 percent of all patent office challenges despite being targeted in more than one-third of all patent suits filed during the same time period. 

The reason for this deficit is two-fold.  First, though patent office challenges are less expensive than litigation, they are far from cheap.  A typical challenge costs more than $250,000, a princely sum for a small business.  Second, when a patent owner targets a large number of customers rather a single manufacturer, it creates a collective action problem that discourages any one party from paying for a challenge that will ultimately benefit everyone accused of infringement. 

Fortunately, third-party organizations can help small businesses overcome these obstacles and, increasingly, are stepping up to do so.  Public interest groups, for example, can raise funds from the public at large to fund challenges that otherwise might not be brought.  The Electronic Frontier Foundation recently crowd-funded a successful challenge of a patent asserted against numerous podcasters.  Similarly, industry associations and risk management firms can efficiently pool resources from a large number of potential targets to challenge problematic patents.  Nonprofits like the Texas Association of Realtors, American Simmental Association, and Printing Industries of America, as well as for-profit firms like Unified Patents and RPX, have begun to challenge patents threatening their respective members. 

A ban on third-party challenges will stop this promising development in its tracks, harming the very constituency patent reform legislation was originally intended to aid.  Eliminating a mechanism that promises to benefit thousands of small business just to protect a few weak drug patents makes little sense.  If anything, Congress should work to broaden, not restrict, access to PTO challenges.  Lowering the filing fee—presently set at a whopping $23,000 (66 times more than the cost of filing a lawsuit)—would be an excellent start.

Love is an assistant professor of Law and co-director of the High Tech Law Institute at Santa Clara University.