Congress must choose for or against innovation

Everybody’s for “innovation” these days.

Innovation is as American as fireworks on the Fourth of July, the iconic garage inventor who makes some great discovery and turns it into a commercial success, or the Washington Monument honoring George Washington, the Father of Our Country.

{mosads}But Congress is exhibiting schizophrenic legislative impulses toward innovation.  One day, lawmakers overwhelmingly pass the pro-innovation 21^st Century Cures Act.  Another day, Congress bears down on weakening the very vehicle that incentivizes American innovation, U.S. patents.

The Cures bill passed on a 344-77 margin last Friday.  This bipartisan legislation came about through a yearlong consensus-building process in the House Energy & Commerce Committee, involving health care stakeholders, patient groups, universities, government officials, and others.

As a result, Cures holds promise for streamlining regulatory approval procedures that add costs and delays to new medical devices, medicines, health IT, and other breakthroughs to alleviate patient suffering and treat or even cure chronic conditions or rare diseases.

That’s why hundreds of research- and intellectual property-intensive organizations, along with patients’ advocates, support the Cures initiative.

However, the mislabeled Innovation Act is expected soon to come before the same lawmakers and may pass by a wide margin — despite the bill’s decidedly anti-innovation provisions.

How come?  This legislation flew through the House in the last Congress, getting a similarly one-sided vote.  Then, House leaders rocketed the “Innovation” Act from bill introduction through committee to the floor in 43 days, including Thanksgiving recess.  Most lawmakers voted in ignorance of the contents of the bill, thanks to the less than transparent process employed.  The legislation died in the Senate, once opponents pointed out defects and harmful effects.

What makes this bill so dangerous for American innovation?  H.R. 9 would devalue patents and restrict the judicial recourse of patent owners.  It would tilt the court system against inventors and toward patent infringers.  Here are some of the worst parts of H.R. 9.

To begin defense of a patent in court, the bill’s “heightened pleadings” require, in the initial notice to the court that one intends to pursue judicial action, that the patent owner disclose extensive, detailed information, then continually update those details throughout the case — an onerous burden meant to discourage lawsuits to defend your patent.

This requirement goes so far as to pierce the corporate veil, or disclose publicly the inner workings of and individuals involved in the patent owner’s business.  This is ostensibly to ascertain the “real parties in interest” because of shell companies in some patent lawsuits.  But it forces plaintiffs to reveal competitively sensitive information to the infringer they’re suing, who can use that information as a weapon in the marketplace while the court case plods along.

The specific claims the bill demands must be spelled out up front, of exactly how you’re patent is being infringed, are often unknowable prior to discovery.  But the bill severely restricts discovery — the process of providing the patentee relevant documents that reveal how the infringer has been infringing the patent.  It also forces patent owners to pay for the discovery costs of infringers and gives infringers the ability to halt the discovery process, delay the case, and game the judicial system.

H.R. 9’s default setting is loser-pays.  The very prospect an independent inventor, his or her investors, and the company’s leadership team would have to grapple with is the intimidating potential of having to pay the other party’s legal costs.  This becomes a deterrent not only of frivolous cases, but of meritorious cases where the defendant, say a big company, has the resources to bring a litigation gun to a knife fight.

Judges already have the ability to shift fees, if circumstances warrant.  Making loser-pays automatic will keep many independent inventors away from court because the risk, should they lose in court, is bankruptcy.  A mutlizillion-dollar infringer versus a small inventor isn’t a fair fight with mandatory fee-shifting.

But wait, it gets worse.  The joinder provision joins other parties to pay the shifted legal costs that the inventor can’t afford.  Universities, investors, technology transfer offices, and others get put on the hook for tens or hundreds of thousands, even millions of dollars, even if it was a legitimate court case.

Joinder will cause many not to invest in high-value, IP-intensive ventures because the financial risk exposure will be too great.  Investors, who are used to risking 100 percent of their investment, will become liable of losing more than 100 percent of their investment.  Entrepreneurs and innovators won’t be able to raise funds or commercialize their patents because of joinder and fee-shifting.

The mandatory customer stay measure severely devalues patents.  An inventor couldn’t recover but a small portion of the value of the invention — say, that of a tiny chip used in a high-tech consumer product.  Such meager damages awards lack realistic relation to the chip’s functionality within the higher-market-value device.

Under the bill’s loose definition of “covered customer,” the infringer may stay legal action against itself and downstream customers, including major retailers, not just mom-and-pop stores.  Upstream parties, such as a product assembly plant, manufacturer, and suppliers, are also defined as “covered customer” or “end user.”

The only one left is the indirect infringer, the single source of the infringing component, who may well be in China and impossible to enforce a U.S. judgment against.  Perversely, H.R. 9 requires the patent owner to prove indirect infringement before proving direct infringement.  A patent holder would have to litigate the same infringement issues twice in order to recover damages.  The costs and delay would be prohibitive, including for many larger companies.

Therefore, any of these provisions makes defending a patent a high hill, even for established companies.  The combination of H.R. 9’s provisions makes defending a patent a high mountain.  And for the independent inventor, any combination makes a legal defense of one’s IP an insurmountable legal Mount Everest.

Notably, many of the same universities, patient groups, medical organizations, and others who support the 21^st Century Cures Act oppose the “Innovation” Act.

Congress faces a choice.  It can stand up for American innovation, such as with 21^st Century Cures.  Or it can stand against innovation, demolishing the only way patents can be protected — by enforcing them in court, if necessary.

One thing is clear.  H.R. 9 undermines what Cures is trying to achieve.  Congress can’t claim to support innovation and the countless benefits it brings, if it passes H.R. 9.  The two are mutually exclusive.  Cures is pro-innovation; H.R. 9 is anti-innovation.

Edwards consults on intellectual property, health care innovation, and regulatory and policy issues. Among other clients, Edwards is co-director of the Inventor’s Project.