A few weeks ago, I was asked to give an update on patent reform to a group of Wall Street investors. My first reaction was that it would be a relatively short presentation because, despite the flurry of activity in Washington, progress in this area has been slow. Indeed on the legislative front, patent reform came to a screeching halt when Senator Patrick Leahy (D-Vt.), chair of the Senate Judiciary Committee, abruptly and unexpectedly pulled patent reform off the agenda for this session.
But I realized, that even with a group of non-patent, non-legal folks, there is still much to discuss. After all, whereas in-house counsel are focused on judicial, regulatory and legislative results that can make a direct impact on reducing the amount and severity of non-practicing entity (NPE) litigation, investors have a different perspective. They are trying to understand trends and shifts in public policy that might affect the direction of markets, sectors and individual companies. For the investors, I framed the discussion by first looking at the efforts underway in the three branches of the federal government, and then pointing out a marked shift by reformers this round. While the last patent reform effort included legislative changes to substantive patent law, today most reform efforts stress improving transparency in the patent market, rationalizing the costs of litigation and strengthening the quality of patents.
With this change in emphasis, we see that there is a trend toward recognizing and treating patents as assets and ensuring that they are transacted in a fair and economically rational way. To a room full of investment professionals, this made perfect sense.
I started with the executive branch, where over the past year President Obama has pushed patent reform to the fore with executive actions aimed at improving transparency and data on patents and litigation activity. The Federal Trade Commission also announced a planned investigation into the NPE business model. And earlier this year, the White House pushed the matter further with initiatives to improve patent quality through crowdsourcing of prior art and better training and tools for United States Patent and Trademark Office examiners. Those efforts appear to be mirrored by a judicial branch that agreed to hear a record seven patent cases this past year. I didn't give the investors a précis on each, but knowing that Wall Street has been aware of the debate over the patentability of software, I did note that Alice Corp. v. CLS Bank has been heard by the Supreme Court, and that the case is expected to provide further clarity regarding patentability of computer-implemented inventions in the wake of Bilski v. Kappos.
I also discussed the recent decision in Octane Fitness v. Icon Health and Fitness. Determining when the loser pays was the most important issue for many of the reform-oriented companies and also the most polarizing for the other side. Earlier this year, it was looking like some form of “loser pays” system would end up in the Senate bill, and so the debate focused on what it might look like.
On April 29, 2014, the wind was taken out of the sails of that effort when the Supreme Court issued its decision in Octane. It replaced the Federal Circuit's 2005 test for awarding attorneys fees in patent cases. But when you look a little deeper, you find that this is not a “new” test at all and essentially returns to the 1952 Patent Act that allows for fee shifting in exceptional cases. No doubt, there will be years of additional decisions by the lower courts interpreting the Supreme Court's “new” guidance.
I ended with a quick look at recent legislative activity around reform and offered some perspective regarding the dozen or so patent reform bills introduced in the past year. It's clear that some additional reform may occur in the legislative branch, but right now, none of the currently proposed laws appear able to gain the combined support of the House and Senate.
If there was a takeaway for the investors, it was that change doesn't come easy in Washington. But even though case law evolves slowly and comprehensive legislative changes are rare, the good news is that progress seems inevitable.