[Update: the America Invents Act passed. Interesting passage from one of the reports: “Companies like Google, Dell, IBM, Apple, Cisco, and others also applauded the bill’s passage.  Innovation Alliance, which represents smaller tech companies, was more muted in its response. The bill was criticized by some in Congress for favoring larger businesses.” Indeed. The primary change to “first to file” and the secondary change allowing more administrative appeals benefits large companies with large budgets for patent filings. It doesn’t do anything at all to help small businesses; it puts them at a competitive disadvantage.

Update II: Freakonomics has a post about a recent study indicating that, when Canada passed the same change to “first to file,” individual inventors were disadvantaged. That’s consistent with my analysis below.]

Patent trolls, particularly software patent holding companies, are back in the news again with an excellent This American Life broadcast, “When Patents Attack”, examining Nathan Myhrvold’s company, Intellectual Ventures:

We told Intellectual Ventures that Chris Sacca compared their business to a mafia shakedown and in an e-mail, Peter Detkin called that ridiculous and offensive. He then reiterated some of the arguments you’ve heard about how IV protects inventors and went on to say, “We’re a disruptive company that’s providing a way for patent-holders to recognize value.” (By “recognize value,” he means “make money.”) “That wasn’t available before we came on the scene, and we are making a big impact on the market. That obviously makes people uncomfortable. But no amount of name-calling changes the fact that ideas have value.”

David E. Martin, Chairman of M·CAM Inc. (which has various patent analysis services), told NPR that ‘30 percent of U.S. patents are essentially for things that have already been invented.’

That’s a problem. Software patents have fallen under particular criticism because of their ability to frustrate the fast pace (and sometimes shoestring budgets) of internet startup companies. Smart folks who know about software and startups like Paul Graham and Marco Arment have differing views on whether software should even be eligible for patent protection.

Where ever one falls on it — I represent plaintiffs (in this context, inventors or their assignees) so am generally favorable to them, though at the moment I’m defending a infringement suit, too — there are obviously numerous problems with our patent prosecution and patent infringement litigation systems. In sum, patents are granted too easily and then patent infringement suits are too expensive to defend.

Unfortunately, it seems that Congress (once they figure out if they want to end that whole two-centuries of impeccable credit run or not) has come up with a “solution” that might make the problem worse:

On June 23, the U.S. House of Representatives passed The Leahy-Smith America Invents Act, H.R. 1249, by a 304-117 vote. The vote follows the U.S. Senate’s March 95-5 vote for S.23, but differences between them mean the bills must be reconciled before becoming law. …

Each of the bills includes new post-grant review processes allowing challenges to issued patents for a set period of time. They would also change the inter partes re-examination process, which can be triggered by anyone who is not the patent owner, including an alleged infringer. Both bills allow for inter partes review either after the PTO grants a patent or after the post-grant review. …

[Stephen Moore of Kelley Drye & Warren] said each of the bills would create too many avenues for third parties to disrupt and delay a filer’s patenting process. “If I really don’t want your patent around, I will put you into a post-grant challenge or an opposition,” Moore said. “If you can get out of your opposition, I’m going to throw an inter partes re-examination against you.”

The end result is more opportunities to game the system, Moore said. “I don’t see how an independent inventor could afford this process,” Moore said.

Bear in mind that Congress hasn’t done anything to change the types of things that can be patented; under the Act, the patent for thermal refreshing of bread mentioned in “When Patents Attack” would still be appropriate. Software patents are still all the same. Rather than come up with better procedures, Congress simply gave us more procedures. Some might think that’s a feature, not a bug. But consider what happened in the securities fraud class action arena. Congress passed the Private Securities Litigation Reform Act (PSLRA) to make it harder and more expensive to pursue securities fraud cases, and the lawsuits just kept on coming:

After the PSLRA was enacted at the end of 1995, some D&O insurers assumed the statute’s passage would mean that many fewer securities lawsuits would be filed, and so they slashed their insurance pricing. The marketplace followed. When securities litigation ramped back up, the D&O insurance industry suffered hundreds of millions of dollars in losses. The industry paid a lot of tuition to learn that what plaintiffs’ lawyers do is file lawsuits.

Research indicated that, although it appeared there were modestly fewer nuisance suits, there were also modestly fewer meritorious suits, and the PSLRA ended up functioning largely as a tax on all litigation. Some smaller cases went away, but the big, expensive ones stuck around and hit harder than ever.

Here’s another part of the PSLRA that isn’t mentioned as much: it gutted the lower-tier plaintiff’s side securities class action firms and made the top-tier plaintiff’s firms much stronger by flooding them with potential cases, allowing them to be more selective with their cases and even more profitable. Consider the SCAS 50: truth is, these days there aren’t really more than 50 firms doing that kind of work any more.

The same might go for the Leahy-Smith America Invents Act. Individual inventors and startups can’t afford to go through multiple re-examinations in front of the USPTO, while “non-practicing entities” like Intellectual Ventures have nothing but time and money to do exactly that. The end result will be to strengthen their hand even further at the expense of the inventors and small businesses the America Invents Act was supposed to protect in the first place.

It doesn’t have to be this way; there are other options available to begin the difficult process of patent reform. I don’t agree with the Iqbal and Twombly line of pleading cases, but, if we’re going to have heightened pleading standards in federal courts, those pleading standards should be applied to patent infringement cases, too, but they aren’t, at least not for allegations of direct infringement. See McZeal v. Sprint Nextel Corp., 501 F.3d 1354 (Fed. Cir. 2007)(rejecting Twombly approach for patent infringement complaints; see Judge Dyk’s dissent for a detailed discussion); see this article for a little more on contributory infringement and indirect infringement pleading.

Check out the Lodsys complaint against Angry Birds maker Rovio and others. (As NPR found out, Lodsys is an Intellectual Ventures shell company.) It says almost nothing of substance, just the names of the parties and the patent numbers. That could be changed to help weed out weak claims and to narrow the issues in the case early on, thereby reducing the cost of defense.

Truth is, the patent troll companies’ claims often aren’t that strong even under current patent laws, but the defense is so expensive that companies end up settling, often for royalty and licensing agreements (which don’t require as much cash up front) just to avoid the defense costs of the case. Considering how aggressively the federal courts police claims for antitrust (e.g., Twombly) or civil rights violations (e.g., Iqbal), it shouldn’t be hard to apply some of the lessons learned there to reduce the filing and continuation of weaker cases.

Of course, certain defendants, particularly the mid-sized and larger corporate defendants, bear some responsibility for the current state of affairs. Here’s a little plaintiff’s secret: nothing makes a plaintiff’s-side patent infringement plaintiff’s lawyer happier than to see the entry of appearance of an AmLaw 100 big law firm for a defendant. Although the clients might think the entry of a big firm will scare the plaintiffs, we know those firms will soak their clients in six-or-seven-figure fees, thereby compelling settlement. If you get sued for patent infringement, look past the AmLaw 100 and find some boutique or small firm built that isn’t built on the “leverage” model.