Patent Reform

Tue, 9/2/2014 - 1:48PM — VALUATION

On September 16, 2011, President Barack Obama signed the Leahy-Smith America Invents Act (AIA). This act resembles the Patent Reform Act of 2009, which died in the Senate, and marked the first major change to the U.S. patent system since 1952. Notably, the AIA implemented the “first inventor-to-file” system. Effective as of March 16, 2013, the U.S. patent system was switched from a “first-to-invent” to a “first inventor-to-file” patent system. This system harmonizes the U.S. system with the majority of the world and urges inventors and companies to accelerate the process of concept to filing.1 However, this bill neglected to address the problems of low-quality patents and frivolous patent litigation. Since the enactment of the AIA, patent litigation frequency and cost has risen precipitously. The rapid growth has been attributable in large part to the growing number of patent assertion entities (PAEs). The figure below displays the steep rise in PAE litigation cases.2

A subsequent patent reform bill was passed through the House of Representatives on December 5, 2013 - the Innovation Act. Under the Innovation Act, judges may shift litigation expenses incurred by the prevailing party to the losing party in an infringement case “unless the courts find that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact, or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.”3  In an effort to address the problem of PAEs, Bob Goodlatte (R-VA) says this bill “will eliminate the abuses of our patent system by discouraging frivolous patent litigation.”4  Nonetheless, this fee-shifting can impose a burden on small innovators and companies because of the possibility of losing a lawsuit and incurring exorbitant litigation costs. Fee-shifting could impact the ability of a small company to enforce its patented technology, which may devalue the patents themselves.

All traction on patent reform stalled on May 21, 2014 when Senator Patrick Leahy, chairman of the U.S. Senate Judiciary Committee, officially removed the patent reform bill from the committee’s agenda. Leahy suggested that, due to a lack of consensus amongst stakeholders, the bill would be temporarily suspended. Senator Leahy is hopeful that the patent reform bill can be discussed later this year, but based on what is already on the legislative calendar, it may remain a low priority for Congress. Additionally, if the Senate does pass a patent reform bill, it will more than likely differ from the same reform passed by the House. It is not unreasonable to assume that patent reform in 2014 is effectively dead.

A special thanks to Josh Gammon and Patrick Fagan for contributing to this blog post.


Photo by Jorge Franganillo / CC BY-SA 4.0

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Ocean Tomo’s Valuation professionals are recognized as experts in IP and intangible asset valuation, having performed hundreds of strategic valuations for Fortune 500 companies, and small-to-mid-sized businesses, across a variety of industry segments. Managing Director Greg Campanella leads the Management Services Group and the Valuation Practice for Ocean Tomo.

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