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Patent reform and the Covered Business Method program
Expanding the 'Covered Business Method' program: Sensible patent reform ... and why opponents have it wrong
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Before the summer Congressional recess, a broad coalition of job-creating businesses added their voices to the pro-reform chorus with a ringing letter to Congress urging that expansion of the Covered Business Method (CBM) program be a cornerstone of any patent reform legislation being considered.
The CBM program provides an innovative, carefully tailored means to address a particularly heinous abuse: manipulating the patent litigation system through aggressive use of unclear and overly broad business method patents by patent aggression entities (PAEs). It is currently limited to business method patents involving financial service products.
These type of patents, rather than embodying meaningful innovation, are a disproportionate basis for PAEs’ abusive tactics. They can be used to assert almost any infringing act. When their validity is challenged in court, defendants win more than 90% of the time—but only after spending millions of dollars. The CBM program is an appropriate, more cost-effective alternative to lengthy litigation in these situations.
The coalition letter, signed by Red Hat, reflects a wide array of sectors. It bolsters efforts like those by Sen. Charles Schumer (S. 886, the "Patent Quality Improvement Act of 2013") and Cong. Darryl Issa and Cong. Judy Chu (H.R. 2766, the "Stopping the Offensive Use of Patents Act," or "STOP Act") who have introduced companion legislation to remove the program’s sunset (AIA provides it will end in 2020) and expand the program to cover all business method patents (not just financial services business methods patents, as the law currently provides).
The coalition effort also recognizes the steps taken by the White House earlier this year, as part of its legislative and regulatory reform priorities, which called for expanding the CBM program "to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board (PTAB)."
Some are opposed
Not surprisingly, some public opposition to expanding and extending the CBM program has emerged.
Concerns generally come from the traditional patent bar, which views any changes to the patent system with skepticism. A former long-time senior official at the US Patent & Trademark Office is typical of this view, expressing concern about possible "uncertainty" with the proposed expansion.
In addition, a number of larger software companies are working against any expansion. While acknowledging the need to correct the economic asymmetries that make abusive patent litigation an attractive business model for PAEs, they and their representatives voice concerns with "singling out computer-enabled inventions as class" and that the CBM program has only been in effect a short while. Just last week, a letter signed by around 100 firms, led by trade groups like the National Association of Manufacturers (NAM), BSA | The Software Alliance, and the Biotechnology Industry Organization (BIO), restated their opposition in a letter to Capitol Hill.
A look at the arguments
Let’s look at the specific arguments put forward by the those who oppose the measure.
Singling out software-related patents undermines the patent system. This line of argument reflects a long-standing principle of the traditional patent community that all patents should be treated equally; distinguishing among them risks the integrity of the system.
But the unique impact of software-related patents on abusive litigation is now well recognized. As the White House report, Patent Assertion and U.S. Innovation indicated, "PAEs take advantage of uncertainty about the scope or validity of patent claims, especially in software-related patents." Numerous studies, including decades-long work of the Federal Trade Commission (FTC), precede and reaffirm this unambiguous effect. Software patents are the subject of a disproportionate share of patent litigations. Over half (55%) of all patent defendants and 82% of PAE defendants are there because of a software patent, many of which are vague, overbroad, and likely to be invalid.
In fact, patent policy has recognized that differentiation can in fact enhance the system to address problems and pitfalls that arise. Notably, the Drug Price Competition and Patent Term Restoration Act, (the 'Hatch-Waxman Act') codified distinct treatment of pharmaceutical patents, a response to the particular regulatory and litigation environment in which they operate.
If this line of argument is taken to its logic conclusion, those pushing it would have to explain why they also support the US PTO’s "Software Qualty Partnership" efforts, which are predicated on the agency’s assessment that "software-related patents pose unique challenges from both an examination and an enforcement perspective." As documented at the roundtables and in comments to the US PTO earlier this year, the current system already distinguishes treatment of software-related patents in a variety of ways.
In fact, the same standard for patentability that applies to every other patent will apply to those subject to the CBM program. Expanding the CBM program does not change the standards for patenting business methods. It provides a procedural response to the specific litigation abusessurrounding these patents, which are nine times more likely to be litigated than other categories of patents. (This point directly answers the concern expressed in the NAM-BSA-BIO letter regarding potential TRIPS Article 27 concerns.)
There are existing procedures to challenge patent validity. Those making this argument point to the availability of existing procedures, which have been updated with the AIA. The two most applicable here are post-grant review and inter partes review.
While certainly important tools for certain situations, none of these existing procedures are designed to address the unique impact of software-related patents on patent litigation abuse.
For example, even if the current flaw (correcting the scrivener's error in the estoppel provision in the AIA) regarding post-grant review is fixed in the current legislative reform effort, it will apply only to patents having an effective filing date after March 16, 2013, thereby excluding the vast majority of potentially eligible poor quality patents.
Moreover, under traditional inter partes reexamination or post-AIA inter partes review, the potential bases for the request are strictly limited to granted patents and printed publications. But for claims covering software-related patents, much of the best prior art is often functioning computer systems or commercial products. These are unavailable for consideration in either reexamination or review.
The CBM program, however, because it is a response to the unique nature and challenges of software-related patents, permits the submission of anything that is prior art pursuant to Section 102(a) of the Patent Act, which includes art known or used by others in the US.
In short, only the CBM program is designed to allow the US PTO to consider whether these type of patents are invalid for being vague, over broad or abstract.
The CBM program places too much burden on the US PTO and patent owners should have their day in court. Those working against expansion of the program, even against its current formulation, assert that expansion of the program, in the face of rising demands and sequestrations cuts, overly burdens the US PTO with a new obligation. Instead, they argue, patent owners should be able to have their unrestricted day in court.
As a narrowly tailored solution to a specific problem, which can only be initiated once litigation has been started or threatened (unlike other forms of review), opponents of the CBM program and its expansion are likely exaggerating the number of cases that will be brought. This is particularly true since the statute limits the CBM program to exclude patents that are a technological innovation. In any case, review is not cheap and funds the program (the fee to be paid to US PTO to request a CBM review is $30,000). I remind readers that the White House included expansion of the program in its priorities earlier this year.
The impact of the potential for review, however, cannot be underestimated, as it will contribute—like other provisions being considered on cost/fee shifting, clarity of plea pleadings, etc., in legislative reforms—to correcting the current imbalance that fuels PAEs in their litigation calculations. Defendants in PAE suits often settle based on the cost of litigation and not on the merits. A less expensive alternative to litigation is desperately needed.
As for concern about precluding patent owners’ day in court, the CBM program is available only when the patent owner has put a ‘covered’ patent into play by bringing suit or threatening to sue. It cannot be used to challenge a whole portfolio. (The NAM-BSA-BIO letter ignores this fact.) A party challenging validity under the program must submit a substantial, 'front-loaded' petition setting out all its arguments and evidence. The US PTO will institute review only if it determines based on the petition and response that it is "more likely than not" that the patent is invalid, hardly a dam-busting threshold.
Where litigation has begun, judges may stay a District Court proceeding involving a ‘covered’ patent review using a number of factors that encourage efficient proceedings—and give PAE defendants their chance to bring their best invalidity argument before experts at the US PTO without destroying their ability to defend themselves in the future.
A reasonable, tailored approach
Ultimately, the expansion of the CBM program shifts the high cost of abusive litigation (the cost of which for a target of PAE threats can approach millions of dollars, even if there is settlement) away from the over burdened courts into a carefully tailored review program.
The program is designed to bring clarity as quickly as possible to patents that are notoriously and far too often overbroad, unclear, and used to game the patent litigation system.
This is far from the promotion of 'uncertainty' as suggested by some. Rather, its the embodiment of current reform efforts to reduce litigation abuse and help restore confidence in our patent system.
Ed. Note: A shout out to my colleague, David Perry, whose expertise and insights were invaluable in preparing this post.