A Tipping Point in Rebalancing Our Patent System

President Obama yesterday provided executive leadership on an issue that is of critical importance to American businesses, consumers and the U.S. economy.

The U.S. patent system has long been held up as a model for promoting ingenuity and encouraging our national history of invention and entrepreneurship.  Recently, however, abusive patent litigation brought who have figured out how to game the system for personal gain has become an assault on innovation.  As evidenced by a new White House study out today, this impact on our economy is significant.

This issue has moved from being a tech issue to being a Main Street one where consumers and the middle class are being affected. 

Technology companies were the first victims, starting a decade ago, of a phenomenon that  four Supreme Court justices, in the unanimous eBay decision limiting the use of injunctions as a patent remedy,  described as follows:  “An industry has developed in which firms use  patents not  as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.  For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent.”

This issue has moved from being a tech issue to being a Main Street concern, where thousands of companies and individuals across a broad range of industries, including small businesses, are being affected. These abusive practices are no longer exclusively aimed at Cisco or other high technology companies.  Our customers ­retailers, grocery stores, and small businesses – are now also being targeted. As a  friend who has started a successful business providing eco-friendly packaging for liquids, now beginning national distribution, wrote to me this morning, “Patents are critical to my little company’s long term success.  We’ve not only developed IP but are also manufacturing.  Making us doubly vulnerable. Even a small company like ours falls pray to these trolls and it seems that every time we raise capital they come out of their nasty caves.”

Cisco has for years been forced to defend itself and our customers against frivolous litigation from patent assertion entities (PAEs), which saps resources that would otherwise be used to create new products and technology.  Today, the largest single component in our legal budget goes to defends these cases, with almost $60 million of annual spend on legal fees alone. While a decade ago we had a small handful of patent cases, almost exclusively involving competitors, today we have almost sixty we are defending, with no more than one  or two involving companies that actually practice the invention they claim we infringe.

The White House’s direct involvement in the effort to stop this abusive behavior illustrates the significance of the issue.  The Administration¹s plan identifies key areas of reform, including shifting fees to deter abusive patent litigation tactics – while protecting small inventors’ access to the judicial system when handled in a way that protects intellectual property rather than furthering litigation abuse, requiring transparency in patent ownership, and eliminating the misuse of our trade laws by PAEs, essentially expanding the Supreme Court decision I referred to earlier.  These and other reforms will help rebalance our patent system towards rewarding innovation and away from impairing it.

We expect that the Administration’s ideas, like those being offered in both the House and the Senate across party lines, should result in timely and significant reform.  We look forward to working with the Administration and both houses of Congress to help make these reforms a reality.

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