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US House Passes Innovation Act; Should the Apparel Industry Celebrate?

In a move that many think will have reverberations for the apparel industry, the U.S. House of Representatives passed the Innovation Act of 2013 by a vote of 325 to 91. The bill is designed to impede the increasingly common practice of non-practicing entities (NPEs) from buying up patents for the purpose of suing businesses and entrepreneurs for infringement, a strategy often referred to as “patent trolling.”

Introduced last October by Rep. Bob Goodlatte (R-VA), the chairman of the House Judiciary Committee, the bill quickly garnered bi-partisan support despite being a lighting rod of controversy among industry leaders. While many argue that stricter regulations regarding patent infringement will reduce gratuitous litigation that undermines entrepreneurial risk taking, others say it will stymie innovation by making the costs of patents prohibitively high.

Amidst the controversy, there is general agreement that patent trolling has become a serious problem. According to Mike McGreary, spokesperson from Engine Advocacy and Electronic Frontier Foundation (EFF), “It almost comes down to extortion. A young company announces even seed funding or an angel or Series A and gets into Techcrunch, and then it gets a demand letter from a long list of lawyers regarding patents that are vague or old and as simple as password protecting documents on a website.”

The problem, according to McGreary, is that the costs of handling the lawsuit, even if a settlement is avoided, diverts funds from business growth. “[The settlement money] could be spent on productive activities like building product. Paying off patent trolls–it’s not creating anything. It’s not building the economy.”

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Retailers actually turn out to be particularly susceptible to patent trolling due to their e-commerce sites, which often rely upon cutting-edge cyber-technology. According to Bob Provenzano, National Retail Federation’s senior director for federal government: “Innovation is playing a huge role in the growth of the retail industry … A lot of the patent infringement claims are on the very innovation that retailers are using, like online shopping carts [and] search engines on websites.”

At the heart of the Innovation Act is a preventive measure: the burden of paying for a trial over patent infringement falls on the loser, potentially providing a powerful disincentive to frivolous lawsuits. There are also considerably revised “pleading requirements,” which mandate the plaintiff to present a much more articulate grounds for litigation prior to trial.

Kevin Burke, president of the American Apparel and Footwear Association (AAFA), said, “It is time to end the abusive and frivolous lawsuits perpetuated by nuisance patent trolls. The U.S. apparel and footwear industry, like so many other industries across our economy, will face continued threats of unwarranted litigation unless we rein in this behavior.  The Innovation Act is a step in the right direction.”

Still, even Burke’s endorsement comes with a significant qualification. He added, “As the legislation now moves to the Senate for consideration, there is still opportunity to improve key provisions of this important legislation.  While we support the intent of the Innovation Act, we urge Congress to go further in preventing this abusive practice by strengthening key provisions of the bill.  For example, the customer stay of enforcement provision, which would require any customers of a product to be subject to the outcome of the initial lawsuit no matter what that outcome is, should be more limited in scope.”

Others are even more anxious that the newly passed legislation has the potential to create barriers to entrepreneurial activity indiscriminately. Austin Curry, principal at Caldwell, Cassady & Curry, said, “It arbitrarily raises the cost of litigation for all plaintiffs and all defendants.”

A statement issued recently by the Higher Education Community, a group of academic institutions devoted to the defense of innovation by university scholars, argues that the law’s pressure on patent trolling is outweighed by its corresponding impact on legitimate patent defense. The statement said, “The ability of universities to transfer inventions resulting from such research into the commercial sector for development relies heavily on the ability of these institutions and their licensees to defend their patents. But the sweeping provisions of H.R. 3309 would undermine that ability, chilling innovation by discouraging the legitimate enforcement of patent rights.”

Some legislators have cautioned that the bill is premature, needing additional deliberation to be both effective and equitable. Reps. John Conyers (D-MI), Mel Watt (D-NC), Mo Brooks (R-AL) and Thomas Massie (R-KY) have collectively recommended that the vote passing the bill be delayed, allowing more time for congressional review.

The last several years have ushered in the most patent law innovations since the 1950’s. In 2011, President Obama signed the Leahy-Smith America Invents Act, which affected a historic shift from a regime of “first to invent” to “first inventor to file.”