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A little known part of patent reform endangers all patents

The stories follow a now-familiar theme, evoking sympathy for the victim and indignation calculated to spur political action. 

The victim: an older couple’s family-owned restaurant, or a young inventor’s breakthrough tech start-up, or a small town’s general-merchandise store that’s beloved by generations of local residents. 

{mosads}And the threat? “Patent trolls”.  More specifically, a letter informing the victim that she uses, say, a Wi-Fi router or computer scanner with patented technology inside and demanding a hefty fee lest the patent owner take the victim to court. The well-meaning but anxious victim, unacquainted with the intricacies of patent law, has little choice: Pay up, hire a lawyer and face exorbitant legal fees, or close their business. 

What could be more unfair?

This narrative is driving one of the least understood but most insidious measures in the patent bills currently on their way to floor votes in the House and Senate: the so-called “covered customer stay” provision. In essence, “customer stay” allows a manufacturer to step in and take on accusations of patent infringement in court, shielding retailers, consumers and other “covered customers” whose own lawsuits would be “stayed” (or suspended) until the patent owner and manufacturer have sorted out their dispute. 

Sounds like a solid solution.  Except that it’s not.  The “customer stay” language in the pending legislation could ravage intellectual property rights, while ironically causing more patent litigation instead of less.  Not the kind of “two-for” we need for our patent system right now. 

Misdirected patent litigation is a problem worth addressing, but the reform narrative is grossly overwrought and vastly exaggerated, yielding a correspondingly overbroad solution. The “customer stay” language in front of Congress uses a hazy definition of “customer” that encompasses everyone from the end-user of a technology to commercial entities up the supply chain all the way to the overseas manufacturers. Worse yet, the bills dictate a rigid application of “stay” by making it mandatory for judges. 

If the current “customer stay” language becomes law, the maker of a patent-infringing product could easily evade accountability by arranging a network of overseas manufacturers to construct the infringing components, and then assemble the pieces. Such supply-chain positioning is easily manipulated. 

Then, when the patent owner sues the product maker, each manufacturer could take turns stepping in to ask for a “stay” as it faces the patent owner in court – in far-flung legal venues, and with different, more complicated rules than a patent owner faces when simply suing a firm that sells an infringing product. Only after years of costly lawsuits against the upstream parts makers could the patent owner finally get her day in court over the alleged theft. 

Most small businesses relying on their patents to bring in both investment and income could never survive this. 

All the while, the infringer, which didn’t have to spend money on R&D to create the patented technology in the first place, could sell the product more cheaply than either the patent owner or rival manufacturers who rightfully pay to license the technology. 

The persecuted mom-and-pop operations used to justify the “customer stay” measures become unsympathetic when “mom” is a multinational conglomerate sourcing infringing goods from a manufacturing facility in China, no? Or how about when “pop” is a mobile retailer selling phones on which he has installed unlicensed software to undercut his competitors? 

And what of the case where that mom and pop really are a mom-and-pop operation unfairly targeted by someone nefariously abusing the patent system? 

“Customer stays” do make sense in such cases, and fortunately, courts already have the discretion to grant stays. For years, judges have “stayed” cases against “customers” while separate cases played out against manufacturers, the large majority of the time when asked, and the number of these “stays” has increased in the wake of a high profile 2014 decision by the U.S. Court of Appeals for the Federal Circuit. 

The key to assuring proper use of the “stay” is discretion, and one of the biggest problems with the current legislation is that it takes decision-making in this area out of a judge’s hands. This is a recipe for recurring miscarriages of justice. 

The other big problem with the “customer stay” provisions in front of Congress is the almost infinite meaning of “customer.” The legislation must narrowly limit “customer stays” for the true retailers and end-users who genuinely deserve our sympathy. The alternative is a system open to abuse far greater and wider than what’s envisioned by the worst accusations against today’s patent system. 

Many patent reformers seem to forget: abuse goes both ways. 

As the House and Senate rework the patent bills aimed at protecting victims of abusive patent litigation, legislators must remember as well to protect the millions of inventors of innovative technologies whose patent rights are their livelihood.  Otherwise, these innovators will be the ones forced to close down.

Kappos is a lawyer with Cravath, Swaine & Moore. He served as the under secretary of Commerce for Intellectual Property and director of the United States Patent and Trademark Office (USPTO) from 2009 to 2013.


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