December 18, 2015
Law360
By Lionel M. Lavenue; R. Benjamin Cassady; Michael Liu Su
Authored by R. Benjamin Cassady, Lionel M. Lavenue, and Michael Liu Su
With the prompting of President Obama, legislators in the United States Congress introduced two expansive bills and four narrower ones early this year.1 Many thought that legislation to address perceived problems with the U.S. patent system, including lawsuits by nonpracticing entities and unintended consequences of the post-grant proceedings created by the America Invents Act, would pass. The White House urged reform as did some justices on the U.S. Supreme Court and many members of Congress. Reform thus seemed inevitable in 2015. But it appears that 2015 will now end without new patent legislation.
Indeed, as of mid-December 2015, not even one bill has been put to a vote, while many of the same issues persist. Congress seems content to remain on the sidelines, despite a surge in patent case filings that will break the record set in 2013. NPE filings are driving the pace—68 percent of the cases filed in the first half of 2015 were filed by NPEs.2 Indeed, in the weeks leading up to the Dec. 1, 2015, change in the Federal Rules of Civil Procedure (which raised the pleading standards for patent cases), the number of newly filed patent cases spiked dramatically to more than three times the number filed in the same period last year.3
One of the proposed bills, the Innovation Act—originally introduced by Rep. Bob Goodlatte, R-Va., in October 2013 and advanced as "the solution to the problem of abusive patent litigation"4—swiftly passed the House in December 2013, but its Senate counterpart, the Patent Transparency and Improvements Act (S. 1720) (introduced by Sen. Patrick Leahy, D‑Vt., in November 2013), stalled and died. At the time, many hypothesized that the Republican-majority House and the Democratic-majority Senate would simply never be able to reconcile their legal and political differences.
So when Rep. Goodlatte reintroduced the Innovation Act in the current Congress, there was great optimism that the bill would pass, with a Republican-majority House and Senate. Although the revived version of the Innovation Act started with the same provisions as those of its predecessor, both the Innovation Act and its Senate counterpart, the PATENT Act faced even greater opposition this time around. Both acts were marked up and approved in June by the House and the Senate Judiciary Committees, respectively. But, in July, members of Congress from both parties strongly voiced opposition to the two bills.5 Other interest groups similarly voiced their dissatisfaction and opposed the bills, and thus, neither bill has been put to a vote. The other four proposed bills have not made great progress either. All of them still languish, and none is expected to pass in this Congress in 2015.
The Innovation Protection, the Demand Letter Transparency and the Targeting Rogue and Opaque Letters Acts all target narrow issues with the current patent system, and therefore they are not as contentious as the bills aimed at more sweeping reform. The Innovation Protection Act is narrowly tailored to protect the resources of the patent system by ending fee diversion from the U.S. Patent and Trademark Office. The DLT and TROL Acts both try to crack down on "abusive use" of demand letters, and both include provisions enabling courts to impose sanctions or reduced damages on parties improperly sending demand letters. Failure to comply with the TROL Act could also subject distributors of improper letters to penalties by the Federal Trade Commission.
The STRONG Patents Act, introduced by Sen. Chris Coons, D-Del., in March 2015, seeks to "strengthen patents" by making them harder to invalidate through post-grant proceedings and specifically the new proceedings created by the America Invents Act. The STRONG Patents Act would require a clear-and-convincing-evidence standard for challenging a patent, as opposed to the current preponderance-of-evidence standard. The act would also provide a patentee, when facing a challenge to its patent claim, the option of canceling that claim or proposing a reasonable number of substitute claims, which would also be reviewed for patentability using a preponderance-of-the-evidence standard.
In addition to changing the standard of review, the STRONG Patents Act would also limit the entities with standing to bring challenges before the Patent Trial and Appeal Board. Currently, anyone can file a challenge against a patent, assuming none of the AIA's preclusions apply.6 Under the proposed legislation, only entities that have been sued for infringement or have standing to bring a declaratory judgment action (i.e., an actual case or controversy exists) may petition the PTAB to review a patent. Further, the proposed legislation restricts which judges at the PTAB may ultimately decide whether a patent is invalid, actually precluding those judges who participated in the decision to institute a post-grant proceeding from deciding the patentability of the challenged patent. Also, the proposed legislation would mandate that ex parte re-examinations, which can currently be filed by any party at any time, be filed by an accused infringer within one year of receiving service of a complaint for patent infringement.
In stark contrast to the STRONG Patents Act, the Innovation Act and the PATENT Act would moderately raise the bar for invalidating patents through post-grant proceedings and make it more difficult to enforce patents by raising pleading standards and providing for fee-shifting. These last two areas of reform have been highly contentious, although changes implemented by the courts since these two acts were initially proposed have called the need for these reforms into question.
When the Innovation and PATENT Acts were proposed, a complaint for patent infringement simply required compliance with Federal Rule of Civil Procedure 8, which demands "a short and plain statement of the claim showing that the pleader is entitled to relief." Form 18 of the Rules provided a de facto "compliant pleading template" that required mere identification the asserted patent and the alleged infringing instrumentality. According to proponents of the Innovation and PATENT Acts, this de minimis pleading standard encourages patentees to use vague complaints as leverage for extracting settlements.7 The loose pleading requirements, they say, also enable patentees to file complaints through shell subsidiaries, obfuscating the true identity of plaintiffs.8
The Innovation and PATENT Acts seek to address these alleged "problems" by requiring much greater specificity in patent-infringement pleadings. For example, both bills would require not only an identification of each patent and claim allegedly infringed, but also an element-by-element analysis of how the accused instrumentality meets all the claim limitations, so long as the required information is "readily accessible" (Innovation Act) or "accessible after a reasonable inquiry" (PATENT Act).
The Innovation Act demands further pleading specificity, including, among other requirements, a description of the authority of the plaintiff to assert the patent, a description of the plaintiff's principal business, a list of complaints filed that asserted the patent, and a statement about whether the patent is subject to standard-setting requirements. Upon filing a complaint for infringement, plaintiffs must also provide "Initial Disclosures," which include an identification of the assignee of the patent, any entity with a right to sublicense or enforce the patent, any entity known to have a financial interest in the patent, and the ultimate parent entity.
On Dec. 1, 2015, however, modifications to the Federal Rules eliminated Form 18, requiring patent complainants, like other litigants, to meet the heightened pleading standards promulgated by the Supreme Court in the Twombly and Iqbal cases,9 though the extent of the information district courts will require patent complainants to plead under the new rules will not become evident until the viability of recent complaints are tested by motions to dismiss. In any case, however, it is unlikely that district courts will require complaints to contain the depth of information proposed in the Innovation and Patent Act, so although the rule change may alleviate some of the concerns of the proponents of the Innovation and PATENT Acts, it will not go as far as the drafts of those acts envisioned. Nevertheless, Congress may allow implications of the rule change to take shape before passing any legislation that tinkers with the pleadings standards.
Regarding fee-shifting, according to proponents of the Innovation Act and the PATENT Act, patentees allegedly have an advantage under the traditional "American Rule," where each party generally pays its own fees, absent exceptional circumstances.10 Since accused infringers often face higher fees and costs of litigation, this rule arguably drives wrongly accused parties to settle, especially when the total attorney's fees and costs to defend the case exceed settlement costs.
Notably, while Congress considered the fee-shifting provisions, the Supreme Court's opinion in Octane Fitness LLC v. ICON Health & Fitness Inc.11 altered the fee/cost paradigm significantly, lowering the bar for what constitutes an "exceptional case" warranting a fee award. Under Octane Fitness, attorneys' fees and costs may be awarded to a prevailing party where the substantive strength of a party's position "stands out from others," as shown by a preponderance of the evidence. Before Octane Fitness, "exceptionality" required clear and convincing evidence and, typically, independently sanctionable conduct or bad faith.
The Innovation Act and the PATENT Act seek to make the recovery of fees and costs even easier. The Innovation Act would make fee-shifting the default rule, always awarding the prevailing party reasonable fees and expenses, unless the nonprevailing party's position and conduct were "reasonably justified" or "special circumstances make an award unjust." Further, a party may move to require the opposing party to certify its ability to pay such fees; if it cannot, the court may make an interested party that can pay join the suit. According to the bill's proponents, this would restrict the practice by which NPEs file suits through underfunded shell companies to shield themselves from liability for questionable cases.
The PATENT Act does not go so far as to make fee-shifting the default rule. Instead, it would require the court to determine whether a nonprevailing party's position was "objectively reasonable in law and fact," and whether the party's conduct was "objectively reasonable." Similar to the current standard set by Octane Fitness, if the court finds a party's position or conduct objectively unreasonable, it must award reasonable attorney's fees, absent special circumstances making an award unjust. Further, under the PATENT Act, a defendant may file a statement that the primary business of the plaintiff is the assertion and enforcement or licensing of patents; then the plaintiff must provide a certification establishing that it has sufficient funds to pay an award of attorney's fees, demonstrating that its primary business is not patent enforcement and licensing, or identifying an interested party that may be held accountable for fees, to the extent one exists and does not renounce its interest.
On the post-grant-proceedings front, both the Innovation and PATENT Acts would change the claim-construction standards for inter partes review and post-grant review from "broadest reasonable interpretation" to "ordinary and customary meaning." Further, they would require that PTAB judges consider claim constructions made previously by district courts. Narrowing the standard for claim interpretation in this way would make it more difficult to invalidate patents.
To prevent so-called frivolous challenges to patents, the PATENT Act would require the patent office to issue regulations making clear that a party challenging a patent "does so under an obligation substantially similar to the obligations contained in Rule 11 of the Federal Rules of Civil Procedure." Rule 11 allows courts to impose sanctions on attorneys whose filings are frivolous or lack evidentiary support. Members of the Senate Judiciary Committee said that imposing a similar obligation would "prevent[] gamesmanship" in PTAB proceedings.
In one tip of the hat to a more relaxed standard for PTO review, the PATENT Act also seeks to change the scope of estoppel for PGRs by striking the "reasonably could have been raised" language, limiting estoppel to positions actually presented for review. However, in a restriction, the PATENT Act would bind a party in an IPR to any representations regarding claim construction made by that party in any other patent office or district court proceedings.
In the aggregate, the Innovation Act and the PATENT Act favor patent defendants. The groups supporting and opposing the bills have thus fallen into somewhat predictable camps. Technology companies that have largely been the target of NPE litigation generally support the legislation, while independent inventors, startups and universities, who have concerns about legitimate patent enforcement, generally oppose the bills.
While the Innovation Act and the PATENT Act draw support from the government and different industries, a close look at the supporters shows that they welcome the legislation for different reasons.
The USPTO has repeatedly indicated its support for the Innovation Act. For example, during a hearing on the bill before the House Judiciary Committee, USPTO Director Michelle Lee testified that she was pleased with the reintroduction of the Innovation Act and supported its fee-shifting presumption.12 She indicated that the Obama administration generally supports the Innovation Act and that the bill should target abusive actions while giving innovators the flexibility to assert their legitimate patent rights. She also pointed out that the Obama administration supports setting higher pleading standards that would require a detailed explanation of how asserted patents are infringed. Regarding the act's proposed change to the "American Rule," Director Lee noted that "fault based fee-shifting will raise the costs for those who engage in abusive tactics."
According to opinion articles in the press, many technology companies have been targets of abusive NPE patent litigation, and unsurprisingly, they support the Innovation and acts, sharing Director Lee's belief that heightened pleading standards and fee shifting would help curb the use of baseless and exploitative NPE cases. For example, the Software and Information Industry Association has openly stood behind the Innovation Act.13
On the other hand, those in the pharmaceutical and biotechnology industry generally support the bills for a wholly different reason—reforming post-grant proceedings. The industry has rarely been the target of abusive NPE patent litigation and has thus traditionally remained a bystander to the introduction and promulgation of patent-reform legislation. But in 2015, some companies in the industry became targets of arguably abusive IPRs filed by third parties proactively challenging patents for questionable reasons, including manipulating market conditions by casting doubt over the intellectual property of market participants. As a result, the industry began pushing for amendments to the bills that changed the evidentiary and pleading rules for IPRs, making them akin to district court patent litigation (and reducing the incentive for third parties to file IPRs).14 Such amendments would not be a well-received change by those in the technology industry frequently targeted by NPEs, because the amendments would make it more difficult to challenge questionable patents, especially those enforced by NPEs.
On the flip side, those opposed to the Innovation Act and the PATENT Act seem more unified. The many critics of the proposed acts include independent inventors, startups, venture-capital associations and universities. As voiced by members of Congress representing these opponents, one of the biggest problems with the bills is their failure to effectively distinguish well-meaning inventors, startups, and universities from "abusive NPEs."15 Critical of the bills' failure to distinguish between "trolls" and "legitimate patent holders," university representatives, in an editorial in the Wall Street Journal, stated:
Not every patent holder seeking to protect its patent from infringement is a troll. Indeed most are not. Yet the Innovation Act starts from such a presumption, sweeping legitimate patent holders, including universities, in with trolls, making it considerably riskier and costlier for all patent holders, not just patent trolls, to enforce their patents against violators.16
The opponents worry that the bills' provisions aimed at curbing abusive patent litigation would also chill legitimate patent enforcement.
Moreover, the proposed heightened pleading standards and fee-shifting provisions in the Innovation and PATENT Acts would raise enforcement costs, potentially harming independent inventors and startups without the resources of established technology companies. Indeed, because patent and other intellectual property rights often constitute a significant part of an independent inventor's or startup's assets, those rights sometimes serve as the primary assets for attracting investors. If those rights cannot be cost-effectively enforced, they lose value, discouraging potential investors.
Many universities also oppose the bills' fee-shifting provisions (and especially those in the Innovation Act), arguing that they impose an unfair burden on researchers. Many universities reap benefits from their research efforts by way of technology-transfer offices. These offices can operate similarly to NPEs, in that they seek to negotiate patent licenses and will, if necessary, bring enforcement lawsuits. Universities fear that their legitimate activities in enforcing their educationally obtained technology rights will be conflated with abusive NPE tactics under the proposed fee-shifting provisions.
In June 2015, a coalition of universities, inventors, manufacturing-technology and life science companies, venture capitalists, and startup communities released a joint statement arguing that the Innovation Act would "dramatically weaken intellectual property rights, harm U.S. competitiveness and undermine a patent system that has been critical to incentivizing innovation and job creation in our country for more than 200 years."17 With such opposition, the chance of success for the Innovation Act and the PATENT Act has dwindled almost to zero.
The stark contrast between the STRONG Patents Act and the Innovation and PATENT Acts highlights the effects of special interests on patent reform. Even though technology companies, the biopharmaceutical industry, startups, individual inventors and universities include innovators who should be the intended beneficiaries of Congress' mandate to promote the progress of science and the useful arts, each of these entities has various and competing concerns about the current patent system that have brought reform legislation efforts to a grinding halt.
Given these competing interests by so many different parties, it makes practical sense for Congress to sit back and give the courts time to incubate the new changes in law—namely, the recent eradication of Form 18, and the Supreme Court's decisions in Octane Fitness and Alice v. CLS Bank18—that may alleviate some concerns reformers have about "abusive litigation practices." The USPTO and courts may also address concerns with the post-grant proceedings before Congress can act, as the Supreme Court may hear argument on the claim-construction standard used in those proceedings next term.19 Thus, instead of sweeping reforms, which often bring uncertainty and unintended consequences, narrow carve-outs where there is clear consensus—e.g., stopping abusive demand letters—may be the best course forward for the bills in the current Congress. But whatever is best, the fact remains that nothing is likely to happen this year, and any potential for patent reform will have to wait for another congressional term.
Endnotes
1 To date, members of the current Congress have proposed six bills on patent reform, which include: (1) the Innovation Protection Act (H.R. 1832); (2) the Demand Letter Transparency (DLT) Act (H.R. 1896); (3) the Targeting Rogue and Opaque Letters (TROL) Act (H.R. 2045); (4) the Support Technology and Research for Our Nation's Growth (STRONG) Patents Act (S. 632); and the two bills taking center stage—(5) the Innovation Act (H.R. 9); and (6) the Protecting American Talent and Entrepreneurship (PATENT) Act (S. 1137).
2 Lisa Shuchman, After a Dip, Patent Litigation Is on the Rise, Corporate Counsel (July 14, 2015), http://www.corpcounsel.com/id=1202732070747/.
3 Matthew Bultman, Patent Cases Spike Ahead of End to Bare-Bones Complaints, Law360 (Dec. 1, 2015), http://www.law360.com/articles/732909/patent-cases-spike-ahead-of-end-to-bare-bones-complaints.
4 Press Release: Goodlatte, Defazio, Issa, Nadler, Smith, Lofgren, Eshoo Introduce Patent Litigation Reform Bill, (Feb. 5, 2015), http://judiciary.house.gov/index.cfm/2015/2/goodlatte-defazio-issa-nadler-smith-lofgren-eshoo-introduce-patent-litigation-reform-bill (quoting Representative Eshoo).
5 Steve Brachmann, Innovation Act delayed in House amid Bipartisan Bicameral Disapproval, IPWatchdog (July 15, 2015), http://www.ipwatchdog.com/2015/07/15/innovation-act-delayed-in-house-amid-bipartisan-bicameral-disapproval/id=59858/.
6 See generally Lionel Lavenue & Andrew Strickland, Behind Bars: A Closer Look at the Statutory Bars for Filing Inter Partes Review Petitions, IP Litigator (May/June 2013), http://www.finnegan.com/resources/articles/articlesdetail.aspx?news=d3b568b8-96b6-416b-b67a-b08ad65a1fb9.
7 See, e.g., Daniel Nazer, Six Good Things About the Innovation Act: Part One, Heightened Pleading, Electronic Frontier Foundation (Oct. 31, 2013), https://www.eff.org/deeplinks/2013/10/six-good-things-about-innovation-act-part-one-heightened-pleading.
8 Press Release: Goodlatte, Defazio, Issa, Nadler, Smith, Lofgren, Eshoo Introduce Patent Litigation Reform Bill, (Feb. 5, 2015), http://judiciary.house.gov/index.cfm/2015/2/goodlatte-defazio-issa-nadler-smith-lofgren-eshoo-introduce-patent-litigation-reform-bill.
9 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662 (2009).
10 Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2164 (2015) ("Our basic point of reference when considering the award of attorney's fees is the bedrock principle known as the American Rule: Each litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise.").
11 134 S. Ct. 1749 (2014).
12 Hearing Before the House Judiciary Committee, No. 114-20 (Apr. 14, 2015), http://judiciary.house.gov/_cache/files/8e33d461-7e7c-49db-ad8f-b623e424485e/114-20-94184.pdf.
13 The Software & Information Industry Association, SIIA Says Judiciary Passage of The Innovation Act is Positive Sign for Patent Reform, Press Release (June 11, 2015), http://www.siia.net/Press/SIIA-Says-Judiciary-Passage-of-The-Innovation-Act-is-Positive-Sign-for-Patent-Reform.
14 Jeff John Roberts, Patent reform inches onwards but poison pill could kill it, Fortune (June 5, 2015), http://fortune.com/2015/06/05/patent-reform-pharma/.
15 Steve Brachmann, Innovation Act delayed in House amid Bipartisan Bicameral Disapproval, IPWatchdog (July 15, 2015), http://www.ipwatchdog.com/2015/07/15/innovation-act-delayed-in-house-amid-bipartisan-bicameral-disapproval/id=59858/.
16 Robert A. Brown & James P. Clements, A Patent-Troll Bill With Bad College Grades, The Wall Street Journal (Apr. 14, 2015), http://www.wsj.com/articles/a-patent-troll-bill-with-bad-college-grades-1429051694.
17 Joint Statement from AAU, APLU, IA, MDMA, NVCA, and USIJ on House Judiciary Committee Markup of H.R. 9 (June 10, 2015), http://innovationalliance.net/from-the-alliance/joint-statement-aau-aplu-ia-mdma-nvca-usij-house-judiciary-committee-markup-h-r-9/.
18 134 S. Ct. 2347 (2014); see also Steven Seidenberg, Business-method and software patents may go through the looking glass after Alice decision, The ABA Journal: Supreme Court Report (Feb. 1, 2015), http://www.abajournal.com/magazine/article/business_method_and_software_patents_may_go_through_the_looking_glass_after.
19 See Dennis Crouch, Cuozzo Takes IPR Challenge to the Supreme Court, PatentlyO (Oct. 7, 2015), http://patentlyo.com/patent/2015/10/cuozzo-challenge-supreme.html.
.
Originally printed in Law360 (www.law360.com). Reprinted with permission. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients
Conference
2024 Licensing Executives Society USA – Canada Annual Meeting
October 20-23, 2024
New Orleans
Conference
4th Annual Passport to Proficiency on the Essentials of Hatch-Waxman and BPCIA
October 8-24, 2024
Virtual
Hybrid Conference
2024 Patent Law Institute: Critical Issues & Best Practices
September 30 - October 1, 2024
New York
Seminar
Intellectual Property in the Age of AI: What Do You Own and How Do You Balance Risks?
September 25, 2024
Boston
Due to international data regulations, we’ve updated our privacy policy. Click here to read our privacy policy in full.
We use cookies on this website to provide you with the best user experience. By accepting cookies, you agree to our use of cookies. Please note that if you opt not to accept or if you disable cookies, the “Your Finnegan” feature on this website will be disabled as well. For more information on how we use cookies, please see our Privacy Policy.
Finnegan is thrilled to announce the launch of our new blog, Ad Law Buzz, devoted solely to breaking news, developments, trends, and analysis in advertising law.