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Patent Law Reform on the Horizon

January 16, 2015

Patent Law Reform on the Horizon

January 16, 2015

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Patent law reform is on the horizon again.  In the last Congress, numerous patent law reform bills were introduced in the Senate and the House but none were passed in both houses.  Comments by leading members of the House Judiciary Committee, Representative Goodlatte (R-Va) and Issa (R-Ca), indicate that patent legislation will be on the agenda again in the recently reconvened Congress.  With a single party controlling both houses, a patent bill seems better poised to pass into law.  What provisions might be included in such a law?  And what impact might they have?

If the bills submitted in the last Congress are any indication, the new legislation will likely focus on measures that are designed to curb abusive tactics in patent litigation, particularly by non-practicing entities (“NPEs”).  This was the intent of Representative Goodlatte’s “Innovation Act” (H.R. 3309) which the House passed handedly in December 2013.  This bill stalled in the Senate where competing bills such as the Patent Abuse Reduction Act (“S.1013”), the Patent Litigation Integrity Act of 2013 (“S. 1612”), the Patent Transparency and Improvements Act of 2013 (“S. 1720”) and the Transparency in Assertion of Patents Act (“S. 2049) were introduced by Senator Cornyn (R-Tx), Senator Hatch (R-Ut), Senator Leahy (D-Vt), and Senator McCaskill (D-Mo), respectively.  Forthcoming legislation may include prominent aspects of these bills such as the following:

Fee Shifting.  Currently, attorney fees may be awarded to a prevailing party under 35 U.S.C. § 285 in “exceptional circumstances.”  Bills S. 1013, S. 1612 and H.R. 3309, each sponsored by Republicans, made fee shifting the rule rather than the exception by awarding fees to the prevailing party except where the non-prevailing party proves its position and conduct during litigation were justified.

Notably, last spring the Supreme Court broadened the legal framework for assessing exceptionality to a “totality of the circumstances” test in Octane Fitness v. Icon Health & Fitness.  And in Highmark v. Allcare, the Court clarified that fee awards are reviewed on appeal for abuse of discretion, a deferential standard.  The full impact of Octane Fitness and Highmark have yet to be felt, and implementing an outright reversal of the fee-shifting may over-correct a problem that the courts have already adequately addressed.

Posting bonds for attorney fees.  The fee shifting provision in Senator Hatch’s bill, S. 1612, was bolstered by a provision that ensures patentees have sufficient funds to pay attorney fees if they are ultimately awarded.  The bill did this by allowing courts to order patentees to post a bond sufficient to cover the cost of paying the accused infringer’s attorney fees and expenses.  Interestingly, the bond provision was designed to specifically affect NPEs.  It required courts deciding bond motions to consider whether the patentee is an institution of higher education, a named inventor, or original assignee, or whether the patentee makes or sells a product related to subject matter of the asserted patent.

Although it is not outcome determinative, an order requiring a bond could significantly impact the dynamic of the case by essentially branding the patentee a “patent troll”, a label that may also haunt the patentee in future litigations.

Increased Specificity of Pleadings.  Senator Cornyn’s bill, S.1013, required a complaint to disclose detailed infringement contentions and to identify ownership or related interests in the asserted patent.  The pleading standard in S. 1013 goes well beyond the requirements of either the Federal Rules of Civil Procedure (i.e., Form 18) or the Supreme Court’s “facial plausibility” pleading standard in Twombly and Iqbal.  Specifically, it required an initial pleading for patent infringement to identify each allegedly infringed claim and to provide detailed contentions for those claims; it must also identify anyone who may enforce the patent, anyone with a financial interest in the patent and indicate whether the patent is subject to certain types of licenses.

The pleading standards in S. 1013 set a high bar that may adversely affect patentees who are not abusively asserting their patents.  This may be so where, for example, the patentee asserts method claims and thus cannot effectively formulate infringement contentions before being permitted to “look under the hood” of the accused method during fact discovery.

Joinder of Interested Parties.  Section 299 of the Patent Act provides for joinder of additional accused infringers, but not patentees, on the grounds that they are jointly, severally or alternatively liable for the same infringing acts as the accused infringer.  S. 1013 would have amended § 299 to permit joinder of parties with an interest in the patent.  An “interested party” would include co-owners, assignees, and exclusive licensees of the asserted patent, as well as “any person with a direct financial interest in the outcome of the action, including a right to receive proceeds, or any fixed or variable portion thereof.”  Notably, the latter category of interested parties could potentially pertain to passive investors such as stockholders and result in joinder of parties whose interest in the asserted patent is, at best, attenuated.

Discovery Limitations.  In addition to significant changes to pleading standards, Senator Cornyn’s bill contained sweeping measures that limited the timing, cost and scope of fact discovery.  S. 1013 limited discovery until claim construction is complete, and shifted costs for discovery beyond “core documentary evidence” to the party seeking the discovery.  “Core documentary evidence” is limited to enumerated categories of material relating to conception and reduction to practice, technicalities of the accused instrumentality, invalidating prior art, and damages.

Importantly, the bill did not impose any requirement on courts regarding the timing of their claim construction order, or address the various local rules of district courts regarding fact discovery or the Markman process.  Nor did it address fact discovery that pertains to other aspects of patent litigation such as secondary considerations of non-obviousness, indirect infringement or inequitable conduct.

Transparency of Patent Ownership.  Senator Leahy’s bill, S. 1720, required patentee’s initial disclosures to identify any entity with an interest in the patentee’s case.  Specifically, it required patentees to disclose “a financial interest (of any kind) in the subject matter in controversy or in a party to the proceeding” and “any other kind of interest that could be substantially affected by the outcome of the proceeding.”  Similar to the joinder provision in S. 1013, this provision could potentially encompass a passive shareholder in its broad definition of “financial interest.”

Customer Stay of Litigation.  S. 1720 included a provision that addresses situations where, in addition to suing an entity that makes an accused instrumentality, a patentee sues a downstream end user of the accused instrumentality as leverage against the manufacturer.  This bill would have allowed such customers to seek to timely stay the litigation pending resolution of the issues in the patent action against the manufacturer.  Notably, this provision did not provide any relief to customers when there is no lawsuit between the patentee and manufacturer.

Bad Faith Demand Letters.  Senator Leahy’s bill (S. 1720) and Senator McCaskill’s bill (S. 2049) included measures to curb abusive patentees from sending demand letters in bad faith.  S. 1720 would have rendered the “widespread sending” of bad faith demand letters a deceptive act or practice that the F.T.C. may take action against.  The bill defined bad faith demand letters as those that communicate false threats or omit critical information such as the specific patent at issue.  In addition to including similar measures, Senator McCaskill’s bill empowered state attorney generals, as well as the F.T.C., to enforce the provisions therein.

A common underlying theme pervades these various bills:  abusive tactics by patentees plague the U.S. patent system and must be curbed.  Considering the bills together, it is interesting how they affect each step of patent enforcement—from the initial demand letter, to the content of a complaint, to the parameters of discovery and finally to the award of attorney fees. Whether Congress ultimately enacts a law that so comprehensively combats abusive tactics while avoiding the pitfalls of the previous bills remains to be seen.  Stay tuned.

Author: Brian Doyle

The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.

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