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Congressional Patent Reform Efforts — Arent Fox Analysis

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Congressional Patent Reform Efforts — Arent Fox Analysis

On December 5, 2013, the House of Representatives passed the Innovation Act (H.R. 3309) by a vote of 325 to 91. This bill, sponsored by House Judiciary Committee Chairman Bob Goodlatte (R-VA), is designed to curtail the abuses of so-called “patent trolls” and to supplement provisions of the America Invents Act, which went into effect on September 16, 2011. In contrast to the fairly quick action by the House, the Senate is working at a slower pace and will hold its first hearing on the differing Senate version of this legislation, the Patent Transparency and Improvements Act (S. 1720), later in December, with committee consideration likely delayed until 2014.

If the Innovation Act becomes law without change, it will have a dramatic effect on patent litigation and consequently on strategies employed by plaintiffs, defendants, and patent assertion entities. The net effect of the legislation will be to discourage patent litigation by “patent trolls” and patent assertion entities who might otherwise use the courts to further their licensing campaigns.

One of the prominent and perhaps most controversial provisions of the proposed new law is the fee-shifting clause, which would allow district courts greater discretion to award fees and costs against a party who raises a patent claim that is not “substantially justified.” This would be a significant revision over the current standards for seeking fees for the prevailing party. Such a provision could create a strong deterrence to patent litigation by increasing the downside financial risks for a party bringing suit or levying a patent counterclaim.

Also, the Innovation Act includes provisions severely limiting discovery before the Markman order (claim construction ruling) and requiring detailed infringement contentions at the outset of the litigation. These requirements will undoubtedly increase the costs of due diligence and the pleading requirements for would-be patent plaintiffs.

If enacted in its current form, the House bill would call for greater transparency in requiring the disclosure of companies and investors who have a direct financial interest in the plaintiff’s patents. This provision, along with provisions allowing defendants to join “interested parties” in the litigation appears to be intended to expose the identities of third parties funding plaintiff’s patent infringement suits. It also provides means for defendants to potentially levy counter-claims against them by joining them in the action.

A more detailed analysis of some of the salient provisions of the Innovation Act and changes over existing patent laws is discussed below.

Fees and other expenses (Sec. 285). This fee shifting provision would allow prevailing parties to seek reasonable attorneys’ fees and expenses in connection with any claim raised under the patent statutes unless the court finds that the position of the non-prevailing party was “substantially justified.” The current standard for seeking attorneys fees for prevailing parties applies only if the case is deemed “exceptional” under Section 285, which in the case of infringement claims means that the party seeking fees must demonstrate that the infringement assertions were objectively baseless and brought in subjective bad faith. This is a difficult standard to meet in most cases and the new law would allow for greater flexibility in fee shifting.

Pleading requirements for patent infringement actions (Sec. 281A). Parties asserting infringement claims would be required to identify specific patent claims alleged to be infringed and to provide details, unless not “reasonably accessible,” regarding how accused instrumentalities infringe the asserted claims, including the specific theories of infringement (direct, indirect, doctrine of equivalents, etc.) and the details of those theories. Current pleadings standards in patent infringement cases do not require this detail and such disclosures are typically required later in the case in jurisdictions invoking Patent Local Rules or during the course of discovery. “Notice” pleading under FRCP 8 and Form 18 generally suffices for direct infringement theories under current law. The new law will subject patent infringement complaints and counterclaims to stricter scrutiny and motion practice.

Joinder (Sec. 299). The provision amends the joinder statute to allow the defendant to join an “interested party” to the litigation, which is defined broadly to include parties that are assignees of the asserted patents, parties that have a right to enforce or sublicense the patent, or parties that have a financial interest in the patents at issue. This provision would expand the joinder provisions beyond the compulsory or permissive joinder rules under FRCP 19 to allow defendants to join parties such as patent assertion entities and investors who may be financing the litigation.

Discovery in patent infringement action (Sec. 299A). This provision would limit discovery in patent cases before the claim construction (Markman) ruling to “information necessary for the court to interpret the meaning of the patent claim, including any interpretation of those terms used to support the claim of infringement.” The court can expand discovery before the Markman ruling in its discretion as necessary to resolve motions or ensure “timely resolution of the action.” There are currently no statutory limits to discovery in patent cases other than those imposed by FRCP 26 (or by the court’s own local rules or standing orders) which allows for discovery on all claims or defenses as soon as the Rule 26(f) conference has taken place. The new law would greatly restrict the scope and amount of discovery that can be taken before the claim construction order is issued.

Transparency of Patent Ownership (Sec. 290). These amendments would require the plaintiff to disclose to the patent office, to the court, and to the opposing party, the identity of any person or entity that has a financial interest in the patents at issue, including the right to collect proceeds related to the assertion of the patent. Failure to disclose the identity of these parties will expose the plaintiff to sanctions. Presumably this law is intended to make it easier for defendants to join the financiers of the patent suits as “interested parties.” Currently, there is no requirement that the plaintiff, often a corporation created for purposes of patent litigation, disclose the identity of its investors or stakeholders which are often larger patent assertion entities or licensing groups. Although some courts require plaintiffs to file a “Certificate of Interested Parties”, often this is limited to persons or entities that own 10% or more of the plaintiff’s company.

Customer-Suit Exception (Sec. 296). This law would require the court to grant a motion to stay the litigation against customers of a manufacturer of the accused product or process if the covered manufacturer is a party to the action or to a separate action involving the same patent or patents related to the same covered product or process. Although Federal Circuit case law has developed in recent years permitting stays of suits against customers when the manufacturer is the real party of interest, this law would make stays a statutory right of the defendants seeking to prevent multiplicity of litigation against customers and end users of accused products.

After House passage of this legislation, Senate Judiciary Committee Chairman Patrick Leahy (D-VT) issued the following statement:

“I commend the House for taking action to address the growing problem of patent trolls. Supporting American innovators and protecting those who are being targeted by patent trolls is a bipartisan priority. Targeted reforms should address abuses in the system while ensuring that legitimate inventors can continue to succeed and grow our economy. I look forward to working through the Committee process in the Senate to achieve this goal.”

Arent Fox will continue to monitor this legislation closely and keep our clients informed and updated on changes and impacts from the legislation.

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