Their names include the Patent Abuse Reduction Act (S. 1013), the Patent Litigation Integrity Act (S. 1612) and even the Saving High-Tech Innovators from Egregious Legal Disputes Act (nicknamed the SHIELD Act) (H.R. 845). Legislators on both sides of the aisle, along with President Obama, have brought a dizzying array of legislation and executive actions to try to address a rise in patent litigation by nonpracticing entities (NPEs), known by some as “patent trolls.” Indeed, during his 2014 State of the Union address, the President stated that despite passing sweeping new changes in the America Invents Act, one of the biggest changes to the patent system in 50 years, he was not done yet. He said that he hoped to “pass a patent reform bill that allows our businesses to stay focused on innovation, not costly and needless litigation.” In addition to proposed federal legislation, the Federal Trade Commission has launched an investigation into such allegedly abusive litigation, and Oregon, Vermont and Wisconsin have all passed laws targeting the problem.
The concern over abusive litigation at the highest levels of the government is echoed by many General Counsel, 28 percent of whom, according to a recent study by Norton Rose Fulbright, list intellectual property and patent issues as a major concern for their corporation (up from just 19 percent in 2012). These concerns match up to a significant increase in NPE litigation. According to PWC’s 2013 Patent Litigation Study, patent lawsuits jumped over 30 percent last year to more than 5,000 suits filed – a record. Moreover, the median damages recovery for a nonpracticing entity continues to average about twice the recovery for a practicing entity.
So what are the various legislative responses to this growing concern? H.R. 3309, introduced by Representative Goodlatte, was quickly passed by the House of Representatives in 2013. The proposed bill included nine key proposals (discussed below) that were designed to attempt to curb abusive litigation. In the Senate there are at least five bills that have been introduced, with the most attention going to Senator Leahy’s S. 1720, currently being negotiated within the Judiciary Committee. Taken together, these five bills include the nine key proposals in H.R. 3309.
To even the interested observer, given the number of bills and the pace of negotiations, it is difficult to stay fully informed about what the newest proposals include. Moreover, while the legislation is predominantly targeted at reducing abusive litigation or the burden on the targets of assertion campaigns, many proposals have the potential to affect other forms of patent litigation and bear close scrutiny by in-house counsel. Below is a brief summary of the major proposals included in the various pending legislation.
Most of the proposed legislation includes provisions to award attorneys’ fees and litigation costs to the prevailing party (this is not simply limited to the defendant in an NPE litigation). Each of the proposals also includes an exception if the nonprevailing party was either reasonably or substantially justified in the conduct. Known as the English Rule, paying the prevailing party’s legal fees is commonplace in other jurisdictions, but rare in the United States absent an actual showing of exceptional circumstances or bad faith. While the intent of this provision is clear – to increase the risk of bringing patent litigation lawsuits – the legislation is generally not limited to protecting defendants’ rights and instead could affect all patent litigations and litigants. To address this concern, some alternative legislation provides that while fees are not shifted, district courts are given more leeway in sanctioning nonprevailing parties.
The proposed legislation would also significantly limit the available discovery prior to claim construction, the point when the district court interprets the meaning of the claims in the patent. Under the current model, claim construction proceedings are often held in the middle of the case after a significant amount of discovery has already been conducted. As proposed, parties could only conduct discovery on information necessary to construe a claim or resolve a motion. Moreover, if the case proceeds after claim construction, each party would be responsible for producing its own set of “core documentary evidence.” Additional discovery could be requested from the district court. However, the party seeking additional discovery may need to pay the costs of production, including attorneys’ fees.
While some nonpracticing entities exist to reap their own rewards, some exist to protect their true owners from the ongoing litigation or any bad press associated with it. The proposed legislation would require disclosure of entities with an interest in the outcome of the litigation and would permit the district court to bring the real party-in-interest into the litigation. It is believed that this will both promote settlement and allow for more substantive discovery from the real owners of the intellectual property.
Despite federal rules that favor liberal notice pleadings, legislators hope to reduce frivolous litigations by increasing the pleading standard for complaints. Both the House and Senate proposals would require patentees to specifically identify each asserted claim, the names and models of the allegedly infringing products, and describe a good faith theory of infringement for each product. Some legislation would also require patent holders to automatically disclose licensing and other financial data.
In an effort either to quickly settle cases or to pressure larger manufacturers and suppliers to settle, some nonpracticing entities target end users. Typically they send large numbers of letters to customers but demand a smaller settlement amount. Many times these small businesses settle because they say that they simply cannot afford to mount a legal defense. This proposal would promote staying the litigation against the end user while the case against the manufacturer proceeds.
In conjunction with providing for stays of litigation against end users, several of the bills also attempt to curb the practice of sending what have been called “bad faith demand letters,” which often target these same end users and customers. The proposed legislation gives the Federal Trade Commission the power to investigate and to take action against patent holders that send letters in bad faith or without a reasonable basis for infringement. Moreover, at least one bill would create a national database of demand letters. Any assertion entity that sends more than 20 letters must register those letters and adhere to minimum standards of information that must be included in them.
The proposed legislation would also provide for a more robust way to challenge patents in the United States Patent and Trademark Office (PTO). Currently, if a party asks the PTO to review a patent under the new Post Grant Review proceeding, that party cannot challenge the validity of the patent in a later civil proceeding based on anything that was, or reasonably could have been, presented to the PTO. The legislation would eliminate this provision. While parties still would not be able to relitigate positions actually taken in the PTO, they would now be able to rely on arguments that they “reasonably could have,” but did not actually, raise during Post Grant Review. In addition, for all validity proceedings, most of the legislation would require the PTO to interpret claim terms using the “plain and ordinary meaning” standard used in civil litigation, not the more expansive “broadest reasonable interpretation” now used in proceedings before the PTO.
In addition to changing the standard for claim construction, these proposals would also expand another new program before the PTO to challenge the validity of patents, the “Covered Business Method Review”program. The proposed legislation would expand the scope of the review by either eliminating the “financial product” limitation in the America Invents Act or expanding the prior art available during the proceeding. Moreover, while the program is currently scheduled to sunset in eight years, some of the legislation would eliminate that sunset provision.
Bankruptcy trustees would be barred from terminating certain forms of licenses, and bankruptcy protection would be extended to include other forms of intellectual property.
It is difficult to look into our crystal ball and see what the ultimate legislation will look like. However, it is clear that in-house counsel should be actively engaged and informed about these new changes in the law, many of which have the potential to not just curb abusive patent litigation, but also to impact patent litigation generally.
Aaron D. Charfoos is a Member of Dykema’s Intellectual Property Group and Litigation Department, resident in the firm’s Chicago office. An experienced trial lawyer, Mr. Charfoos specializes in complex patent and commercial litigation. He counsels clients on intellectual property portfolio valuation, and technological development and patent prosecution strategy. He represents clients in computer science, telecommunications, biotechnology, medical devices and technology outsourcing.