Patent Reform Tries Again

Patent reform, long a decidedly unsexy topic best discussed over a strong espresso, has been a hot topic in recent years. Even though Congress substantially overhauled the patent system just three and a half years ago with the passage of the America Invents Act, the continued public drumbeat (a drumbeat taken up by President Obama, among others) against “Patent Assertion Entities” (PAE), aka “patent trolls,” has caused a continued beehive of patent reform activity in the Supreme Court and Congress.

In fact, the 113th Congress saw no fewer than six legislative proposals to further refine the patent system, before patent reform stalled in the Senate in 2014 in the face of apparent criticism by trial lawyers, biotechnology firms and pharmaceutical companies.

With the 114th Congress back in session, patent reform is back on the table, with consensus forming around two bills with bipartisan support: the Innovation Act, which is being considered in the House and the PATENT Act, being considered in the Senate. These proposals share many features (and have some important differences) and have passed their respective Judiciary Committees, meaning they still need to be considered by the full Congress and signed by the President to pass. So what has Congress been up to? Let’s take a look.

Overview Of The Proposals

The Innovation Act (H.R. 9) was introduced by House Judiciary Committee Chairman Rep. Bob Goodlatte (R-VA) in February 2015, and already has 27 bipartisan co-sponsors. Representative Goodlatte was a driving force behind patent reform in the 113th Congress, as he collected a number of proposals from other proposed bills in a “discussions draft” that looks very similar to the Innovation Act.

The Protecting American Talent and Entrepreneurship Act, or PATENT Act, (S. 1137) is the Senate counterpart to the House’s Innovation Act. Introduced by Senator Chuck Grassley (R-IA) in April 2015, it has a 37 percent chance of enactment and has 6 bipartisan co-sponsors.

Both bills share a number of similar proposals, including:

Heightened Pleading Requirements. Patent plaintiffs generally do not need to provide extensive detail regarding the alleged infringement in their complaints. This has led to criticisms that patent trolls can file poorly investigated claims to impose discovery costs on their opponents. Both bills contain a number of requirements that would increase the amount of detail a patent plaintiff would have to include in a complaint. This would make patent cases more expensive to bring in the first instance.

Patent Ownership Transparency. Both bills contain provisions to improve transparency into who is really behind a patent assertion, as patent assertion entities that are effectively judgment-proof are often created to obscure the party that is truly interested in the litigation.

Customer/End-User Stays. Both bills contain provisions that would permit a stay of a suit brought against a downstream user in order to let the provider of the allegedly infringing product duke it out with the patent holder directly, instead of the customer. There has been a persistent call for provisions of this type since at least a 2011 campaign by a PAE called Innovatio against small business that operated Cisco Wi-Fi products.

Demand Letters. Patent trolls have been criticized for broadly distributing vague, misleading letters demanding payment for a license; they leave the recipient scratching their heads as to the extent of their liability, yet fearful enough of the costs of litigation to entertain entering into a license. Both bills contain provisions to address this problem, though the PATENT Act does so with more clarity as it establishes a list of details that must be included in demand letters and a “clear and detailed” description of why each patent is infringed.

The PATENT Act also empowers the FTC to crack down on abusive demand letters. The Innovation Act more generically provides that a demand letter must include “basic information” about the infringement allegation in order to be legally relevant, and states that “purposely evasive demand letters” are improper and potentially punishable in litigation.

Discovery Limits. PAE lawsuits often lead to quick settlements because defendants cannot bear the cost of full-blown civil discovery. Both bills try to reduce these costs by commissioning the court system to fashion rules to limit discovery regarding “non-core” documents, with the goal of limiting a case to the technical and financial information that realistically relates to a plaintiff’s claim. In addition, the Innovation Act limits discovery until the issuance of a “claim construction” order defining the patent(s) at issue (which is often a dispositive event in patent litigation), while the PATENT Act precludes any discovery until the resolution of certain preliminary motions.

Fee Shifting. By far the most controversial aspect of both bills are the provisions they contain regarding the shifting of attorney fees. Attorney fee shifting was previously discussed in the 113th Congress in the context of the SHIELD Act, which received interest, but ultimately did not mature into a bill. Again, both bills propose making it easier for winners to recover legal fees from losers, with the Innovation Act making it the easiest.

The Innovation Act would make recovery of fees easier by directing courts to make the presumption that a winner should recover its legal fees in a patent suit unless the losing party shows it was “reasonably justified” in litigating or identifies other “special circumstances” that make the award unjust. The PATENT Act also authorizes fees if the losing party was not acting in an “objectively reasonable” manner, but without any presumption that fees will be awarded.

Of course, a defendant has to actually litigate a case to victory prior to becoming eligible for attorney fees, but the threat of an attorney fee award may deter PAEs from filing a weak case to begin with. Critics have complained that attorney fee-shifting provisions may result in chilling patent lawsuits by small businesses, inventors and universities that may otherwise be meritorious.

Other provisions. The bills together also contain a number of less significant changes, though still important, changes such as technical changes to Patent Office rules governing review of already-issued patents (the Innovation Act, in particular, seeks to somewhat curtail the use of the Patent Office to invalidate issued patents), community outreach measures, calls for continued studies, and the protection of patent licenses in bankruptcy.

Who Loves/Hates These Bills?

These bills have the aggregate effect of moving the needle in favor of patent defendants; therefore, the groups favoring and opposing the bills have fallen into somewhat predictable camps. Technology companies and their lobbyists in the software and high-tech industries that have been victimized by PAE lawsuits in the past, such as and The Software & Information Industry Association, have applauded the legislation.

Their enthusiasm has been shared by USPTO Director Michelle Lee, who has testified that she was pleased the House reintroduced the Innovation Act and supported the fee-shifting presumption. But there also are many critics of the Innovation Act, including universities, venture capital associations and pharmaceutical associations, such as the Association of American Universities, Association of University Technology Managers, Association of Public & Land-Grant Universities and Innovation Alliance.

In June 2015, these critics released a joint statement asserting that the proposed changes will “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.”  With that being said, the PATENT Act seems to have found some tepid support by some detractors of the Innovation Act, largely because fee shifting does not occur by “presumption,” as in the Innovation Act.

What Does All This Mean?

The last time we covered patent reform, we noted that there was some consensus forming around provisions that would be palatable enough to pass. The Innovation Act and PATENT Act of this term show that there is significant legislative consensus forming, within the Judiciary Committees at least, as to measures such as pleading standards, abusive demand letters and streamlining discovery. However, there is still significant opposition to either bill in their current forms, and particularly to the aggressive fee-shifting provisions in the Innovation Act. In addition, it’s not clear how the differences in both bills will be ironed out by the House and Senate, making passage this term looking less certain by the day.

That being said, there remains significant support for patent reform, and if a law passes in the form of either the Innovation Act or the PATENT Act, it would be the continuation of a trend that has taken place over the last 10 years to reduce the strength of individual patents in favor of accused infringers. Technology companies that are developing their IP strategy should therefore pay attention to the patent reform debate, and companies with established portfolios should reassess the value of their portfolio in the current legal environment.