Pending patent reform is a critical step in reforming US patent litigation

March 2014 | SPOTLIGHT | INTELLECTUAL PROPERTY

Financier Worldwide Magazine

Litigation-based patent reform is coming to the United States, and it will be good for businesses across industries. The 2011 America Invents Act (AIA) worked significant changes to the patent process and created valuable Patent Office-based post-grant review proceedings. But the AIA had virtually no impact upon the volume, scope or cost of patent litigation. In fact, patent litigation has continued to grow since the AIA was enacted. In particular, patent assertion entities or patent trolls have continued to multiply and increase the number of suits that they file.

Late last year, the House of Representatives passed the Innovation Act (also known as the Goodlatte bill) by a bipartisan vote of 325-91. A number of amendments that would have gutted or watered down the bill were defeated. The US Senate is expected to consider and hold a floor vote on a version of the Innovation Act and perhaps other reform bills during the first quarter of 2014. While it is impossible to know the exact form of the bill that the Senate will vote on, we can reasonably expect that it will include the key provisions of the Innovation Act, as set out and discussed below.

Heightened pleading requirements.Today, a complaint need only identify the asserted patent, the accused infringer and make the most general allegations of what may infringe. The Innovation Act requires significantly more information. A complaint would have to identify the asserted claims and specify how they are infringed. The bill also removes Form 18 (which allows the earlier mentioned bare-bones pleading) and requires the creation of a new, more substantive form complaint. Any company that has received a complaint and then puzzled over what they were accused of doing knows this is a positive step. Although it may not deter plaintiffs from filing suits, providing accused infringers additional information allows companies to better assess and define and then manage their risk.

Fee shifting.The Innovation Act requires that a losing plaintiff pay the accused infringer’s legal fees, at least if the claims the plaintiff brought were not reasonably justified under law. This is not a pure loser pays system. If the loser’s claims were brought in good faith and were reasonably justified in law and fact, fees will not be awarded. Even the modified loser pays system benefits businesses. Under the current system where attorney’s fees are only awarded in ‘exceptional’ cases there is very little incentive to defend even the worst claims when offered a nuisance value settlement because there is little hope of recovering the seven figure fees that a case to trial costs. By making fee awards more common and attainable, the Innovation Act levels the playing field. Companies accused of infringement can choose to fight questionable or bad claims, just like they would in non-patent suits. Of course, even with a stronger potential to recover fees at the end of a case, going the distance in the face of defence cost settlements will be difficult for many companies to stomach on tight legal budgets.

Joinder for fee payment.The Innovation Act prevents judgment-proof shell companies. Where attorney’s fees are awarded against a company that is not able to pay them (for example a shell company), the Court may join an interested party (presumably a parent entity or investor) to pay the fees. This provision promises to end, or at least reduce, the era of judgment-free patent trolls.

Discovery in patent cases.Courts are given discretion to limit discovery to claim construction issues until after the Court construes the claims. Of course, many Courts already do this. So, it does not add much, although it may cause more courts to go down this route, which would be positive. As with requiring more detailed complaints, providing for limited discovery and upfront claim construction helps a company better assess its risk and, therefore, make better business decisions.

Upfront ownership/interest disclosure.Along with its complaint, a plaintiff must disclose: the patent assignee, the parent entity of any assignee, any entity with a right to sublicence or enforce the patent, and any entity with a financial interest in the patent. There is also a duty to update this information throughout the case. While this knowledge may not decide any cases, knowledge is power. And disclosure of these entities may change the calculus on filing suit for some plaintiffs whose parent entities or investors do not want to be publicly disclosed. The information also allows an accused infringer more information about its adversary and may identify additional leverage points for litigation or mediation of the dispute.

Customer-suit exception. A manufacturer may intervene in a suit against its customer, or customers. If the manufacturer intervenes, the manufacturer and the customer agree to the manufacturer taking over the suit, and the customer agrees to be bound by any decisions as to the manufacturer, then the customer suit must be stayed. This provision is hotly contested. Companies that face suits based upon products that they purchase or resell or internet widgets that they licence are pushing for even more stringent customer exceptions. And companies that supply those products, software and services want some flexibility in deciding how to handle the cases against themselves and their customers. But at a macro level, it makes sense to reduce the number of suits and focus the case and the damages on the entity that creates the accused product, software or service.

Potential discovery limitations.The Innovation Act directs the Judicial Conference to promulgate rules and procedures on core document discovery. Hopefully, this will help limit discovery and the related discovery costs. If that happens, it will be a win for all accused infringers because discovery remains one of the largest drivers of attorney’s fees and costs in patent litigation.

Patent studies. The Innovation Act requires several studies: a study on secondary market oversight for patent transactions; a study on patent quality; a study considering a patent small claims court; a study on bad faith demand letters and their impacts; and a study on business method patent quality. While studies do not guarantee any changes, continued investigation of the problems with the patent system is positive for companies because it creates additional exposure for the problems and continues the conversation of meaningful reform beyond that date that any bill is passed and signed into law.

Post-grant review (PGR) and inter partes review (IPR) claim construction. The PTO must construe the claims in PGR and IPR, and the PTO will be bound by district court claim constructions to the extent that they exist. This is positive because using district court constructions will streamline the IPR and PGR processes, while also narrowing the PTO’s constructions.

Overall, assuming that the Senate can pass a similar bill, the House’s passage of the Innovation Act is a big step forward for companies facing patent suits. There remains a long way to go, but assuming something resembling the Innovation Act is passed by the Senate and is signed by President Obama, it will be a real improvement.

R. David Donoghue is a Deputy Practice Group Leader at Holland & Knight LLP. He can be contacted on +1 (312) 578 6553 or by email: david.donoghue@hklaw.

R. David Donoghue

Holland & Knight LLP