Recently the House Judiciary Committee voted  24-8 to approve a revised version of the Innovation Act.  As we previously discussed, the Innovation Act was re-introduced in the House earlier this year in the same form approved by the entire House at the end of 2013.  The Judiciary Committee recently met to mark-up and vote on the bill.  A summary of the Act’s provisions as well as the approved amendments is provided below.

Demand letters and willful infringement.  The Innovation Act (Sec. 3, beginning at page 18) would prohibit a patent plaintiff from relying on a pre-suit demand letter as evidence of willful infringement if the demand letter did not identify “with particularity the asserted patent,” the “product or process accused,” and “the ultimate parent entity of the claimant” nor explain “with particularity, to the extent possible following a reasonable investigation or inquiry, how the product or process infringes one or more claims of the” asserted patent(s).  The PATENT Act, which was recently recently approved by the Senate Judiciary Committee, contains a similar provision but also goes farther.  Specifically, as we previously discussed, the PATENT Act would expressly regulate demand letters sent in bad faith by patent owners by granting the Federal Trade Commission the express authority to bring enforcement actions against individuals and entities that send such bad faith demand letters.  The Innovation Act simply requires the PTO to conduct a study of bad faith demand letters and their potential impact on the marketplace, with a report to Congress on the findings of the study due within a year.

Heightened infringement pleading standards.  Similar to the PATENT Act, the Innovation Act (§ 281A(a), beginning at page 2) would increase the specificity and information required to plead patent infringement.  Specifically, “unless the information is not reasonably accessible,” a patent plaintiff would be required to identify, in its initial complaint, the patents, the asserted patent claims, the accused infringing products or services, and an element-by-element description of how each accused product or service infringes the asserted patent claims.  As we previously discussed, the Judicial Conference has already taken steps to increase the specificity of patent infringement complaints by amending the Federal Rules of Civil Procedure to eliminate Form 18 “Complaint for Patent Infringement,” which only requires a patent plaintiff to provide a bare recitation for pleading direct patent infringement.  Form 18 will be eliminated in December of this year.  The Federal Circuit also held that, while Form 18 kept it from requiring more specificity in pleading direct infringement, it did not prevent it from requiring more specificity with respect to pleading indirect infringement.  The elimination of Form 18 may allow courts to require more detailed pleadings than the current Rules require.  Given this, the full House might consider whether and to what extent there remains support for the heightened pleading provisions of the reintroduced Innovation Act.

Patent ownership and financial information.  Like Section 3 of the Senate Judiciary Committee’s PATENT Act (§ 281B(b), beginning at page 7), the Innovation Act (Sec. 4(b), beginning at page 22) would require a patent plaintiff to disclose at the outset of an infringement case certain patent ownership and financial interest information to the court, other parties, and the U.S. Patent and Trademark Office (PTO), including the patent assignee, the assignee’s parent entity, any entity with a right to sublicense or enforce the patent, and any entity with a financial interest in the patent.

Disclosure of Standard Setting Obligations.  Simliar to the PATENT Act (§ 281B(b), beginning at page 8), the Innovation Act (Sec. 4, at page 23) would require a patent plaintiff to disclose to the court, other parties and the PTO certain information regarding obligations to Standard Setting Organizations (SSOs).  The Innovation Act would require a patent plaintiff to state “whether a standard-setting body has specifically declared” any of the asserted patents “to be essential, potentially essential, or having potential to become essential to that standard-setting body, and whether the United States Government or a foreign government has imposed specific licesning requirements with respect to such patent.”  As we explained previously, this language is a misnomer, as SSOs generally do not declare patents essential or potentially essential.  Instead, the patent owner declares whether its patent may be essential to an industry standard, usually by way of a a letter of assurance or similar assurance to the SSO.  These assurances often only state that the identified patents might cover a standard and what the patent owner would do as far as licensing the patent if the patent actually is essential to the standard.   And often patent owners submit blanket letters of assurance that do not identify any particular patent. The Senate’s PATENT Act more accurately reflects this practice, requiring a patent plaintiff to state “whether the patent is subject to an assurance made by the [patentee] to a standards development organization to license others under such patent[(s)]”  if “the assurance specifically identified such patent or claims therein” and “the allegation of infringement relates to such standard.”  The PATENT Act would also require a patent plaintiff to state “whether the Federal Government has imposed specific license requirements with respect to” the asserted patents, but not whether a foreign government has imposed specific licensing requirements.

Discovery cost shifting.  The Innovation Act (Sec. 6, beginning at page 34) would require six district courts participating in the patent pilot program to develop rules and procedures governing discovery of core documentary evidence, including rules addressing whether cost should be shifted for such discovery, potential phasing of discovery of electronic communications, and other limits on discovery in patent cases.  The PATENT Act (Sec. 6, beginning at page 19), would authorize the Judicial Conference to develop such rules and procedures.

Customer stay.  Like Section 4 of the PATENT Act (§ 299A(b), beginning at page 13), the Innovation Act (Sec. 5, § 296(b), beginning at page 30) would require district courts to stay patent infringement suits against customers of allegedly infringing products if certain conditions are met.  Specifically, courts would be required to stay a case against a customer if (1) the manufacturer of the accused product or process is a party to the action against the customer or a separate action involving the same patent(s) “related to the same covered product or covered process”; (2) the customer agrees to be bound by the court’s ruling on any issues in common between the customer and manufacturer; and (3) the stay is sought within 120 days after the first complaint for infringement is served or before the first order, whichever is later.   In cases where the customer impleads the manufacturer as a party to the infringement action against the customer, a district court would be required to stay the portion of the case against the customer if the manufacturer and the customer consent in writing to the stay.  “In any other case in which the covered manufacturer did not consent in writing to the stay, the court may not grant the motion to stay if the stay would be inconsistent with an indemnity or other agreement between the covered customer and the covered manufacturer,” or “if the covered manufacturer shows that the covered customer is in a better position to understand and defend against the claims of infringement.”

As we previously discussed, the Federal Circuit’s decision in In re Nintendo may impact this provision.  In Nintendo, the Federal Circuit ordered a district court to stay claims against defendant retailers accused of selling an infringing product in favor of letting the manufacturer of the accused product and the patentee litigate the merits of the infringement claims.  The district court was ordered to sever the claims against the retailers from those against the manufacturer, and to transfer the case against the manufacturer to the Western District of Washington, where the manufacturer’s U.S. operations are based.

Prevailing party fee/cost shifting.  Similar to Section 7 of the PATENT Act (§ 285(a), beginning at page 24) the Innovation Act (§ 285(a), beginning at page 5) also includes fee and cost shifting provisions, although the competing bills take a different approach.  Under the PATENT Act, a district court would first be required to determine “whether the position of the non-prevailing party was objectively reasonable in law and fact” as well as “whether the conduct of the non-prevailing party was objectively reasonable.”  Only if the court finds that the position of the non-prevailing party was “not objectively reasonable in law or fact or that the conduct of the non-prevailing party was not objectively reasonable” is the court required to “award reasonable attorney fees to the prevailing party unless special circumstances would make an award unjust.”

The Innovation Act, however, would set a default rule that would require fees and costs to be awarded to the prevailing party unless the positions of the non-prevailing party are shown to be objectively reasonable:

The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a name inventor) make an award unjust.

As we previously discussed, recent Supreme Court decisions have relaxed the standard for showing a case to be “exceptional,” thereby permitting the prevailing party to collect their reasonable attorney fees, from “clear and convincing evidence” to the lower preponderance of the evidence standard.  The high Court also changed the standard of review of fee awards in patent cases from de novo to the more relaxed “abuse of discretion” standard which grants much more deference to the district court’s decision.  The House and the Senate may consider whether statutory fee shifting provisions are necessary given this recent Supreme Court jurisprudence.

The venue amendment.  One of the amendments that was approved during mark-up of the Innovation Act would change the rules governing where a patent infringement action or an action seeking a declaratory judgment of non-infringement or invalidity may be brought.  Under the Act’s provision, such cases may only be filed where: (1) the defendant has its principal place of business or is incorporated; (2) the defendant has committed an act of infringement and has a regular and established physical facility; (3) the defendant has agreed or consented to be sued; (4) the invention claimed in a patent-in-suit was conceived or actually reduced to practice; (5) significant research and development of an invention claimed in a patent-in-suit occurred at a regular and established physical facility; (6) a party has a regular and established physical facility that such party controls and operates and has (a) engaged in management of significant research and development of an invention claimed in a patent-in-suit, (b) manufactured a product that embodies an invention claimed in the patent-in-suit, or (c) implemented a manufacturing process that embodies an invention claimed in a paten-in-suit; or (7) for foreign defendants that do not meet (1) or (2) above, wherever personal jurisdiction may lie over them.

Supporters of this amendment indicated that it was designed to restore limits on venue in patent cases and make it more difficult for patentees to file infringement suits in district courts that they perceive as more favorable to patent owners but which are inconvenient for accused infringers who often do not have any real, substantial contacts with such fora.  The House Judiciary Committee’s website specifically states as follows:

Restores Congress’s intent that patent infringement suits only be brought in judicial districts that have some reasonable connection to the dispute.  Since 1987, Congress has regulated the venue in which patent actions may be brought.  These limits protect parties against the burden and inconvenience of litigating patent lawsuits in districts that are remote from any of the underlying events in the case.  In 1990, the U.S. Court of Appeals for the Federal Circuit ‘re-interpreted’ that statute in a way that robbed it of all effect.  The Innovation Act corrects the Federal Circuit’s error, and restores the congressional purpose of placing some reasonable limits on the venue where a patent action may be brought.

At this time, the House has not scheduled a full vote on the Innovation Act.