1. Introduction

On February 5, 2015, Congressman Robert Goodlatte re-introduced his patent reform bill known as the Innovation Act in the United States House of Representatives. (H.R. 9.) The February 5 bill is identical to the Innovation Act passed by the House of Representatives on December 5, 2013, by a vote of 325-91. (113th Congress, H.R. 3309.) That bill stalled in the Senate, eventually being removed from the Senate Judiciary Committee’s agenda in May 2014. In the last Congress, more than a dozen other patent reform bills also were introduced in the House and the Senate. None of those bills, however, received a vote on the floor of either chamber of Congress.

Congressman Goodlatte’s Innovation Act stands a good chance of being approved by both the House and the Senate in the new Congress. Moreover, President Obama previously expressed a willingness to sign such patent reform legislation. In light of the likelihood that the Innovation Act or some version of it becomes law, this paper provides a detailed description of its contents. While proponents of patent reform are applauding the re-introduction of the Innovation Act, a number of its provisions fall into the category of “be careful what you wish for.”

  1. The Innovation Act – H.R. 9

The Innovation Act contains at least eleven main elements: 

  • Demand letter specificity
  • Heightened pleading requirements
  • Fee shifting
  • Disclosure of interested parties
  • Phased discovery
  • Customer stays
  • AIA Amendments
  • Extension of the patent litigation pilot program
  • Codification of the double patenting doctrine
  • Extension of bankruptcy protections for patents and trademarks
  • Small business and miscellaneous patent improvement provisions
  1. Demand Letters

The Innovation Act follows the trend of numerous other prior federal bills, state laws, and state law proposals by regulating demand or “cease-and-desist” letters. The Act states that demand letters “should” include “basic information about the patent in question, what is being infringed, and how it is being infringed.” Demand letters lacking those basic elements will be considered “evasive,” “a fraudulent or deceptive practice,” and an “exceptional circumstance” to be considered when a court evaluates whether the litigation was abusive. Moreover, a plaintiff seeking to establish willful infringement may not rely on evidence of pre-suit notification unless such notification identifies with particularity the asserted patent, the accused product or process, and the ultimate owner of the asserted patent, and further explains with particularity to the extent possible following a reasonable investigation how the accused product or process infringes the asserted patent. 

The Act’s demand letter provisions are not as detailed as many of the recently enacted state laws and do not contain the fines or other penalties common to those state laws. In addition, the Act does not expressly preempt those state laws, so federal preemption of such laws will remain an open question.

  1. Heightened Pleading Requirements

The Innovation Act expressly eliminates Form 18 which provided a pre-approved bare-bones complaint for patent infringement and which the Federal Circuit Court of Appeals relied on to refuse to extend the holdings of Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) to direct infringement claims. See McZeal v. Sprint Nextel Corp., 501 F.3d 1354 (Fed. Cir. 2007).[1] Going further, the Act requires a patent holder to plead each asserted patent claim, specifically identify each allegedly infringing product or process by name or model number, and explain how each accused product or process infringes each claim on an element-by-element basis. Essentially, the bill would require that the patent holder include a claim chart along with its complaint which, in turn, likely will lead to a dramatic increase in early motion to dismiss practice under Federal Rule of Civil Procedure 12. These provisions also will invite litigation over whether the required information was “reasonably available” to the plaintiff at the time of filing. Other new pleading requirements include a description of the plaintiff’s ownership rights, a list of all prior complaints asserting the patents-in-suit, and any licensing commitments (e.g. through standard setting bodies).

  1. Fee Shifting

The Innovation Act makes “loser-pays” fee shifting the default rule. The court shall award reasonable attorneys’ fees and costs to the prevailing party unless the position and conduct of the non-prevailing party was reasonably justified in law and fact or special circumstances would make fee shifting unjust. The Court also can make the fee award recoverable against other “interested parties,” such as when the plaintiff is just a shell entity created to assert the patents-in-suit. The fee shifting provision would apply to cases pending for less than six months prior to the date of enactment. In the 113th Congress, this was the most controversial provision of the Innovation Act, and that remains the case today especially in light of the Supreme Court’s recent decision in Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014), lowering the threshold for awarding attorneys’ fees under the current law. The actual effect of the Octane decision in the district courts remains to be seen.

  1. Disclosure of Interested Parties

The Innovation Act requires patent holders to disclose to the court, the Patent Office, and adverse parties all real parties-in-interest, such as assignees, entities with license or enforcement rights, parties with a direct financial interest in the plaintiff or the patents-in-suit, and ultimate parents of the plaintiff. “Financial interest” is defined as ownership or control of more than 5% of the plaintiff or the right to receive proceeds from assertion of the patent. Financial interest does not include attorneys representing the plaintiff on a contingent fee basis or stock-holders who do not have any control over the litigation. 

The bill also imposes an ongoing duty to supplement this information. If a party does not abide by its ongoing disclosure obligations to the Patent Office, then it may not recover damages or attorneys’ fees during the period of non-compliance, and the court may award sanctions to adverse parties. Finally, the courts may join such interested parties upon a showing by a defendant that the plaintiff’s interest is primarily asserting the patent-in-suit in litigation.

  1. Phased Discovery

The Innovation Act limits discovery prior to claim construction to information necessary to construe the claims or resolve motions. (These limits do not apply to actions brought by patent holders against competitors seeking a preliminary injunction.) The courts have discretion to expand discovery to prevent injustice.

The Act also directs the Judicial Conference of the United States (the body that drafts and amends the Federal Rules of Civil Procedure) to draft new discovery rules to address the “asymmetries in discovery burden and costs” in patent cases. To that end, the Conference should enact rules creating several categories of discovery: core discovery, discovery of electronic communications, and additional discovery. Under these rules, discovery of electronic communications would be strictly limited and “additional discovery” would typically be paid for by the requesting party, including the producing party’s reasonable attorneys’ fees. This bifurcation of discovery and cost-shifting represents a dramatic shift from the open discovery common to federal litigation today. Moreover, while the limits on discovery of electronic communication will save the parties costs and fees, they seem ill-suited to a world in which most communication occurs electronically.

Finally, the Act directs Judicial Conference to study these rules governing and amend them as needed. (The Act also directs the Commission to develop case management procedures that encourage the district courts to identify potential dispositive issues focus on early summary judgment motions.)

  1. Customer Stays

The Innovation Act requires courts to stay suits against customers where the manufacturer of the accused product or process also has been accused of infringing the same asserted patent. To obtain such a stay, the manufacturer and the customer must agree to the stay and the customer must file a motion to stay its case within the later of 120 days of the suit or entry of the first scheduling order. The customer also must agree to be bound by any issues finally decided as to the manufacturer. If a manufacturer, however, agrees to a consent judgment or does not appeal a final judgment, then the court may determine that the decision is not binding on the stayed customer defendant. The court also may lift the stay if it determines that the manufacturer suit will not resolve a major issue in the customer suit or is otherwise unjust to a party seeking to lift the stay.

Note that the Act’s definitions of “covered manufacturer” and “covered customer” do not seem well-suited for distribution chains involving multiple layers of suppliers. Put another way, when the distribution chain consists of more than A selling to B, the intermediate parties seem to fit the definitions of both covered manufacturers and covered customers.

  1. AIA Amendments

The Innovation Act contains several amendments to the 2011 America Invents Act.

First, the Act requires the Patent Office to use the standard used by district courts when construing claims in litigation rather than the currently used “broadest reasonable construction” standard borrowed from the patent prosecution process. Interestingly, this provision would make it harder rather than easier to invalidate patent claims under the AIA, contrary to the spirit of almost every other provision of the Innovation Act.

Second, the Act eliminates the estoppel provision in the Post-Grant Reviews that currently bars a petitioner from asserting in a subsequent civil action any ground that the petitioner “reasonably could have raised” during the post-grant review. This estoppel language, however, remains in effect for Inter-Partes Reviews.

Third, the Act expands the scope of prior art available to petitioners in filing covered business method review petitions. 

Fourth, the Act allows the Patent Office to waive the filing fees in certain CBM reviews. 

  1. Extension of Patent Pilot Program

The patent litigation pilot program existing in certain district courts shall be extended for an additional ten years.

  1. Double Patenting

The Innovation Act codifies the doctrine of double patenting for first-inventor-to-file patents. 

  1. Bankruptcy Protection

The Innovation Act bars bankruptcy trustees from terminating certain patent licenses by giving licensees the right s described in section 365(n). The Act adds trademarks to the definition of “intellectual property” in the bankruptcy code. Finally, the Act holds the bankruptcy trustee to any contractual obligations to monitor and control the quality of a licensee’s product or service.

  1. Small Business Provisions and Patent Improvement Provisions

The Innovation Act requires the Patent Office to develop educational resources for small businesses, including programs to increase awareness of abusive litigation practices. The Patent Office may give special consideration to the unique needs of small firms owned by disabled veterans, women, and minority entrepreneurs. To that end, the Act also requires the Patent Office to create a web-site to notify the public of all new patent cases.

The Act directs the Patent Office to study the prevalence of bad faith demand letters.

The Act directs the Patent Office to study the impact of the Act on the ability of individuals and small businesses owned by women, veterans, and minorities to assert, secure, and vindicate the constitutionally guaranteed exclusive right to inventions and discoveries by such individuals and small businesses.

The Act directs the Patent Office to study the volume and nature of business method patent lawsuits.

The Act requires the Patent Office to study the secondary market for patents in the United States and to examine licensing and other oversight requirements that may be placed on the patent secondary market.

The Act directs the Patent Office to study its own examination procedures, patent quality, and the technologies available to improve patent examination quality.

Finally, the Act requires the federal courts to study the idea of developing a patent small claims procedure.

  1. Prospects for Passage

Most Congressional observers believe that the change in control of the United States Senate presages approval of the Innovation Act, or some form thereof, in the 114th Congress. Moreover, the White House previously has signaled its intention to support and sign patent reform legislation. It remains to be seen, however, whether the White House will be as enthusiastic about a reform bill that includes mandatory attorneys’ fee-shifting and other dramatic changes to the default rules of civil procedure. In conclusion, we expect to see some form of the Innovation Act enacted into law in the year 2015.