The House Judiciary Committee held a hearing this afternoon to examine the Supreme Court rulings that have been handed down since the Innovation Act was first introduced in 2013.  The Committee was interested in determining whether and how these cases have impacted the need for patent reform.  The Committee heard testimony from four witnesses:

  • Herbert Wamsley (Executive Director if the Intellectual Property Owners Association)
  • Krish Gupta (Senior VP & Deputy General Counsel of EMC Corporation)
  • Andrew Pincus (Partner at Mayer Brown)
  • Robert Taylor (Counsel for the National Venture Capital Association)

All four witnesses appeared to support patent reform (at least to some degree) and believe that the Supreme Court’s decisions, while helpful to combat abusive patent litigation, have not done enough.  Although the National Venture Capital Association, represented by Mr. Taylor, raised the most concern with the proposed legislation.  The prepared remarks of the witnesses can be accessed on the House Judiciary Committee website.  For those interested a summary of the hearing, I have identified a few of the highlights on each major topic of discussion.

Octane/Highmark & Fee-Shifting

The opening remarks of the Committee members showed that the fee-shifting provisions of the Innovation Act remain the most controversial.  For example, Rep. Jerrold Nadler noted that while he supports the Innovation Act, the fee-shifting provision is on the outer edge of what he could support.  In addition, after noting that he may be the “skeptic” of the Committee, Rep. John Conyers said that the fee-shifting provision is “unwise” and he is not persuaded that it is good for the patent system.

The Octane and Highmark decisions recently changed the standard for awarding attorney fees under Section 285.  Before Octane, the prevailing party had to establish that the losing party’s position was objectively unreasonable and asserted in bad faith.  Octane held that fees could be awarded where the case “stands out from others with respect to the substantive strength of a party’s litigation position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”  Octane also lowered the evidentiary burden from clear and convincing to a preponderance of the evidence standard.  Highmark, a companion case, held that the district court’s exceptional case determination should be reviewed for abuse of discretion rather than under the existing de novo standard of review.

In his prepared remarks and testimony, Mr. Wamsley said that, despite the changes in the application of Section 285 and reports that judges are awarding fees in more cases, further legislation on the issue is still needed.  He stated that Octane fails to provide a clear, objective test for lower courts, and that some judges will not be inclined to award fees despite the lower standard.  He further testified that the IPO supports the “presumptive” fee-shifting provisions in the Innovation Act because it will more effectively deter abusive litigation and promote consistency and predictability.  Mr. Taylor did not agree that presumptive fee-shifting was appropriate because it distinctly favors larger corporations over smaller ones.

Notably, Rep. Goodlatte disagreed with the characterization that the Innovation Act includes a presumption of fee shifting.  He said there is no presumption in the statute, and further stated that both plaintiffs and defendants will benefit because they will have a better understanding of the circumstances under which fees will be awarded.  Mr. Pincus picked up on this point and commented that defendants need more certainty on the standard for fee-shifting so they can decide whether to settle or fight charges of infringement.

Mr. Gupta testified that Octane and Highmark do not go far enough. He testified that in the 9 months following these decisions, there was only a 4% increase in granted fee motions (his statistics showed that 62% of fee motions were denied before the decisions compared to a 58% denial rate after).  He concluded that the Innovation Act’s fee-shifting provision is the simplest way to discourage the filing of frivolous and abusive suits.

Mr. Taylor testified that the joinder provisions in the Innovation Act are the most concerning for start-up companies.  He said that the provisions are not clear, and they could result in a venture capital firm being on the hook for attorney fees.

Twombly/Iqbal and the Pleading Requirements

The witnesses also discussed the impact of the pleading requirements on patent litigation.  Mr. Gupta, for example, testified that the abrogation of Form 18 would be a positive development because district courts would then apply the stricter standards of Twombly/Iqbal.  But he also said that those cases do not set forth bright-line rules and there will inevitably be satellite litigation over the sufficiency of the pleadings and variable outcomes depending on the judge.  Mr. Taylor agreed that the pleading requirements of the Innovation Act will result in more disputes at the beginning of the case over whether the allegations in the complaint are satisfactory.  Mr. Gupta concluded that legislation is needed to provide uniform, clear national standards so that defendants can prepare their case from the outset.

I recently wrote on the impact of the Innovation Act’s pleading requirements.  I concluded that they would ultimately do more harm than good because of the problems identified at the Committee hearing, but offered alternatives to achieve the intended benefits of heightened pleading requirements.

Alice & Other Section 101 Cases

Several of the witnesses testified about the Alice decision and its impact on patent litigation.  For example, Mr. Wamsley testified that it is too early to tell what long-term impact Alice will have on abusive behaviors in patent litigation.  He said that reports show a significant increase in patents being invalidated under Section 101, but there is too little data to say whether this is a trend or temporary spike.

Mr. Gupta testified that while helpful in some cases, Alice impacts only a small percentage of patents.  He believes that defendants will still incur significant costs even in cases where the patent is invalidated under Section 101.  He says that plaintiffs who file bad-faith litigation understand these costs and can still coerce settlements out of defendant operating companies that would rather pay less to settle than to litigate.

Mr. Taylor took a slightly different view of the developments under Section 101.  He concluded that cases in this area are refocusing the entire federal judiciary on the basic objective of the patent system to protect specific categories of subject matter and nothing else.  He also said that motions early in the case to determine whether a patent is directed to patentable subject matter will prove to be a powerful new tool to dispose of meritless, abusive lawsuits.  But he noted that, due to the uncertainty of Alice and patent reform in general, companies may shift their focus from disclosure and protection through patents to the use of trade secrets to protect their ideas.

Nautilus & Indefiniteness

In Nautilus, the Supreme Court adopted a “reasonable certainty” standard in determining whether a claim term satisfies the definiteness requirement, which replaced the “insolubly ambiguous” standard that had been applied by the Federal Circuit.  Several witnesses believed that it should now be easier for a defendant to challenge the validity of a vague patent.  Mr. Wamsley testified that Nautilus may have a long-term effect on abusive litigation, but he could not yet find evidence of its impact.  Mr. Pincus testified that Nautilus can help restore balance to patent litigation.  He stated that the more restrictive standard for definiteness will enhance patent quality, which is an essential antidote to abusive patent litigation.  Mr. Taylor believed that Nautilus will have a significant impact in reigning in the practice of asserting infringement without regard to what the invention was actually intended to cover.

Teva and the Standard of Review for Claim Construction

In Teva, the Supreme Court held that factual findings in support of claim construction (such as findings based on the testimony of experts) should be reviewed for clear error, not the de novo standard applied by the Federal Circuit.  The de novo standard, however, still applies to the review of intrinsic evidence and the ultimately construction.

Mr. Wamsley testified that Teva will have minimal effect on curbing abusive litigation.  Mr. Gupta disagreed, and testified that patentees will now have an additional incentive to pick the district court most favorable to them, and that court’s claim constructions will be more insulated from Federal Circuit review.  Mr. Pincus largely agreed with Mr. Gupta, and said that parties will now rely on experts more heavily in claim construction.  He concluded that patentees will benefit because they will have another cost burden to exploit to increase the settlement pressure on defendants.