Patent reform has momentum Congress once again.  Motivated by the perceived ills of “patent trolls” on businesses and the economy, many advocates of reform want to make it harder and costlier for some patentees to assert their patents.  To this end, Representative Goodlatte, chairman of the Judiciary Committee, recently introduced the Innovation Act which is similar to a bill introduced in the last Congress.  Despite passing 325-91 with considerable bipartisan support, this previous bill, also called the Innovation Act, stalled in the Senate where several competing bills were being considered (for more on these bills, see here).  As with its predecessor, the latest Innovation Act includes provisions that would significantly impact patent litigation such as limitations on pre-Markman discovery, higher pleading standards for asserting patent infringement and fee-shifting in favor of the prevailing party.

Representative Goodlatte’s Innovation Act is designed to curb abusive patent litigation brought by “patent trolls.”[1]  While the measures in this bill will likely have a disproportionate impact on how and whether patent assertion entities (“PAEs”) litigate, no provision in the bill explicitly pertains to PAEs to the exclusion of other types of patentees.[2]  If, as many observers agree, PAEs are the cause of so much abusive patent litigation, should reform measures be tailored to affect only PAEs?  Some of the bills introduced in the last Congress included such a provision.

Senator Hatch’s bill (S. 1612) permitted courts, on motion by an accused infringer, to order patentees to post a bond sufficient to ensure payment of the accused infringer’s attorney fees and other expenses.[3]  The bill identified factors related to the characteristics of PAEs that courts should weigh when considering a motion for a bond, e.g., whether the party alleging infringement manufactures or sells products related to the asserted patent, and whether it is a named inventor or original assignee of the asserted patent.  Other factors appear designed to exclude non-practicing entities that few would consider to be the typical abusive patent litigant, i.e., institutions of higher education, licensees of such institutions that further research related to the licensed technology, and non-profit technology transfer organizations.

Also in the last Congress, Senator Cornyn and Senator Schumer proposed a compromise bill with a measure that would, on its face, disparately impact PAEs.  As with Representative Goodlatte’s current Innovation Act, the Cornyn-Schumer compromise bill required more specificity in patent pleadings such as the identity of each accused instrumentality and each allegedly infringed claim.  However, unlike the Innovation Act, it excluded from this heightened pleading requirement patentees who suffer competitive harm due to the alleged infringement.  The competitive harm must be genuine—the patentee must have made substantial investment in the research, development, manufacturing or sale of products or services in the same field as the asserted patent.  Unable to show either competitive harm or substantial investment, PAEs would be burdened with these requirements while many other patentees would not.

If the purpose of reform is to inhibit PAEs, it seems reasonable to target PAEs in a way that does not adversely impact litigants who are not “trolls.”  The measures in the bills described above are directed to “trolls”, but could inadvertently harm some non-PAEs.   For instance, since these measures would increase litigation costs for PAEs, they could also decrease the market value and liquidity of patents for which PAEs would pay less, or not at all, to account for these increased costs.[4]  Hence a patentee—particularly start-ups or small entities—who tried unsuccessfully to commercialize a patent could find it difficult to recoup its sunk costs.  Such a patentee could assert the patent itself, but it may lack the necessary capital.  Litigation funding aside, it may be more economically efficient for the patentee to focus on further innovation rather than litigation.  In this instance, NPEs promote economic efficiency rather than hinder it.[5]

Criteria for identifying “trolls” could account for this scenario.  In addition to considering whether the party alleging infringement manufactures or sells products related to the asserted patent, the test in Senator Hatch’s bill could consider whether a previous assignee of the patent conducted such activity, or invested significantly in developing such products.  Similarly, the criteria in the Cornyn-Schumer compromise bill for considering whether to exempt a patentee from heightened pleading standards could include competitive harm suffered by a previous assignee of the asserted patent.

Even with changes, these tests for identifying PAEs may be inadequate in some instances.  For example, they do not account for a patentee who typically invests significantly in research and development and commercializes its patents, but who asserts a patent in its portfolio that it did not develop or commercialize, perhaps against a longtime competitor.  With respect to the asserted patent, this patentee is technically a non-practicing entity, but is unlike a typical PAE which exists solely or primarily to assert patents.  Rather than specifically address every possible scenario, a law tailored to hinder PAEs could identify the factors like the ones discussed above, and further empower to consider other factors as needed.

How would courts respond to statutes that differentiate PAEs from other sorts of patentees?  Would courts embrace the idea of hindering “trolls” or balk at differentiating among types of patentees?  In some contexts, courts have been wary of distinguishing PAEs from other patentees.[6]  For instance, courts often preclude accused infringers from referring to PAEs as “trolls” during trial.[7]  And, when deciding whether personal jurisdiction lies over patentees whose only connection with the forum state is a letter offering a patent license, courts have refused to consider that the patentee is a “troll”, even if doing so would curtail baseless litigation.[8]

However, in other contexts, courts appear to be receptive to the idea that PAEs can be treated differently than other patentees.  Relying on the Supreme Court in eBay Inc. v. MercExchange, L.L.C., one court has found that an NPE cannot obtain an injunction against patent infringement.[9]  Although eBay did not address PAEs explicitly, the Court found that in applying the traditional four-factor test for injunctions, courts may consider whether the subject matter of the patent is a business method, a favorite of PAEs.[10]  More to the point, other courts have found that an unsuccessful plaintiff’s “troll” activities weigh in favor of awarding fees to the accused infringer.[11]  Furthermore, courts have acknowledged that the fact that a patentee does not practice its patent can affect a damages analysis[12] and renders the patentee unable to meet the “domestic industry” requirement for standing before the ITC.[13]

In sum, federal courts are acutely aware of the issues surrounding PAEs.  In some circumstances, courts take measures to combat abusive PAE practices, but in other situations courts appear to feel powerless to distinguish PAEs from other litigants even if they are willing to do so.  Laws that specifically target PAEs such as the ones proposed in the last Congress would give courts tools to combat abusive PAEs while leaving unscathed more agreeable NPEs such as universities.  Although these particular measures pertained only to bond motions and pleading standards, it may make sense to apply them to other measures such as the pre-Markman discovery limitations.  Perhaps most importantly, laws that single out “patent trolls” could change the dynamic of a litigation—if the court acknowledges from the outset of a case that specific conditions apply to the patentee because it is a “troll”, that PAE would probably be very wary of engaging in abusive litigation tactics, and more likely to settle relatively early.