The Innovation Act includes a revised version of 35 U.S.C. §285 that changes the standard for awarding fees and expenses to the prevailing party in patent cases. Supporters of the Act contend that the new standard will lead to more fee shifting and greater predictability (a charge that I analyzed in recent blog post).
One significant component of the Act’s fee-shifting overhaul is the addition of a section called “Joinder of Interested Parties” to 35 U.S.C. §299. This provision would allow the district court to join an “interested” third party to a litigation and make that third party liable for any portion of a fee award that cannot be paid by the losing party. The joinder provision is aimed at companies that “hide behind” so-called “patent trolls”, which often have no assets other than the asserted patents.
Although this provision has been promoted as a weapon against abusive litigation, in practice, it will have little impact on its intended target. The Act provides a loophole that will allow companies that back “patent trolls” to avoid joinder and any responsibility for a fee award. Unfortunately, the same approach will be impractical (or impossible) for universities, researchers, and companies that back start-ups. In fact, the consequences of the joinder provision could be so severe for these entities that the Act may prove to be a significant barrier to the enforcement of legitimate patent rights.
Overview of the Joinder Framework
In a patent case where fees and expenses have been awarded, the accused infringer may move to join an “interested party” if the patentee cannot pay the award. The district court “shall” grant such a motion upon a showing that the patentee “has no substantial interest in the subject matter at issue other than asserting such patent claim in litigation.” The Innovation Act does not actually define what it means to have a “substantial interest in the subject matter at issue.” But based on the intent of the bill, the accused infringer will likely argue that only patentees who practice the patents themselves meet this requirement.
Under the Act, only an “interested party” may be joined to pay a fee award. The term “interested party” is defined as a person that: (a) is an assignee of the patent, (b) has a right to enforce or sublicense the patent, or (c) has a direct financial interest in the patent, which includes the right to any damages award or license revenue. The definition, however, excludes an attorney or firm whose financial interest arises from the receipt of compensation for providing legal representation. It also excludes persons whose sole financial interest is the ownership of an equity interest in the party alleging infringement, unless such person also has the right or ability to influence, direct, or control the civil action.
The Joinder Provision Will Not Deter Abusive Litigation
The promoters of the Innovation Act contend that companies behind “patent trolls” will be discouraged from filing lawsuits if they could be on the hook for a fee award. And that may be true. The problem is that the Innovation Act provides an easy way for these companies to avoid liability.
Although the first section of the joinder provision states that the court “shall” grant a motion to join unless the patentee has a substantial interest in the subject matter at issue, the next section (titled “Limitation on Joinder”) sets forth important restrictions. Under the heading “Required Denial of Motion,” the Act states that the court “shall deny” a motion to join if the interested party “renounces … any ownership, right, or direct financial interest” that the interested party has in the patent.
If the patentee’s position in the litigation was so unreasonable that the defendant not only won, but also received a fee award, it would seem that any company backing the patentee would renounce its financial interest rather than pay a fee award. At that point in the litigation, any future revenue from the patent would seem remote (and probably not worth the risk of paying millions in fees and expenses to see if the district court’s rulings hold up on appeal). Moreover, even if the lower court is reversed on appeal, nothing in the bill prevents the company from regaining its financial interest and then backing the patentee in future litigation. With this “loophole” in place, it is unlikely that the joinder provision will achieve its intended goal.
The Joinder Provision Will Likely Discourage Universities From Enforcing Their Patents
While the companies behind “patent trolls” will be able to avoid liability for a fee award, the same will not be true for many universities. Academic and research institutions routinely transfer technology from the research environment to the marketplace. For example, a survey showed that in 2013 more than 800 new companies were formed around transferred technologies (and noted that more than 4000 startups from previous years were still in operation). These start-ups are typically formed around exclusive patent licenses, which provide a royalty to the university and often give the licensee the right to enforce the patents. Should one of these licensed companies bring suit and be subject to a fee award, the university could be joined as an interested party under the Innovation Act. But unlike companies that back “patent trolls,” universities cannot easily renounce their ownership and financial interest in the patent. Patents owned by state universities, for example, may be considered state property, and thus renouncing ownership will be impractical or impossible.
Another wrinkle for universities is that most have long-standing policies that provide for the sharing of patent royalties between the university, the researchers who invent the patented technologies, and in some cases, the researcher’s school, department, and lab. (See, e.g., the policies of Harvard, Stanford, University of California, andYale.) For patented inventions derived from federal funding, these policies are mandatory. For example, if a non-profit organization retains title to a federally-funded invention, the Bayh-Dole Act requires that the organization pay the inventors a portion of the royalties and use the remaining amounts for research, development, and education consistent with the organization’s mission. Thus, the university researchers, departments, and labs that would receive royalties could also be joined.
These same issues will also play a significant role in a university’s decision to enforce their patents in litigation. While it is true that researchers, departments, and labs would only be subject to joinder if the university cannot pay a fee award, the reality is that most universities have limited budgets for acquiring and commercializing their patents. And the few that can afford litigation would struggle to pay a fee award. Universities have already voiced their displeasure with the Innovation Act’s fee-shifting provision because it will increase the costs and risks associated with litigation. The possibility that a defendant may be able to gain leverage in a litigation by seeking join researchers and departments will only further reduce a university’s appetite for litigation.
The Joinder Provisions Could Also Impact Venture Funding for Start-Ups
One of the witnesses at the February 12 House Judiciary Committee Hearing on patent reform testified on behalf of the National Venture Capital Association (NVCA). Although the NVCA has expressed support for the intent and purpose of patent reform, the group has also raised concern over several aspects of the Innovation Act, including the joinder provision. When the concerns about the joinder provision were raised at the hearing, the focus of discussion quickly turned to whether the testimony was consistent with the views of the entire association, rather than the actual impact of the joinder provision on venture investment. (The NVCA recently submitted a letter to clear up any misconception that this testimony was not aligned with the views of its entire membership). Another witness, however, did argue that venture capitalists would not be impacted by the joinder provision (but did not elaborate other than to say it was apparent from the language of the bill).
From my reading of the joinder provision, it seems that the concern expressed by venture capitalists and technology-based start-ups is justified. The definition of “interested party” excludes a person whose sole financial interest in the patent is “ownership of an equity interest in the party alleging infringement,” which suggests that venture capitalists would not be subject to joinder. But the exclusion is not available if the person “has the right or ability to influence, direct, or control the civil action.” Venture capitalists are typically “active” investors, who almost always want a seat on the board of directors. Consequently, it will be very difficult to say that the venture capitalist board member will not, at a minimum, be able to “influence” the civil action. Patent litigation is a costly and risky proposition for small companies. The possibility that investors may be liable for a fee award could have a chilling effect on investment and the ability of start-ups to enforce their patents.