Last week, House Judiciary Committee Chariman Bob Goodlatte (R-Va.) reintroduced the Innovation Act, a bill that attempts to address perceived patent litigation abuse.  This current bill as introduced is identical to the bill that was passed by the House in December of 2013 by a vote of 325-91.  Discussed below are some of the Act’s provisions as well as judicial developments since the 2013 House vote that may impact those provisions.

Heightened Pleading Requirements

The proposed Innovation Act requires a patent owner to disclose a lot more information in its initial pleadings–e.g., Complaint–in order to first start a patent infringement lawsuit, rather than awaiting that information in initial disclosures or discovery.

Pleading Infringement.  The proposed Act (§ 281A(a), beginning at page 2) contains provisions to increase the specificity and information required to plead patent infringement, requiring a patentee to identify 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.

But there has been some development along these lines in the judiciary since this identical legislation was proposed in December 2013.  The udicial Conference recently recommended amending the Federal Rules of Civil Procedure to eliminate example pleading forms, including Form 18 “Complaint for Patent Infringement” that provided a bare recitation for pleading direct patent infringement.  The Committee concluded that the “sample complaint” forms, like Form 18, “illustrate a simplicity of pleading that has not been used in many years.”  Further, “[t]he increased use of Rule 12(b)(6) motions to dismiss, the enhanced pleading requirements of Rule 9 and some federal statutes, the proliferation of statutory and other causes of action, and the increased complexity of most modern cases have resulted in a detailed level of pleading that is far beyond that illustrated in the forms.”  This rule change is expected to take effect in December 2015.

Importantly, the Federal Rule’s current presumption that use of the existing Form 18 is sufficient pleading to survive a motion to dismiss had hindered courts from requiring more specificity in pleading patent infringement.  The Federal Circuit indicated that Form 18 kept it from requiring more specificity in pleading direct infringement, but the court was able to require more specificity with respect to pleading induced or contributory infringement (see our June 7, 2012 post on In re Bill of Lading).  The  Judicial Conference’s elimination of Form 18 may allow courts to require more detailed pleadings than the current Rules require.  Congress may consider this when deciding whether and to what extent there remains support for the heightened pleading provisions of the reintroduced patent reform bill.

Patent Ownership and Financial Interest.  The proposed Act (Sec. 4(b), beginning at page 16) 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.

Standard Setting Obligations.  A patentee would be required, under proposed § 281A.(a)(10), beginning at page 4, to identify in the initial pleadings any standard setting organizations (SSOs) to which the patent has been declared essential, stating:

 [W]hether a standard-setting body has specifically declared such patent 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 licensing requirements with respect to such patent.

As we explained previously, the language “whether a standard setting body has specifically declared such patent to be essential …” 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 do not state definitively whether the patent covers the standard, only that it might cover the standard and what the patent owner would do as far as licensing the patent if the patent actually is essential to the standard.  Perhaps Congress will clarify or remove this language to align with real world practices.

Prevailing Party Fee/Cost Shifting

The proposed Act (§ 285A, beginning at page 6) would depart from the “American Rule” generally applied in all civil cases that each party bears its own attorneys fees; ratther, the proposed Act would presumptively award costs and attorneys fees to a prevailing party unless the position and conduct of the nonprevailing party was reasonably justified in law and fact.  There has been case law development on this issue after Congress considered this language in 2013.

Specifically, on April 29, 2014, the Supreme Court issued two opinions (Octane Fitness and Highmarkthat relaxes the standard for fee-shifting in patent cases, lowers the burden of proof from clear and convincing evidence to a preponderance of the evidence, and also changes the standard of appellate review of district court fee awards in patent cases from de novo to the more deferential abuse of discretion standard (i.e., the district court’s decision is more likley to withstand appellate review).

35 U.S.C. Section 285 governs fee-shifting in patent cases and provides that a “court in exceptional cases may award reasonable attorney fees to the prevailing party.”  Prior to Octane Fitness and Highmark, courts applied the Federal Circuit’s stringent test in Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc. to analyze whether a case was “exceptional.”  Under Brooks, a case was “exceptional” if (1) the case involved “material inappropriate conduct” in the litigation or prosecuting the patent or (2) the case was both “objectively baseless” and “brought in subjective bad faith.”  Brooks also required a prevailing litigant to establish the “exceptional” nature of a case by “clear and convincing evidence.”

As we previously reportedOctane Fitness overruled Brooks and adopted a more flexible test that gives district courts more discretion to determine, on a case-by-case basis, whether a case is “exceptional” given the totality of the circumstances.  Octane Fitness also held that a prevailing party need only show that a case is exceptional by a preponderance of the evidence, rather than the higher clear and convincing burden of proof.  Highmark overruled Brooks’ holding that a de novo standard of review applies to a district court’s determination that a case is exceptional.  Under Highmark, such determinations are now reviewed for an abuse of discretion, which is much more deferential to the district court’s decision and renders it less likely to be reversed on appeal.

In considering the reintroduced bill, Congress may consider how the new, flexible and discretionary fee-shifting standards set forth in Octane Fitness and Highmark, warrants revising–if not tabling altogether–the proposed fee-shifting provisions in favor of awaiting further judicial development under the new and more flexible Octane Fitness/Highmark standard.

Discovery

Mandatory Disclosures of SSO Obligations.  With respect to discovery obligations, the Act (Sec. 6(a)(2), beginning at page 27) also proposes that the Judicial Conference consider “documents relating to any licensing term or pricing commitment to which the patent or patents may be subject through any agency or standard-setting body” to be part of the “core documentary evidence” that must be produced by a patent-plaintiff to defendants in every litigation.

Discovery Cost Shifting.  The proposed Act (Sec. 6(a)(2), beginning at page 27) also would impose fee-shifting for discovery of core documentary evidence and other discovery requests , limit the scope of discovery that would be permitted prior to claim construction, and also require the Judicial Conference to develop rules and proposals limiting discovery in patent cases and to study the efficacy of the rules enacted.

Here again, there has been judicial development on this issue since 2013 that may impact the proposed bill.  The Judicial Conference has revised Federal Rule of Civil Procedure 26 — which governs, inter alia, the scope and timing of discovery – to expressly incorporate a requirement that any discovery sought in a civil case be “proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.”  The Judicial Conference has also revised Rule 26 to expressly permit a district court to “allocat[e]” the expenses for the costs of the discovery that is sought.  While the Judicial Conference noted that this change “does not mean that cost-shifting should become a common practice” and that “[t]he assumption remains that the responding party ordinarily bears the costs of responding” to a discovery request, the House should nonetheless consider what impact these revisions to Rule 26 may have on the Act’s proposed discovery limitation and cost-shifting provisions.

Customer Stay

Some supporters of the proposed Act expressed concerns about certain non-practicing entities (what some refer to as “patent trolls”) suing customers of allegedly-infringing products, rather than suing the manufacturer of those products, to leverage a quick settlement against an end user that is not familiar with the technology or patents in general (e.g., a coffee shop providing WiFi access).  The proposed Act (§ 286, beginning at page 22) would allow a manufacturer to intervene in a patent suit brought against its customer.  Under the Act, a patent suit against the customer may be stayed as to the customer while the manufacturer and patent plaintiff litigate the merits of the infringement action, so long as (1) the manufacturer and the customer consent, (2) the stay is sought within 120 days after the first complaint for infringement, and (3) the customer agrees to be bound by the court’s ruling on any issues in common between the customer and manufacturer.  Some have expressed concern that this provision may be abused and used beyond unsophisticated end customers.

The Federal Circuit’s decision in In re Nintendo may impact this provision.  As we previously reported, in Nintendo, the Federal Circuit ordered a district court to stay claims against defendant retailers accused of selling an infringing product in order to let the case proceed against the manufacturer of the accused products.  The Federal Circuit ordered the district court 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.  The House may consider whether and to what extent the customer-suit exception may be in necessary in light of  the Nintendo decision.

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As we previously reported, the Innovation Act was pulled from consideration by the Senate in May of 2014, which also was considering its own patent reform bill introduced by Senator Leahy.  As Representative Goodlatte alluded, should the House vote to approve the Innovation Act, it will then be up to the Senate to resume its consideration of the Act or a competing bill and resolve any disagreements through committee.  Prior to approving the Act, however, the House may consider the potential impact of the intervening judicial developments discussed above and revise accordingly.