Originally appeared in InsideCounsel on January 16, 2015.
Patent litigation reform has been gaining prominence among legislators. Even as hard numbers are just beginning to emerge regarding the effectiveness of the administrative procedures introduced by the Leahy-Smith America Invents Act (AIA), federal lawmakers are already considering new legislation that may include even more dramatic measures. In parallel, a substantial and growing minority of states have enacted legislation targeting “bad faith” patent assertion, usually through laws intended to require more specificity from cease-and-desist letters.
The Empirical Impact of the America Invents Act
The AIA, enacted in 2011, was the most significant patent legislation in over 50 years, and while it is too early to measure the effects of all of its provisions, a wealth of data and analysis of the newly established administrative review procedures is starting to be available. The AIA established several administrative proceedings, but inter partes review (IPR) is by far the most popular to date, constituting 89 percent of AIA petitions filed through December 2014.
IPR petitioners have had modest success under the IPR regime. The USPTO’s statistics for IPR petitions terminated as of October 2014 show that the USPTO instituted IPR proceedings for 67 percent of claims challenged, and 34 percent of claims challenged were ultimately cancelled or disclaimed, which is similar to the invalidation rate under the old inter partes reexamination scheme. Furthermore, while IPR has not supplanted traditional litigation—about 80 to 90 percent of IPR proceedings filed are associated with co-pending litigation—district courts have stayed co-pending litigation in approximately 80 percent of cases once the PTO has instituted IPR proceedings, although some courts known for speedy resolution, such as the Eastern District of Texas, are less receptive to stays. Many defendants are therefore able to delay or altogether avoid a portion of the large discovery costs of district court litigation once they have successfully initiated an IPR.
IPR proceedings are also currently about twice as fast as traditional infringement litigation. The Patent Trial and Appeal Board (PTAB) has taken an average of 15 months to reach a final decision on the merits, while the median time to trial for patent litigation is currently 2.5 years. IPR and the other administrative proceedings introduced by the AIA therefore appear to have short-circuited at least some of the costs of infringement litigation for parties sophisticated enough to take advantage of the complex new procedures.
There Is Broad Support for Additional National Reform Legislation
Even as defendants are beginning to enjoy the benefits of IPR and other administrative proceedings, legislators are marshalling support for additional reforms. Following the 2014 midterm elections, prominent lawmakers from both parties expressed their intention to push for additional patent legislation in the coming year, and the White House has also signaled support for additional reforms. Both branches have focused their rhetoric primarily on curbing the perceived abusive practices of nonpracticing entities (NPEs). While NPEs’ business models remain controversial, their willingness to litigate is not: NPEs filed 59 percent of all patent infringement lawsuits in 2012 and 67 percent of infringement lawsuits in 2013, suggesting that the AIA has done little to discourage litigation by NPEs.
New patent reform legislation may take a form similar to 2013’s House Bill 3309, which passed the House by a vote of 325 to 91 in December 2013 but stalled in the Senate Judiciary Committee. Bill 3309 would have significantly increased the pleading requirement for non-ANDA patent infringement cases by requiring plaintiffs to, among other things, identify each patent infringed on a claim-by-claim basis, give a concise statement of how each claim limitation is met, and describe the principal business of the party alleging infringement. The bill would also have created a presumption of fee shifting to any prevailing party (and included provisions to prevent the asserting party from avoiding those consequences through use of subsidiaries or by unilaterally terminating the lawsuit), limited discovery prior to claim construction, regulated demand letters, and called for new procedural rules to address “the asymmetries in discovery burdens” in patent litigation.
State Legislatures Have Also Targeted Patent Litigation Practices
Despite the national scope of patent law, state legislatures are also paying increased attention to patent litigation reform. Several states have passed new laws to deter entities from threatening patent infringement litigation without providing a substantial basis for their accusations. In May 2013, Vermont enacted legislation prohibiting the “bad faith assertion of patent infringement.” The Vermont act does not define “bad faith.” Rather, it lists nine factors that evidence bad faith, including the degree of specificity of the patentee’s demand letter, whether a claim-by-claim comparison was made, and the reasonability of both the license terms offered and the period of time given for response. The Vermont act also sets forth seven factors that weigh against a finding of bad faith, most notably whether the party asserting the patent is the inventor or original assignee and whether that party has made a substantial investment in practicing the patent asserted. The act permits exemplary damages as well as equitable relief, economic damages, costs and attorney’s fees, and it also authorizes the state’s attorney general to enforce the act’s provisions. Seventeen other states have followed Vermont’s lead and enacted similar legislation.
Patent litigation reform continues to occupy a prominent position in the current legislative landscape. On the national level, there is momentum towards additional procedural reform even as companies are beginning to enjoy the substantial changes introduced by the AIA’s administrative procedures, while recent state legislative efforts indicate the issue has popular appeal. However these trends are resolved, though, patentees and their attorneys can expect increased scrutiny of efforts to assert patents, and they should keep a meticulous eye on best practices, particularly with respect to cease-and-desist letters.