Current reform efforts have focused in part on negating the perceived ill effects of NPEs and have had modest success already
The dramatic rise in lawsuits brought by non-practicing entities (NPEs)—sometimes pejoratively called patent trolls—in the past few years has spurred systemic changes to the patent law system. From Congress to state legislatures, from the Supreme Court to district courts, the various changes are making an impact on the way patent lawsuits are litigated. But what impact has this had on NPE lawsuits? Are the companies that provide real goods and services more insulated from attacks by NPEs as a result of these systemic changes? Are more changes needed and what does the future hold?
The enactment of the Leahy-Smith America Invents Act (AIA) in 2011 overhauled the American patent system in a way that had not been accomplished since the Patent Act codified the laws in 1952. Fundamental changes introduced by the AIA included a “first-to-file” system for obtaining patents to replace the “first-to-invent” approach. Another fundamental change was the creation of new and improved post-grant adversarial proceedings in the Patent Office called inter partes review (IPR), covered business method review (CBM), and post grant review (PGR), which allow interested parties to challenge issued patents.
These proceedings are already having a significant impact. The rapid pace of IPR proceedings makes them attractive to patent challengers. According to recent USPTO statistics, the newly created Patent Trial and Appeal Board (PTAB) takes an average of 15 months to reach final decision on the merits in these new IPR proceedings. For IPRs terminated as of Jan. 15, 2015, 51 percent of claims in petitions instituted by the PTAB were either found to be unpatentable by the PTAB or were cancelled or disclaimed by the patent owner. To defendants facing an infringement suit that could last for several years, the prospect of having claims declared unpatentable by the PTAB after just 15 months is very attractive. This stands in stark contrast to 36-month average pendency of the former, lesser-used inter partes reexamination procedure, which IPRs and the other post-grant review procedures have effectively replaced.
Just as the impact of the AIA is being truly felt, lawmakers are looking toward additional reforms. Though many of these efforts have been sidelined by a divided Congress, there are indications that certain reforms aimed at NPEs are back on the table. In February, Congressman Bob Goodlatte re-introduced the Innovation Act, which was initially passed by House in late 2013 by a 325-91 margin, but hit a major road block when Senator Leahy pulled the Senate’s version of the bill from the Senate Judiciary Committee’s agenda in May 2014.
Several sections of the Innovation Act are aimed directly at NPEs. The new bill not only introduces heightened pleading standards for patent cases, but also requires plaintiffs to disclose information about the patent-in-suit that would prevent NPEs from hiding their ownership of the patent behind shell companies. The bill also limits the scope of discovery in the period before claim construction and introduces a fee-shifting provision.
It remains to be seen whether the reintroduced bill will make it past the Senate and into law, but with 19 co-sponsors evenly split along the political divide, its bipartisan character is evident. In addition, many state legislatures have passed laws aimed at curbing abusive patent demand letters by prohibiting bad faith assertion of patent infringement and providing damages and attorney’s fees for those wrongfully accused.
Supreme Court Judicial Reforms
While post-AIA patent reform was delayed in Congress, the Supreme Court decided several cases that have created a tougher environment for patentees with weak cases. In particular, the Supreme Court has addressed patent eligibility of software and other patents, the “definiteness” standard for patent claims, and fee shifting. In Alice v. CLS Bank, the Court unanimously held that merely implementing an unpatentable “abstract idea” using a computer does not transform the idea into something patent eligible under 35 U.S.C. § 101. Since Alice was decided, the Federal Circuit has struck down several software patent claims as unpatentable abstract ideas. Likewise, the Supreme Court tightened the “definiteness” requirement of 35 U.S.C. § 112 in Nautilus Inc. v. Biosig Instruments Inc. by requiring that claims inform those skilled in the art of the scope of the invention “with reasonable certainty.”
The Supreme Court has also given district courts more authority to award attorney’s fees under the Patent Act’s fee shifting provision in a duo of cases, Octane Fitness and Highmark. In Octane Fitness, the Supreme Court created a more flexible standard for the award of attorney’s fees in “exceptional cases,” allowing district courts to consider the totality of the circumstances in determining whether a case is “exceptional.” The new test for an “exceptional case” is “simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”
In Highmark, the Supreme Court also gave more deference to district courts’ decisions to award fees, requiring appellate review under an “abuse of discretion” standard, instead of de novo review. This change appears to be having an impact. District courts have taken advantage of this increased authority to award fees in 25 out of 54 post-Octane Fitness cases in which the fee-shifting provision of the Patent Act was raised. The vast majority of the cases (20 out of 25) awarded fees to the accused infringer. NPEs now have to think even more carefully about bringing unmeritorious infringement suits.
Case Management by District Courts
In the shadow of these changes by Congress and the Supreme Court, district courts have been making their own contribution by exercising their case management authority. Since 2008, the number of districts with local patent rules has tripled, and there has been a surge in standing orders governing patent cases instituted by individual judges. In the District of Delaware, for example, Chief Judge Stark and Judge Robinson have overhauled their case management processes in order to make patent cases more efficient. By streamlining patent cases, individual judges can cut down on costly and inefficient delays, therefore lowering the burden of litigation costs. As these costs are often higher for defendants in cases involving NPEs, increased efficiency should benefit accused infringers. In addition, district courts are increasingly staying cases in which inter partes review (IPR) is instituted by the PTAB, a trend which will also be helpful to accused defendants in NPE cases.
Overall Effect: Where Are We Now?
Though these reforms are ongoing, they are already having effects on patent litigation. The number of patent cases filed in 2014 has dropped for the first time since 2010, and the percentage of patent litigations filed by NPEs also appears to be decreasing. It is likely that all of the above changes are contributing to these trends.
The long-term effects of recent patent reform efforts will become more apparent in the coming years, and the last few years have demonstrated that patent litigation is not a static environment. From sweeping acts of Congress, to new law from the Supreme Court and increasing case management by district courts, patent reform continues to change the patent litigation landscape in response to new and different challenges. Current reform efforts have focused in part on negating the perceived ill effects of NPEs and have had modest success already. The debate continues whether more reform is needed, but further developments will occur, both in Congress and the courts and inside counsel need to stay alert.
Originally appeared in InsideCounsel on March 2, 2015