On February 5, 2015, the House Judiciary Chairman, Rep. Bob Goodlatte (R-VA), flanked by a bipartisan group of his peers, reintroduced his “Innovation Act” (H.R. 9). The bill is the second time in as many years that the Republican-controlled House has introduced legislation aimed at curtailing the excesses of patent protection litigation. In mid-2014, the first incarnation of the “Innovation Act” (H.R. 3309) passed the House but died in the Democratic-controlled Senate. This time, however, the Republican majority extends into the Senate.
In his statement, Rep. Goodlatte pitched the bill as “commonsense reform” aimed at “curb[ing] abusive patent litigation.” The Act’s major provisions include significantly heightened pleading and demand letter requirements, an attorney’s fee shift to the non-prevailing party, discovery limits, plaintiff patent ownership transparency, and stays of litigation against end users. These reforms are aimed ostensibly at protecting emerging and innovative market enterprises. Rep. Darrell Issa (R-CA), another of the bill’s supporters, explained that “increasingly, Americans find innovation obstructed, with attempts to enter the marketplace frequently shut down by well-funded patent trolls who exploit loopholes in the patent system.” But if this is really the Act’s intent, something may have gone awry. The companies lining up in support of the Innovation Act include Apple, Google, and Broadcom – not exactly average garage start-ups. Meanwhile, those who should be cheering legislation aimed at making it easier for start-ups to enter the marketplace are urging caution.
Six higher education associations, including the American Council on Education and the Association of American Universities, criticize the Act for debilitating the U.S. patent system and “discouraging the private sector from turning a university’s research discoveries into the innovations that improve our nation’s economy, health, and quality of life.” Also, in a January 21 letter to the House Judiciary Committee, a host of 250 companies, start-ups, and known innovators — including Qualcomm Inc., Merck & Co., and Monsanto Co. — objected to the bill, claiming congressional action was unnecessary in the wake of legal measures that have reined in the worst patent litigation abuses.
Whether a GOP Senate will spell a different fate for the Innovation Act remains to be seen, but it is worth revisiting the major provisions in the proposed legislation.
Heightened Pleading Standard
The Innovation Act’s changes to the pleading requirements for patent infringement actions are arguably its most sweeping. In brief, Section 3 of the Act would require patent holders to allege how each asserted claim under a given patent is found within each infringing process, product, or instrumentality. The Act attempts to balance these stiff requirements with the caveat that they are not required if the information is “not reasonably” or “readily” accessible (the Act uses both terms). Even if they are able to meet this standard, plaintiffs are still required to explain why the information was not accessible and to describe the efforts made to access it. The Act’s rigorous requirements are intended to discourage unwarranted fishing expeditions by patent trolls, but the question remains as to whether they will effectively bar many valid infringement claims as an unintended consequence. Much will depend on how courts interpret not reasonably and readily accessible – terms which are undefined in the bill.
The first incarnation of the Innovation Act (H.R. 3309) caught the ire of then-Majority Leader Senator Harry Reid (D-NV). This was due to the Act replacing the bedrock presumption that parties bear their own costs, absent fraud or recklessness, with one where the non-prevailing party must pay the prevailing party’s fees. This measure returns in Section 3 of the new Innovation Act (H.R. 9), but this time with a different majority leader, Mitch McConnell (R-KY). Regardless of which party controls the Senate, significant concerns remain as to the fee-shifting provision’s potential effectiveness in combatting patent litigation abuses. The chief problem recognized by many commentators is that in order to have any real effect, defendants must “prevail” in court. Many accused infringers are often unwilling to take that risk, especially when settling early is still a relatively cheap alternative to litigation. This problem is accentuated because those who abuse the system generally bank on their opponents settling. Thus, they are willing to risk that an accused infringer would rather avoid a lengthy, costly patent dispute than waiting to see if they can prevail before the fact-finder. Nevertheless, the fee-shifting provision may embolden some companies that refuse to quickly settle with patent abusers and perhaps encourage others to follow suit.
Transparency in Patent Ownership
Section 4 of the Innovation Act demands transparency in patent ownership by requiring plaintiffs to disclose up front “the ultimate parent entity” of any assignee of the patent. This is aimed at the common practice whereby nonpracticing patent enforcers hide behind a web of shell companies when filing their suits. This duty, moreover, is ongoing throughout the course of the litigation. To give the provision teeth, the disclosure rules are imposed under threat of penalty, including increased damages under Section 285.
Limitations on Demand Letters
The Innovation Act also takes aim at “purposely evasive demand letters.” Blanket demand letters are often the quintessential tool of the stereotypical patent troll and there is wide agreement that those letters need curtailing. The Innovation Act would amend Section 284 of the Patent Act to include a “Willful Infringement” section that requires identifying “with particularity”: the asserted patent, product or process accused, the ultimate parent’s entity, and how the product or process infringes a patent claim. American high-tech companies of all sizes, including start-ups, strongly favor this provision. Indeed, the Democrat-backed alternate, the STRONG Patent Act (S. 632), employs even harsher tactics across the board against trolls, including for “rogue and opaque letters” sent in “bad faith.” But without knowing more about the distinction between what constitutes a “bad faith” letter, those in the legal community still are hesitant to praise such aggressive patent amendments.
Mandatory Stays of Action Against Consumers
The Innovation Act also provides that an action against a customer may be stayed if the customer agrees to be bound by the results of a suit against the manufacturer. This is designed to expand the currently available “customer suit exception,” so that patent owners cannot sue a defendant’s customers to pressure the defendant into settling. However, some view this provision as the most troubling of all. One healthcare public policy expert from the California Health Institute warns that this provision will “prolong litigation, increase costs, while placing a company’s intellectual property in legal limbo.” The Intellectual Property Owners (IPO) Association supports the provision, but agrees that carefully tailored language must be used to avoid adverse consequences to innovators.
While the Act has broad bipartisan support that likely will extend again to the White House, the bill’s sponsors have not yet persuaded everyone that the Act is the proper tool for the job. The steady decline in patent litigation brought by nonpracticing entities since the enactment of the AIA begs the question whether the Innovation Act is necessary. Indeed, a study by Lex Machina found that patent litigation rates were declining steadily and last year were back to 2009 and 2010 levels. Perhaps to combat abusive litigation, a simpler, more targeted solution is preferable, or perhaps a little time and patience is needed to allow the AIA to do its job.