Companies that find themselves either defending against patent infringement lawsuits or enforcing their own patent infringement claims should pay close attention to the Innovation Act of 2013 (H.R. 2639). The Innovation Act (“the Act”), which was introduced by Representative Bob Goodlatte (R-VA), made it out of committee and has now been passed by the House, is aimed squarely at non-practicing entities (“NPEs”), i.e., companies that own patents but that do not sell any products or provide any services themselves. While NPEs may be the primary target, the Innovation Act, if passed, will impact all patent litigation, not just NPE efforts. Likewise, while primarily having a potentially negative impact on plaintiffs, the Act will also have potentially negative impacts on defendants. With bipartisan support and the backing of the White House, the Innovation Act may be the first such legislation to pass.

The Innovation Act makes numerous amendments to Title 35, the section of U.S. Code embodying U.S. patent law. These changes include introducing a discovery delay and other discovery changes, fee shifting, customer suit staying and party-of-interest transparency, heightening pleading requirements and expanding post-grant review. If nothing else, NPEs and their targets should know the following about these changes and the Innovation Act:

Discovery: Perhaps the most expensive and intrusive aspect of any U.S. patent litigation is the discovery process. Indeed, the expense and process of discovery is often the most effective tool used by plaintiffs to bring defendants to settlement, as the process can begin early in the case before any substantial determinations regarding the merits are decided. As a result, defendants are often forced to spend up to hundreds of thousands of dollars going through the discovery process before having any idea whether infringement is a substantial risk or not. The Innovation Act significantly neuters this tool and makes other significant changes to discovery in patent cases:

  1. The Act limits discovery to only matters relevant to interpreting the claims until such time as the claims are actually interpreted. Claim interpretation is often dispositive of the merits of the case. Consequently, defendants would be able to dispose of frivolous cases before the expensive discovery process or make settlement decisions more fully informed of the risks; and
  2. The Act seeks to better balance discovery costs between the parties, ordering the Judiciary Conference to address the presumably unfair burden placed on defendants and place a higher burden of costs on plaintiffs.

Fee Shifting: Another area in which U.S. patent litigation, indeed U.S. litigation as a whole, differs from foreign litigation is that, except in extreme cases, each party bears its own litigation costs. Currently, NPEs often file suit against multiple defendants. Each defendant is often offered a settlement for an amount much less than that defendant’s anticipated litigation costs. As defendants settle, the settlement price typically is increased for other defendants, further encouraging early settlement. Consequently, many defendants that otherwise believe they have a strong non-infringement case will settle because the cost of achieving victory is substantially higher than settling. This strategy would not work in most foreign countries since, in those countries, the losing party pays the winning party’s fees and costs. The Innovation Act would align U.S. patent litigation with this practice and eliminate the strategy of leveraging high litigation costs for early settlement.

  1. In other words, under the Act the Court can force the losing party to pay the winning party’s attorney fees and costs. If passed, this would have a dramatic effect on patent litigation defendants’ decision making process and the typical enforcement strategy of many NPEs. By allowing Courts to shift the litigation costs to the losing side, defendants may be significantly motivated to litigate when they have a strong case even if the price of settlement is relatively low. Combined with the discovery delay described above, defendants will have considerable incentive to remain in the case at least through claim interpretation and to fight infringement claims if the claim interpretation is favorable…
  2.  …but, by allowing Courts to shift litigation costs to the losing side, defendants’ potential exposure may also be much higher. If the defendant ultimately loses a case, the Court presumably could order them to pay the plaintiff’s litigation costs, particularly if it was apparent that they should have settled. Consequently, the Act’s changes will necessitate defendants making smart decisions about their risk exposure. Fortunately, the discovery delay will enable defendants to economically make more effective decisions by delaying significant discovery costs until after claim interpretation.
  3. The Act’s fee-shifting provisions also allows for the limited joinder of parties (such as those covered by transparency provisions described below) to satisfy the award of litigation costs. In principle, this provision could be used against defendants as well as plaintiffs.

The other changes mentioned above may also cast a chill on the NPE business and other patent plaintiffs.

Customer Suit Staying

  1. The Innovation Act requires the staying of patent lawsuits against a defendant’s customer. Plaintiffs often sue a defendant’s customers in order to pressure the defendant into settling, often on terms less favorable than the defendant’s actual liability would dictate. Under the Act, an action against a customer may be stayed if the customer agrees to be bound by the results of a suit against the manufacturer. Consequently, customer suit staying takes away another pressure point for plaintiffs.

Post-Grant Review Expansion

  1. The Innovation Act expands the post-grant review available against covered business methods (“CBMs”), making CBM review a more effective tool to fight back against patent lawsuits. Specifically, the Act makes the CBM review program permanent and codifies the broad interpretation of what is a CBM.

Heightened Pleading Requirements

  1. Currently, many plaintiffs merely name the patents infringed and, in some cases, the products or services infringing. Heightened pleading requirements require more detailed initial pleading by plaintiffs, including greater details describing how a defendant’s products or services infringe the asserted patent claims.

Party-of-Interest Transparency

  1. The actual parties of interest are often not discernible from patent complaints. Many NPEs are shell companies that serve the purpose of hiding the actual party asserting the patent. The Innovation Act requires detailed descriptions of the plaintiff’s business and identification of the real party or parties-of-interest behind the asserting plaintiff. Such transparency makes next to impossible for plaintiff’s to hide their true identity and may impact litigation strategies currently used by NPEs and other plaintiffs.
  2. Additionally, the party-of-interest transparency provisions of the Act also permit possible joinder of the real party or parties-of-interest behind the asserting plaintiff. This provision gives real teeth to the Fee Shifting provisions of the Act as it may prevent a real party-of-interest from hiding behind a shell company with limited or no resources and avoiding the consequences of the Fee Shifting provisions.

Keep in mind that the Innovation Act will not just affect the Act’s main target, NPEs. Indeed, the Innovation Act has the potential to affect others. Defendants that choose to fight a patent lawsuit rather than settle could find themselves on the losing end of the fee-shifting provisions. Also, the Act may encourage a delay in sharing sales numbers until after claim interpretation, with the result that defendants that may have previously settled for reasonable amounts may find themselves paying much higher amounts if the claim interpretation goes poorly. On a different front, the amounts NPEs and others are willing to pay for patents may be reduced because of the greater risks and costs involved in enforcement. This could reduce the market for patents that provide additional sources of revenue for many patent owners. This in turn could reduce the overall value of patents, the amount companies are willing to spend on patenting and result in an overall chilling effect on research and development and ultimately innovation. As the Innovation Act evolves through the legislative process, some or all of the points above may vary, but the clear direction of the Act, the limitation of patent litigation by NPEs, will remain.