Proposed patent legislation has been causing a stir at both the federal and state levels recently. In an effort to curb infringement litigation initiated by non-practicing entities, often referred to as "patent trolls," lawmakers have been proposing "anti-patent troll legislation," generating a variety of responses.
Of the numerous bills broaching this controversial subject, two at the federal level appear to have gained traction. The Innovation Act1, sponsored by House Judiciary Chairman Robert Goodlatte and passed in the U.S. House of Representatives on December 5, 2013, is the more ambitious of the two
The changes it suggests to the current patent regime include:
- Heightened pleading requirements2 —Plaintiffs in infringement suits must identify all asserted patents and describe in a high degree of detail the alleged infringement, including the specific infringed claims of each patent and the name or model number of each accused product;
- Fee shifting to the losing party3 —The court must award the prevailing party reasonable fees and expenses incurred unless it finds the losing party was justified in its position;
- Transparency of ownership4 —Patent holders must disclose all beneficial owners of a patent-in-suit, including assignees, entities with the right to sublicense or enforce, entities with a direct financial interest, and parent corporations for all such entities. If a losing plaintiff is unable to pay an award of fees, a defendant may join such beneficial owners to the suit, denying plaintiffs the option of using shell companies to sue in order to obscure their identities and shield their pockets; and
- Protection of customers5 —Where a plaintiff sues a product manufacturer and its customers, suits against customers may be stayed if the manufacturer agrees to handle the suit on behalf of its customers, avoiding duplicative defense costs.
The Innovation Act suggests, but does not mandate, changes to the practice of sending demand letters to potential defendants. It states in no uncertain terms: "It is the sense of Congress that it is an abuse of the patent system and against public policy for a party to send out purposely evasive demand letters to end users alleging patent infringement."6 The bill advises that demand letters include "basic information" about the patent(s)-in-suit, the claims alleged to be infringing, and how such claims are allegedly infringing; however, it does not mandate that letters include this level of detail and provides neither carrots nor sticks to achieve this goal.7
The second bill, the Patent Transparency and Improvements Act,8 was sponsored by Senate Judiciary Chairman Patrick Leahy and is expected to be debated soon. The current draft of this bill also calls for transparency of ownership and protections for customers.9 It goes beyond the Innovation Act to add a requirement that demand letters meet certain standards or else be deemed an unfair or deceptive practice under the Federal Trade Commission Act.10 This bill does not, however, include changes to pleading standards or fee shifting to the losing party.
Several states, including Vermont, Oregon, Nebraska, and Wisconsin, have initiated similar legislation of their own. For example, Vermont’s Bad Faith Assertions of Patent Infringements law provides judges a list of factors to enable them to identify patent infringement actions that lack legitimacy. These factors closely track the demand letter provisions before Congress, but they also admonish against plaintiffs (i) seeking excessive money, (ii) demanding payments on a short time scale, or (iii) making deceptive claims regarding infringement.11 The law provides victims of bad faith suits the right to sue offending plaintiffs and to receive special damages. The law also gives the Vermont Attorney General an independent cause of action against such plaintiffs.
These bills have been the subject of much debate, with both vocal supporters and equally passionate detractors. At the federal level, President Obama called for patent reform in his State of the Union address, arguing that reform would "allow businesses to stay focused on innovation, not costly, needless litigation."12Chairman Leahy, sponsor of the Patent Transparency and Improvements Act, likens the current misuse of the U.S. patent system to extortion.13
Detractors voice concern that this legislation is too defendant-friendly and will disadvantage small companies legitimately attempting to assert their patents, potentially stifling grassroots innovation. Some warn that this legislation "will have unintended consequences" and can "weaken the patent system overall."14
The state-level legislation has generated its own share of commentary. Those against it argue that federal preemption of state patent legislation extends to this reform.15 Others disagree, arguing that state courts can apply their own reforms as long as they comply with the federal standards currently in place for determining "bad faith."16 Still others argue that some aspects of patent disputes, such as patent ownership, sale, and licensing, are already governed by state law, so this reform would merely extend the current role of states in the patent arena.17
Opponents of state-level legislation also argue that such reform will generate inconsistencies in legal standards that will prove troublesome for both plaintiffs and defendants.18 Patent owners legitimately trying to enforce their rights will potentially have to comply with different laws in each jurisdiction, a heavy burden in a world where innovation disseminates quickly and broadly. Supporters of state-level legislation classify this extra burden as a boon, as it would disrupt the economies of scale that make large-scale, abusive lawsuits feasible, thus helping to curb such suits by increasing the expense of filing them.19 Others argue that allowing states some autonomy in patent legislation may help "grow local innovation ecosystems, like California has with Silicon Valley."20 Vermont and other states looking to enact anti-troll legislation may become havens for companies dealing primarily in innovation, as other states have become for plaintiffs bringing infringement suits. Some contend that such differentiation may also be desirable.
While many anxiously await the outcome of this bout of legislation, we advise not holding your breath—the federal legislation is unlikely to navigate its way through Congress anytime soon, and the fate of state legislation may not be fully determined until after that time.