United States: The US House Of Representatives Passes The Innovation Act, Which Makes Significant Changes To Patent Litigation

On December 5, 2013, the US House of Representatives passed Judiciary Chairman Bob Goodlatte's (R-VA) patent reform legislation, H.R. 3309, the "Innovation Act," by a vote of 325 to 91. The passed bill is significantly different from the September 23, 2013 discussion draft, previously introduced by Chairman Goodlatte. With the House set to wrap up legislative activity for the year on Friday, December 13, 2013, attention now shifts to the Senate. On Tuesday, December 17, 2013 the Senate Judiciary Committee will hold a hearing entitled, "Protecting Small Businesses and Promoting Innovation by Limiting Patent Troll Abuse," to discuss various aspects of patent reform, including the House passed bill. No material legislative developments are expected before the end of the year.

As passed, H.R. 3309 is designed to curb patent litigation abuse by Patent Assertion Entities ("PAEs"),1 as well as to make technical modifications to the Leahy-Smith America Invents Act (Public Law No. 112-29, passed 9/16/2011). Most of the provisions contained in the original bill survived, although with some amendment. Specifically, the surviving provisions include:

  1. Raising the pleading requirements for patent complaints,
  2. Limiting discovery, with certain key exceptions, in patent cases to claim construction issues until the court has construed the patent claims,
  3. Requiring the losing party in a patent case to pay the costs and fees of the prevailing party, unless the conduct of the losing party was "reasonably justified in law and fact" or "special circumstances (such as economic hardship to a named inventor) make an award unjust," and
  4. Permitting the courts to join noticed parties in-interest where a losing party "alleging infringement" is unable to pay the fee and expense awards.

Other provisions in the passed House bill include:

  1. Requiring heightened disclosure in demand letters in order to meet the notice requirements for treble damage awards,
  2. Requiring a plaintiff in a patent case to disclose parties in-interest or who would benefit financially from the litigation, and
  3. Requiring courts to stay litigation against customers that use products that are accused of infringement when there is a concurrent litigation against the manufacturer of those products.

Importantly, several key elements of the original bill were removed from the passed version. Specifically, several of the amendments to the Leahy-Smith America Invents Act were deleted, including:

  1. The repeal of 35 U.S.C. § 145,
  2. The revision of 35 U.S.C. § 141(a) limiting appeals from the Patent Trial and Appeals Board solely to the Court of Appeals for the Federal Circuit, and
  3. Revisions limiting the Covered Business Method Patent program to post-AIA patents, adopting the definitions of "'used in the practice, administration, or management of a financial product or service'" from SAP America, Inc. vs. Versata Dev. Group, Inc., and repealing the program's sunset provision. The key provisions of the passed bill are discussed in more detail below.

Heightened Pleading Standard

The provisions of the bill that may have the greatest impact on patent litigation involve the heightened pleading requirements for claims in a patent infringement action. The bill eliminates Form 18, which is a form complaint for patent cases in the Federal Rules of Civil Procedure that requires plaintiffs to provide only basic information, including the patent being asserted and an allegation of infringement. The bill also amends 35 U.S.C. § 281A to require patent claims to be plead to include more detailed information, including identification of all the patents and each claim contained therein alleged to be infringed, a specific listing of all products alleged to infringe each claim, and allegations identifying each claim element and limitation within the allegedly infringing product. In addition, the complaint would be required to describe the party's "authority" to assert each patent, provide a "clear and concise" description of the plaintiff's principal business, list all the cases filed where the patents have been asserted, and indicate whether a standards setting body has specifically declared the patents to be essential and whether FRAND requirements have been imposed on the patent. The passed bill does permit the party to generally describe required information that is "not readily accessible" and to file complaints containing confidential information under seal. Importantly, the heightened pleading requirements do not apply to claims arising under 35 U.S.C. § 271(e)(2).

The heightened pleading requirements will place a greater burden on patent suit plaintiffs to perform a thorough pre-complaint investigation and draft a detailed complaint. They would also likely put increased focus on motions directed to the sufficiency of a patent complaint.

Awarding Costs and Fees to the Prevailing Party

The passed bill amends the attorney fee statute (35 U.S.C. § 285) to require courts to award "reasonable fees and other expenses" to the prevailing party in a patent case, unless the losing party's "position and conduct were reasonably justified in law and fact" or "special circumstances" would make the award unjust. Unlike the draft bill, the passed bill specifically indicates that "severe economic hardship to a named inventor" would be considered such a circumstance. Any party can also move the court to require another party to certify that it can pay a fees-and-expenses award. Further, if the losing party cannot pay such an award, then the court may make a party, joined under the revised joinder provisions in 35 U.S.C. 299(d) (discussed below), liable for the award. It is notable that the draft bill referred to an "interested party" but the bill, as passed, refers only to "a party." Regardless, the fee award is a stark departure from the American Rule (where each party generally bears responsibility for its owns fees and costs) and would be limited to patent cases.

The fee reversal provision is clearly designed to provide a strong disincentive to bringing frivolous patent lawsuits. Seemingly to provide further disincentive to bringing a suit at all, the bill provides that a party unilaterally offering a covenant not-to-sue will automatically be deemed a "non-prevailing party" and potentially subject to liability for an award of fees and expenses, unless the covenant was offered when the party could still "dismiss the action or claim without a court order under Rule 41."

Additional Joinder Provision

The passed bill amends 35 U.S.C. § 299(d) to require the court to grant a motion to join "interested parties" in cases where fees and expenses have been awarded against a losing patent plaintiff who is unable to pay the award, but only if the prevailing party can show that the losing party had "no substantial interest in the subject matter at issue other than asserting such patent claim in litigation." The court may deny the motion if the "interested party" was not subject to service of process, would cause the court to lose subject matter jurisdiction, or would create improper venue. The court must deny the motion if the "interested party" was not provided proper timely notice or has renounced all interest in the patents at issue.

The bill defines "interested parties" to include assignees, anyone with a right to enforce, anyone with a right to sublicense, and anyone with a direct financial interest in the asserted patents. The new joinder provisions appears to be directed toward combatting the alleged PAE tactic of using shell entities to bring patent suits. However, the passed provisions do provide potential escape routes for an entity behind a PAE to avoid liability for litigation fees.

Additional Disclosures in Patent Cases

The additional disclosure provisions passed in the bill are basically the same as those in the original bill. The provisions build upon the current practice of information on each patent lawsuit being disclosed to the United States Patent and Trademark Office (USPTO), where it becomes public record. The passed revisions to 35 U.S.C. § 290 maintain the disclosure requirement, but also require additional disclosures:

  1. Any assignees of the asserted patents;
  2. Any entities with the right to enforce or sublicense the asserted patents;
  3. Any entity with a financial interest in either the patent or the party asserting the patent; and
  4. The ultimate parent entity of any of the entities disclosed. These disclosures are made subject to an ongoing duty to disclose, where any changes of assignment, interest, or ownership must be updated with the USPTO within 90 days of the change.

Heightened Standards for Demand Letters

A new addition to the passed bill is an extensive amendment to 35 U.S.C. § 284, which attempts to limit the power of demand letters as evidence for notice where treble damages are sought. Under the provisions, a plaintiff may not rely on its demand letter as proof of pre-suit notice of infringement for willfulness purposes unless the notice letter "identifies with particularity":

  1. The asserted patent;
  2. The accused product or process,
  3. The "ultimate parent" of the plaintiff, and
  4. "Explains with particularity, to the extent possible following a reasonable investigation or inquiry, how the product or process infringes one or more claims of the patent." Separately, the bill also requires the USPTO to study the prevalence and effect of demand letters, particularly "bad faith" demand letters, on the marketplace.

Limiting Discovery in Patent Cases

The discovery process in patent cases can be lengthy and expensive. To address this, the draft bill added 35 U.S.C. § 299A, which limits discovery prior to claim construction. Under the proposed language, a court would generally be barred from permitting discovery prior to the claim construction ruling, unless the discovery was necessary for claim construction.

The passed bill retains 35 U.S.C. § 299A, but adds multiple exceptions which effectively undermine the provision. For instance, the court must permit discovery to proceed in cases where failure to resolve the case within a specified period "will necessarily affect the right of the party with respect to the patent" (specifically, matters arising under 35 U.S.C. § 271(e)), where a preliminary injunction is being sought, or where both parties consent to be excluded from the limitation. Limited discovery will also be permitted to resolve motions pending prior to claim construction, where "circumstances would make denial of discovery a manifest injustice."

The passed bill also requires the Judicial Conference of the United States to propose and implement "rules and procedures" to limit discovery in patent cases. Under the passed provisions, each party would be responsible for the costs of producing "core documentary evidence," including documents relating to:

  1. Conception, reduction to practice, patents, and patent applications;
  2. Technical operation of the accused product or process;
  3. Potentially invalidating prior art;
  4. Patent licenses entered into before or after the complaint was filed;
  5. Profits attributable to the claimed invention of the asserted patent before the complaint was filed; and
  6. Patent marking or other notice of the patent.

Notably, "core documentary evidence" does not include computer code unless specifically determined by the court upon motion for good cause. Changed from the proposed bill, the passed bill now offers "issues and proposals" for the Judicial Conference to consider. Also, the bill provides for a 4-year period during which the Judicial Conference "shall study the efficacy of the rules" and may make "initial modifications" to the designated categories of core documentary evidence" and "as otherwise necessary to prevent a manifest injustice."

Potential Stay of Actions Against Customers

The bill establishes a customer-suit exception, which addresses patent actions that allege infringement based on a customer's use of an infringing product made by a manufacturer that has also been accused of infringement. If both the manufacturer and customer consent in writing to a stay, and the customer agrees to be bound by any common "issues"2 that are "finally decided as to the covered manufacturer." The stay can be lifted on motion with a showing that the "action involving the covered manufacturer will not resolve a major issue in the suit against the covered customer" or the stay will "unreasonably prejudice the moving party. Importantly parties involved in cases arising under 35 U.S.C. § 271(e)(2) cannot seek a stay.

A new provision added to the passed bill protects the customer if the manufacturer enters a consent judgment with the plaintiff or fails to appeal a final decision. Under the provision, the court may, upon motion by the customer, determine that the consent judgment or unappealed decision will not be binding if it would "unreasonably prejudice" or "be manifestly unjust to the covered customer."

Protections for US Patent Licensees in the Event of Bankruptcy

Although significantly changed from the proposed bill's language, the passed bill addresses the issue of the impact of foreign bankruptcy on U.S. intellectual property rights of the debtor. Prior blanket language that applied section 365(n) to a debtor's licenses of intellectual property has been deleted. Instead, the new language addresses situations where the foreign representative repudiates a contract under which the debtor licensed intellectual property. In such cases, the licensee "shall be entitled to make the election and exercise the rights described in section 365(n)." Additional new language has been added which specifically address trademarks, including the added burden that the trustee "not be relieved of a contractual obligation to monitor and control the quality of a licensed product or service."

Increased Duties for Studies and Outreach

The passed bill adds new and additional obligations for the USPTO, the Government Accountability Office (GAO), and several other governmental agencies, using "existing resources" to undertake educational programs, increase outreach, and study the patent environment.

USPTO-specific unfunded mandates within the bill include:

  1. "Develop educational resources for small businesses to address concerns arising from patent infringement," with special consideration for minority-owned, veteran and disabled veteran-owned, and women-owned businesses;
  2. Expand the USPTO's ombudsman program to "provide education and awareness on abusive patent litigation practices;"
  3. Modify the USPTO's website to provide the public with information on patent cases in federal court;
  4. Conduct a study related to "patent transactions occurring in the secondary market," and make recommendations as to how to promote transparency and fairness in such markets;
  5. Conduct a study on "patents owned by the U.S. Government;"
  6. Assist the GAO in conducting a study on "patent examination at the [USPTO] and the technologies available to improve examination and improve patent quality;"
  7. Conduct a study on the prevalence and effects of demand letters on the marketplace; and
  8. Conduct a study "to examine the economic impact of sections 3, 4, and 5 of [the Innovation Act] and any amendments made by such sections" as they impact individuals and women, veteran, disabled-veteran, and minority-owned small businesses to "assert, secure, and vindicate the constitutionally guaranteed right to inventions and discoveries".

The GAO must undertake several specific and new unfunded mandates, including:

  1. A study on patent quality and access to the best information during patent examination; and
  2. A study on the volume and nature of litigation involving business method patents.

The Administrative Office of the U.S. Courts is required to conduct a study to explore developing a "Patent Small Claims Court" pilot program in certain judicial districts.

Technical Revisions to the AIA

The proposed bill contained multiple provisions focused on the AIA. As noted above, several of the major provisions, including most of those modifying the Transitional Program for Covered Business Method Patents, have been removed from the final passed version. Provisions that did ultimately pass with the bill include:

  1. A provision requiring the Patent Trial and Appeals Board to consider district court claim constructions in Inter Partes and Post-Grant Review Proceedings;
  2. Codifying the doctrine of double-patenting for first-inventor-to-file patents;
  3. Expanding the scope of prior art usable in "covered business method patent" proceedings;
  4. Clarification of patent term adjustment procedures in 35 U.S.C. § 154(b)(1);
  5. Extending the Patent Pilot Program;
  6. Various technical corrections to 35 U.S.C. §§ 102(b)(1)(A), 115(a), 119(e)(1), 120, 291(b), 316(a), and 326(a); and
  7. Amendment of 35 U.S.C. § 32 to extend the statute of limitations for attorney misconduct to 18 months.

Conclusion

Many provisions of the passed bill were intended to limit the perceived excesses of PAEs, but may affect all patent litigants and perhaps prevent or dissuade parties from pursuing legitimate claims. In an attempt to counteract the perceived draconian nature of some provisions, the bill also includes a significant number of exceptions and exclusions. As a result, critics argue that the passed provisions may be ineffective at meeting the objective of dissuading PAEs, while still providing additional disincentives to meritorious litigants.

The bill now passes to the Senate for further debate and vote. Chairman Goodlatte has been working closely with Senate Judiciary Chairman Patrick J. Leahy (D-VT) on a companion bill. That bill, S. 1720, the "Patent Transparency and Improvement Act of 2013," was introduced by Chairman Leahy on November 18, 2013 and has been referred to the Senate Committee on the Judiciary. With bipartisan interest in the issue of PAEs and patent litigation reform, it seems likely that Congress will address the issue before the end of the current session or shortly after the start of the next session.

We will continue to provide updates on the progress of these bills and other patent reform legislation that arises in Congress.

Footnotes

1 PAEs are also referred to as Non-Practicing Entities ("NPEs") or more colloquially as "Patent Trolls."

2 The original draft bill recited "judgment entered against the covered manufacturer." The new language appears to be broader and may provide res judicata protection for issues decided in the manufacturer's favor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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