United States: Legislation Targeting Non-Practicing Entities (NPEs) Passes In House By Comfortable Margin

Last Updated: January 2 2014
Article by Rudy Hill

On Thursday, December 5, 2013, the U.S. House of Representatives approved the "Innovation Act" (H.R. 3309), a bill principally aimed at curtailing certain patent infringement litigation practices of non-practicing entities (NPEs). The legislation's sponsor, Judiciary Committee Chairman Bob Goodlatte (R-Va.), explained the impetus behind the bill: "Abusive patent litigation is a drag on our economy. Everyone, from independent inventors to startups, to mid and large size businesses face this constant threat. The tens of billions of dollars spent on settlements and litigation expenses associated with abusive patents suits represents truly wasted capital, wasted capital that could have been used to create new jobs, fund research and development, and create new innovations and technologies that would promote the progress of science and useful arts." The House passed the bill by a sound margin, 325-91; it now goes to the U.S. Senate for consideration.

Patent Infringement Litigation and Non-Practicing Entities (NPEs)

A non-practicing entity (NPE) is one that enforces patent rights against accused infringers, but does not practice the patented technology itself. NPEs are commonly referred to in a more negative light as "patent trolls." Some NPEs have earned this designation by practicing aggressive litigation models that are viewed by alleged infringers as nothing short of extortion. For example, an NPE may acquire the rights to a broad patent or group of patents in a given field and then issue demand letters to hundreds of companies – both large and small, from the manufacturer to the end user – that are alleged to be infringing the patented technology. The NPE demands from each a certain sum of money – ostensibly a licensing fee – which is usually an amount calculated to encourage companies to settle in lieu of incurring the high cost of patent infringement litigation.

On the other hand, many NPEs defend their business model by arguing that they serve a vital function in the intellectual property marketplace – namely, they protect the small inventor, who usually lacks the means and resources necessary to enforce a valid patent. And, not all NPEs practice these controversial "broad demand for payment" tactics. Indeed, a standard definition of "non-practicing entity" inevitably sweeps in some more traditional business models, such as institutions of higher education. This makes targeted legislation difficult to draft.

The Innovation Act

The public perception that NPEs may be stifling innovation and fostering economic inefficiency, along with the apparent proliferation in patent infringement filings in recent years, has prompted a legislative response in the form of the Innovation Act. The bill is largely viewed as a bipartisan effort. It is sponsored by Goodlatte, a Republican Congressman, and also enjoys the support of the Obama Administration, which announced that it "appreciates the inclusion of many of [its recommended] measures in H.R. 3309 and supports the bill's provisions to require disclosures in patent infringement cases, streamline actions involving end-users, and provide educational resources for small businesses."

The principal changes sought by the Innovation Act include the following:

  • Heightened patent infringement pleading standards. An absence of strict pleading requirements in patent infringement litigation has forced some targets of NPEs to defend vague and generalized allegations of infringement. The Innovation Act seeks to require all parties alleging infringement to identify the specific patents and claims in issue and to plead how the accused infringer has infringed those claims with regard to specific instrumentalities (i.e., processes, machines, manufactures, or compositions of matter). The Act also requires parties alleging infringement to set forth their authority to file suit, to describe their principal business, to identify all other complaints filed in which the patents-in-suit have been asserted, and to state whether the patents-in-suit are essential or likely to become essential.
  • Patent ownership disclosure requirements. Many NPEs have complex corporate structures that add to the difficulties associated with refuting their allegations. The Innovation Act seeks to eliminate this unnecessary confusion by requiring all parties alleging infringement to identify all assignees of the patent or patents-in-suit; any entity with a right to sublicense or to enforce the patent or patents-in-suit; any entity that the party alleging infringement knows to have a financial interest in the patent or patents-in-suit; and the ultimate parent entity of the party alleging infringement.
  • Loser-Pays Provision. Although provisions forcing the non-prevailing party in litigation to pay the prevailing party's reasonable fees and expenses are controversial, they certainly aid in reducing frivolous filings. The Innovation Act seeks to implement such a provision, but allows the courts to order otherwise when they find "that the position and conduct of the non-prevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust." The Act also seeks to allow a prevailing party to join any other interested party if the non-prevailing party cannot pay the fees and expenses.
  • Discovery Limitations. Discovery in patent infringement litigation is an expensive process, and many times the costs of discovery alone can exceed the reasonable settlement value of the case. NPEs often capitalize on this reality to obtain early settlements from alleged infringers. The Innovation Act seeks to mitigate this leverage by limiting the discovery that can be conducted before the court issues a ruling on claim construction. Under the Act, such discovery would be restricted "to information necessary for the court to determine the meaning of the terms used in the patent claim."
  • Protective measures for end users. A common target of NPEs is the end user of a given technology, which often is a small business with no patent litigation experience and a limited or non-existent litigation budget. These businesses frequently settle with NPEs instead of contesting the NPE's claims on the merits. The Innovation Act seeks to allow a court to stay suits against end users when, among other conditions, the manufacturer of the technology is defending against infringement claims concerning the same allegedly infringing product or process.

Reaction to the Innovation Act

Opponents of the Innovation Act include the Federal Circuit Bar Association, which has told members of Congress that the judicial branch of the United States Government should take the lead in cracking down on so-called patent trolls, not Congress, and that the proposed legislation would likely be ineffective. Additionally, the Association has expressed concern that the bill sweeps too broadly and that some of its provisions will foster additional "motions practice" litigation and fees litigation that will deter innovation, instead of promoting it. In a similar vein, representatives of small businesses, venture capital-backed startups, and the higher education community have expressed concern about some of the bill's provisions. These groups also fear that that the bill will stifle legitimate patent enforcement in their respective efforts to target the practices of certain NPEs.

Despite these concerns, the bill has passed in the House and now proceeds to the U.S. Senate, where the Judiciary Committee is expected to take it up before the end of 2013. The bill's wide margin of passage in the House, along with its support from the Obama Administration, make it likely that some version of the bill ultimately will become law. If and when the Act's passage occurs, its provisions can be expected to change substantively the landscape of patent litigation, and especially litigation involving NPEs.

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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