United States: A Sign Of Targeted Patent Reform In Congress?

Congress tried hard at patent reform in its past two terms, the 113th (2013-2014) and the 114th (2015-2016). A total of 22 bills were introduced. Momentum was especially strong from late 2013 to early 2015, when the well-publicized Innovation Act was introduced twice. The White House urged reform, as did some justices on the U.S. Supreme Court and many members of Congress. At the time, patent reform seemed inevitable, and many thought that legislation aiming to address perceived problems with the U.S. patent system would pass. But ultimately, no bills became law. Now, three months into the 115th congressional term, no patent bill has been proposed yet, but some legislation, although not specifically targeted at patents, hints at what might come next.

Strong Start with Overarching Reform

Congress' most recent attempt at patent reform started in early 2015, at the beginning of the 114th congressional term. By April 2015, members of the House and the Senate had collectively introduced six bills on patent reform, which included the Innovation Act (H.R. 9) and its companion bill, the Protecting American Talent and Entrepreneurship (PATENT) Act (S. 1137).1

The Innovation Act was originally introduced by Rep. Bob Goodlatte, R-Va., in October 2013, in the 113th congressional term, and advanced as "the solution to the problem of abusive patent litigation."2 It swiftly passed the House in December 2013, but its Senate counterpart at the time stalled and died. When the Innovation Act was reintroduced in 2015, there was great optimism that the bill would pass, with a Republican-majority House and Senate.

The Innovation Act and its subsequent counterpart, the PATENT Act, were overarching bills that aimed to curb so-called "abusive NPE [nonpracticing entity] litigation practices" through various means. For example, both bills would require not only an identification of each patent and claim allegedly infringed, but also an element-by-element analysis of how the accused instrumentality meets all the claim limitations.

The Innovation Act demanded further pleading specificity, such as a description of the authority of the plaintiff to assert the patent and a list of complaints filed that asserted the patent., The Innovation Act also required plaintiffs, upon filing a complaint for infringement, to provide "initial disclosures," which include an identification of the assignee of the patent, any entity with a right to sublicense or enforce the patent, and the ultimate parent entity.

In addition, the Innovation Act would make fee-shifting the default rule and always award the prevailing party reasonable fees and expenses, unless the nonprevailing party's position and conduct were "reasonably justified" or "special circumstances make an award unjust." The PATENT Act, on the other hand, did not go so far as making fee-shifting the default, but it required a district court to determine, upon motion, whether a nonprevailing party's position was "objectively reasonable in law and fact" and whether its conduct was "objectively reasonable."

Also, for inter partes review and post-grant review, both bills would change the claim construction standards from "broadest reasonable interpretation" to "ordinary and customary meaning" and would require that Patent Trial and Appeal Board judges consider claim constructions by district courts.

Losing Steam Due to Competing Interests

The Innovation Act and the PATENT Act were marked up and approved in June 2015 by the House and the Senate Judiciary Committees. But, in July 2015, members of Congress from both parties strongly voiced opposition to the two bills.3 Other interest groups similarly voiced their dissatisfaction and opposed the bills, and thus, neither bill was ever put to a floor vote.

In the aggregate, the Innovation Act and the PATENT Act favor patent defendants. The groups supporting and opposing the bills thus fell into somewhat predictable camps. Technology companies that have largely been the target of NPE litigation generally supported the legislation, while independent inventors, startups, and universities—who have concerns about legitimate patent enforcement—generally opposed the bills. But, while the Innovation Act and the PATENT Act drew support from the government and different industries, a closer look at the supporters shows that they welcome the legislation for different reasons.

For example, according to opinion articles in the press, many technology companies have been targets of abusive NPE patent litigation, and unsurprisingly, they supported the Innovation and PATENT Acts, sharing U.S. Patent and Trademark Office Director Michelle Lee's belief that heightened pleading standards and fee shifting would help curb the use of baseless and exploitative NPE cases.4

On the other hand, those in the pharmaceutical and biotechnology industry generally supported the bills for a wholly different reason—reforming post-grant proceedings. Starting in 2015, some companies in the industry became targets of arguably abusive post-grant proceedings filed by third parties proactively challenging patents for questionable reasons, including manipulating market conditions by casting doubt over the intellectual property of market participants. As a result, the industry began pushing for amendments to the bills that would change the evidentiary and pleading rules for post-grant proceedings.5 Such amendments were not well-received by those in the technology industry frequently targeted by NPEs, because the amendments would make it more difficult to challenge questionable patents, especially those enforced by NPEs.

In contrast, those opposed to the overarching reform seem more unified. The many critics of the Innovation and PATENT Acts included independent inventors, startups, venture-capital associations, and universities. As voiced by members of Congress representing these opponents, one of the biggest problems with the bills was their failure to effectively distinguish well-meaning inventors, startups and universities from "abusive NPEs."6 For instance, the proposed heightened pleading standards and fee-shifting provisions would raise enforcement costs, potentially harming independent inventors and startups without the resources of established technology companies. Many universities also feared that their legitimate activities in enforcing their educationally obtained technology rights will be conflated with abusive NPE tactics under the proposed fee-shifting provisions.

Targeted Reform

Given these competing interests by numerous parties, overarching patent reform became almost impossible. Thus, instead of sweeping reforms, which often brought uncertainty and unintended consequences, narrow carve-outs where there was clear consensus seemed more practical. In beginning of the 114th congressional terms, several "small-fix" bills were introduced—the Innovation Protection Act (H.R. 1832), the Demand Letter Transparency (DLT) Act (H.R. 1896), the Targeting Rogue and Opaque Letters (TROL) Act (H.R. 2045), and the Support Technology and Research for Our Nation's Growth (STRONG) Patents Act (S. 632).7

The Innovation Protection Act was narrowly tailored to protect the resources of the patent system by ending fee diversion from the USPTO. The DLT and TROL Acts both tried to crack down on "abusive use" of demand letters, and both included provisions enabling courts to impose sanctions or reduced damages on parties improperly sending demand letters. Failure to comply with the TROL Act could also subject distributors of improper letters to penalties by the Federal Trade Commission. The STRONG Patents Act, in contrast, sought to "strengthen patents" by making them harder to invalidate through post-grant proceedings.

After all-encompassing reforms listed above gradually lost steam, more targeted bills emerged in 2016. The Venue Equity and Non-Uniformity Elimination (VENUE) Act (S. 2733) sought to limit the forums where plaintiffs may bring suit, and the Trade Protection Not Troll Protection (TPTP) Act (H.R. 4829) aimed to prevent most NPEs from asserting patent infringement in the U.S. International Trade Commission.8

What Now in the 115th Congress?

The competing interests that stalled overarching patent reform still exist, and with a litany of other priorities, the 115th Congress has been and likely will stay preoccupied by issues at the top of President Donald Trump's agenda, such as trade, immigration, health care and taxes.9 Thus, targeted reform may remain the most pragmatic approach going forward. Tellingly, while Rep. Goodlatte has pledged to keep pursuing patent reform, he has not yet mentioned any overarching bill like his Innovation Act from the last two terms.10 Instead, he stated that "the House Judiciary Committee plans to reform the litigation system by seeking to reduce frivolous lawsuits, making it harder for trial lawyers to game the system, and improving protections for consumers and small businesses."11

This focus is shown in the first bill in this congressional term that may have an effect on patent litigation, even though the bill does not specifically target patent litigation. The Lawsuit Abuse Reduction Act of 2017 (H.R. 720), co-sponsored by Rep. Goodlatte and passed by the House in early March, would change Rule 11 of the Federal Rules of Civil Procedure to make court-imposed sanctions mandatory when a party makes a frivolous claim. Under the current discretionary standard, if a court determines that Rule 11(b)—which sets forth requirements on representations made to the court and minimum standards any lawsuit must satisfy—has been violated, it "may impose an appropriate sanction on any attorney, law firm, or party that violated the rule or is responsible for the violation."12 The bill would also remove Rule 11's current "safe harbor" provision, which allows parties or attorneys an opportunity to avoid sanctions by curing the violation within 21 days. The bill sets a baseline sanction of reasonable expenses incurred as a "direct result" of the violation. In patent cases, the baseline likely includes at least the expenses of preparing the motion for sanctions, but "direct result" could mean the entire case, if the infringement allegations on which the complaint is based are truly baseless.

However, these seemingly strong provisions may have limited real-world effects. For the court to impose sanctions, it would still need to find a violation of Rule 11(b) in the first place. The bill would not change the standard of what constitutes a violation. By some measures, less than 1 percent of patent cases involve Rule 11 motions,13 so unless aggrieved parties become more willing to bring such motions under the proposed Rule 11, its effect on patent litigation may be limited. Anecdotally, those accused of Rule 11 violations in patent cases under the safe harbor provision rarely amend their complaint or withdraw offending motions, so removing the provision is not expected to have significant impact either.

Also, while the bill has passed the House, it could still face significant opposition in the Senate. Its provisions are similar to those in an earlier version of Rule 11 that was in effect from 1983 to 1993, when sanctions were nondiscretionary. Opponents of the bill have argued that it would reopen the door to abuses seen under the earlier Rule 11, such as preventing civil rights lawsuits and a possible chilling effect on indigent or small plaintiffs.

Regardless of the fate of the Lawsuit Abuse Reduction Act, it shows a clear sign that after learning that overarching patent reform cannot be easily achieved, legislators are now pursuing targeted patent reform or general litigation reform that may have disparate effects on patent cases. Comprehensive patent reform, especially in view of the sweeping changes brought about by the American Invents Act about five years ago, proved to be too much too soon, and individual courts are using existing tools to address concerns over so-called abusive practices that Congress sought to remedy.14

Footnotes

1 For a detailed discussion of these bills, see A Review Of Patent Bills In The 114th Congress, Lionel Lavenue et al., Law360 http://www.law360.com/articles/664670/a-review-of-patent-bills-in-the-114th-congress).

Press Release: Goodlatte, Defazio, Issa, Nadler, Smith, Lofgren, Eshoo Introduce Patent Litigation Reform Bill, (Feb. 5, 2015) (http://judiciary.house.gov/index.cfm/2015/2/goodlatte-defazio-issa-nadler-smith-lofgren-eshoo-introduce-patent-litigation-reform-bill
(quoting Representative Eshoo)).

3 Steve Brachmann, Innovation Act delayed in House amid Bipartisan Bicameral Disapproval, IPWatchdog (July 15, 2015) (http://www.ipwatchdog.com/2015/07/15/innovation-act-delayed-in-house-amid-bipartisan-bicameral-disapproval/id=59858/).

4 Hearing Before the House Judiciary Committee, No. 114-20 (Apr. 14, 2015) (http://judiciary.house.gov/_cache/files/8e33d461-7e7c-49db-ad8f-b623e424485e/114-20-94184.pdf). 

5 Jeff John Roberts, Patent reform inches onwards but poison pill could kill it, Fortune (June 5, 2015) (http://fortune.com/2015/06/05/patent-reform-pharma/).

6 Steve Brachmann, Innovation Act delayed in House amid Bipartisan Bicameral Disapproval, IPWatchdog (July 15, 2015) (http://www.ipwatchdog.com/2015/07/15/innovation-act-delayed-in-house-amid-bipartisan-bicameral-disapproval/id=59858/).

7 For a detailed discussion of these bills, see A Review Of Patent Bills In The 114th Congress, Lionel Lavenue et al., Law360 (http://www.law360.com/articles/664670/a-review-of-patent-bills-in-the-114th-congress).

8 For a detailed discussion of these two bills, see Patent Reform Beyond The Innovation Act: The VENUE Act, Lionel Lavenue et al., Law360 (http://www.law360.com/articles/788794/patent-reform-beyond-the-innovation-act-the-venue-act); Patent Reform Beyond The Innovation Act: The TPTP Act, Lionel Lavenue et al., Law360 http://www.law360.com/articles/788810/patent-reform-beyond-the-innovation-act-the-tptp-act).

9 See Innovate Bigly?—Patent Reform Under @realDonaldTrump, Lionel Lavenue et al., Law360(https://www.law360.com/ip/articles/865950/innovate-bigly-patent-reform-under-realdonaldtrump).

10 Chairman Goodlatte Announces Agenda for 115th Congress, House Judiciary Committee Press Release (https://judiciary.house.gov/press-release/goodlatte-announces-agenda-115th-congress/).

11 Chairman Goodlatte Announces Agenda for 115th Congress, House Judiciary Committee Press Release (https://judiciary.house.gov/press-release/goodlatte-announces-agenda-115th-congress/).

12 Fed. R. Civ. P. 11(c)(1) (emphasis added).

13 Why There Is No Frivolous Patent Lawsuit Crisis, Jaime A. Siegel et al., Law360 (https://www.law360.com/articles/539922/why-there-is-no-frivolous-patent-lawsuit-crisis).

14 See De Facto Patent Reform in the Eastern District of Texas, Lionel Lavenue et al., Law360 (https://www.law360.com/articles/750017/de-facto-patent-reform-in-the-eastern-district-of-texas).

Originally published in Law360.

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