by Casey Kraning-Rush, Ph.D., L'16 In 2011, a Boston University study found that business entities in the United States incurred $29 billion in direct costs due to acts by patent assertion entities (PAEs), sometimes referred to in the media as patent trolls. PAEs are companies which enforce patent rights by alleging infringement with the aim of collecting licensing fees or settlement costs, without actually manufacturing the products covered by their patents. This past June, President Barack Obama publically urged Congress and the United States Patent and Trademark Office (USPTO) to take steps towards reducing abusive lawsuits by enacting legislation and examination rules aimed at increasing specificity in both claim language and infringement allegations.
On October 23rd, the Chairman of the House Committee on the Judiciary, Rep. Bob Goodlatte (R-VA), introduced a bipartisan reform bill to combat misuse of the U.S. patent system. The proposed bill, entitled the “Innovation Act” (H.R. 3309) specifies a number of provisions and amendments to the Leahy-Smith America Invents Act, which took full effect on March 16, 2013. The bill identifies several measures designed to discourage patent trolls from bringing meritless lawsuits. Key provisions of the Innovation Act include:
(1) Enacting More Specific Pleading Requirements: The proposed legislation seeks to revise pleading requirements in patent cases to align more closely with the standard set by the Supreme Court in the landmark cases Bell Atlantic v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009). In these cases, the Court revised its interpretation of Rule 8 of the Federal Rules of Civil Procedure, concluding that a pleading must include sufficient factual content for the court to reasonably infer, beyond a mere possibility, that the opposing party is liable for the alleged misconduct.
While this standard has been widely implemented, confusion has arisen in the district courts regarding how best to resolve the apparent conflict between the Twombly/Iqbal standard and Form 18: Complaint for Patent Infringement. Form 18 requires a plaintiff to simply state that he owns the patent in question, that the defendant has infringed the patent, and that the plaintiff has given the defendant notice of the infringement. Treating Form 18 as the authoritative guide to pleading in patent cases, district court judges have been reluctant to implement a higher standard of pleading not required on the form. PAEs have capitalized on these relaxed guidelines, stating broad infringement claims and forcing defendants to either settle a potentially specious suit or face a costly discovery process.
The proposed legislation seeks to abolish Form 18 and replace it with an updated form requiring a plaintiff alleging infringement to specifically identify the infringing claim of the patent, the accused product or feature being used to infringe, and an explanation of where each element of each claim is found within the accused product or feature.
(2) Limitations on Initial Discovery: Additionally, the bill proposes a system in which, if the court finds it necessary to obtain additional information to construe the meaning of the claim in question, it can limit initial discovery to address only this issue. Discovery in patent cases can be a protracted affair, and discovery pertaining to claim construction often occurs with the rest of discovery, even though claim construction issues are at the heart of an infringement case, if not entirely dispositive. By focusing on this element of discovery first, the legislation aims to reduce the overall costs of discovery.
(3) Implementing a Fee-Shifting System: While filing a patent infringement suit is a relatively inexpensive proposition, litigating a case through trial can cost millions. As the law currently stands, a court is at liberty to award attorney fees to a prevailing party in “exceptional circumstances” only. By initiating a “loser pays” system, in which the non-prevailing party pays all the litigation costs, lawmakers hope to both deter patent trolls from initiating frivolous litigation, and also provide an avenue for meritorious defendants to meet claims head on without the deterrent of litigation costs. This process will be particularly important for smaller companies who may not have the capital to comfortably fund litigation. Importantly, if the court finds that the position of the non-prevailing party was substantially justified, it has the liberty to exempt that party from this provision.
(4) Greater Transparency in Patent Ownership: Finally, in order to prevent PAEs from using shell companies to hide the actual parties in interest, this legislation requires full disclosure to the court and all involved parties of the assignee of the patent in question, any party with a sublicense for the patent, and any entity that has a financial interest the patent.
Thus far, the primary opposition to the proposed bill comes from parties expressing concern about the effects of these changes on universities and research institutions, which often operate in a manner similar to PAEs in licensing their patents very early to larger manufacturing companies, while still retaining their intellectual property rights. The chief concern being purported is that these entities may face difficulty in enforcing their patents or successfully disputing infringement claims. Additionally, there is concern that smaller companies may avoid bringing lawsuits out of fear of losing and incurring all of the resulting court costs.
Nevertheless, initial reaction to the bill has been largely positive, with the patent community largely supporting the bill. This legislation takes important steps necessary to enable the judiciary to begin the tough battle against combating the ever-increasing number of PAEs preying on large and small businesses alike.
For a complete look at the proposed Innovation Act (H.R. 3309): https://www.eff.org/files/2013/10/23/innovation-act.pdf
For a brief section by section overview of the Innovation Act: http://judiciary.house.gov/news/2013/10232013%20%20Section%20by%20Section%20Patent%20Bill.pdf