In the 113^th Congress, the U.S. House of Representatives passed the “Innovation Act” (H.R. 3309) in December of 2013 by a bi-partisan vote of 325 to 91; however, this legislation languished and died in the U.S. Senate.  On February 5, 2015, Congressman Goodlatte, House Judiciary Committee Chairman, joined by a bi-partisan group of House committee and sub-committee chairs who have a common interest, introduced H.R. 9, the “Innovation Act” in the House, which is “identical” to the legislation passed by the House in 2013.  The Innovation Act is an attempt to address some of the more egregious behaviors of patent assertion entities (PAEs) and build on patent reforms passed in the “America Invents Act of 2011.”

The Innovation Act (H.R. 9) includes the following major provisions:

• Plaintiffs are required to disclose who the owner of a patent is before litigation.
• Plaintiffs, in their court proceedings, are required to actually explain why they are suing a company.
• Courts are required to make decisions about whether a patent is valid or invalid early in the litigation process.
• When parties bring lawsuits or claims that have no reasonable basis in law and fact, the Innovation Act requires judges to award attorneys’ fees to the victims of the “frivolous” lawsuit – referred to as a “loser pays” system.  Moreover, the bill allows judges to waive the award of attorneys’ fees to both plaintiffs and defendants in special circumstances.
• The Judicial Conference is required to make rules to reduce the costs of discovery in patent litigation.
• The Innovation Act creates a voluntary process for small businesses to postpone expensive patent lawsuits while their larger sellers complete similar patent lawsuits against the same plaintiffs.
• The Patent and Trademark Office is charged with providing educational resources for those facing abusive patent litigation claims.

According to the Federal Trade Commission, a PAE (also pejoratively referred to as a “patent troll”) is defined as “a business model that focuses on purchasing and asserting patents against manufacturers already using the technology, rather than developing and transferring technology” to licensees, thus simply transferring a legal right not to be sued for the transfer of money.  Patent law scholars also call a PAE a “non-practicing entity” (NPE), in contrast to a “practicing” entity, or a firm that uses patents to design or manufacture products or processes.  An NPE that is not a PAE can include university research laboratories, licensing agents, development firms, and both technology entrepreneurs and major technology companies selling or licensing their patents.  In contrast, a PAE focuses on aggressive civil litigation, threatening to sue thousands of companies through elaborate “letter campaigns”, without any credible evidence of infringement; creating “shell companies” that make it difficult for defendants to identify who is suing them; asserting that their patents cover inventions not imagined at the time of the patent grant; and enforcing “weak” patents in litigation, assuming some companies will financially settle litigation instead of risking a trial.

Patent Reform Overkill?

While there is strong support in Congress for H.R.9, and President Obama has indicated that he would support legislation addressing patent law reform, there are stakeholder interests expressing serious reservations over this comprehensive patent law reform legislation.  In a January 21, 2015 “open letter” sent to Chairmen Goodlatte and Grassley, of the House and Senate Committees on the Judiciary, and Ranking Members John Conyers and Patrick Leahy, a coalition representing “the majority of the nation’s patent holders and inventors”, ranging from universities (Association of American Universities) and nonprofit foundations (Texas Life Science Foundation), to start-ups and small businesses (National Small Business Association), to manufacturing, technology, and life science companies (Monsanto, Qualcomm, and Merck & Co., Inc.) and industry and professional associations (PhRMA and IEEE-USA), announced that:

We are willing to work with you and other stakeholders to develop targeted and measured reforms that address harmful patent enforcement practices.  However, we will continue to strongly oppose legislation that would weaken the overall patent system and thereby diminish innovation and job creation in the United States (emphasis added).

In addition, there have been several major judicial and administrative developments in patent law since the last time your committees fully considered these issues and drafted proposed legislation.  As a result of these developments, we are even more concerned that some of the measures under consideration over the past year go far beyond what is necessary or desirable to combat abusive litigation.  Indeed, new patent lawsuit filings already have dropped dramatically – 40 percent, year over year, from 2013 to 2014.

These “recent developments”, according to these signatories, include:

• Five key patent cases decided in 2014, including Alice Corporation v. CLS Bank, Nautilus v. Biosig Instruments, Limelight Networks v. Akami Technologies, Octane Fitness v. ICON Health Fitness, and Hallmark Inc. v. Allcare Health Mangement Systems, are ostensibly making it easier to defeat PAEs and dis-incentivizing the litigation of meritless claims.
• Under the America Invents Act, new procedures were created to allow anyone to challenge patents in a fast, relatively inexpensive proceeding before the Patent Trial and Appeals Board.  Judges in patent cases are now granting 80 percent of all motions to stay patent litigation if the patent is also involved in a parallel “inter partes review” or “covered business method patent review” proceeding.  In the two years since the U.S. Patent and Trademark Office implemented the new procedures in late 2012, petitioners have challenged claims of more than 2,300 patents.  In concluded proceedings, fully 75 percent of the involved claims have been found not patentable and only about 20 percent of patents have survived the proceedings with no changes.
• In October 2014, the Judicial Conference of the United States adopted changes to the Federal Rules of Civil Procedure that will ensure that patent cases meet the heightened pleading standards required of all other federal cases.  The changes also will ensure that discovery in patent litigation will be “proportional to the needs of the case”, reducing the ability of patent plaintiffs to use unnecessary discovery requests to drive up costs for defendants in an effort to force unwarranted settlements.  The rule changes are currently pending before the U.S. Supreme Court and are expected to be sent to Congress in early 2015.
• The Federal Trade Commission and state attorneys general are aggressively using their authority to combat abusive patent demand letters and protect small businesses and consumers from unscrupulous practices.  Instead of collecting settlement fees, senders of mass demand letters now find themselves mired in legal proceedings and their patents subject to challenges.

Moreover, these signatories argue that “these judicial and administrative developments, and the plunge in the patent litigation rate, have fundamentally changed the landscape under which patent legislation should be considered.”  Another significant example of this “fundamental change in the patent landscape” is presented by Lex Machina, a vendor of data and analytics systems to corporations and law firms, who reports that total patent case filings decreased from 6,063 new cases in 2013 to 5,010 cases in 2014, or a 17.4% decline in the past year.

Targeted Patent Reform Legislation

The public policy issues raised by PAEs are of interest to a wide variety of stakeholders concerned with the effectiveness of the U.S. patent system.  The crux of the issue over patent reform appears to be twofold: whether Congress should enact comprehensive patent reform legislation, or pass targeted legislation making specific – and limited –improvements to the nation’s patent system to address flaws in the system.  This is not a “zero-sum” decision for Congress.

Those stakeholders who are signatories to the “open letter’ to Congress make a thoughtful case for considering the effects of previous legislation, as well as ongoing judicial and executive branch responses to PAE abuses in the U.S. patent system.  To that end, since Congress is earnestly re-considering comprehensive patent reform, its members need to carefully review the recent evidence on the reduction in new patent lawsuits (“Is it the beginning of a trend, or is there reason to believe it is an anomaly that will readjust upwards in 2015?”); the longer-term ramifications of the recent U.S. Supreme Court case holdings (“Will they affect PAE behavior?  If so, to what extent?”); the long-term implications of the adopted changes to the Federal Rules of Civil Procedure (“Will they limit discovery in patent litigation cases?”); patent challenges under the America Invents Act (“Are these patent challenges of a significant volume and sustainable over time?”); and the effects of the FTC and state attorneys general to stem the tide of PAE demand letters (“To what extent are these efforts sustainable?  What are their measurable impacts on reducing the volume of such activities?”).

A careful vetting of these recent trends may result in a “culling” or alteration of major provisions now in H.R. 9.  Either a less comprehensive bill may emerge, or perhaps individual, targeted legislation is crafted.  An example of the latter would be the “Targeting Rogue and Opaque Letters Act of 2014” (“TROL Act”), approved by a bipartisan vote of 13-6 in the House Subcommittee on Commerce, Manufacturing and Trade in July of 2014, but which was not voted on by the House of Representatives and died in the 113^th Congress.  The purpose of the TROL Act was to rein in abusive patent demand letters generated by PAEs that threaten civil litigation.

Great care needs to be undertaken by Congress, as the unintended consequences of comprehensive patent reform legislation could take years to emerge, and subsequently years to “cure” legislatively.  Thus erring on the side of legislative caution over zeal is the approach which will have the best public policy outcome.