In a notably rare occurrence, President Obama, the Republican Congress and even the U.S. Supreme Court seem to agree on the need to reform the current patent system. President Obama has urged Congress to "pass a patent reform bill that allows our businesses to stay focused on innovation, not costly and needless litigation."1 Rep. Bob Goodlatte, R-Va., has stated that "patent trolls . . . file numerous patent-infringement lawsuits against American businesses with the hope of securing a quick payday."2 And, in part, the Supreme Court has even weighed in, Justice Antonin Scalia recently warning against "the in terrorem power of patent trolls."3

But the specifics of the reform—and the degree to which the patent system needs it—remain up for debate. To date, members of the current Congress have proposed six bills on patent reform, which include: (1) the Innovation Act (H.R. 9) and its companion bill; (2) the Protecting American Talent and Entrepreneurship (PATENT) Act (S. 1137); (3) the Innovation Protection Act (H.R. 1832); (4) the Demand Letter Transparency Act (DLTA) (H.R. 1896); (5) the Targeting Rogue and Opaque Letters (TROL) Act (H.R. 2045); and (6) the Support Technology and Research for Our Nation's Growth (STRONG) Patents Act (S. 632). When we add these to the 14 bills proposed by the last Congress, including the previous version of the Innovation Act, the total number of proposed legislative changes to the patent system since the America Invents Act adds up to 20 bills.

The two most comprehensive bills currently in the spotlight—the Innovation Act and the PATENT Act (proposed by Goodlatte and Sen. Charles Grassley, R-Iowa, respectively)—focus on curbing "abusive" patent litigation practices through various means, many relating to procedural and evidentiary standards. In contrast, a third attempt at reform—the STRONG Patents Act—seeks to "strengthen patents" by making them harder to invalidate.

The much-publicized DLTA and TROL Act both try to crack down on "abusive use" of demand letters, although the broader PATENT and STRONG Patents Acts include similar provisions. The bills include provisions enabling courts to impose sanctions or reduced damages on those parties improperly sending demand letters. Failure to comply with the TROL Act could even subject distributors of improper letters to penalties by the Federal Trade Commission.

The final proposed new law—the Innovation Protection Act—is narrowly tailored to protect the resources of the patent system by ending fee diversion from the patent office, but it does not address other acts, which are the focus of this review.

Proposed Changes to Federal Patent Litigation

Remedies for "Abusive" Demand Letters

The current patent statutes do not specifically address presuit notification. Thus, a patentee can generally send a demand letter, alleging infringement, devoid of any detail about what products infringe or how they infringe. These vague threats often force inexperienced parties into settlement, unjustifiably increasing the patentee's "in terrorem power." The proposed reforms address some of these practices by imposing certain presuit notification requirements.

For example, the Innovation Act requires that demand letters identify the ultimate parent entity and explain the infringement allegations with particularity. Demand letters that fail this standard cannot be used as evidence of presuit notification, a key element in claims for willful infringement.

The DLTA places an even higher burden on entities seeking to assert patents, requiring those that send 20 or more demand letters during any 365-day period to submit information to the patent office, including: (1) the identity of the patent owner and the exclusive licensee (if any); (2) the ultimate parent entity; (3) each obligation to license the patent on reasonable and nondiscriminatory terms; (4) each case that has been filed relating to the patent; and (5) any ex parte or inter partes review(s) of the patent. Failure to comply could lead to sanctions and denial of increased damages under 35 U.S.C. § 284 and of reasonable fees under § 285.

Under the DLTA, entities asserting patents must also provide certain details in the demand letters, including an element-by-element description of why the recipient's accused product allegedly infringes the patent. If a demand letter fails these requirements, recipients may petition the patent office for nullification of the patent, unless the patent owner pays an additional fee within three months, absent an unintentional, unavoidable, or good-faith mistake.

Heightened Pleading Standards

Under current law, a complaint for patent infringement simply requires compliance with Rule 8, which demands "a short and plain statement of the claim showing that the pleader is entitled to relief." Further, Form 18 provides a template for compliance with Rule 8 and outlines that a complaint for patent infringement need only identify the asserted patent and the alleged infringing instrumentality. But according to congressional proponents of reform, this easy pleading standard encourages patentees to use vague complaints as leverage for extracting settlements. The loose pleading requirements, they say, also enable patentees to file complaints through shell subsidiaries, obfuscating the true identity of plaintiffs.

The Innovation Act and the PATENT Act seek to address these alleged "problems" by requiring much greater specificity in patent infringement pleadings. For example, both bills would eliminate the use of Form 18 (as does the STRONG Patents Act, although it does not propose any other changes to the pleading standards) and 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, so long as the required information is "readily accessible" (Innovation Act) or "accessible after a reasonable inquiry" (PATENT Act).

The Innovation Act demands further pleading specificity, including, among other requirements, a description of the authority of the plaintiff to assert the patent, a description of the plaintiff's principal business, a list of complaints filed that asserted the patent, and a statement about whether the patent is subject to standard-setting requirements. Upon filing a complaint for infringement, plaintiffs must also provide "Initial Disclosures," which include an identification of the assignee of the patent, any entity with a right to sublicense or enforce the patent, any entity known to have a financial interest in the patent, and the ultimate parent entity.

Limiting Discovery

According to those seeking reform in Congress, the cost of discovery gives patentees leverage over accused infringers, as costs pile up quickly before the accused infringers have a chance to prove noninfringement. The proposed bills aim to prevent the practice whereby a patentee can "price a license below anticipated discovery costs as a tactic for extracting fees."

To this end, two of the proposed bills would limit discovery until there is some indication that the patentee has a viable claim. Under the Innovation Act, discovery would be limited to claim construction until a Markman ruling is issued. The PATENT Act does not go this far, providing only for a stay of discovery pending resolution of motions to dismiss, motions to transfer venue, or motions to sever. Yet, under both legislative proposals, a court would still have discretion to expand the scope of discovery in certain circumstances.

Fee-Shifting

According to authors of several of these the bills in Congress, patentees allegedly have an advantage under the traditional "American Rule," where each party generally pays its own fees, absent exceptional circumstances. Since accused infringers often face higher fees and costs of litigation, this rule arguably drives wrongly accused parties to settle, especially when settlement costs less than the total attorney fees and costs required to defend the case.

Notably, while Congress mulled these potential remedies, the Supreme Court's 2014 opinion in Octane Fitness LLC v. ICON Health & Fitness Inc.4 altered the fee/cost paradigm significantly, lowering the bar for what constitutes an "exceptional case." Under Octane Fitness, attorney fees and costs may be awarded to a prevailing party, where the substantive strength of a party's position "stands out from others," as shown by a preponderance of the evidence. Before Octane Fitness, "exceptionality" required clear and convincing evidence and, typically, independently sanctionable conduct or bad faith.

The proposed bills before Congress seek to make the recovery of fees and costs even easier. The Innovation Act would make fee-shifting the default rule, always awarding 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." Further, a party may move to require the opposing party to certify its ability to pay such fees; if it cannot, the court may make an interested party that can pay join the suit. According to the bill's proponents, this would restrict the practice by which patent-assertion entities file suits through underfunded shell companies to shield themselves from liability for questionable cases.

The PATENT Act does not go so far as to make fee-shifting the rule. Instead, it would require the 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." Similar to the current standard set by Octane Fitness, if the court finds a party's position or conduct objectively unreasonable, it must award reasonable attorney fees, absent special circumstances making an award unjust. Further, a defendant may file a statement that the primary business of the plaintiff is the assertion and enforcement or licensing of patents; then, the plaintiff must provide a certification establishing that it would have sufficient funds to pay an award of attorney fees, demonstrating that its primary business is not patent enforcement and licensing, or identifying an interested party that may be held accountable for fees, to the extent one exists and does not renounce its interest.

Changes to Patent Office Proceedings

Under the AIA, an alleged infringer can use patent office proceedings to challenge a patent. These proceedings, before the Patent Trial and Appeal Board, provide ways of invalidating a patent at a fraction of the cost of district court proceedings. Interestingly, some of the proposed legislation seeks to makes these PTAB procedures available to fewer parties, while some of the proposed legislation seeks to make them available to a larger number of parties. According to advocates, the proposed changes represent an attempt to strike a balance between protecting those wrongly accused and protecting patentees from challenges to their patents.

Cancellation/Invalidation More Difficult at the PTAB

Both the Innovation and PATENT Acts would change the claim construction standards for inter partes review and post-grant review from "broadest reasonable interpretation" to "ordinary and customary meaning" and require that PTAB judges consider claim constructions previously made by district courts. Narrowing the standard for claim interpretation in this way would make it more difficult to invalidate patents.

The STRONG Patents Act would raise the bar for invalidity even farther, requiring a clear-and-convincing-evidence standard for challenging a patent, as opposed to the current preponderance-of-evidence standard. It would also provide a patentee, when facing a challenge to its claim, the option of canceling that claim or proposing a reasonable number of substitute claims: The PTAB would also review any substitute claims by a preponderance of the evidence. Similarly, the PATENT Act would also provide the option of substitute claims, reviewed by a preponderance of the evidence, but substitute claims must be narrower in scope than the canceled claim.

Limiting Standing

The STRONG Patents Act would limit the entities with standing to bring challenges before the PTAB. Currently, anyone can file a challenge against a patent, assuming none of the AIA's preclusions apply.5 Under the proposed legislation, an entity may petition the PTAB only if it has been sued for infringement or has standing to bring a declaratory-judgment action (i.e., an actual case or controversy exists). Further, and somewhat shockingly, the legislation restricts which judges at the PTAB may ultimately decide whether a patent is invalid, actually precluding those judges who participated in the decision to institute a PGR or an IPR from deciding on the validity of the challenged patent. Also, the legislation would mandate that ex parte reexaminations, which can currently be filed at any time, be filed by an accused infringer only within one year of service of a complaint on the accused infringer.

Attorney Conduct at the PTAB (Rule 11)

To prevent so-called frivolous challenges to patents, the PATENT Act would require the patent office to issue regulations making clear that a party challenging a patent "does so under an obligation substantially similar to the obligations contained in Rule 11 of the Federal Rules of Civil Procedure." Rule 11 allows courts to impose sanctions on attorneys whose filings are frivolous or lack evidentiary support. Members of the Senate Judiciary Committee said that imposing a similar obligation would "prevent gamesmanship" in PTAB proceedings.

Altering the Rules of Estoppel

The PATENT Act seeks to change the scope of estoppel for PGRs by striking the "reasonably could have been raised" language, limiting estoppel to positions actually presented for review. Also, the PATENT Act would make a party in an IPR bound by any representations regarding claim construction by that party in the patent's prosecution history in any later patent office or district court proceedings.

Conclusion

The AIA, passed less than four years ago, brought about sweeping changes to the patent system, including the overwhelmingly popular PTAB proceedings that allow actual and would-be alleged infringers to challenge questionable patents. Indeed, at the time, Sen. Orrin Hatch, R-Utah, stated that those parts of the AIA were intended to "creat[e] a cost-effective alternative to formal litigation."6 Yet, as with all legislation, the AIA had unexpected consequences—allowing certain entities to proactively challenge patents for questionable reasons, including manipulating market conditions by casting doubt over the intellectual property of market participants. As one example, former hedge fund manager Kyle Bass reportedly engineered challenges to pharmaceutical patents by the use of PTAB proceedings. In one case, attacking patents held by Acorda Therapeutics caused its stock price to drop by 7.6 percent;7 another attack caused a 5.2-percent drop in the stock price of Shire PLC.8

Thus, as Congress seeks new solutions to address current-day issues in patent law, it may be unavoidable that smart companies and people will still find ways to avoid (or exploit) the "new solutions." So, while Washington may be currently experiencing rare political harmony in crafting patent reform, the steps will likely be only incremental, as there is really no definite solution—only tweaks to a system that does its best to balance the interests of protecting intellectual property while allowing those accused of infringement a chance of a fair and economical defense.

Footnotes

1 Timothy B. Lee, The Switchboard: Obama calls for patent reform in State of the Union, the Washington Post (Jan. 29, 2014), http://www.washingtonpost.com/blogs/the-switch/wp/2014/01/29/the-switchboard-obama-calls-for-patent-reform-in-state-of-the-union/.

2 Press Release, Congressman Bob Goodlatte, Goodlatte Introduces Patent Litigation Reform Bill (Feb. 5, 2015), http://goodlatte.house.gov/press_releases/660.

3 Commil USA, LLC v. Cisco Sys., Inc., No. 13-896, 575 U.S. ___, slip op. at 3 (2015) (Scalia, J., dissenting).

4 134 S. Ct. 1749 (2014).

5 See generally Lionel Lavenue & Andrew Strickland, Behind Bars: A Closer Look at the Statutory Bars for Filing Inter Partes Review Petitions, http://www.finnegan.com/resources/articles/articlesdetail.aspx?news=d3b568b8-96b6-416b-b67a-b08ad65a1fb9.

6 Gene Quinn, Patent Abuse or Genius? Is Kyle Bass Abusing the Patent System?, IPWatchdog, (Apr. 8, 2015), http://www.ipwatchdog.com/2015/04/08/is-kyle-bass-abusing-the-patent-system/.

7 Lisa Shuchman, Big Pharma: Let's Shift Patent Debate Away From Trolls, Corporate Counsel (May 20, 2015), http://www.corpcounsel.com/id=1202726911929/Big-Pharma-Lets-Shift-Patent-Debate-Away-From-Trolls.

8 Id.

Originally printed in Law360 (www.law360.com). Reprinted with permission.

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