By Kevin E. Noonan —

Leonard Cohen sings:

Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That's how it goes
Everybody knows

What everybody doesn't seem to know is how to get Congress to listen to the needs of the innovation community when well-heeled sectors put their lobbying and financial support in favor of legislation purportedly aimed at improving innovation ("It's a jobs bill!") by changing the rules of the patent system in their favor.  But since various stakeholders have made the effort it is well for us at least to listen to what they have to say.

The Higher Education Community

In a statement released November 8, 2013, the Association of American Universities (AAU), American Council on Education (ACE), American Association of Medical Colleges (AAMC), Association of Public and Land-grant Universities (APLU), Association of University Technology Managers (AUTM), and Council on Government Relations (COGR) "communicated the[ir] views" on the provisions of H.R. 3309 (oxymoronically entitled "The Innovation Act").  (As with most of these letters and communiques, the Chairman is extolled for the "open, thoughtful process" and the goals of the bill lauded as being directed to "reduc[ing] abusive patent litigation," which putatively has a "corrosive impact on the U.S. patent system and the capacity of that system to foster innovation and economic competitiveness.  With that as prelude, the authors should have expressly conceded that their aim was merely to rearrange the deck chairs rather than challenge the shaky assumptions behind the legislation; the only hint of disagreement is that the measures proposed in the bill may be "overbroad" and lead to "unintended consequences.  To whom they would be unintended is unclear, but the universities clearly state that any such negative consequences would be suffered by them.)  Nevertheless, this stakeholder missive provides specific commentary on the various provisions of the bill:

•    The fee-shifting provisions.  The first example of overbreadth is the scope of the statutes where fee-shifting would be mandated, including "the Space Act, the Atomic Energy Act, the Non-Nuclear R&D Act as well as all titles of the omnibus bills in which the Bayh-Dole Act and amendments became law."  These provisions would impact not only "abusive" litigation practices but also ones that fall within the scope of "ordinary enforcement procedures and litigation activities," the authors not recognizing that the supporters of this bill believe that "ordinary enforcement procedures and litigation activities" are themselves abusive (insofar as they are directed at such supporters).  The statement recognizes that fee-shifting will occur in the ordinary course against non-prevailing patentees due to the "burden of proof and substantive standards" imposed upon the nonprevailing party by the bill.  This outcome will have a "chilling effect" on impecunious parties, like universities, small businesses and startups, the statement asserts, and instead the university groups suggest that fee shifting should be limited to cases where the nonprevailing patentee plaintiff "is not the named inventor of or an original assignee to an asserted patent and does not make or sell a product related to the subject matter described in the asserted patent."

•    Joinder provisions under Sec. 299(d).  Here, it is the definition of the term "interested party" that is purportedly overbroad according to these stakeholders.  The risk, they recognize, is that in combination with the fee-shifting provisions universities will be put at risk in litigation by their licensees, resulting in an "unfunded mandate" against them.  This would result in "a substantial disincentive for universities and startups to enforce patents on new technologies and innovations," which while true would return the situation regarding university inventions to pre-Bayh-Dole status, where companies could simply steal university inventions with impunity.

•    The pleading requirements under Sec. 281(A).  This objection is merely practical, wherein a patentee plaintiff is charged with making averments in a complaint that may not be known until after discovery, and if not permitted to amend may foreclose relief for certain activities.  (Not mentioned is the practical effect of the requirement, since the scope of discovery is defined in large part by the allegations of the complaint that define relevant evidence.)

•    The "transparency" of patent ownership under Sec. 4.  Again, the objection is a practical and logistical one, insofar as the breadth of the requirement (which exists for the life of the patent) "may well exceed the capacity of even the best-intentioned plaintiff to acquire and provide."

•    The discovery limitations under Sec. 299(A).  While clearly viewed as posing the greatest risk in conjunction with the pleadings requirements discussed above, the statement also notes that the judiciary has the ability to limit discovery when necessary and the blanket limitations imposed by the bill "could make it more difficult to provide information called for in other sections of the bill and could militate against cases where allowing broader discovery would be more efficient."

•    Changes in the provisions of the Leahy-Smith America Invents Act.  These objections are concerned with expanding the scope of post-grant review of covered business method patents, and narrowing the extent of the estoppel that attaches to petitioners who employ the new post-grant review procedures.  The universities are concerned that the former will sweep into the scope of these reviews patents other than "pure" business method patents (few of which are owned by universities) and that removing the "reasonably could have raised" estoppel will promote patentee harassment by "extending, rather than limiting, patent litigation."

The Biotechnology Industry Organization (BIO)

The letter from BIO, although less obsequious in tone than the university groups' letter, similarly praises at least the intent of the bill.  But the letter (signed by BIO President and CEO, Jim Greenwood, himself a former Congressman) is front-and-center regarding the potential for the legislation to "erect unreasonable barriers to access to justice for innovators, especially small start-ups."  The letter also sounds a caution against legislative solutions to what are essentially problems (insofar as they exist) in judicial administration, better handled by the judiciary in BIO's view (and the view of several members of the Federal Circuit; see below).

BIO begins with the parts of the bill it can support:  protecting IP licenses in bankruptcy cases; harmonizing claim construction standards applied by the PTO and the courts; and clarifying the judicially created doctrine of obviousness-type double patenting (particularly under the "first-inventor-to-file" provisions of the Leahy-Smith America Invents Act); and the "recognition [in the bill] of the already existing and specific statutory schemes that apply to [ANDA] litigation."  Of concern, however, are the following provisions of the bill:

•    "Routinely defer[ring] or suspend[ing] discovery and litigation on the merits in patent infringement cases";
•    "Permit[ting] infringers to add additional parties to the litigation under overly broad criteria and permitting [prevailing] parties to seek reimbursement of [] litigation costs against other parties under a vaguely-defined and potentially very broad set of patent-related cases";
•    "Requir[ing] unreasonable amounts of pleading specificity and disclosure and public recordation of patent ownership, litigation interests, and other business or confidential information";
•    "Direct[ing] courts and judges [on] how to handle patent case management in an overly-prescriptive and one-size-fits-all manner that would unduly interfere with the responsibility of judges and courts to craft case-appropriate management orders that reflect the complexity of the matters at issue and the respective positions of the parties"; and
•    "Singl[ing] out patents on certain technologies for unfavorable treatment in open-ended administrative litigation, contrary to long-standing U.S. policy and international treaty obligations."

(For many reasons, the last of these points raises particularly acute concerns, both with challenges to U.S. authority, moral or otherwise, before the WTO and with regard to advancing American interests abroad in the face of patent challenges to U.S. patentees under other national patent systems.)

The letter concludes by noting at least some of the expected consequences of enactment of these provisions:  "systematic delays in patent litigation" due to "piecemeal discovery and adjudication" and the "inclusion of potentially numerous and unnecessary parties," which would increase the "time and expense of patent litigation" (here, BIO notes that such an outcome would be contrary to "the legislations purported goals").  In an effort to address the "abusive litigation practice of the few," BIO warns that the legislation will "impose unjustified burdens on too many legitimate patent owners seeking to enforce and defend their inventions in good faith."

The Pharmaceutical Research and Manufacturers of America (PhRMA)

PhRMA, in a letter to the Judiciary Committee by its Executive Vice President of Advocacy and member Relations, Chester (Chip) Davis, also raises issues similar to other stakeholders albeit with less substantive detail or supporting argument.  PhRMA "commends" Congress for "considering legislation to curb abusive patent litigation" and "applauds [the Committee's] efforts" in this regard, but voices the following concerns:

• Increasing pleadings requirements, which "raises questions about the balance between having information available in pleadings and providing prompt and effective access to the courts by patent owners";
• Including fee-shifting provisions for "covenants not to sue";
• Restricting discovery in a way "that could serve to delay ultimate resolution of patent litigation and increase costs";
• Lacking "balance" over the requirements for "transparency" regarding patent ownership;
• Including a "customer suit" exception not "targeted narrowly";
• Infringing on the province of the Judicial Conference and the Supreme Court regarding case management;
• Eliminating Section 145 proceedings (providing for an applicant or interference litigant to appeal to the U.S. District Court as an alternative to the Federal Circuit);
• Expanding the time and scope of the transitional Covered Business Method Patent [Reexamination] Program;
• Limiting the scope of Patent Term Adjustment (by adopting the PTO's position regarding the availability of so-called "B" delay after filing an RCE).

Former Chief Judge Paul Michel

One of the evident benefits of being a retired, former Chief Judge of the U.S. Court of Appeals for the Federal Circuit is that it must be generally recognized that you know of what you speak, and that (if you have the proper inclination) you can speak authoritatively on proposals like H.R. 3309.  Former Chief Judge Michel does not disappoint, and he recently spoke on the provisions of Chairman Goodlatte's bill.

As reported in IPLaw 360 by Ryan Davis, the former Chief Judge does not think much of the bill.  In a speech at Fordham Law School's recent IP Summit, Judge Michel is quoted as saying the bill would "do more harm than good" and is "hugely counterproductive."  Of these features of the bill, the Chief Judge notes that the pleadings requirements require such "excruciating detail" that they may more readily be deemed defective, resulting in an increase in motions to dismiss which will at a minimum raise the time and cost of litigating (such motions "will become routine," according to Judge Michel).  Provisions requiring nonprevailing patentee plaintiffs to pay their opponents' litigation costs will "backfire" because prevailing attorneys will always seek them (fearing malpractice liability for not doing so).  Not surprisingly, Judge Michel also asserted that the discovery provisions amounted to Congressional "micromanaging" of the judiciary.

But the Chief Judge saved his most strident criticism to provisions of the bill that would expand the Covered Business Methods Patent Program, calling this the "worst part" of the bill.  This is because the scope of patents under this proposed expanded program would include almost all software patents and the existence of this option for such patents will lead to stays in patent litigation while the PTO procedures are exhausted.

Judge Michel predicted that "[t]he value of patents will go down and the value of patent portfolios will go down" if the bill is enacted by Congress, despite the fact that the bill is a "blunderbuss attempt to curb abusive litigation tactics by a small fraction of litigants."

The former Chief Judge conceded that he was in favor of "smart patent reform" legislation, but only by legislators who "understand how the patent system works, not by congressional staffers and lobbyists."

H.R. 3309 passed out of the Judiciary Committee last night by a vote of 33-5, and is headed to the House floor.  Senator Leahy introduced a companion (but not identical) bill in the Senate yesterday (see "Yet Another "Patent-Troll" Bill – Senator Leahy Introduces Patent Transparency and Improvements Act").  In one House of Congress or the other, members of the patenting community who "understand how the patent system works" need to make sure their Congressional representatives know it too.

By Andrew Williams —

There has been a flurry activity recently in both the House and Senate aimed at addressing the perceived patent-troll problem.  We have recently reported on the introduction of both the "Innovation Act," from Rep. Bob Goodlatte (R-Va), and the "Patent Litigation Integrity Act," from Sen. Orrin Hatch (R-Utah).  The Goodlatte bill was marked-up today by the House Judiciary Committee in a session that lasted into the early evening (we will provide details on the amendments at a future date).  In addition, on the heels of a hearing by the U.S. House Energy & Commerce subcommittee on "The Impact of Patent Assertion Entities on Innovation and the Economy," Rep. Jared Polis (D-Co.) introduced the "Demand Letter Transparency Act."  According to a statement on Rep. Polis's website, this Act "strikes the right balance in protecting the rights of legitimate patent holders to enforce their patents while protecting consumers and businesses against non-legitimate abusers of the patent system."  Adding to this ever-increasing mass of proposed legislation, Sen. Patrick Leahy (D-Vt.), chair of the Senate Judiciary Committee, introduced S. 1720 (the "Patent Transparency and Improvements Act of 2013") on Monday, November 18, 2013.  Because this Act contains some provisions not found in any of the other pieces of legislation, and because of Sen. Leahy's influential position in Congress with regard to intellectual-property matters, an analysis of the provisions of this Act is warranted.

Transparency of Patent Ownership

As the title of the Act would suggest, one of the provisions of the bill is aimed at making the ownership of patents transparent.  Sen. Leahy has a couple of different ways to accomplish this.  First, any patentee that files an action in Federal Court would be required to disclose any and all persons that have a financial interest in the controversy or a party to the proceedings, or that have an interest that could be affected by the outcome of the proceedings.  The complication comes in the definition of "financial interest."  The proposed legislation refers to 28 U.S.C § 455(d), which is the section of the U.S. Code that addresses the disqualification of federal judges.  "Financial interest" is defined as "ownership of a legal or equitable interest, however small, or a relationship as director, advisor, or other active participant in the affairs of a party," providing any of the enumerated exceptions do not apply, such as passive ownership through a mutual or common investment fund.  As a result, a publically traded corporation brining a patent infringement lawsuit would be required to provide a list of every stockholder, no matter how many (or few) shares are actually owned.  Such a requirement would be incredibly onerous, and would serve as a significant barrier to patent litigation for such patent holders.

Another "solution" provided for in this bill is an assignment disclosure requirement at the U.S. Patent Office.  When "all substantial rights in an issued patent" have been assigned, the name of the assignee and the ultimate parent entity of the assignee would need to be recorded with the Office within three months.  However, the only hint as to what "all" substantial rights means in this context is whether the assignment "results in a change to the ultimate parent entity."  The penalty for not complying would be that a party asserting infringement "may not recover increased damages under section 284 or attorney fees under section 285 with respect to infringing activities taking place during any period of noncompliance," and the party may be responsible for the reasonable attorney fees incurred by an alleged infringer in discovering the "ultimate patent entities in the chain of title."  Nevertheless, in relation to other mandatory assignment recordation provisions that have been discussed, this one does not appear to be overly demanding.  If this provision passes, it would behoove any patent owner to confirm that all assignments had been properly recorded at the first signs of any potential infringing activity.  It would also be necessary to conduct the proper due diligence related to assignment recordation before taking any interest in a patent, because the ability to recover such fees for some period of time may already have been forfeited.

Customer Stay

In order to address the concern that "patent trolls" are preying on customers, not manufacturers, Sen. Leahy's bill contains a provision allowing for the stay of litigations where both a customer and manufacturer have been sued for patent infringement.  This section is not dissimilar to other proposed legislation.  The requirement for the grant of a motion for stay would include the consent in writing of both the manufacturer and the customer, that the manufacturer be a party to the action or a separate action involving the same patents and relating to the same product or process, that the customer must agree to be bound by the decision, and that the motion must be filed early in the case.  The Act also provides that the stay can be lifted by a motion showing that a major issue in the customer action will not be resolved by the manufacturer action, or if the stay would unreasonably prejudice the party seeking to lift the stay.  Finally, the estoppel effect of the stay could be waived if the manufacturer seeks or consents to a consent judgment or fails to prosecution to a final, non-appealable judgment at least one common issue that gave rise to the stay.

Bad-Faith Demand Letters

There has been a lot of activity in the past week or so directed to the impact of demand letters on the patent system.  This is interesting, because demand letters themselves do not necessarily fall within the scope of the patent statute.  Still, the prototypic activity of a putative "patent troll" is the sending of demand letters, and if the anecdotal evidence is to be believed, all of these letters have little to no information.  However, any attempt to solve this problem through legislation will certainly have unintended consequences, likely to detriment of legitimate patent holders.  Moreover, it is difficult to see how the First Amendment rights of patent holders can be protected in the attempt to curtail this practice.  Finally, it would appear that one potential out for the patent holder would be to pre-emptively file a complaint, which could then be included with, or substituted for, any demand letter.  Of course, Rule 11 would need to be satisfied.  Nevertheless, it would appear that to have the intended effect, "demand letter" legislation will need to go hand-in-hand with some form of heightened pleading standards.  The concern is that such legislation may introduce more problems than it solves, as we have highlighted in previous posts in this forum.

The Leahy bill addresses the demand letter issue by empowering the Federal Trade Commission to consider such conduct an "unfair or deceptive act or practice."  In order to be classified as such, the patent holder must "engage in the widespread sending of written communications" that "falsely threaten that administrative or judicial relief will be sought if compensation is not paid or the infringement issue is not otherwise resolved."  The demand letter would also be considered to be "unfair or deceptive" if it lacks a reasonable basis in fact or law, or if the content "is likely to materially mislead a reasonable recipient."  Of course, the success of this section will depend on the definitions of several key terms.  For example, just what does it mean to "falsely threaten"?  Will this apply anytime a lawsuit does not result?  Or will it be necessary to demonstrate that the patent holder never had any intention of filing suit (which may be difficult to prove without a "smoking gun").  Still, by giving the power to the FTC to combat this issue, it may solve some of the issues that were highlighted above for any attempt to directly legislate the issue.

AIA-Related Provisions

The Leahy bill also includes provisions that expand upon some of the changes brought about by the America Invents Act ("AIA").  For example, the bill provides for the use of claim construction rules in post-grant and inter partes reviews that are consistent with those used in federal court.  Currently, the Patent Trial and Appeals Board ("PTAB") uses the broadest reasonable interpretation standard, similar to that employed by the Office during the patent application examination process.  The problem is that these two different claim construction rules could result in two different oppositely-dispositive constructions based solely on while rule was applied.  There is general agreement that such a provision is necessary.  Another AIA-related provision is the codification of the double-patenting doctrine for first-inventor-to-file patents.  Finally, Leahy's bill includes some technical corrections to the AIA.

Other Miscellaneous Provisions

Leahy's Patent Transparency and Improvements Act of 2013 also contains several provisions that do not fall within these various categories.  First, the bill provides for small business education and outreach.  The only issue is that it must be funded from existing sources.  Next, there is a section of the bill that provides for the protection of intellectual-property licenses in bankruptcy.  Finally, the bill calls for several studies to be carried out by the Patent Office or other organizations.  For example, the bill requires the Patent Office Director to undertake a study "to develop legislative recommendations to ensure greater transparency and accountability in patent transactions occurring on the secondary market," "to examine the economic impact that the patent secondary market has on the United States," "to examine licensing and other oversight requirements that may be placed on the patent secondary market," and "to examine the requirements placed on other markets."  The bill would also require the Director to conduct a study on patents owned by the United States Government.  The GAO would be required to study patent examination at the Office and the technologies available to improve patent quality.  Finally, the Director of the Administrative Office of the United States Court would be charged with conducting a study to examine the idea of a patent small claims court.  These studies are clearly an attempt to get at the heart of a lot of the complaints that have been levied at the so-called patent trolls.

We will continue to monitor the legislative activity in Congress directed to patents and addressing perceived abusive patent litigation, and we will continue to report on any significant activity that occurs.