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June 23, 2015Published Article

The PATENT Act: Be Careful What You Wish For

I.              Introduction

Within Michael Best’s White Paper, “Innovation Act Update,” published March 9, 2015, we outlined the patent reform legislation pending in the United States House of Representatives known as the Innovation Act. (H.R. 9.) On April 29, 2015, Senators Grassley, Cornyn, Hatch, Klobuchar, Leahy, Lee and Schumer introduced a competing patent reform bill in the United States Senate known as the Protecting American Talent and Entrepreneurship Act of 2015, or the PATENT Act. (S. 1137.)

As we wrote in our “Innovation Act Update,” some version of the PATENT Act or Congressman Goodlatte’s Innovation Act stands a good chance of being approved by the Congress in the current session. Moreover, President Obama previously expressed a willingness to sign patent reform legislation. In light of the likelihood that the PATENT Act or some version of it becomes law, within this White Paper, we provide a detailed description of its contents as approved by the Senate Judiciary Committee on June 4, 2015, by a vote of 16-4. While proponents of patent reform are applauding the Congress’ renewed focus on patent reform, a number of its provisions continue to fall into the category of “be careful what you wish for.”

II.              The PATENT Act – S. 1137

The PATENT Act contains at least nine main elements:

  • Demand letter specificity
  • Small business and miscellaneous patent improvement provisions 
  • Extension of bankruptcy protections for patents and trademarks
  • AIA Amendments
  • Customer stays
  • Stayed discovery
  • Disclosure of interested parties
  • Fee shifting
  • Heightened pleading requirements

A.        Demand Letters

Like the Innovation Act, the PATENT Act follows the trend of numerous other prior federal bills, state laws and state law proposals by regulating demand or “cease-and-desist” letters. The Act states that demand letters shall:

  • identify each patent believed to be infringed,
  • identify each person with the right to enforce the asserted patents.
  • provide notice of the potential right to seek a stay, and
  • explain the alleged infringement,
  • identify each product or process believed to infringe,
  • identify at least one allegedly infringed claim,

A later amendment by Senator Feinstein prohibits such letter from including a specific monetary demand without the consent of the parties.

If a demand letter fails to include all of the required information and the patent holder files suit, then the defendant’s time to respond to the complaint is extended by 30 days. In addition, the patent holder may not rely on its deficient demand letter as evidence of willful infringement.

The PATENT Act also expressly condemns “abusive” demand letters. The Act makes “widespread” transmission of “bad faith” demand letters a violation of Section 5 of the Federal Trade Commission Act. The “widespread” requirement excludes isolated letters sent by business other than “patent trolls” from the Act. Bad faith demand letters include:

  • letters threatening litigation when there is a pattern of false threats to file suit,
  • letters likely to mislead because they fail to identify the person seeking to enforce the patent, identify the patent and identify the accused product or process.
  • letters lacking a reasonable basis in law or fact, and

The Act’s demand letter provisions are not as detailed as many of the recently enacted state laws and do not contain the fines or other penalties common to those state laws beyond its reference to Section 5 of the FTC Act. In addition, the Act does not expressly preempt those state laws, so federal preemption of such laws will remain an open question.

B.        Heightened Pleading Requirements

The PATENT Act expressly eliminates Form 18, which provided a pre-approved bare-bones,  complaint for patent infringement, and which the Federal Circuit Court of Appeals relied on to refuse to extend the holdings of Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) to direct infringement claims. See McZeal v. Sprint Nextel Corp., 501 F.3d 1354 (Fed. Cir. 2007) [1]. Going further, the Act requires a patent holder to plead each asserted patent claim, specifically identify each allegedly infringing product or process, by name or model number when possible, and explain how each accused product or process infringes each claim on an element-by-element basis. Essentially, the bill would require the patent holder to include a claim chart along with its complaint which, in turn, likely will lead to a significant increase in early motion to dismiss practice under Federal Rule of Civil Procedure 12. These provisions also will invite litigation over whether the required information was “accessible” to the plaintiff at the time of filing, as these heightened pleading requirements contain exceptions for information that is not accessible after a reasonable inquiry.

The PATENT Act does not require pleading a description of the plaintiff’s authority to bring suit, a description of the plaintiff’s principal business, a list of all prior complaints asserting the patents-in-suit or licensing commitments (e.g. through standard setting bodies) as required in the Innovation Act. The PATENT Act, however, does include separate financial interest transparency requirements as described below in Section D.

C.        Fee Shifting

The PATENT Act does not make “loser-pays” the default rule, unlike the Innovation Act. Instead, the PATENT Act tries to strike a balance between protecting the right of a patent holder to enforce its patent on the one hand, and deterring abuses in patent litigation, on the other, tracking the Supreme Court’s recent decision in Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014). To that end, the Act requires fee shifting when the losing party’s litigation position was not objectively reasonable in law or in fact. The Act also requires fee shifting if the losing party’s litigation conduct was not objectively reasonable. The prevailing party bears the burden of demonstrating that it is entitled to such a fee award. The PATENT Act creates exceptions for “special circumstances” such as economic hardship to a named inventor or for an institution of higher education.

The PATENT Act also includes provisions designed to ensure that non-practicing entity plaintiffs can pay such a fee award. The PATENT Act does not provide for joinder of interested parties later in the suit in order to fund an attorneys’ fee award like the Innovation Act. Instead, if a party defending an infringement claim can assert in good faith that the party asserting infringement is primarily in the business of enforcing patent rights, then the party asserting infringement must:

  • establish that it will have sufficient funds to satisfy a fee award,
  • identify other interested parties, or state that it has no such interested parties.
  • demonstrate that its primary business is not patent enforcement, and

If the party asserting infringement cannot establish that it has sufficient funds to satisfy a fee award or demonstrate that it is not a “patent troll,” then it must notify all interested parties, and those interested parties are responsible for any fee award that the party asserting infringement cannot pay unless they renounce their interests in the asserted patents.

As in the Innovation Act, “interested parties” does not include attorneys or equity interests in the asserting entity without any right to direct or control the asserting entity. In addition, the PATENT Act exempts institutions of higher education from this requirement.

D.        Disclosure of Interested Parties

The PATENT Act requires patent holders to disclose to the court and adverse parties all interested parties within 14 days of filing suit. This disclosure must include the identity of each assignee, any ultimate parent entity, all entities with the right to sublicense or enforce the patents-in-suit and their ultimate parent, and all entities with a financial interest in the patents-in-suit, the patentee, and any ultimate parent thereof. Financial interest is defined to include the right to receive proceeds, including contingent proceeds, or control of more than 20% of the patent; the definition excludes indirect ownership through mutual funds or mutual insurance companies. Note that the Innovation Act excluded persons who might receive contingent proceeds and set the control threshold at 5%.

This disclosure also must include a listing of all complaints filed by the patentee or its affiliates during the three-year period preceding filing suit.

This disclosure must include any assurances made to standards setting bodies or the federal government regarding licensing.

Finally, the patentee must provide this disclosure to the Patent Office within one month of its disclosure to the court and the parties.

Going forward, the PATENT Act requires all patent assignments to be recorded in the Patent Office. Failure to comply has serious consequences. First, a patent holder will be precluded from recovering enhanced damages or attorneys’ fees during the period of non-compliance. Second, the court shall award a prevailing accused infringer its reasonable attorneys’ fees incurred in discovering the identity of any improperly undisclosed entity. 

E.         Stayed Discovery

The PATENT Act requires courts to stay discovery pending motions to dismiss, transfer venue or sever accused infringers. The court, however, may allow limited discovery if necessary to resolve such motions, if necessary to resolve a motion for preliminary injunctive relief or to preserve evidence. Moreover, this automatic discovery stay does not preclude courts from requiring the parties to exchange infringement or invalidity contentions as required by local patent rules.

Note that the Innovation Act contains greater constraints on discovery, essentially limiting discovery prior to claim construction to information necessary to construe the claims or resolve motions.

Like the Innovation Act, the PATENT Act also directs the Judicial Conference of the United States (the body that drafts and amends the Federal Rules of Civil Procedure) to draft new discovery rules to address the “asymmetries in discovery burden and costs” in patent cases. To that end, the Conference should enact rules creating several categories of discovery: core discovery, discovery of electronic communications, and additional discovery. Unlike the Innovation Act, the PATENT Act does not attempt to define “core discovery” but instead leaves that task to the Judicial Conference.

Under these rules, discovery of electronic communications would be strictly limited, and “additional discovery” would typically be paid for by the requesting party, including the producing party’s reasonable attorneys’ fees. This bifurcation of discovery and cost-shifting represents a dramatic shift from the open discovery common to federal litigation. Moreover, while the limits on discovery of electronic communication will save the parties costs and fees, they seem ill-suited to a world in which most communication occurs electronically.

F.         Customer Stays 

The PATENT Act requires courts to stay suits against customers where the manufacturer of the accused product or process also has been accused of infringing the same asserted patent. Unlike the Innovation Act, the PATENT Act defines customers to include retailers and end users who do not manufacture or cause the manufacture of any part of the accused product or process.

To obtain such a stay, the customer must file a motion to stay its case within the later of 90 days of the suit or entry of the first scheduling order. The customer also must agree to be bound by any issues finally decided as to the manufacturer. The manufacturer’s consent is not required unless it has been made a party to the action on motion by the customer, unlike the Innovation Act which always requires the manufacturer’s consent to obtain a stay.

If a manufacturer, however, agrees to a consent judgment or does not appeal a final judgment, then the court may determine that the decision is not binding on the stayed customer defendant. The court also may lift the stay if it determines that the manufacturer suit will not resolve a major issue in the customer suit or is otherwise unjust to a party seeking to lift the stay.

G.        AIA Amendments

The PATENT Act contains several amendments to the Inter-Partes Review (IPR) and Post-Grant Review (PGR) provisions of the 2011 America Invents Act.

First, the Act allows a patent holder to respond to a Patent Office review petition with citations to supporting evidence. The challenger can then file a reply in support of its review petition. The PATENT Act also restates that patents are presumed valid – even in Patent Office review proceedings. Although, a challenger only needs to prove invalidity by a preponderance of the evidence rather than meet the clear and convincing standard used in the district courts.

The Patent Office may reject a petition in the “interests of justice” and consider, among other factors, whether the asserted grounds of unpatentability are the same as those considered in a prior judicial or Patent Office proceeding. Moreover, a petition should not be granted based on an evidentiary standard in the Patent Office that differs from the evidentiary standard used in a district court proceeding.

Second, the Patent Office must assign different panels to the institution decision and the determination of validity on the merits. (The two three-judge panels can have one common member.) In addition, the panel judging validity on the merits must use the Philips standard used by the district courts when construing claim terms in litigation rather than the current “broadest reasonable construction” standard borrowed from the patent prosecution process. Interestingly, this provision would make it harder rather than easier to invalidate patent claims under the AIA, contrary to the spirit of almost every other provision of the PATENT Act. The Patent Office also must take into account any claim construction already conducted by the district courts. Finally, the Patent Office must draft rules imposing a good faith filing requirement akin to Federal Rule of Civil Procedure 11.

The Senate intends this new language is to make it easier for the Patent Office to reject a review petition when the patent-in-suit already has been the subject of judicial scrutiny – such as in ANDA litigation. The Senate Judiciary Committee believes that some parties, such as hedge funds, have filed review petitions attacking pharmaceutical company patent protection for the sole purpose of driving down stock prices and profiting from that stock drop or to obtain a “shakedown” settlement. Some commentators have referred to these entities as “reverse patent trolls” because they seek a settlement in exchange for not challenging a patent’s validity. Recent amendments to the Innovation Act in the House also attempt to address this problem with new provisions narrowly targeting hedge fund investors and other reverse patent trolls.

Third, the PATENT Act includes provisions that would make it easier for a patent holder to amend its patent claims during on ongoing Patent Office review, potentially helping the patent holder preserve its patent’s validity.

Fourth, the Act eliminates the estoppel provision in the Post-Grant Reviews that currently bars a petitioner from asserting in a subsequent civil action on any ground that the petitioner “reasonably could have raised” during the post-grant review. This estoppel language, however, remains in effect for Inter-Partes Reviews.

Fifth, a petitioner can add additional claims to its Patent Office review petition outside of the one-year time limit for filing such a petition if the patent holder added new claims to the case after that one-year period expired.

Sixth, parties to a Patent Office review are bound in future cases by any claim construction argument adopted by the Patent Office during an IPR or PGR.

Seventh, the parties can present live testimony at the “trial” if “the panel finds that such testimony would facilitate resolution of the case because genuine issues of material fact, conflicting expert opinions, or issues of witness credibility exist.”

Unlike the Innovation Act, the PATENT Act does not address, much less expand the Covered Business Method review provisions of the AIA. 

H.        Bankruptcy Protection

Like the Innovation Act, the PATENT Act bars bankruptcy trustees from terminating certain patent licenses by giving licensees the rights described in section 365(n). The Act adds trademarks to the definition of “intellectual property” in the bankruptcy code. Finally, the Act holds the bankruptcy trustee to any contractual obligations to monitor and control the quality of a licensee’s product or service.

I.          Small Business Provisions and Patent Improvement Provisions

The PATENT Act requires the Patent Office to develop educational resources for small businesses. The Act also requires the Patent Office to create a website to notify the public of all new patent cases.

The Act directs the Patent Office, along with the Commerce Department, the Treasury Department and the SEC, to recommend legislation to ensure greater transparency and accountability in patent transactions. The Act also requires these agencies to examine the economic impact of the patent secondary market and whether that market needs licensing or oversight to ensure a level playing field.

The Act requires the federal courts to study the idea of developing a patent small claims procedure.

Finally, the Act directs the Comptroller of the United States to study business method litigation and the quality of such business method patents.

III.        Prospects for Passage

Most Congressional observers believe that the change in control of the United States Senate presages approval of the PATENT Act, the Innovation Act or some form of those bills in the 114th Congress. To that end, the House continues to amend the Innovation Act, recently adding new venue provisions that would make it more difficult for non-practicing entities to bring their suits in the Eastern District of Texas. Moreover, the White House previously has signaled its intention to support and sign patent reform legislation. On the other hand, opposition to these bills is mounting from small businesses and individual inventors who sincerely believe that these changes will make it harder for them to protect their patent rights, thereby enabling larger companies to infringe their patents with impunity, as well as from those who benefit from the current system. In the end, it appears likely that Congress will amend the Patent Act during this session.


 

[1] Amendments to the Federal Rules of Civil Procedure set to take effect in December 2015 also include abolition of Form 18.

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