Let the AIA Reforms Have an Opportunity to Prove They Work

What follows is a portion of the written statement of Q. Todd Dickinson, Executive Director of the American Intellectual Property Law Association, republished here with permission. Mr. Dickinson testified today at the Senate Judiciary Committee hearing on “Protecting Small Businesses and Promoting Innovation by Limiting Patent Troll Abuse.” To read Mr. Dickinson’s full prepared statement please see Testimony of Q. Todd Dickinson.

Q. Todd Dickinson, Executive Director of the American Intellectual Property Law Association.

A recurring theme that can be traced through the patent reforms of the AIA to the current debate over patent litigation abuse is the issue of patent quality. A key component of the reported abuses is the assertion of allegedly invalid or overbroad patents, the very abuse for which AIA post-grant procedures were created, in order to improve patent quality. These matters of patent quality are being addressed by the changes made to the law by the Judiciary and by Congress in the AIA, which are only now beginning to be felt.4 It may well be premature to conclude that they are not doing the job.

Take one major example, as a former Director of the USPTO in particular, I would support, as former Director Kappos did, giving the post-grant processes in the USPTO a chance to work.

They have only been in place for less than two years, and in the case of PGR, less than one.5 Early data suggests that they are performing in many ways as Congress intended, at least at the macro level, to provide an efficient, less expensive means to address potentially low quality patents. We believe that the prudent course is to give these reforms the chance to demonstrate their efficacy to deal with the concerns for which they were created before we consider making significant additional changes which may have their own unintended consequences. In support of this proposition to wait and see how they are working, we would simply point out that the AIA itself requires that USPTO study the reforms implemented by the AIA and report back to Congress by September 16, 2015. Those reports would serve as an important and more empirically-driven body of data which would allow for greater clarity and direction in making any necessary changes.

The Current Environment

Nonetheless, we do understand that there is something different about certain abusive behaviors currently plaguing the business community. Specifically since the passage of the AIA, there has emerged a practice by some patent rights holders of sending widespread distributions of demand letters – often to small and patent unsophisticated end users such as “mom and pop” businesses, coffee shops, retail stores, or restaurants, who have often acquired and used equipment or services often ancillary to their primary business. These letters, often threatening, allege infringement of a patent or patents, sometime without citing to them specifically, rarely suggesting how the end-user is infringing specifically other than perhaps by using a particular broadly identified technology, such as “scanner,” and demanding relatively small amounts to settle an alleged dispute or provide a license. Demand letters are nothing new and have been sent and received by both large and small companies for years. However, the law has evolved such that it has become more difficult for patent holders to assert allegations of direct infringement against service providers or product suppliers, with the result that more and more patent holders have reached out to downstream customers to assert their patents.

We would also note that this is an area where there is little empirical data on which to gauge the magnitude of the problem. Some have suggested that there are only a handful of entities engaging in abusive behavior, but the large cumulative number of demand letters creates the impression of a more pervasive problem. Additionally, as the Vermont Attorney General has noted in his complaint against one of the most notorious of these abusers, in spite of the significant number of demand letters which were purportedly sent out, as of July 8, 2013, the date of the complaint, that company had not filed a single infringement lawsuit.6

In point of fact, therefore, many of these practices—sending a multiplicity of demand letters containing vague allegations and minimal information, with persistent but relatively modest settlement terms, and apparently with little preparation for actually bringing a lawsuit—may have less to do with abusing the rules and procedures in patent litigation per se than they have to do with consumer fraud and deceptive trade practices arising from the demand letter. In some respects, this problem is similar to the problem we saw in the late 1990s involving invention promotion firms preying on innocent inventors, who had little knowledge of the patent system and paid exorbitant fees to such firms in exchange for very little in return. In both cases, the targets of the abuse have been exploited with misleading information about patents and the patent system.

Law enforcement has developed measures to deal with such wrongdoers. With respect to invention promotion firms, the FTC responded to a massive fraud committed by many such firms by launching in 1997 “Project Mousetrap” to identify, prosecute and fine firms engaged in fraudulent or deceptive practices.7 As will be discussed further below, the FTC has already undertaken a thorough study of all of these practices, and is in a traditional and well-understood position to take action against consumer fraud and deceptive trade practices. In addition, state attorneys general have similar long-term experience and authority to deal with abusive behavior. As already stated, recently several attorneys general have pursued state law actions against certain patent owners for abusive litigation behavior.8 Given the nature of this more recent problem, which in many ways has triggered the broader political reaction among organized constituencies such as retailers, restaurants and real estate agents that has led us here today, we would suggest that it would be prudent to consider allowing those enforcement bodies with the appropriate experience and authority to pursue the matter.

However, state law remedies also require careful examination, first to guard against encumbering legitimate patent enforcement, and second to guard against limiting the litigation privilege and free speech right to send demand letters in the first instance.

AIA Reforms Were Directed to Many Complaints About Litigation

Any further proposed legislative remedy should not overlook the extensive revisions which the AIA only recently accomplished. The AIA includes a variety of reforms directed to improving the quality of pending patent applications and the enforceability of issued patents. With respect to patent quality, the legislation institutes a first-inventor-to-file system that will provide a more objective basis for establishing the priority of rights. It also provides tools to allow third parties to participate in patent examination9 or challenge the validity of an issued patent.10 These tools are expected to decrease abusive patent litigation practices by reducing the issuance of low quality patents and by providing a lower-cost administrative procedure for challenging issued patents. With respect to patent enforcement, the AIA reforms to prior user rights,11 case removal,12 false marking,13 and joinder practice,14 are all areas in which the interests of plaintiffs and defendants were in need of rebalancing. The exact balance struck by these various reform provisions is just beginning to unfold.

Evidence of the Problem

One particular challenge in crafting any legislative remedy to a problem is understanding the metes and bounds of the problem at hand. Such is the case in this current discussion. The nature and the scale of abusive patent litigation continue to be strongly debated, with partisans rising from academia, the media, Congress, and the White House. In general, at least the theme of early studies was to focus on the nature of the actor rather than the act. In this case, identifying or labeling them as “trolls,” “non-practicing entities,” or “patent assertion entities” who are gaming or manipulating the intellectual property system for their private advantage and to the detriment of the economy and society. These studies often provided the analytical underpinnings framing the debate, and found their way into many other reports and news articles.

What is still under serious debate is how well the available data supports the conclusions of these studies, which are often based on confidential information and surveys. A recent study responding to the debate put it this way:

“While the rhetoric in these studies is often sharp and clear, the same cannot also be said for the disclosures of the underlying data. The studies merely provide summary data to the public and often do not differentiate among the various types of NPEs. Instead, the studies broadly classify companies as either NPEs or not NPEs (sometimes, trolls or non- trolls). Importantly, nearly all of the data upon which these studies are premised are confidential and thus are not available for peer review or for use in other studies.” 15

Another reaction to the PAE debate in this area has come from the Government Accountability Office (GAO), which was tasked by Section 34 of the AIA to study the consequences of patent litigation by PAEs.16 Concerning the size of the problem, the August 22, 2013, the GAO report confirmed a 33% increase in patent litigation from 2010 to 2011, but said that most stakeholders attributed that increase to anticipated changes in the joinder rules in 2011 under the AIA. A further finding of the report, based on a representative sample of 500 patent infringement lawsuits from 2007 to 2011, shows that manufacturing companies brought most of the lawsuits, and that NPEs brought about 20% of all of the lawsuits. The report also identified other causes for increased patent litigation, such as (1) the prevalence of patents with unclear property rights, (2) the attraction of large monetary awards, and (3) corporate recognition that patents are a more valuable asset than previously thought.

One particular issue being addressed that has direct relevance to patent litigation abuse is the lack of detail in complaints alleging patent infringement. The sufficiency of pleadings generally was addressed by the Supreme Court rulings in Twombly and Iqbal,22 which arguably set the bar higher for patent complaints than Form 18 of the Federal Rules of Civil Procedure. The Federal Circuit in K-Tech Telecommunications v. Time Warner Cable confronted the conflict of pleading standards and said that, notwithstanding the Twombly and Iqbal rulings, the Forms control because the rules of procedure may not be changed by judicial interpretation.23

With regard to proposals to direct specific procedural rules by legislation, we would note that last August, the Judicial Conference Advisory Committee on Civil Rules proposed a series of changes to the rules of civil procedure, and included a proposal to abrogate Rule 84 entirely, with all of its forms, making specific reference to Form 18 and the Twombly and Iqbal requirements.24 Hopefully, this process will obviate the need for similar statutorily-mandated rules.

Also high on the list of many reformers is a change to 35 U.S.C. § 285 to make it easier for trial courts to award attorneys’ fees to prevailing parties. The current statute permits an award to a prevailing party in “exceptional cases,” which the Federal Circuit has interpreted in a way that makes fees very difficult to recover. The Judiciary is currently addressing this issue as well. Pending in the Supreme Court right now is a case that could change the standard used by district courts in awarding fees,25 and another case that could change the standard used by the Federal Circuit in reviewing such awards.26 AIPLA has filed amicus briefs in both cases arguing that district courts require more discretion to award attorneys’ fees where warranted.27

Probably the most tumultuous issue in patent law right now is the question of patent eligibility under 35 U.S.C. § 101. While that statutory language is fairly straightforward, identifying the various categories of inventions that are patentable subject matter, the Supreme Court years ago staked out exceptions to statutory subject matter where the patents recite a law of nature, a natural phenomenon, or an abstract idea. The Court has taken a number of cases recently involving method claims and found them ineligible as claiming an abstract idea, but in Alice Corp. Pty, Ltd. v. CLS Bank International, the Court is currently considering whether a system claim, i.e., one that combines a method and an apparatus, can be ineligible as an abstract idea.28 This case has the potential to resolve numerous questions created by past decisions which could impact the entire software industry. To the extent that confusion over the law of software patents has provided an opportunity for questionable infringement claims, the Court’s decision to review Alice to clear up such confusion is another example of action by the Judiciary to address the validity of some patents that may be the subject of perceived patent litigation abuses.

The complexity of patent law and its scientific and technical subject matter is compounded by the complexity of the litigation procedures for enforcement that gives the patent rights its value.29 All of this complexity may well provide extraordinary opportunity for misconduct, but the challenge for Congress is to see that the cure is not worse than the disease. Oftentimes, the procedures that may be applied for efficient management of one case will not necessarily be effective in another case.

Below we consider the specific provisions of S. 1720, as well as the issues raised by alternative approaches to litigation abuse.

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FOOTNOTES

3.  See, e.g., Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009); eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006); In re TS Tech USA Corp., 551 F.3d 1315 (2008).

4. Regarding patent quality, no issue is of greater importance than sustainable funding of the USPTO. We will discuss this in more detail below.

5. With respect to Inter Partes Review (IPR) petitions, trials have been instituted in over 80% of cases, since the proceedings became available on September 16, 2012. For Post Grant Review (PGR), these proceedings are available for patents that issue under a file-inventor-to-file (FITF) system and no trials have yet been instituted since the FITF system has only been in effect since March 2013. See Trial Proceeding Statistics available at http://www.uspto.gov/ip/boards/bpai/stats/aia_trial_proceedings.pdf.

6.  See the complaint of the Attorney General of Vermont in State of Vermont v. MPHJ Technology Investments, LLC, at http://www.atg.state.vt.us/assets/files/Vermont%20v%20MPHJ%20Technologies%20Complaint.pdf.

7.  See http://www.ftc.gov/news-events/press-releases/1997/07/ftcstate-project-mousetrap-snares-invention- promotion-industry

8. See the complaint of the Attorney General of Vermont in State of Vermont v. MPHJ Technology Investments, LLC, at http://www.atg.state.vt.us/assets/files/Vermont%20v%20MPHJ%20Technologies%20Complaint.pdf; see cease and desist letter from Nebraska Attorney General, at http://www.ago.ne.gov/resources/dyn/files/1069534z3005a836/_fn/071813+Farney+Daniels+LLP+- +Cease+%26+Desist+Letter+and+Civil+Investigative+Demand.pdf; see consent order reached by Minnesota Attorney General at http://www.ag.state.mn.us/Consumer/PressRelease/130820StopPatentTrolling.asp.

9. AIA, Pub. L. No. 112-29, § 8.

10. AIA, Pub. L. No. 112-29, § 6.

11. AIA, Pub. L. No. 112-29, § 5.

12. AIA, Pub. L. No. 112-29, § 19(c).

13. AIA, Pub. L. No. 112-29, § 16(b).

16. Intellectual Property: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality, GAO-13-465, Aug 22, 2013, available at http://www.gao.gov/products/GAO-13-465 (visited Nov. 21, 2013).

17. See 78 Fed. Reg. 61352.

18. “Patent Assertion Entity Activities Workshop” (“Workshop”) jointly conducted on December 10, 2012, by the FTC and the Department of Justice (“DOJ”).

19. 78 Fed. Reg. 61352.