Earlier today the House Judiciary Committee held another hearing on H.R. 9, which is more commonly referred to as the Innovation Act. One of the most controversial aspects of the Innovation Act is the so-called fee-shifting provision, which would establish a presumption that the losing party in patent litigation would have to pay the attorneys’ fees of the prevailing party. Other aspects of the Innovation Act would require more detailed complaints to be filed by the plaintiff in patent litigation, detailed disclosure of the real party in interest, limit discovery and give technology consumers the ability to stay patent litigation pending the completion of litigation against the technology creator.
Leading up to this hearing the Federal Circuit Bar Association send a letter to the Judiciary Committee together with a study of all cases where district courts have awarded attorneys fees since the Supreme Court issued decisions in Octane Fitness, LLC v. ICON Health & Fitness, Inc. and Highmark, Inc. v. Allcare Health Management System, Inc. Essentially, in these two cases the Supreme Court lowered the standard for awarding attorneys fees and also granted district courts broad discretion to do so where appropriate. The Federal Circuit Bar Association pointed out that in the year preceding these two landmark decisions only 13% of requests for attorneys fees were granted, but since 50% of requests for fees have been granted, directly calling into question the need for fee-shifting provisions that would create a presumption that fees should shift. This fact-based study could be game changing because it will give those interested in pressing pause every reason to want to allow more time to see whether there is any need for a legislative fix on this issue.
That being said, there did not seem to much desire today to press the pause button, although there was an ever so slight shift in the rhetoric used. There were statements recognizing the need to keep open legitimate avenues to for innovators to protect themselves against infringement, and a strong desire to make sure that legislation focus on bad actions and actors. Not surprisingly, the Committee seems to largely think that the Innovation Act does strike the proper balance, although there was also recognition that changes could be made to make the bill better. The fact that the Committee seems open to amendments, and Undersecretary of Commerce for Intellectual Property and Director of the U.S. Patent and Trademark Office, Michelle Lee seemed to support the need for some amendments, stands in rather stark contrast to previous statements that the bill would remain intact as it moves through the House.
Passing the Innovation Act is “something I consider central to US job creation and security,” Congressman Bob Goodlatte (R-VA), who is Chairman of the Judiciary Committee, explained as he began the hearing. “If we want to continue as leaders in the global economy we must encourage the innovators of today…” Goodlatte would go on to say, however, that “the rules of the road require regular adjustment,” arguing that it is necessary for Congress to periodically amend the Patent Act, and that this is one of those moments in time. He would also say in his opening statement that the Innovation Act, in his opinion, goes to the heart of the abuses seen in with patent litigation, citing specifically the abuses of shell corporations, for example.
Much of what Congressman Goodlatte said was not new; he is predictably strongly in favor of his own bill and believes it is exactly the right thing for the patent system and the U.S. economy. Goodlatte did, however, acknowledged that it is important to preserve valid enforcement tools for innovators, which is why it will be important to target abusive litigation behavior specifically, which he believes the Innovation Act does do. He would go on to say that the term “patent troll is more of an adjective that describes behavior… and not a noun.”
In closing his opening statement Congressman Goodlatte explained that he believes the Innovation Act “strikes the right balance” between innovators and those who need relief from abusive tactics. He also explained that it is his belief that if defendants must continue to “fight frivolous litigation they won’t have time for innovation.”
Congressman Jerrold Nadler, Ranking Member of the Judiciary Committee, also provided an opening statement. Nadler explained that the hearing is important because it “will allow us to examine the problem of abusive patent litigation.” He would also go on to cite the “wave of abusive litigation by patent trolls… to extort settlements.” Like Congressman Goodlatte, Nadler also explained that Congress “must be careful that the reforms included in this legislation do not cause unintended consequences.” He also acknowledged that it was possible that there would be changes to the bill, and that he hoped that this hearing would take steps toward providing information that could result in positive amendments being made to the bill.
Nadler also explained that he has long been a supporter of fee-shifting and that he believes that the Innovation Act strikes an appropriate balance that would protect those who bring “reasonable but ultimately unsuccessful claims.”
Based on the opening remarks of Congressman Goodlatte and Congressman Nadler, it seems that the House Judiciary Committee is open to considering changes to the Innovation Act, which is quite different than previous statements about the bill not changing. Further, it seemed to me that there was an acknowledgement that legislation should not unnecessarily burden innovators who are seeking redress for the infringement of their patents, which also seemed to be a slight shift in the position of the Committee. Finally, there seemed to be a defensive nature to the remarks by both Goodlatte and Nadler, particularly on the issue of fee-shifting.
The hearing was broken down into two parts with separate witness panels. The first segment saw Director Lee as the only witness.
“We are pleased that you have reintroduced the Innovation Act,” Lee explained as she started her testimony. Indeed, throughout her testimony he would time and time again explain that the Administration generally supports the provisions of the Innovation Act. She would also go on to generally say that she believes the final legislation should target abusive actions while not making it difficult for innovators to assert legitimate patent rights and address infringement.
On the issue of fee-shifting, Lee supported the provisions in the Innovation Act saying that “fault based fee-shifting will raise the costs for those who engage in abusive actions.” She would also go on to say that the Administration believes it is good policy for complaints to contain more information and also supports having a complaint explain how at least one claim is infringed, including statements that explain how allegedly infringing device incorporates each of the elements of that representative claim.
Lee also explained that the Administration generally support the bill’s proposal relative to customer stay provisions, although recognizing that “appropriate safeguards should be provided,” including perhaps having the customer asserting the stay to agree to be bound by the ruling in any litigation between the patent owner and the technology manufacturer. This proposal would require an amendment to the Innovation Act.
The one area where it did not seem that the Administration is on board with the Innovation Act is with respect to staying discovery until there is a claim construction ruling. “Discovery is a significant cost driver in litigation… but claim construction is complex and can be difficult to perform in a vacuum,” Lee explained. “Claim construction alone may not dispose of a case particularly where there is no discovery, “Lee said, which correctly recognizes that the district court would likely not be able to dispose of cases after claim construction rulings are issued when no discovery on the issue of infringement has occurred.
In response to a question from Congressman Goodlatte, it appeared as if Director Lee took something of a shot at universities, who strongly oppose fee-shifting provisions and the joinder provisions, which they fear would allow a university to be sucked into patent litigation against their will and ultimately on the hook for attorneys fees for actions they did not take or authorize. Lee explained that as much as universities play an important a role in the innovation ecosystem, “if you control or engage in abusive litigation you should be held liable, and should be able to be joined.”
Although Lee did say earlier that those who control or engage in abusive litigation should be liable, there was something about the way she answered that did suggest a bit of a disregard for the concerns of universities. Later on during her testimony, during the question and answer segment with Congressman Ted Deutch (D-FL), Lee would return to try and clarify what she said about universities.
Congressman Deutch explained that universities are fearful of the joinder provisions, and particularly so in conjunction with fee-shifting. Deutch asked: “Are the concerns of the Universities unfounded?” Lee responded that regardless of whether you are a university or a business, if you are actively investing in a business there should be liability, but when there is a passive investor “we should make sure that we do not expose them to liability.” Deutch pressed forward: “Are the universities wrong?” Lee replied, “If the universities are not controlling the litigation they should be protected.”
My own editorial comment about this exchange is that the wholehearted support for fee-shifting, particularly combined with joinder provisions, unfortunately does not seem to recognize the chilling impact fee-shifting will have on innovators, including universities. Numerous innovators explain that fee-shifting will cause them to likely choose not to seek to enforce rights through litigation. If that is the case, why they would they seek a patent in the first instance? Fee-shifting provisions, particular the presumptive fee-shifting represented in the Innovation Act, will provide a disincentive to seek a patent, which will have negative repercussions in terms of innovation and the funding of innovation.
Returning in time to Congressman Goodlatte’s question and answer time, he inquired: “What is the PTO doing from ensuring the IPR process is not being abused?”
Director Lee began by talking of the eight city listening tour she took and the quick fixes to the applicable rules that the Office has recently implemented. She would go on to say that where the Office can within the Congressional mandate, everything the Office can do to ensure IPR proceedings are fair is being done. Director Lee did not provide any specifics relating to ensuring against IPR abuse. My editorial comment here is that the lack of specifics from Lee is almost certainly due to the fact there is little or nothing the USPTO can do to stop IPR abuse given the way the statute is currently written.
During his questioning, Congressman Nadler seemed confused about why patent owners could not at the outset of litigation, in the complaint, identify each and every claim that is infringed. He asked Director Lee whether not asserting every claim that is potentially infringed would be some way deceptive. Director Lee did a good job answering this question and trying to explain the realities of patent litigation, but the question from Congressman Nadler suggests he is not familiar with patent litigation or the fact that at the outset of litigation it is not always possible to know each and everything that ultimately will be uncovered after discovery.
Congressman Issa asked about forum shopping, to which Director Lee explained that anything that can be done to prevent forum shopping should be done. Issa would also go on to ask Director Lee whether CBM should be extended? Director Lee seemed quite uncomfortable with the question, explaining that the intent was that the CBM procedure be limited in time. Congressman Issa attempted to follow up, but made more of a statement than a question, and after a bit of an awkward exchange the hearing moved on.
Congressman Conyers (D-MI), who said he had a number of amendments that he thought would make the Innovation Act better, asked Director Lee whether the joinder provisions risked chilling investment. Director Lee explained that was a valid concern because the fear of being brought into a patent infringement litigation could chill investment given the concern that investors might be held to be on the hook for a fee award.
Later on during the hearing, Congressman Hank Johnson (D-GA), pointed out that last term the Supreme Court decided a handful of patent cases leading up to a simple question: “Shouldn’t we wait to tip the scales in favor of infringers?” Lee responded: “We do need legislative reforms on certain issues that only Congress can address.”