Patent Reform 101 – A Primer on Pending Patent Legislation

It wasn’t so long ago when President Obama signed the America Invents Act (AIA) into law. Most watchers will tell you that the AIA represented the most substantive change to U.S. patent laws since 1952, but its impact was really far greater. With a single exception the 1952 Patent Act codified existing case law into a coherent and mandatory set of laws. The AIA threw out one patent regime and substitute it with an entirely new system. Regardless of how you choose to characterize the magnitude of the AIA, many in the industry thought that patent reform efforts would go on hiatus for another generation, or two, as it had done between 1952 and 2011.

Behind the scenes further patent reform efforts were already underway even as the ink on the AIA was still wet. Patent reform is the new normal and we can expect that it will continually be raised in every new Congress for the foreseeable future. Efforts to reform the patent system were stalled in the 113th Congress largely thanks to two decisions from the United States Supreme Court that made it easier for district court judges to award attorneys fees in appropriate circumstances, a new tool that judges have availed themselves of generously, nearly quadrupling the number of attorneys fees awards in the year after those seminal decisions.

Immediately after Republicans regained control of Congress in the 2014 mid-term elections leaders in both the House of Representatives and Senate vowed to take up patent reform early in the 114th Congress. They were true to their word, although producing the quick results they wanted has proven difficult given the strong push to curb the appetite for reform and to allow the system some time to settle.

Currently there are four serious proposals for patent reform in various stages of consideration in Congress. They are: (1) The Innovation Act; (2) The TROL Act; (3) the STRONG Patents Act; and (4) the PATENT Act. There is also another bill – the Innovation Protection Act – that likely has no chance of passing but which is eminently reasonable. A summary of each of these five bills follows, along with one thing to watch for which could completely upset all predictions. For more on patent reform please see Capitol Hill.

[Patent-Reform]

Innovation Act

On February 5, 2015, House Judiciary Committee Chairman Congressman Bob Goodlatte (R-VA) bypassed the IP Subcommittee and reintroduced the Innovation Act, which passed in the House during the 113th Congress but then failed in the Senate. The Innovation Act includes fee-shifting provisions, which provide that the loser of patent infringement litigation would have to pay the attorneys fees of the winner unless the loser’s positions are found to have been objectively reasonable. Fee-shifting provisions have been a major stumbling block for the Innovation Act. There also remains an open question about whether fee-shifting is necessary given recent Supreme Court rulings giving district courts broader discretion to award attorneys fees, and the reality that a large majority of defendants simply choose to settle rather than fight patent infringement lawsuits to a conclusion, which would be required to obtain fees.

The Innovation Act also contains provisions that would heighten pleading standards on patent plaintiffs beyond what is necessary to institute a patent infringement lawsuit. The Innovation Act also includes the so-called “customer-stay provision,” which seeks to customers from patent litigation lawsuits more appropriately brought against the manufacturer of the allegedly infringing product. The customer stay provisions have become another major stumbling block. The Innovation Act defines the term “covered customer” as “a party accused of infringing a patent or patents in dispute based on a covered product or process.” The term “covered product or process” is defined as “a product, process, system, service, component, material, or apparatus, or relevant part thereof, that: (A) is alleged to infringe… or (B) implements a process alleged to…” Thus, it would be possible for large tech companies to stay patent litigation and force patent owners to seek redress from the manufacturers of infringing components or products, which may be impossible given that so many manufacturers are overseas and not susceptible to legal process in the United States.

Congressman Goodlatte may have a hearing or markup with respect to the Innovation Act at some point during the week of May 11th, although rumors of an impending markup have leaked previously and ultimately proved to be incorrect. There are some who are starting to suspect that the Innovation Act has become too controversial. There are even whispers that the Innovation Act may not be able to make it out of the House Judiciary Committee, which would explain why the much anticipated markup has yet to happen. Obviously, there has been a strong headwind against the bill or it would have been voted out well before this. Still, it would be shocking if the Innovation Act does not make it out of Committee given that the same bill passed by a vote of 325-91 in December 2013.

For more on the Innovation Act please see:

TROL Act

The Targeting Rogue and Opaque Letters Act, more commonly referred to as the TROL Act, was introduced during the 113th Congress and passed the House Commerce Subcommittee with bipartisan support. The TROL Act addresses the sending bad faith patent demand letters, clarifying that such activity may violate the Federal Trade Commission Act. The Act defines bad faith as either applying to false or misleading statements or omissions, whether knowingly false, made with reckless indifference to the truth, or made with an awareness of a high probability that the statements or omissions would deceive the sender intentionally. The TROL Act also further authorizes the FTC and state attorneys general to bring actions to stop the abusive behavior, but also provides a good faith affirmative defense. The Act would further preempt any state law or regulation expressly relating to the transmission or contents of communications relating to the assertion of patent rights.

On April 29, 2015, the House Committee on Energy and Commerce voted to approve the TROL Act by a vote of 30-22. This vote means that the TROL Act will be favorably reported out of Committee and now moves on for consideration by the full House of Representatives. The TROL Act being the first bill to get voted out of Committee is at least a little surprising given the Innovation Act passed the entire House by more than a 3 to 1 margin in December 2013, and further given how Republican leaders in the House promised to move the Innovation Act quickly during the 114th Congress.

For more on the TROL Act please see:

Innovation Protection Act

The Innovation Protection Act is one of the lesser-known patent reform bills, but like several of the other bills it has been percolating in Congress over the past few years. The bill, which was introduced in April 2015 by Congressman John Conyers, Jr. (D-MI), would provide a source of permanent funding for the USPTO.  The fees collected by the USPTO would remain available to the USPTO until expended. This common sense idea has been floated for years, but it never seems to go anywhere. Appropriators have been unwilling to commit to allowing the USPTO to keep user fees, diverting over $1 billion in user fees from the USPTO since 1992 according to the Intellectual Property Owners Association. Conyers has characterized fee diversion as “a tax on innovation.”

The Innovation Protection Act would go further than the fee provisions contained in the America Invents Act (AIA). The AIA did create a revolving fund for use by the USPTO, but whether and how much the USPTO can spend is still governed by appropriators. The Innovation Protection Act is cosponsored by Congressman Jim Sensenbrenner (R-WI), Congressman Jerrold Nadler (D-NY), Congressman Trent Franks (R-AZ), Congresswoman Zoe Lofgren (D-CA), Congressman Doug Collins (R-GA), Congressman Ted Deutch (D-FL), Congressman Dana Rohrabacher (R-CA), and Congressman Hakeem Jeffries (D-NY).

[Varsity-2]

STRONG Patents Act

Senators Chris Coons (D-DE), along with co-sponsors Dick Durbin (D-IL) and Mazie Hirono (D-HI) submitted The Support Technology and Research for Our Nations Growth Patents Act, or the STRONG Patents Act, on March 3, 2015. The STRONG Patents Act would make a variety of changes to post grant administrative proceedings that the Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademark Office (USPTO), including requiring the PTAB to abandon the broadest reasonable interpretation standard (BRI) and mandating that claims be presumed valid. The Act would also eliminate fee diversion, make it easier to obtain willful damages, make divided infringement actionable even if not all steps are practiced by a single entity, and give the Federal Trade Commission (FTC) greater ability to go after those who send fraudulent or misleading demand letters, but creates a good faith defense. The bill would also eliminate Form 18 of the Federal Rules of Civil Procedure, which has already been proposed by the Judicial Conference. The STRONG Patents Act is supported by the Biotechnology Industry Organization (BIO), the Innovation Alliance, and at least several major university groups.

It is worth noting that the STRONG Patents Act is similar to several other pending pieces of legislation in the House of Representatives. More specifically, the Innovation Protection Act reintroduced by Congressman John Conyers (D-MI) would similarly put an end to fee diversion. The TROL Act (discussed below) also seeks to target fraudulent and abusive demand letters.

For more on the STRONG Patents Act please see:

PATENT Act

Without question, the Protecting American Talent and Entrepreneurship (PATENT) Act has the most misleading name. Introduced on April 30, 2015, by Senator Grassley (R-IA) and Senator Leahy (D-VT), the bill has nothing to do with talent or entrepreneurship, but everything to do with patents. Whoever came up with this name had to really stretch so that the acronym would spell out the word “patent.”

In any event, the bill would establish higher pleading standards for patent infringement complaints, which the sponsors say would give defendants real notice of the claims against them. The bill also contains a controversial customer stay provision similar to the one found in the Innovation Act. This could prove to be a huge stumbling block because the way the provisions are written even the largest tech companies could move to indefinitely stay patent litigation because they are themselves consumers (i.e., have purchased something from another manufacturing company). The PATENT Act also requires district courts to stay discovery while early dispositive motions (i.e., motions to dismiss and motions to transfer venue) are being considered. The bill would also direct the Judicial Conference to develop rules about how much a party should bear the cost of discovery beyond what is considered core for the case. Fee shifting is one area where there is a meaningful difference between the PATENT Act and the Innovation Act. While the Innovation Act creates a presumption that the loser should pay the attorneys fees of the prevailing party unless there is a finding that the losing party pursued only reasonable theories in the case, the PATENT Act would shift fees only if the prevailing party proves that the losing party was not “objectively reasonable.” This is a subtle but important difference, although fee shifting in any form can be expected to generate real opposition. Finally, the bill would also require the United States Patent and Trademark Office (USPTO) to keep information about patent ownership in order to provide a resource about patents being asserted in a demand letter or lawsuit. Those who watch the USPTO know that this was on the agenda for rulemaking, but after receiving enormous opposition from patent owners with large portfolios rulemaking plans were scuttled.

For more on the PATENT Act please see:

On the horizon – Kyle Bass Reform

Hedge fund manager Kyle Bass has come up with a creative, moneymaking strategy that focuses on invalidating pharmaceutical patents. According to the Wall Street Journal, Bass targets pharmaceutical companies who have a large portion of their revenues coming from one patented drug. Bass shorts the company in advance of filing an Inter Partes Review (IPR) at the USPTO challenging the propriety of the patent. The pharmaceutical and biotechnology industries are livid about what many refer to simply as “the Kyle Bass problem.” BIO expressed extreme disappointment with the PATENT Act because it did not contain an IPR fix to the Bass problem, although the BIO statement on introduction of the PATENT Act suggests that they have some assurances from Senators that an IPR fix will be considered in amendments.

Virtually everyone believes there will ultimately be a legislative fix to the Kyle Bass problem. The fix could become quite complicated though, so there is some doubt about how quickly a fix will come. If a suitable legislative fix were to be incorporated into the PATENT Act that would virtually assure that pharma and bio would put their considerable lobbying might behind the legislation, which would give it momentum that could be hard to stop in the Senate. Given that the Obama Administration supports the PATENT Act, pharma and bio support could place it on a fast track to becoming law.

For more on this please see Patent Abuse of Genius? Is Kyle Bass Abusing the Patent System?

[Program-Endnote]