‘Patent Reform’ Tips Power in Favor of Infringers and Against Small Businesses

Part I of this five part series focused on the national economic impact of the pending patent reform bills.  These included the disincentive to invent, job losses, shifting jobs overseas, and loss of American wealth.  Part II looked at the impacts of “Loser Pays,” “Pay to Play,” and “Fee Shifting-Joinder” provisions.  Part III talked about Covered Business Methods (CBM) and Elimination of Post Grant Review Estoppel.  Part IV discusses the mechanisms of how the other provisions of the bills will make us poorer and kill jobs for ourselves and our children. Part V will summarize our discussion.

In this Part IV, we will discuss:

• Disclosure of All Plaintiff Interested Parties;
• Enhanced Pleadings and Limiting Discovery, and
• Customer Stays.

While some of these provisions may seem to make sense on their surface, and tailored to provide greater transparency, the reality is that the provisions are extraordinarily burdensome. For example, as written one proposal would require a corporation bringing a patent infringement lawsuit to disclose every stockholder, even if they only own a single share. Furthermore, by micromanaging patent litigation, discretion will be taken away from district court judges while at the same time onerous obligations are placed on small businesses before they can even begin to assert patent infringement.  This is additionally problematic, as so many entities already knowingly choose to infringe rather than negotiate licenses or engineer around patent rights.  Finally, customer stays will prohibit some patent holders from ever receiving a remedy.

Disclosure of All Plaintiff Interested Parties requires both investors and licensors to be disclosed.  This will discourage commerce in two ways.  First, in the early stages of company formation, it will require Angel investors to break one of their major tenants, secrecy.  Angel groups are formed to provide anonymity.  This provision will discourage Angels from investing in the smallest companies, when outside funding is hardest to obtain.  Secondly, it will dampen licensing activities.  When a licensee needs time to incorporate the licensed invention into their product, they normally do not want to alert their competition as to where they are moving in the market.  This will disclose the fact that the licensee is adding a new feature or an entirely new product line.

The Patent Transparency and Improvements Act of 2013 (S.1720) requires making the ownership of patents transparent at two times. First, any patentee that files an action in Federal Court would be required to disclose any and all persons that have a financial interest.  So, every person with one share of stock would need to be disclosed. [Requiring the use of 28 U.S.C § 455(d), which is the section of the U.S. Code that addresses the disqualification of federal judges, defines “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.”  As a result, a publicly traded corporation bringing 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.  It is particularly bad for small companies who have tapped friends and family, who may have required secrecy about their investment to keep family harmony.  Now, those relationships will have to be disclosed to the world.

The bill also requires an assignment disclosure 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. 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.”

Enhanced Pleadings and Limiting Discovery – HR 3309 and other bills (S.1013) have a provision that dictates enhanced pleadings requiring that the plaintiff produce substantially more information, and a provision limiting discovery prior to claim construction. Patent suits are among the most complicated and detailed, with many variables. The trial judge is the closest to the case and legislating how that judge manages the case will damage the trial judge’s ability to bring a fair solution to both parties. What’s more, both of these changes affect the inventor negatively and the infringer positively, thus stacking the deck even further against the inventor. In an already expensive and complicated process, these two elements require the patent holder to spend more money up front and operate with less information than is needed. These are particularly onerous to small business inventors as they curtail the patent holder’s ability to enforce a patent and reduce the ability of the judge to manage the case effectively.

In addition to legislating court procedure, enhanced pleadings will cause delays in filing suit and add additional costs.  It is anticipated that there will be more disputes about the adequacy of the complaints which will also increase the cost of litigation.  And, limited discovery will “delay resolution” to the “disadvantage of patent owner” even with “meritorious claims” thus the “alleged infringer is incentivized to draw out” the claim construction ruling.

Currently, the Federal rule governing pleadings “‘generally requires only a plausible short plain statement of the plaintiff’s claim,’ showing that the plaintiff is entitled to relief.”[i] The In re Bill of Lading opinion held that for patent infringement, the complaint need not “plead facts establishing that each element of an asserted claim is met” nor “even identify which claims it asserts are being infringed.”[ii] The plaintiff must merely follow Form 18 as set forth by the Federal Rules of Civil Procedure and include “a statement that defendant has been infringing the patent ‘by making, selling, and using [the device] embodying the patent.’”[iii]
Under the Innovation Act (HR 3309), the complaint must include a detailed description of patent infringement. This is before the patent holder is able to do any discovery, so unless the infringement is obvious, the patent holder may not know the precise method of infringement. Thus, the Innovation Act effectively reverses In re Bill of Lading and specifically abolishes Form 18.[iv]

This is a significant new burden and trap for small businesses, as the pleadings must be detailed before discovery.  At best, this will delay justice for the small business, and add to the cost.  At worst, it will deny justice for the small business as they will not be able to properly ascertain all of the details of infringement prior to performing discovery, and after discovery it will be too late to amend the pleadings.

The Innovation Act would require the complaint to include, for each accused instrumentality, an “identification of each claim of each patent . . . that is allegedly infringed,” the name or model number (if known), and a detailed explanation of where each element of the claim is found in the accused instrumentality.[v] The complaint would also be required to explain, “with detailed specificity, how each limitation of each claim . . . is met by the accused instrumentality.”[vi]

HR 3309 requires the Complaint Must Identify and Explain Any Missing or Inaccessible Information.  If the information required to plead patent infringement with specificity is not “reasonably accessible,”  the plaintiff is required to include in the complaint “a description of any [such] information . . . , why such undisclosed information was not readily accessible, and the efforts made by such party to access such undisclosed information.”[vii]  However, current local rules usually allow defendants move to strike deficient contentions or move for a more definite statement. Thus, infringer Defendants would likely use this against patent plaintiffs alleging deficient pleadings, moving to dismiss the complaint for failure to state a claim upon which relief may be granted. This will be particularly onerous for small business inventor plaintiffs with limited budgets.

 “Core Documentary Evidence” is a concept introduced by the Innovation Act and limits most discovery to only certain documents.[viii]  S.1013 requires that any information beyond the core documentary evidence be paid by the requesting party.[ix]   Once again, this penalizes inventor plaintiffs and helps infringer defendants by limiting the discovery.  It also increases the cost to the inventor by requiring payment for the other side’s discovery costs and legal fees in advance or posting of a bond.  This is particularly difficult for small business inventors.  S.1013 also limits electronic discovery and prohibits discovery of “electronic communication, such as email, text messages, instant messaging, and other forms of electronic communication, unless the court finds good cause for including such computer code or electronic communication.”[x] This language will shield infringer defendants.

Customer Stays present a problem for patents that focus on “use” rather than manufacture.  The inventor is left with no way to enforce her patent when she can’t sue a manufacturer as the manufacturer is not violating any claims of the patent, and they can’t sue the end users (“Customers”) until she prevails against the manufacturer.  This may put the inventors in a Catch-22, where they will have no remedy.

David J. Kappos, the former Director of the USPTO, writes[xi]:

The problem [with customer stays] is that many modern products are built by assembling component parts from different sub-manufacturers — in some cases hundreds or thousands of parts like memory chips, connectors, processors, displays, cases, fasteners, etc. As drafted, the law is so broad that it would hand out “get out of jail free” cards within these networks of sub-manufacturers, including the infringing product’s actual manufacturer, instead of just protecting consumers and retailers.

This untargeted approach invites clever patent infringers — including foreign manufacturers, assemblers and parts suppliers — to conspire with one another, arranging for the lowest value, least accessible, least answerable party to handle suits for patent infringement instead of the product’s actual manufacturer having the liability. That would make it considerably more difficult for innovators like ATI to stop patent infringers, who under the proposal would be able to hide behind complicated assembly and manufacturing chains. …

Perhaps this gambit would be understandable if our laws contained no mechanism to correct situations where suits fail to focus on the most appropriate party. But that is not the case. In fact, every federal court already has the power to “stay” patent litigation against an inappropriate defendant in favor of a more appropriate one. And the data shows that, with few exceptions, courts have succeeded in granting stays in the customer/manufacturer cases cited as the rationale for this provision.

Due to space limitations, the comments in Parts II, III, and this Part IV just touch the surface of the problems with the proposed legislation.  For a more thorough discussion, please see SBTC’s 24-page letter to the Office of Advocacy at the SBA at http://sbtc.org/wp-content/uploads/2014/02/Letter-to-Office-of-Advocacy-regarding-Patent-Reform-2-13-2014-final.pdf .

Part V will summarize the issues and provide commentary on alternatives to the proposed legislation that will not harm America’s Invention Ecosystem.

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About the Authors

Robert N. Schmidt is Chairman and CEO of Cleveland Medical Devices, Inc., a company that develops, manufactures and markets sleep disorder products. Schmidt is also the National Co-Chair of the Small Business Technology Counsel (SBTC), which is a Council of the National Small Business Association (NSBA).

Heidi Jacobus is Chairman and CEO of Cybernet Systems Corporation, which is a leader in American research and development in the medical and defense fields and is one of the country’s largest Small Business Innovative Research (SBIR) contract winners. Jacobus is also the National Co-Chair of the Small Business Technology Counsel (SBTC), which is a Council of the National Small Business Association (NSBA).

Jere W. Glover is Of Counsel to the Washington, DC, firm of Seidman & Associates. Glover is also the Executive Director of the Small Business Technology Counsel (SBTC), which is a Council of the National Small Business Association (NSBA).