“Patent Trolls” Beware – Congress Tackles Vexatious Patent Litigation

If the mainstream media is to be believed, the patent system is now “broken.”[1] This notion is frequently blamed on the perceived increase in so-called patent assertion entities (“PAEs”), referred to derogatorily in the press as “patent trolls.” More often than not, these media reports cite to a limited number of examples illustrating the perceived abuses, and reach the conclusion that patents are stifling innovation.[2]

The Governmental Accountability Office (“GAO”) came to a different conclusion, noting that even though there may have been an increase in PAE activity, there was no cause for alarm.[3] This study was based on both empirical evidence and data from all patent infringement lawsuits filed between 2000 and 2011.[4] In fact, the GAO noted that in both the federal courts and the Patent Office already seeking to correct the perceived problems.[5] Nevertheless, even if there is some disagreement about the severity of the problem, almost everyone is in agreement that there has been an increase in abuses associated with the assertion of patents.

In response to these concerns, both the executive and legislative branches of the U.S. government have been working on patent reform. For example, the White House released a report last June entitled “Patent Assertion and U.S. Innovation,” accompanied by several executive initiatives and legislative recommendations.[6] In addition, several pieces of legislation have been introduced in both the House and the Senate to address this perceived “patent troll” problem. As Sens. Leahy and Lee explained, the goal of such legislation is “to make it harder for bad actors to succeed, while preserving what has made America’s patent system great.”[7] The difficulty is in narrowly crafting such legislation to specifically address the perceived problems without also ensnaring legitimate patent holders, and without introducing unexpected negative consequences for the patent system as a whole.

The House of Representatives has already passed legislation to curb abusive patent litigation. Rep. Goodlatte introduced the “Innovation Act” (H.R. 3309) on October 23, 2013, and with remarkable speed, the bill was passed by an overwhelming majority of the House on December 5, 2013.[8] The Senate has not acted as quickly, but several key pieces of legislation have been introduced. One of these, Sen. Hatch’s “Patent Litigation Integrity Act” (S. 1612), is aimed at shifting reasonable fees from the prevailing to the non-prevailing party.[9] In addition, Sen. Leahy, along with Sens. Lee and Whitehouse, introduced the “Patent Transparency and Improvements Act” (S. 1720).[10] Action on one or more of these introduced bills is expected later this year. Of the provisions found in these legislative initiatives, two that are touted as necessary to address the perceived “patent troll” problem involve fee-shifting and heightened pleading standards for patent lawsuits.

Fee-Shifting Provisions

The perception is that “patent trolls” are flourishing because there is virtually zero cost in bringing or threatening a patent infringement lawsuit. This is because even if a patent holder is unsuccessful against an alleged infringer, it is rarely required to pay the fees of the winning party. Moreover, PAEs often have a fraction of the discovery costs, because the documents related to obtaining the patent are commonly retained by the original assignee. As a result, even successfully defending against a patent infringement suit can cost millions of dollars, thereby creating an overwhelming incentive for the accused infringer to license the patent at the outset. As President Obama put it last year, “patent trolls” are essentially trying to “leverage and hijack somebody else’s idea and see if they can extort some money out of them.”[11] One solution is to make it easier for courts to shift the cost of attorney’s fees to the non-prevailing party, and there are several ways in which this can be accomplished.

Currently, 35 U.S.C. § 285 provides that a “court in exceptional cases may award reasonable attorney fees to the prevailing party.”[12] The Federal Circuit has held that a case is only exceptional when “both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless,” absent misconduct in litigation or in securing the patent.[13] However, Chief Judge Rader recently argued that the “court should return to the rule that a district court may shift fees when, based on the totality of the circumstances, it is necessary to prevent a gross injustice,” thereby eliminating the need to parse evidence into subjective and objective categories.[14] This proposal comes as the Supreme Court is set to hear two cases dealing with the fee-shifting provision of § 285. In one, Octane Fitness v. Icon Health and Fitness, the issue was framed to address this exact issue: “does the Federal Circuit’s promulgation of a rigid and exclusive two-part test for determining whether a case is ‘exceptional’ under 35 U.S.C. § 285 improperly appropriate a district court’s discretionary authority to award attorney fees to prevailing accused infringers in contravention of statutory intent and this Court’s precedent . . . .”[15] Chief Judge Rader had previously spoken out about the fee-shifting provision, complaining that federal judges were not using § 285 with sufficient regularity to discourage “troll”-like behavior.[16] Therefore, it is possible that the Judiciary itself will partially rectify the problem.

The Executive Branch has suggested taking it a step further. Included in President Obama’s legislative recommendations was one aimed at permitting “more discretion in awarding fees to prevailing parties in patent cases.”[17] The hope was to make fee shifting in patent cases “similar to the legal standard that applies in copyright infringement cases.”[18] In copyright cases, there is no exceptional-case requirement, but rather a court may “award a reasonable attorney’s fees to the prevailing party as part of the costs.”[19] Without the exceptional-case requirement, the barrier to obtaining attorney’s fees in patent infringement suit would be much lower, thereby creating a disincentive for “patent trolls.”

The Congressional approach goes even further. In both the Innovation Act and the Senate’s Patent Litigation Integrity Act, § 285 would be modified to make the shifting of fees in patent cases the default, which could only be overcome by a showing that the litigation conduct was justified. The Innovation Act provides for the award of reasonable fees to the prevailing party unless “the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact or that special circumstances . . . make an award unjust.”[20] The Senate’s version of this provision has an even higher standard, requiring the conduct to be “substantially justified.”[21] This shift in the default would provide courts with the ability to “punish” non-practicing entities that are considered to have asserted their patents abusively. However, such a change could have unintended consequences. For example, legitimate patent infringement lawsuits could be stifled, regardless of whether the patent holder is a practicing entity or not. Nevertheless, organizations such as the Intellectual Property Owner’s Association have come out in favor of this default shift.[22]

The Senate’s bill also includes a provision not found in the Innovation Act for how to hold the patent-asserting plaintiffs accountable for such fees. S. 1612 provides courts with the ability to require bonding by the “party alleging infringement.”[23] Factors are provided to help determine whether such a bond is “unreasonable or unnecessary,” such as whether the party is an institution of higher learning, whether the party is the named inventor or original assignee, or whether the party practices the invention.[24] Such a provision, however, could result in the establishment of a patent enforcement system with two classes of plaintiffs – those for whom there are no upfront costs, and those for whom there is an “entry fee,” which could run in the millions of dollars. Even the White House has acknowledged the economic justification for non-practicing patent intermediaries, because they can help innovators that do not have the resources to capitalize their own inventions.[25] Such a “bond” provision could have a chilling effect on legitimate patent asserting entities, and therefore the unintended consequences of hindering innovation. Sen. Hatch has defended this provision by noting that fee-shifting without this option “is like writing a check on an empty account,” likely because “patent trolls” often have limited assets, and therefore would be “judgment proof” with regard to fee-shifting.[26] Therefore, he has insisted that a bonding provision is necessary in any legislation dealing with “trolls.”[27]

Heightened Pleading Standards

“Patent trolls” are also thought to be flourishing because to bring a patent infringement suit requires only notice pleading as set forth by Form 18. Therefore little more than a statement of jurisdiction, the patent being asserted, and the alleged infringing product or action needs to be disclosed for the complaint to be sufficiently pleaded. The Innovation Act and the Senate’s Patent Transparency and Improvements Act would shift the system from “notice” pleading to requiring information resembling that included with infringement contentions not normally provided until much later in a litigation. For example, the type of information required by a patent-asserting party would include an identification of each patent and claim allegedly infringed, where each element is found in each “accused instrumentality,” whether infringement is literal or under the doctrine of equivalents, and how the claim terms correspond to the functionality of the accused instrument.[28] It is unclear if claim charts will be required to satisfy this pleading requirement. The new pleading standard will also require a description of any direct or indirect infringement, the right of the party to assert the patent, an identification of lawsuits involving the same patent(s), and whether the patent is subject to any licensing terms or pricing commitments.[29]

On the one hand, requiring a more detailed statement of alleged infringement seems reasonable. However, with heightened pleading standards, a patent infringement suit could get mired in a challenge to the sufficiency of the pleadings before ever addressing the merits of the case. The Act does not specify the level of detail required, nor the penalty for failing to meet the new standard. Although parties normally have the right to amend a complaint once, it is not clear if leave will be freely granted if more than one is needed. Will an amended complaint be required if the patent holder’s infringement contentions are modified after discovery? Will limited discovery be allowed if the alleged infringer challenges the sufficiency of the complaint? None of these issues have been addressed.

The Innovation Act does address the situations where the information necessary to satisfy this heighted standard is not readily accessible to a party. The Act provides that a patent holder can explain why the undisclosed information was not available and the efforts undertaken to obtain the information.[30] Of course, it is unclear what standard that the courts will use to determine if information is, in fact, unavailable, and whether research efforts were satisfactory.

Of course, applying a heightened pleading standard to all patent cases could easily be a double-edged sword. It would likely have the effect of reducing the number of vexatious patent “fishing expeditions,” in which minimal pleadings permit a plaintiff to conduct extensive (and expensive) discovery in search of a theory of infringement. On the other hand, it could discourage legitimate suits where infringement is likely to exist, but the exact theory of infringement requires at least some discovery to nail down.

Ultimately, these attempts to solve the “patent-troll” problem through legislative initiatives such as fee-shifting and heightened pleading standards are problematic because Congress has not attempted to define what a “patent troll” is. Without a clear understanding of the threat, any attempt to curtail it is bound to have unintended consequences. As such, all patent holders need to pay attention to determine the impact of this new legislation.