The Innovation Act

by McDermott Will & Emery
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On December 5, 2013, the House approved the Innovation Act, H.R. 3309, primarily intended to address abusive behavior by patent owners in infringement litigation. The bill passed by a bipartisan vote of 325-91.

Although the avowed purpose of the legislation is to control litigation by so-called patent trolls (A.K.A. non-practicing entities, or NPEs), the provisions focus on specific litigation behaviors and thus would affect all patent cases, regardless of the nature of the patent owner.  The most controversial provisions would create a “loser pays” scheme in most cases and would dictate litigation discovery timing and content.  Other, less controversial provisions, require greater transparency with regard to patent ownership, and impose more demanding requirements for pleading patent infringement.

Pleading Disclosures

The House bill would require that complaints for patent infringement identify, among other things, each patent and claim asserted, the accused device or process, model numbers for accused devices and how each asserted claim is found within the accused apparatus or process.  In addition, the bill would impose a requirement that the patent owner describe its right to assert the patent, describe its principal business and list other complaints asserting the patents in suit and any licenses covering those patents through any agency or standard-setting body.  If a patent owner cannot satisfy these requirements, it must state what is not disclosed, why it is not disclosed and that efforts were made to access the undisclosed information. Confidential information could be filed under seal.

Loser Pays

Among the most controversial provisions in the House bill is a provision that would require courts to award attorneys’ fees to the prevailing party in any patent litigation unless the position and conduct were “reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.”  If the non-prevailing party cannot pay, fees may be recoverable from a joined interested party. Infringement complaints under the Hatch-Waxman Act are exempted from this provision.

Discovery

Subject to certain exceptions, if a district court that concludes claim construction is required, under the House bill it must limit discovery to determining the meaning of claim terms, including “any interpretation of those terms used to support the claim of infringement,” until a claim construction decision is issued.

Transparency

Except in the context of Hatch-Waxman Act cases, the House bill requires the patent owner/plaintiff (on an ongoing basis) to disclose to the U.S. Patent and Trademark Office (USPTO), to the court and to each adverse party the following: any assignee, any entity with a sublicense or enforcement rights, any entity with a financial interest in the patent and the ultimate parent of any assignee.  An entity would have a “financial interest” if it has the right to receive proceeds with regard to the asserted patent, and direct or indirect ownership of more than 5 percent control of the plaintiff in the action.

Customer Suits

Under the House bill courts must grant a motion to stay an action against a “covered customer” if the customer and “covered manufacturer” give written consent, the covered manufacturer is a party or is in a separate action on the same patent or a patent related to the same covered product and  the covered customer agrees to be bound by the decision in the action against the covered manufacturer. The motion to stay must be filed within 120 days of service of the first pleading specifically identifying the covered product. To protect the covered customer, if the covered manufacturer enters into a consent judgment on common issues that gave rise to the stay, or declines to prosecute through appeal a final decision on common issues, the consent judgment or unappealed final decision would not be binding on the covered customer if it would unreasonably prejudice or would be manifestly unjust.

An amendment in the form of a substitute bill that would have more closely mapped to the Senate version was defeated by a vote of 258-157. The roughly equivalent bill in the Senate, the Patent Transparency and Improvements Act (S. 1720), introduced by Sen. Patrick J. Leahy (D-Vt.),  is a less ambitious version of the House bill, but is proceeding at a slower pace.  S. 1720 does not include the provisions that would force patent infringement case management rules on the district courts or procedures as to pleading, discovery timing and limits, cost-shifting related to discovery or loser-pays fee shifting.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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