White House Issues Executive Actions and Legislative Recommendations Aimed at Patent Assertion Entities

by Wilson Sonsini Goodrich & Rosati
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Recognizing a problem that has long plagued Silicon Valley technology companies, on June 4, 2013, President Barack Obama issued executive actions and legislative recommendations "to protect innovators from frivolous litigation and ensure the highest-quality patents in our system." The announcement by the White House describes patent assertion entities (PAEs) as companies that, in the president's words, "don't actually produce anything themselves" and that instead "essentially leverage and hijack somebody else's idea and see if they can extort some money out of them." Notably, the announcement refers to these entities as "patent trolls" and refers to the operating companies accused of infringement as "innovators." While the announcement is sure to have a positive impact on the national dialogue regarding this problem and may spur legislative action, it will not have an immediate impact on patent-troll litigation.

The White House's initiatives generally are aimed at the following goals: improving patent quality, increasing transparency in the patent system, curbing the most egregious lawsuits, improving the processes at the International Trade Commission (ITC), and education and outreach. The announcement follows increased congressional activity introducing bills targeting PAEs and President Obama's comments regarding PAEs during a recent Fireside Hangout. The current state of affairs, proposed changes, and the likely impact of these initiatives are discussed below.

Executive Actions

  1. Making "Real Party-in-Interest" the New Default: The United States Patent and Trademark Office (PTO) will put rules in place requiring patent applicants and owners to provide information regarding patent ownership when involved in PTO proceedings, including designation of the "ultimate parent entity" owning a patent. Today, PAEs often operate through shell companies that prevent defendants from knowing who the real parties-in-interest are and the extent of the patent portfolios they control. These shell companies are also sometimes used to avoid personal jurisdiction and to defeat declaratory judgment jurisdiction. Though it frequently is possible to determine who is behind a PAE through research, these new rules should result in greater transparency and hinder abusive PAE tactics, including repeat actions by the same patent owners.
  2. Tightening Functional Claiming: The PTO will apply greater scrutiny to functional claiming and develop strategies to improve claim clarity. PAEs frequently have used patents with overly broad claims—particularly in the case of software patents—to allege infringement by wide swaths of products far afield from that to which the patent was intended to apply. These battles typically play out in costly claim construction proceedings more than a year into litigation. New rules limiting functional claims to actual disclosures in patent specifications and their equivalents could prevent over-claiming and, in the long term, address the patent thicket plaguing software innovation.
  3. Empowering Downstream Users: The PTO will provide new educational materials. PAEs increasingly have targeted retailers, consumers, and end-users for doing nothing more than using off-the-shelf products in their intended manner in an effort to obtain multiple settlements in lieu of a single settlement with a product's manufacturer and to establish favorable licensing frameworks to use in future litigation. The PTO's outreach efforts may increase public knowledge regarding PAE activity, particularly for the most unsophisticated of targets, enabling them to better understand their options prior to acquiescing to a costly license.
  4. Expanding Dedicated Outreach and Study: The PTO is announcing an expansion of its outreach efforts, including six months of high-profile events across the country to develop new ideas and consensus around updates to patent policies and laws. The PTO also is enlisting distinguished academic experts to develop more robust data and research on the issues bearing on abusive litigation.
  5. Strengthening Enforcement Process of Exclusion Orders: An interagency review of Customs and Border Protection (CBP) and International Trade Commission (ITC) procedures for evaluating the scope of exclusion orders will take place to ensure that the process and standards for exclusion-order enforcement are transparent, effective, and efficient. ITC practitioners long have recognized the need for an improved process to make the ITC's unique remedy more effective once it has been issued. Today, if the ITC determines that a violation of the statute has occurred, it issues an exclusion order. But an ex parte proceeding before Customs or a lengthy ITC enforcement proceeding are the only options should questions regarding the scope and enforcement of that exclusion order arise once it is in force.

Legislative Recommendations

  1. Requiring Patentees and Applicants to Disclose the "Real Party-in-Interest": In addition to the executive action discussed above, the White House recommends legislation that would require filing updated ownership information when sending demand letters, filing an infringement suit, or seeking PTO review, and proposes sanctions for noncompliance. The impact of this legislation would be similar to, but more robust than, that discussed above.
  2. Permitting More Discretion in Awarding Fees to Prevailing Parties in Patent Cases: Proposed legislation would provide district courts with greater discretion to award attorneys' fees under 35 U.S.C. § 285 as a sanction for abusive court filings, similar to the legal standard that applies in copyright cases. Though the Federal Circuit recently has awarded sanctions for the maintenance of infringement litigation following claim construction that indicated no objective basis on which to proceed, the standard remains that attorneys' fees are awarded in only "exceptional" cases—that is, when a case has been found to involve subjective bad faith and be objectively baseless. The proposed legislation may help curb abusive litigation practices by PAEs. It is, however, unlikely to help innovators with limited resources, as in order to eventually recover fees, a litigant first must be able to litigate a case through judgment and prevail.
  3. Expanding the USPTO's Transitional Program: The White House recommendations would expand the PTO's transitional program for covered business method (CBM) patents to include a broader category of computer-enabled patents and to permit a wider range of challengers to petition for review of issued patents. The recommendations would provide a mechanism for challenging a broader category of patents and would enable the PTO to weed out bad CBM patents even absent litigation in district courts.
  4. Protecting Off-the-Shelf Use by Consumers and Businesses: The White House recommends legislation affording end-users better legal protection against liability for using an off-the-shelf product for its intended use. Such legislation would stay judicial proceedings against end-users when an infringement suit also has been brought against a vendor, retailer, or manufacturer. PAEs increasingly have targeted consumers and end-users. Although stays can be obtained under current law, the law has not been consistently applied. Such legislation should enable more efficient resolution of patent litigation and may better protect consumers and small businesses from abusive patent litigation.
  5. Changing the ITC Standard for Obtaining an Injunction: Proposed legislation would subject the ITC to the four-factor test for injunctions set forth in eBay Inc. v. MercExchange, 547 U.S. 388 (2006). Though the ITC does take into account certain public interest factors, exclusion orders are not subject to the eBay test used for injunctions in district courts. Such legislation would make the standards applied at the ITC and district courts consistent and would curb potential abuse of the ITC and its unique remedy by PAEs.
  6. Using Demand-Letter Transparency to Help Curb Abusive Suits: This proposed legislation would incentivize public filing of demand letters in a way that makes them accessible and searchable by the public. There is currently no easily accessible, searchable repository of demand letters, and PAE activities are often secret. The White House's recommendation should provide more transparency and greater information about PAE activities, allowing for coordinated defense and attacks on the validity of suspect patents earlier in the process.
  7. Ensuring the ITC Has Adequate Flexibility in Hiring Qualified Administrative Law Judges (ALJs): Proposed legislation would give the ITC flexibility in hiring ALJs. The ITC thus far has been constrained by the Administrative Procedures Act. New legislation may enable the ITC to hire qualified ALJs more easily to fulfill increased demand for Section 337 investigations.

For more information on patent litigation or related matters, please contact Stefani Shanberg, James Yoon, or another member of Wilson Sonsini Goodrich & Rosati's intellectual property litigation and counseling practice.

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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