Yet Another "Patent-Troll" Bill – Senator Leahy Introduces Patent Transparency and Improvements Act

Washington - Capitol #4There has been a flurry activity recently in both the House and Senate aimed at addressing the perceived patent-troll problem.  We have recently reported on the introduction of both the "Innovation Act," from Rep. Bob Goodlatte (R-Va), and the "Patent Litigation Integrity Act," from Sen. Orrin Hatch (R-Utah).  The Goodlatte bill was marked-up today by the House Judiciary Committee in a session that lasted into the early evening (we will provide details on the amendments at a future date).  In addition, on the heels of a hearing by the U.S. House Energy & Commerce subcommittee on "The Impact of Patent Assertion Entities on Innovation and the Economy," Rep. Jared Polis (D-Co.) introduced the "Demand Letter Transparency Act."  According to a statement on Rep. Polis's website, this Act "strikes the right balance in protecting the rights of legitimate patent holders to enforce their patents while protecting consumers and businesses against non-legitimate abusers of the patent system."  Adding to this ever-increasing mass of proposed legislation, Sen. Patrick Leahy (D-Vt.), chair of the Senate Judiciary Committee, introduced S. 1720 (the "Patent Transparency and Improvements Act of 2013") on Monday, November 18, 2013.  Because this Act contains some provisions not found in any of the other pieces of legislation, and because of Sen. Leahy's influential position in Congress with regard to intellectual-property matters, an analysis of the provisions of this Act is warranted.

Transparency of Patent Ownership

As the title of the Act would suggest, one of the provisions of the bill is aimed at making the ownership of patents transparent.  Sen. Leahy has a couple of different ways to accomplish this.  First, any patentee that files an action in Federal Court would be required to disclose any and all persons that have a financial interest in the controversy or a party to the proceedings, or that have an interest that could be affected by the outcome of the proceedings.  The complication comes in the definition of "financial interest."  The proposed legislation refers to 28 U.S.C § 455(d), which is the section of the U.S. Code that addresses the disqualification of federal judges.  "Financial interest" is defined as "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," providing any of the enumerated exceptions do not apply, such as passive ownership through a mutual or common investment fund.  As a result, a publically traded corporation brining 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.

Another "solution" provided for in this bill is an assignment disclosure requirement 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.  However, the only hint as to what "all" substantial rights means in this context is whether the assignment "results in a change to the ultimate parent entity."  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."  Nevertheless, in relation to other mandatory assignment recordation provisions that have been discussed, this one does not appear to be overly demanding.  If this provision passes, it would behoove any patent owner to confirm that all assignments had been properly recorded at the first signs of any potential infringing activity.  It would also be necessary to conduct the proper due diligence related to assignment recordation before taking any interest in a patent, because the ability to recover such fees for some period of time may already have been forfeited.

Customer Stay

In order to address the concern that "patent trolls" are preying on customers, not manufacturers, Sen. Leahy's bill contains a provision allowing for the stay of litigations where both a customer and manufacturer have been sued for patent infringement.  This section is not dissimilar to other proposed legislation.  The requirement for the grant of a motion for stay would include the consent in writing of both the manufacturer and the customer, that the manufacturer be a party to the action or a separate action involving the same patents and relating to the same product or process, that the customer must agree to be bound by the decision, and that the motion must be filed early in the case.  The Act also provides that the stay can be lifted by a motion showing that a major issue in the customer action will not be resolved by the manufacturer action, or if the stay would unreasonably prejudice the party seeking to lift the stay.  Finally, the estoppel effect of the stay could be waived if the manufacturer seeks or consents to a consent judgment or fails to prosecution to a final, non-appealable judgment at least one common issue that gave rise to the stay.

Bad-Faith Demand Letters

There has been a lot of activity in the past week or so directed to the impact of demand letters on the patent system.  This is interesting, because demand letters themselves do not necessarily fall within the scope of the patent statute.  Still, the prototypic activity of a putative "patent troll" is the sending of demand letters, and if the anecdotal evidence is to be believed, all of these letters have little to no information.  However, any attempt to solve this problem through legislation will certainly have unintended consequences, likely to detriment of legitimate patent holders.  Moreover, it is difficult to see how the First Amendment rights of patent holders can be protected in the attempt to curtail this practice.  Finally, it would appear that one potential out for the patent holder would be to pre-emptively file a complaint, which could then be included with, or substituted for, any demand letter.  Of course, Rule 11 would need to be satisfied.  Nevertheless, it would appear that to have the intended effect, "demand letter" legislation will need to go hand-in-hand with some form of heightened pleading standards.  The concern is that such legislation may introduce more problems than it solves, as we have highlighted in previous posts in this forum.

The Leahy bill addresses the demand letter issue by empowering the Federal Trade Commission to consider such conduct an "unfair or deceptive act or practice."  In order to be classified as such, the patent holder must "engage in the widespread sending of written communications" that "falsely threaten that administrative or judicial relief will be sought if compensation is not paid or the infringement issue is not otherwise resolved."  The demand letter would also be considered to be "unfair or deceptive" if it lacks a reasonable basis in fact or law, or if the content "is likely to materially mislead a reasonable recipient."  Of course, the success of this section will depend on the definitions of several key terms.  For example, just what does it mean to "falsely threaten"?  Will this apply anytime a lawsuit does not result?  Or will it be necessary to demonstrate that the patent holder never had any intention of filing suit (which may be difficult to prove without a "smoking gun").  Still, by giving the power to the FTC to combat this issue, it may solve some of the issues that were highlighted above for any attempt to directly legislate the issue.

AIA-Related Provisions

The Leahy bill also includes provisions that expand upon some of the changes brought about by the America Invents Act ("AIA").  For example, the bill provides for the use of claim construction rules in post-grant and inter partes reviews that are consistent with those used in federal court.  Currently, the Patent Trial and Appeals Board ("PTAB") uses the broadest reasonable interpretation standard, similar to that employed by the Office during the patent application examination process.  The problem is that these two different claim construction rules could result in two different oppositely-dispositive constructions based solely on while rule was applied.  There is general agreement that such a provision is necessary.  Another AIA-related provision is the codification of the double-patenting doctrine for first-inventor-to-file patents.  Finally, Leahy's bill includes some technical corrections to the AIA.

Other Miscellaneous Provisions

Leahy's Patent Transparency and Improvements Act of 2013 also contains several provisions that do not fall within these various categories.  First, the bill provides for small business education and outreach.  The only issue is that it must be funded from existing sources.  Next, there is a section of the bill that provides for the protection of intellectual-property licenses in bankruptcy.  Finally, the bill calls for several studies to be carried out by the Patent Office or other organizations.  For example, the bill requires the Patent Office Director to undertake a study "to develop legislative recommendations to ensure greater transparency and accountability in patent transactions occurring on the secondary market," "to examine the economic impact that the patent secondary market has on the United States," "to examine licensing and other oversight requirements that may be placed on the patent secondary market," and "to examine the requirements placed on other markets."  The bill would also require the Director to conduct a study on patents owned by the United States Government.  The GAO would be required to study patent examination at the Office and the technologies available to improve patent quality.  Finally, the Director of the Administrative Office of the United States Court would be charged with conducting a study to examine the idea of a patent small claims court.  These studies are clearly an attempt to get at the heart of a lot of the complaints that have been levied at the so-called patent trolls.

We will continue to monitor the legislative activity in Congress directed to patents and addressing perceived abusive patent litigation, and we will continue to report on any significant activity that occurs.