House Passes Patent Reform Legislation

by Goodwin

Patent reform legislation gained momentum with the passage of H.R. 3309, the “Innovation Act,” on December 5, 2013, which is purported to “address the ever increasing problem of abusive patent litigation.”  The legislation was introduced by the Chairman of the House Judiciary Committee, Robert Goodlatte (R-VA), on October 23, 2013, and has several prominent cosponsors, including Howard Coble (R-NC), Chairman of the House Subcommittee on Courts, Intellectual Property, and the Internet, and Lamar Smith (R-TX), Chairman of the House Committee on Science, Space, and Technology.  Chairman Goodlatte stated that the legislation seeks to promote innovation, “eliminate the abuses of [the] patent system, discourage frivolous patent litigation and keep U.S. patent laws up to date.”

The following sets forth the major changes the Goodlatte bill would make to patent litigation and Patent and Trademark Office (“PTO”) practice.

Heightened Pleading Requirement

The bill would replace the normal notice pleading standard and require the entity asserting a patent to identify the specific asserted claim(s), the allegedly infringing products or services, and state “with detailed specificity” how the product or service meets each of the asserted claims’ limitations.  For each alleged indirectly infringed claim, the complaint would also have to identify what and who is directly infringing, and the acts of the indirect infringer that contribute to or induce the direct infringement.  The complaint would also have to identify any other cases asserting the same patent, and whether the patent in suit has been declared “essential, potentially essential, or having potential to become essential to any standard setting body.”  The result of this heightened pleading requirement would be that infringement complaints would look a lot like infringement contentions, which are normally filed much later in a case.  Notably, the bill specifically excludes Hatch-Waxman type litigation under 35 U.S.C. § 271(e)(2) from these pleading standards.

Fee Shifting

The bill would amend current section 285, which allows courts “in exceptional cases” to award attorney fees to the prevailing party, by expressly creating a presumption of fee shifting.  The bill would provide that  the court “shall award, to a prevailing party, reasonable fees and other expenses incurred by that party … unless the court finds that the position of the nonprevailing party or parties was substantially justified or that special circumstances make an award unjust.”  If the nonprevailing party is unable to pay, the bill provides that a court may make the fees and expenses recoverable against other interested parties, such as parent entities.  The discussion drafts of the bill included a provision that would award costs and attorney fees to a party who submitted a settlement offer to the opposing party at least 10 days before trial and ultimately obtained a more favorable outcome, but this provision was not included in the bill as introduced.

Limiting Discovery

The Goodlatte bill would provide that if a court finds that discovery is required to construe the claims, such discovery “shall be limited … to information necessary for the court to determine the meaning of the terms used in the patent claim, including any interpretation of those terms used to support the claim of infringement.”  There are exceptions to this limitation, such as when discovery would assist in resolving a pending motion, or in a Hatch-Waxman case when the resolution of a case within a set period “will necessarily affect the rights of a party with respect to the patent.”

Section 6 of the bill sets forth requirements that the Judicial Conference must use in developing additional rules and procedures related to discovery.  These requirements include that discovery be divided into two parts: “core documentary discovery” and “additional discovery.”  Each party would be entitled to core documentary discovery that is within the possession or control of each party, and such discovery would not be subject to cost shifting, i.e., each party would pay its own core discovery costs.  Core documentary evidence is defined as documents relating to conception, reduction to practice, technical operation of the allegedly infringing product or process, relevant prior art, damages, corporate structure of the parties, and documents related to the accused infringer’s knowledge of the patent prior to the suit.

Core documentary evidence specifically excludes electronic communications such as email and instant messaging; therefore these documents would constitute “additional discovery.”  Under the bill, electronic discovery cannot occur until after the exchange of initial disclosures and core discovery, and requests for such discovery would have to be “specific and … not … a general request for the production of information relating to a product or business.”  There would be a limit of five custodians for electronic discovery, but if the parties agree or the court finds there is a distinct need, parties could obtain additional discovery from five additional custodians.  A party requesting electronic communication discovery from more than 10 custodians would have to bear the costs of such discovery.  The parties would be entitled to seek additional document discovery permitted under the Federal Rules of Evidence but would have to pay for the cost of such discovery, including attorney fees.  When a party seeks additional discovery, it would have to post a bond for the expected costs unless the parties agree otherwise.

Disclosure of Patent Ownership

The bill would amend the statute to require any patentee who files a patent infringement complaint to disclose to the PTO, the district court and adverse parties exactly who has a legal or financial interest in the patents such as assignees, sublicensees and parent entities.  Complaints filed under 25 U.S.C. § 271(e) would be exempt from this requirement.  Failure to comply with this reporting requirement would result in forfeiture of any right to recover fees and expenses from the nonprevailing party or any damages for infringement during the period of noncompliance.

Double Patenting

While Chairman Goodlatte claims the bill only codifies obviousness-type or non-statutory double patenting, this provision could be argued as a major change in double patenting law.  The bill proposes a new section, § 106, which would provide:

A claimed invention of a patent issued under section 151 (referred to as the “first patent”) that is not prior art to a claimed invention of another patent (referred to as the ”second patent”) shall be considered prior art to the claimed invention of the second patent for the purpose of determining the nonobviousness of the claimed invention of the second patent under section 103…

Under current double patenting law, the claims of the first patent, often referred to as the reference patent, and not the patent as a whole are compared to the claims of the patent in suit to determine whether the claims in suit are obvious.  The specification of the reference patent is not considered prior art in an obviousness-type double patenting analysis.  A plain reading of this provision is that the reference patent as a whole would be prior art against the second patent.  Being able to use the entirety of a reference patent in a double patenting analysis would likely result in more invalidated patents on this ground.  Also, because of the reference to § 103, this section could arguably expand the bases for inter partes review.  

Small Business Education, Outreach, Information Access and Studies

The bill would create additional resources for small business owners at the PTO, including a user-friendly website to notify the public when patent litigation commences.

Changes to the Post-Grant Review Process Created by the AIA

First, the bill would limit estoppel after post-grant reviews to grounds actually raised in the review.  Under the AIA, after a final written decision on a post-grant review, a petitioner is estopped from raising arguments of invalidity “on any ground that the petitioner raised or reasonably could have raised.”  The bill would thereby permit more invalidity defenses in district court after a post-grant review.

Second, during post-grant review at the Patent Trial and Appeals Board, claims would be construed using the same standard as that used at the International Trade Commission and district courts – “in accordance with the ordinary and customary meaning of such claims as understood by one of ordinary skill in the art and the prosecution history pertaining to the patent.”  Currently the PTAB construes claims with the “broadest reasonable interpretation.”

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Dozens of diverse associations representing the hotel and lodging, financial services and banking,  insurance, and mobile application industries have publicly supported the bill.  However, groups like the Innovation Alliance, which represents patent owners and stakeholders, have expressed opposition to the bill and say it will have “serious negative unintended consequences on U.S. inventors and the economy” by favoring large companies over small inventors.  Others like the Business Software Alliance have specifically criticized the portion of the bill expanding the CBM patents program, fearing it would endanger software-related patents.

While these changes would undoubtedly impact patent litigation practices and strategies, the focus of debate will be whether these changes will accomplish Chairman Goodlatte’s stated goals, or have unintended and undesirable consequences.  For example, the proposed heightened pleading requirements might deter some frivolous lawsuits and allow parties to move for dismissal early in a case.  However, they could also make it harder for patent owners, particularly small owners or inventors, from pleading with particularity at such an early stage in the litigation.  This is particularly true for product-by-process or other claims that typically require some discovery about the accused product before a patentee can adequately describe the alleged infringement.  Similarly, having a presumption of fee shifting can discourage small patent owners or inventors from bringing otherwise meritorious lawsuits because of the high costs for all sides in patent litigation.

While some believe that district court judges already have adequate tools and flexibility to curtail abusive litigation practices, the House passage of the Innovation Act shows that these proposals will receive serious consideration.  The Innovation Act now heads to the Senate, which is currently considering a “patent reform bill” of its own, the Patent Transparency and Improvements Act, which was introduced by Senators Leahy (D-VT) and Whitehouse (D-RI).

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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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