Legal Alert: UPDATE: The Hare Loses Steam – Patent Litigation Reform Law Unlikely This Year

by Eversheds Sutherland (US) LLP

Efforts by the U.S. Senate to pass an alternative to the Innovation Act, which aims to reform abusive patent litigation, have stalled. Sen. Patrick Leahy, who is leading the effort, has announced that his committee is tabling that work until the interested parties reach a bipartisan compromise. After the House passed the Innovation Act on December 3, 2013, the stage was set for the Senate to take similar action early in 2014. To some observers, this committee decision means that, as a practical matter, no reform package will be enacted during this congressional session.

As the Chairman of the Senate Judiciary Committee, Sen. Leahy, along with co-sponsors Sens. Amy Klobuchar, Mike Lee and Sheldon Whitehouse, introduced the Patent Transparency and Improvements Act in November 2013. Since that time, Sen. Leahy had been working for months with other Senators, including Sens. Charles Schumer and Chuck Grassley, and with representatives of patent owners and the recurring targets of non-practicing patent entities, to craft a compromise bill. In announcing the suspension of committee work on the bill, Sen. Leahy said that an alternative measure was needed because of concerns “that the House-passed bill went beyond the scope of addressing patent trolls, and would have severe unintended consequences on legitimate patent holders who employ thousands of Americans.” Sen. Leahy further explained that the committee could not adopt another proposal, citing the lack of a bipartisan agreement “on how to combat the scourge of patent trolls on our economy without burdening the companies and universities who rely on the patent system every day to protect their inventions.”

Holding out hope for future action, however, Sen. Leahy further stated that if “the stakeholders are able to reach a more targeted agreement that focuses on the problem of patent trolls, there will be a path for passage this year and I will bring it immediately to the Committee.” The question going forward, then, is whether those warring stakeholders will remain interested in crafting legislation under the current state of the law, and whether lawmakers distracted by mid-term elections will act. Because of other efforts to limit the impact of patent litigation by non-practicing entities, those who oppose adopting legislation with “unintended consequences” may succeed in stopping legislation entirely.

Businesses on Opposite Sides

Certain industry groups, such as the Main Street Patent Coalition and the Computer and Communications Industry Association, strongly supported the Senate bill, and even hoped to strengthen it. The Intellectual Property Owners Association (IPO), which does not limit membership to any particular industry, publicly announced its support for reform legislation, if it contains “balanced, non-discriminatory changes in law to stop frivolous litigation and bad faith demand letters.” IPO had been advocating the addition of “presumptive fee shifting” to the Senate bill, a measure that would have made “loser pays” mandatory unless “the position and conduct of the non-prevailing party are objectively reasonable and substantially justified, or unless exceptional circumstances make such an award unjust.”

Businesses with the opposite view include Apple, DuPont, Ford, GE, IBM, Microsoft and Pfizer, which announced their formation of the Partnership for American Innovation (PAI) on April 3, 2014, as the Senate bill appeared to be gaining steam, and Hill-watchers believed that some type of legislation would be passed this spring. Former U.S. Patent and Trademark Office Director David Kappos, a senior adviser to the group, said that these patent owners opposed the patent litigation reform proposals, viewing them as lacking rigorous evidentiary support and being pursued by “those who wish to substantially restrict the patent rights of operating companies in favor of their own narrow business interests.” Kappos said, “The belief that our patent system is broken is patently false.” Guest Column, Detroit Free Press, May 12, 2014. The PAI contends “that the cost of reducing or eliminating the incentives for innovation would be devastating for nearly all sectors of the U.S. economy.” Id.

As Sen. Leahy pointed out, the fundamental disagreement among these stakeholders means that no viable compromise exists. Given the important constituencies on both sides, the lawmakers who are grappling with this issue are unlikely to vote for a measure that is opposed by any significant industry group.

The Supreme Court Makes Room for “Loser Pays,” Other Curbs on Patent Claims

Recent U.S. Supreme Court developments likely contributed to the derailment of patent litigation reform legislation, because new law may repair some of the defects in the patent enforcement system that the legislation was attempting to address.

Many vocal supporters of the House Innovation Act emphasized the need to increase the risks faced by patent asserters in litigation by reforming fee-shifting to increase the likelihood that fees are awarded. Other patent-owning businesses feared that those changes would only discourage legitimate, operating businesses from suing, without deterring patent-holding shell companies.

“Loser pays” legislation may have appeared less urgent when, in unanimous opinions issued on April 29, the U.S. Supreme Court rejected long-standing rules that had discouraged the award of attorneys’ fees to the prevailing party in patent litigation, and made them vulnerable to reversal on appeal. See Octane Fitness, LLC v. ICON Health & Fitness, Inc., No. 12-1184, decided April 29, 2014, and Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., No. 12-1163, decided April 29, 2014. These decisions give district judges more discretion to award fees, overturn the “clear and convincing evidence” standard of proof, and insulate the awards from previous de novo review, in favor of the “abuse of discretion” standard. While nothing in these opinions limits them to any particular type of party or case, observers believe these rulings will be used most frequently against so-called “patent trolls” when they bring suits that ultimately fail at the trial court.

Accused patent infringers received additional assistance from the Court earlier this year. In Medtronic, Inc. v. Mirowski Family Ventures, LLC, 134 S. Ct. 843 (2014), the Court confirmed that the patent owner will bear the burden of proving infringement in declaratory judgment actions, even though the accused infringer is the nominal plaintiff. Clarifying the burden of proof makes declaratory judgment cases more attractive to parties accused of infringement by any patent owner, including non-practicing entities.

The following upcoming decisions of the Supreme Court may devalue computer-related patents, or make litigation marginally less attractive to patent owners:

  • Alice Corporation Pty. Ltd. v. CLS Bank Int’l, No. 13-298, argued March 31, 2014: considering the patentability of computer-implemented business methods.
  • Limelight Networks, Inc. v. Akamai Technologies, Inc., No. 12-786, argued April 30, 2014: addressing the application of the law of inducement of infringement to multi-actor computer system patent claims.
  • Nautilus Inc. v. Biosig Instruments, Inc., No. 13-369, argued April 28, 2014 : focusing on the standards applied by the courts to invalidate vague patent claims, in light of the statutory requirement of particular and distinct patent claiming.

More Modest Legislation Remains Possible

While it appears highly unlikely that any comprehensive patent litigation reform legislation will pass during the current congressional session, both the House and the Senate have bills pending before them attempting to rein in patent licensing demand letter practices. Whether or not these measures will materially reduce the perceived harm done by “patent trolls,” these more focused measures still have a chance of passing, and may gain steam as lawmakers try to look “tough on trolls” before the fall election.

The House Innovation Act contains a “sense of Congress” criticizing “purposely evasive demand letters to end users,” and calling them an abuse of the patent system, a deceptive practice, and an exceptional circumstance. The Senate had been considering legislation aimed at ending the worst demand letter conduct among patent assertion entities since the fall of 2013. The Senate Patent Transparency and Improvements Act went further than the House bill, defining certain types of statements in, or omissions from, licensing demand letters to be unfair or deceptive trade practices, with the Federal Trade Commission (FTC) empowered to enforce compliance.

Sen. Claire McCaskill introduced the Transparency in Assertion of Patents Act (S. 2049), a free-standing demand letter reform bill, in February 2014. S. 2049 would require the FTC to promulgate rules to prohibit unfair and deceptive acts and practices in sending patent demand letters. The bill would require every patent licensing demand letter to identify specific information regarding the patent, the sender’s right to enforce the patent, the accusation of infringement, and the basis for any demanded license amount. Bad faith assertion would be enforceable by the FTC or the attorney general of a state in federal court.

On May 14, 2014, Rep. Lee Terry, chairman of the Commerce, Manufacturing and Trade Subcommittee of the House Energy and Commerce Committee, announced draft legislation focused on demand letters. The legislation would require patent demand letters to include certain basic information to help companies determine whether a letter is legitimate. The FTC would have the authority to enforce the law, including imposing fines, and state attorneys general also would have the power to enforce the federal standards. The Subcommittee met to discuss the proposal on May 22, 2104. This proposal joins H.R. 3540, the Demand Letter Transparency Act, a bill introduced Rep. Jared Polis on November 19, 2013. The Polis bill would create a national mandatory database of high-volume demand letters, and also creates minimum content requirements for a demand letter.

Numerous state legislatures already have passed similar legislation aimed at deterring the practice of sending demand letters to businesses in those jurisdictions. This trend started in Vermont in 2013, and on May 16, Oklahoma became the twelfth state to adopt an “anti-patent troll” law. Whether Congress joins them likely will depend on the ability of patent stakeholders to set aside their other differences. It should be possible to devise a measure that addresses this one perceived problem, without unduly deterring patent owners with legitimate licensing claims from sending letters asserting those claims.

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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