Patent Reform Advances on Capitol Hill

Yesterday the House Committee on Energy and Commerce voted to approve the Targeting Rogue and Opaque Letters (TROL) Act by a vote of 30-22. This vote means that the TROL Act will be favorably reported out of Committee and now moves on for consideration by the full House of Representatives.

That the TROL Act is the first bill to get voted out of Committee has to be at least a little surprising to those who have followed the genesis of patent reform in the House over the past several years. Last year the Innovation Act passed the entire House by more than a 3 to 1 margin. A verbatim version of the Innovation Act was introduced in the House early in the 114th Congress by Congressman Bob Goodlatte (R-VA), who is Chairman of the House Judiciary Committee.

Shortly after the November 2014 elections, Republican leaders in the House and Senate Judiciary Committees announced that patent reform was going to be a top priority and would be taken up very early in the new Congress. This lead many to assume that the Innovation Act would be resurrected, which it was, but also that it would move through the House in rapid fashion, which it has not. It was also believed that the Senate would likely move quickly on similar legislation, perhaps as a way to demonstrate that the new Republican majority could act on bipartisan legislation. Whatever the ultimate outcome, there is no doubt that opponents of patent reform have at the very least slowed things considerably.

It is now believed that Congressman Goodlatte may have a hearing or markup with respect to the Innovation Act at some point during the week of May 11th. Rumors of an impending markup have leaked previously, and have proven incorrect. The House is also not in session next week, which means that those who oppose patent reform will have further opportunity to get to Members of the House while they are back home in their districts. With members returning to their districts activist inventors and innovative companies who need strong patents will likely press hard in what could be a final push against the Innovation Act. Indeed, some are now starting to suspect that the Innovation Act is becoming too controversial. There are even whispers that the Innovation Act may not be able to make it out of the House Judiciary Committee. Obviously, there has been a strong headwind against the bill or it would have been voted out well before this. Still, it would be shocking if the Innovation Act is unable to make it out of Committee.

Meanwhile, the Protecting American Talent and Entrepreneurship Act (the PATENT Act) was introduced into the Senate. This bill, which has nothing to do with either talent or entrepreneurship, is the Senate companion to the Innovation Act. Still, you have to admire the creativity with respect to naming the bill. Who could possibly be against protecting America, talent and/or entrepreneurship?

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Key Provisions of the PATENT Act

Regardless of the forced acronym, the key provisions of the PATENT Act are as follows.

Pleading Standards – The bill would establish higher pleading standards for patent infringement complaints, which the sponsors say would give defendants real notice of the claims against them. The Innovation Act would similarly heighten pleading standards, and so to would the STRONG Patents Act, although the later would only do away with Form 18 of the Federal Rules of Civil Procedure, which truly authorize patent litigation by ambush by allowing the most nebulous and non-informing complaints. Few argue that more information is needed in complaints, but there is a divergence of opinion on how much the patent owner should be required to plead at the outset in the initial complaint. The PATENT Act does make clear that litigants are not required to plead information they cannot obtain. If information is not accessible the patent owner can make general assertions and then later amend the complaint.

Customer Stays – The bill appears to have identical language to the controversial customer stay provision found in the Innovation Act. This could prove to be a huge stumbling block because the way the provisions are written even the largest tech companies could move to indefinitely stay patent litigation because they are themselves consumers (i.e., have purchased something from another manufacturing company). According to Brian Pomper, Executive Director of the Innovation Alliance, “Congress must ensure that any ‘customer stay’ provision does not effectively immunize from liability large companies that use infringing technology and leave patent owners without redress for infringement by foreign manufacturers outside the jurisdiction of U.S. courts.”

Limits on Discovery – The bill would require district courts to stay discovery while early dispositive motions (i.e., motions to dismiss and motions to transfer venue) are being considered. The bill also would direct the Judicial Conference to develop rules about how much a party should bear the cost of discovery beyond what is considered core for the case. The goal here is to limit harassing fishing expeditions, but limiting discovery is a thorny issue given that in many instances it may seem as if there is ongoing infringement but the evidence that would prove literal infringement of all elements of a claim is only in the possession of the alleged infringer.

Fee-Shifting – This is one area where there is a meaningful difference between the Senate version and House version. The Innovation Act creates a presumption that the loser should pay the attorneys fees of the prevailing party unless there is a finding that the losing party pursued only reasonable theories in the case. In the Senate fees would shift if the prevailing party proves and the district court rules that the losing party was not “objectively reasonable.” This is a subtle but important difference, although fee-shifting in any form can be expected to generate real opposition. Whether any form of legislative fee-shifting is even necessary given the Supreme Court’s rulings in Octane and Highmark in 2014 remains in doubt.

Ownership Transparency – The bill would also require the United States Patent and Trademark Office (USPTO) to keep information about patent ownership in order to provide a resource about patents being asserted in a demand letter or lawsuit. Those who watch the USPTO know that this was on the agenda for rulemaking, but after receiving enormous opposition from patent owners with large portfolios rulemaking plans were scuttled.

Predictions and Analysis

While there are differences around the edges between the PATENT Act in the Senate and the Innovation Act in the House, if you are in favor of the Innovation Act you are likely going to be in favor of the PATENT Act, although you probably would prefer stronger fee-shifting provisions of the Innovation Act. If, however, you are against the Innovation Act then you will likely be against the PATENT Act even though it takes a more even-handed approach (in at least some ways) than the Innovation Act.

For some time now I have been predicting either no patent reform this year or patent reform limited specifically, and narrowly, targeting fraudulent and misleading demand letters. At this point it seems that the Innovation Act will not become law. Even if it is voted out of the House the Senate seems disinclined to pursue the most controversial provisions, at least not in the same way. But if the Innovation Act is viewed as too radical it could make it difficult to get enough support for what will undoubtedly be viewed as a “lite-version” of the Innovation Act (i.e., the PATENT Act).

The TROL Act does narrowly target fraudulent and misleading demand letters. Although not a perfect companion bill, the STRONG Patents Act introduced by Senator Chris Coons (D-DE) in early March 2015 does similarly address demand letters. That would tend to suggest that if the TROL Act makes it out of the House there could be an audience in the Senate that would rally around a similar bill. But it is hard to discount what Senator John Cornyn (R-TX) said during a Senate Judiciary Committee hearing in March 2015: “I’m personally of the view that if we don’t have an adequate fee shifting mechanism in the legislation it isn’t worth doing.” Given that he is No. 2 in the Republican Leadership in the Senate his views have to be given disproportionate weight even though he does not Chair the Senate Judiciary Committee.

I continue to believe that the two most likely scenarios are either no patent reform or demand letter reform only. Given that the TROL Act has been voted out of Committee and moves on to the House, and also given how adamant Republicans were about tackling the issue of patent reform, I tend to believe there is a legitimate chance that we could see patent reform that is limited to providing the Federal Trade Commission and State Attorneys General with greater ability to go after fraudulent and misleading demand letters, which many have characterized as nothing more than extortion-like activity.

Of course, everyone in the industry believes that it is only a matter of time before Congress is going to act to do something to stop Kyle Bass and others from shorting stocks and filing Inter Partes Reviews at the Patent Trial and Appeal Board (PTAB). Lobbying is reportedly intense, and has been on the highest of levels with CEOs flying into town to personally register their complaints. But will a Kyle Bass fix become a stand-alone bill or could it get attached to something already pending? If the Kyle Bass fix gets attached to one of the pending patent reform bills all bets are off. The Pharmaceutical and Biotechnology industries could collectively put their considerable lobbying might behind anything that provides IPR relief.

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