Patent Reform 101: A comparison of current fee-shifting language

Congressman Hank Johnson (D-GA).

On Thursday, June 11, 2015, the House Judiciary Committee conducted a hearing for the purpose of marking up the Innovation Act (H.R. 9). Ultimately the Committee voted to accept the Innovation Act as amended by a vote of 24 to 8. Interestingly, virtually all members of the Committee, including Congressman Bob Goodlatte (R-VA), who is Chair of the House Judiciary Committee, acknowledged that additional work is necessary on the language of the bill before a vote should be taken by the full House of Representatives. This is in stark contrast to the way the America Invents Act (AIA) was handled just a few years ago. Once the AIA left Committee amendments were not accepted and those offered on the House floor were summarily defeated. The handwriting was on the wall.

Obviously remembering the procedure, or lack thereof, as the America Invents Act left the Committee in 2011, Members of the Judiciary Committee continued to seek reassurance from Congressman Goodlatte that they would be included in further discussions to modify language of the bill as the Innovation Act moves on to the floor. Goodlatte repeatedly reassured Members that their withdrawn amendments would continue to be considered and urged them to continue to refine certain language to make the proposed amendments more palatable.

Anyone who has followed patent reform knows that fee-shifting provisions are a particularly contentious issue. Fee-shifting relates proposed legislative changes to U.S. patent laws that would allow for district court judges to order the losing party to pay the attorneys fees and other costs of the prevailing party. As you might expect, the issue of fee-shifting came up repeatedly during the hearing today.

The comments of Congressman John Conyers (D-MI) were representative of those who were disappointed that the fee-shifting language in the Innovation Act has not been improved. Conyers and others expressed disappointment that Goodlatte had not taken the opportunity to modify fee-shifting language in the Manager’s Amendment.

One particularly interesting exchange occurred relating to a fee-shifting amendment offered by Congressman Hank Johnson (D-GA). Johnson explained that the Manager’s Amendment “makes every case a fee shifting case,” which is an accurate characterization given the mandatory language of the Innovation Act as amended by the Manager’s Amendment. The Johnson amendment on fee-shifting, which was defeated by a vote of 10 in favor to 22 opposed, would have struck subparagraph (a) of the Manager’s Amendment relative to 35 U.S.C. 285. The Johnson amendment read as follows:

(a) AWARD.— In connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, upon motion by a prevailing party, the court shall determine whether the position of the non-prevailing party was objectively reasonable in law and fact, and whether the conduct of the non-prevailing party was objectively reasonable. If the court finds that the position of the non-prevailing party was not objectively reasonable in law or fact or that the conduct of the non-prevailing party was not objectively reasonable, the court shall award reasonable attorney fees to the prevailing party unless special circumstances, such as undue economic hardship to a named inventor or an institution of higher education (as defined in section 101(a) of the Higher Education Act of 1965 (20 U.S.C. 1001(a))), would make an award unjust. The prevailing party shall bear the burden of demonstrating that the prevailing party is entitled to an award.

(b) DE MINIMIS AND IMMATERIAL EXCEPTION FOR AWARD.— The court may not award attorney fees under this section based on allegedly unreasonable litigation positions or actions of non-prevailing parties that are de minimis or are not material to the consideration or outcome of the litigation.

Johnson explained that the language of his amendment would essentially adopt the language in the PATENT Act, which passed the Senate Judiciary Committee last week.

Goodlatte was incredulous, explaining that he sees no substantive difference between the current fee-shifting language in the Innovation Act and the language found in the PATENT Act. Whether you agree with fee-shifting or not, it is almost impossible to take Goodlatte’s comment at face value. How could he possibly believe that there is no substantive difference? If you actually read the fee-shifting language in the Innovation Act and compare it against the language in the PATENT Act there is a substantial, substantive difference.

[Patent-Reform]

The key language that sets forth the standard that will be applied by the district court judge in determining whether to award the prevailing party compensation for their attorneys’ fees is found in subparagraph (a) in both the Innovation Act and in the PATNET Act. While both bills allow for consideration of special circumstances, as you can see by comparing the language (see below) it is clear that the House version of fee shifting found in the Innovation Act requires attorneys’ fees to be awarded in all cases unless there is a finding by the court that the non-prevailing party took positions that were reasonably justified in law and fact. This clearly creates a presumption that attorneys fees are to be awarded unless there is a satisfactory showing. To the contrary, the language of the Senate bill takes the direct opposite approach, requiring attorneys fees only if the district court makes a finding that the non-prevailing party took positions that were not objectively reasonable. Thus, the Senate bill creates a presumption that attorneys fees are ordinarily not awarded, but can be awarded if there is a satisfactory showing.

The difference between the House bill and the Senate bill boils down to the presumptions made and who will wind up bearing the burden of proof. Congressman Goodlatte is sophisticated and knowledgeable. Surely he has to understand both that there is a difference and that the difference is meaningful.

The issue of fee-shifting bears close watching. It seems unlikely that the Senate will agree to the mandatory fee-shifting provisions found in the Innovation Act. Senator John Cornyn (R-TX) is the driving force behind the Senate fee-shifting language. If the House does not move toward the Senate version of fee-shifting this could create a showdown that ultimately could derail the legislation. Of course, there are a variety of other issues, including inter partes review (IPR) reform that could similarly derail the legislation. In fact, despite both the Innovation Act and PATENT Act passing their respective Committees by an overwhelming vote, the fate of patent reform remains uncertain. Senator Cornyn and Senator Chuck Schumer (D-NY) have already worked to hold down expectations of supporters, acknowledging that real hurdles to passage still remain.

In any event, what follows is the current fee-shifting language found in the Innovation Act, as amended by the Manager’s Amendment and with emphasis added.

(a) AWARD.—The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, unless the court finds that the position and conduct of the non-prevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.

(b) CERTIFICATION AND RECOVERY.—Upon motion of any party to the action, the court shall require another party to the action to certify whether or not the other party will be able to pay an award of fees and other expenses if such an award is made under subsection (a). If a nonprevailing party is unable to pay an award that is made against it under subsection (a), the court may make a party that has been joined under section 299(d) with respect to such party liable for the unsatisfied portion of the award.

(c) COVENANT NOT TO SUE.—A party to a civil action who asserts a claim for relief arising under any Act of Congress relating to patents against another party, and who subsequently unilaterally (i) seeks dismissal of the action without consent of the other party and (ii) extends to such other party a covenant not to sue for infringement with respect to the patent or patents at issue, may be the subject of a motion for attorneys fees under subsection (a) as if it were a non-prevailing party, unless the party asserting such claim would have been entitled, at the time that such covenant was extended, to dismiss voluntarily the action without a court order under Rule 41 of the Federal Rules of Civil Procedure, or the interests of justice require otherwise.

What follows is the current fee-shifting language found in the PATENT Act, with emphasis added.

(a) AWARD.—In connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, upon motion by a prevailing party, the court shall determine whether the position of the non-prevailing party was objectively reasonable in law and fact, and whether the conduct of the non-prevailing party was objectively reasonable. If the court finds that the position of the non-prevailing party was not objectively reasonable in law or fact or that the conduct of the non-prevailing party was not objectively reasonable, the court shall award reasonable attorney fees to the prevailing party unless special circumstances, such as undue economic hardship to a named inventor or an institution of higher education (as defined in section 101(a) of the Higher Education Act of 1965 (20 U.S.C. 1001(a))), would make an award unjust. The prevailing party shall bear the burden of demonstrating that the prevailing party is entitled to an award.

(b) COVENANT NOT TO SUE.—A party to a civil action who asserts a claim for relief arising under any Act of Congress relating to patents against another party, and who subsequently unilaterally (i) seeks dismissal of the action without consent of the other party and (ii) extends to such other party a covenant not to sue for infringement with respect to the patent or patents at issue, may be the subject of a motion for attorney fees under subsection (a) as if it were a non-prevailing party, unless the party asserting such claim would have been entitled, at the time that such covenant was extended, to dismiss voluntarily the action without a court order under rule 41 of the Federal Rules of Civil Procedure, or the interests of justice require otherwise.

(c) RECOVERY OF AWARD.—

(1) CERTIFICATION; DISCLOSURE OF INTERESTED PARTIES.—

(A) INITIAL STATEMENT.—A party defending against a claim of infringement may file, not later than 14 days before a scheduling conference is to be held or a scheduling order is due under rule 16(b) of the Federal Rules of Civil Procedure, a statement that such party holds a good faith belief, based on publicly-available information and any other information known to such party, that the primary business of the party alleging infringement is the assertion and enforcement of patents or the licensing resulting therefrom.

(B) CERTIFICATION.— Not later than 45 days after being served with an initial statement under subparagraph (A), a party alleging infringement shall file a certification that—

(i) establishes and certifies to the court, under oath, that it will have sufficient funds available to satisfy any award of reasonable attorney fees under this section if an award is assessed;

(ii) demonstrates that its primary business is not the assertion and enforcement of patents or the licensing resulting therefrom;

(iii) identifies interested parties, if any, as defined in paragraph (2) of this subsection; or

(iv) states that it has no such interested parties. A party alleging infringement shall have an ongoing obligation to supplement its certification under this subparagraph within 30 days after a material change to the information provided in its certification.

(C) NOTICE TO INTERESTED PARTY.— A party that files a certification under subparagraph (B)(iii) shall, prior to filing the certification, provide each identified interested party actual notice in writing by service of notice in any district where the interested party may be found, such that jurisdiction shall be established over each interested party to the action for purposes of enforcing an award of attorney fees under this section, consistent with the Constitution of the United States. The notice shall identify the action, the parties, the patents at issue, and the interest qualifying the party to be an interested party. The notice shall inform the recipient that the recipient may be held accountable under this subsection for any award of attorney fees, or a portion thereof, resulting from the action in the event the party alleging infringement cannot satisfy the full amount of such an award, unless the recipient renounces its interest pursuant to subparagraph (E) or is otherwise exempt from the applicability of this
subsection.

(D) ACCOUNTABILITY FOR INTERESTED PARTIES.— Any interested parties who are timely served with actual notice pursuant to subparagraph (C) and do not renounce their interests pursuant to subparagraph (E) or are not otherwise exempt from the applicability of this subsection may be held accountable for any fees, or a portion thereof, awarded under this section in the event that the party alleging infringement cannot satisfy the full amount of the award. If a true and correct certification under clause (i) or (ii) of subparagraph (B) is timely filed with the court, interested parties shall not be subject to this subparagraph.

(E) RENUNCIATION OF INTEREST.— Any recipient of a notice under subparagraph (C) may submit a statement of renunciation of interest in a binding document with notice to the court and parties in the action not later than 90 days after receipt of the notice under subparagraph (C). The statement shall be required to renounce only such interest as would qualify the recipient as an interested party.

(F) INSTITUTIONS OF HIGHER EDUCATION EXCEPTION.— Any institution of higher education (as defined in section 101(a) of the Higher Education Act of 1965 (20 U.S.C. 1001(a)) or under equivalent laws in foreign jurisdictions), or a non-profit technology transfer organization whose primary purpose is to facilitate the commercialization of technologies developed by 1 or more institutions of higher education, may exempt itself from the applicability of this subsection by filing a certification that it qualifies for the exception provided for in this subparagraph with the court and providing notice to the parties.

(G) INTEREST OF JUSTICE EXCEPTION.— Any recipient of a notice under subparagraph (C) may intervene in the action for purposes of contesting its identification as an interested party or its liability under this subsection, and a court may exempt any party identified as an interested party from the applicability of this subsection as the interest of justice requires.

(2) INTERESTED PARTY.—In this section, the term ‘interested party’—

(A) means a person who has a substantial financial interest related to the proceeds from any settlement, license, or damages award resulting from the enforcement of the patent in the action by the party alleging infringement;

(B) does not include an attorney or law firm providing legal representation in the action if the sole basis for the financial interest of the attorney or law firm in the outcome of the action arises from the attorney or law firm’s receipt of compensation reasonably related to the provision of the legal representation;

(C) does not include a person who has assigned all right, title, and interest in a patent, except for passive receipt of income, to an entity described in paragraph (1)(F), or who has a right to receive any portion of such passive income;

(D) does not include a person who would be an interested party under subparagraph (A) but whose financial interest is based solely on an equity or security interest established when the party alleging infringement’s primary business was not the assertion and enforcement of patents or the licensing resulting therefrom; and

(E) does not include an insured depository institution as defined in section 19(b)(1)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)) if the sole basis for the financial interest arises from a loan or other debt obligation.

(d) CLAIMS UNDER SECTION 271(e).—

(1) APPLICABILITY.— Subsections (a), (b), and (c) shall not apply to a civil action that includes a claim for relief arising under section 271(e).

(2) AWARD IN CERTAIN CLAIMS UNDER SECTION 271(e).— In a civil action that includes a claim for relief arising under section 271(e), the court may in exceptional cases award reasonable attorney fees to the prevailing party.