US To Take Another Crack At Patent Litigation Reform?

In January, the 114^th Congress arrived in Washington, D.C., with Republicans controlling both the Senate and the House of Representatives for the first time since 2006. One of the first orders of business was to restarted the patent litigation reform efforts that stalled in the last Congress.

On February 5, 2015, a group of legislators introduced a new bill, HR 9, entitled the “Innovation Act.” A copy of the bill as introduced is available HERE.

HR 9 continues recent attempts to address issues left unresolved by the Leahy-Smith America Invents Act of 2012. Very similar legislation passed the House in the last Congress, but did not advance in the Senate, apparently due to opposition from then-Senate Majority Leader Harry Reid. With Republicans now controlling the apparatus of the Senate, it appears that some form of reform legislation has a good chance of passing. HR 9 was introduced by a bipartisan group of lawmakers. In addition, the White House repeatedly has endorsed some steps to curb abusive patent litigation.

The following are some key features of HR 9:

1. Detailed Pleadings. HR 9 proposes to add a new provision to the Patent Act, 35 U.S.C. § 281A, requiring claims for patent infringement raised in a complaint, cross-claim, or counterclaim to be pleaded with significant detail, including identifying the patents and claims asserted, the specific accused products or processes, and a statement of how the product or process infringes the claim, including “with detailed specificity, how each limitation of each claim identified . . .  is met by the accused instrumentality.” The pleading also would need to include information concerning the claimant’s standing, prior litigation involving the patent, and whether the patented invention is “essential” for purposes of implementing any industry standards. If the required information is “not reasonably accessible,” the claimant would be allowed to substitute an explanation, identifying the steps taken to ascertain the information. The bill would direct the Supreme Court to eliminate Form 18 of the Federal Rules of Civil Procedure. The Federal Circuit has relied on that form in refusing to require additional factual allegations in infringement pleadings. See R+L Carriers v. Driver Tech LLC, 681 F.3d 1323 (Fed. Cir. 2012).

2. Loser Pays. HR 9 would amend 35 U.S.C. § 285 to create a loser pays system for fees and expenses incurred in any action “arising under” the Patent Act. A “prevailing party” would be entitled to an award of reasonable fees and expenses unless the court concluded that the losing party’s “position and conduct . . .  were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.” A party could move for an order requiring an opposing party to state whether it is able to pay such an award, and if it could not pay the court would be authorized to join an “interested party” and hold that entity liable for any fees and expenses awarded.

3. Discovery Stays. If the district court determines that claim construction is required, the bill would automatically stay discovery on any subject other than the meaning of the patent claims, subject to exceptions at the court’s discretion.

4. Customer Stays. HR 9 would automatically stay infringement actions brought against customers when the manufacturer of an accused product is named in the action and the customer and manufacturer agree to the stay. Although the customer would be bound by issues decided in litigation against the manufacturer in most cases, it could seek relief from an adverse result if the manufacturer did not defend the action through appeal or entered into a consent judgment, where the result would unreasonably prejudice the customer or be manifestly unjust.

5. Trademarks in Bankruptcy. HR 9 would amend the Bankruptcy Code, 11 U.S.C. § 101, to include trademarks, service marks and the like to the definition of “intellectual property” in the Code. This change would give some additional protection to trademark licensees when a licensor files for bankruptcy protection. 11 U.S.C. § 365(n).

6. Demand letters. The bill seeks to address, at least in part, criticisms that non-practicing entities (NPE’s) and patent assertion entities (PAE’s) engage in deceptive licensing efforts by sending generic demand letters to hundreds of potential infringers, seeking to leverage the threat of expensive litigation to extract settlement agreements. A number of states recently have enacted laws to prohibit abusive patent assertion practices. HR 9 would provide that a demand letter cannot be used to establish willful infringement unless it “identifies with particularity the asserted patent, identifies the product or process accused, identifies the ultimate parent entity of the claimant, and explains with particularity, to the extent possible following a reasonable investigation or inquiry, how the product or process infringes one or more claims of the patent.”

7. Disclosure of real party in interest. The bill would require a plaintiff to notify the USPTO, the court, and all parties of the real parties in interest in any patent infringement suit (and their ultimate parent entities), including any assignee, licensee with the right to grant sublicenses, and any other entity with a financial interest in the patent. If a party in interest is a partnership, the bill would require disclosure of all partnership interests in excess a five percent share of the partnership.

8. Discovery reforms. The bill would direct the Judicial Conference of the United States to investigate and propose procedural reforms to remedy the “asymmetries in discovery burdens and costs” in patent litigation, including the cost and burdens of document and ediscovery, sequencing and bifurcation of discovery, and case scheduling and management in patent actions.

Although HR 9 continues the momentum towards patent litigation reform that started in the last Congress, some commentators have noted that recent changes in the law, including provisions of the America Invents Act and court decisions, may be reducing the incidence of litigation by NPEs and PAEs. As a result, some groups representing patent owners may oppose the bill due to concern that the additional restrictions are unnecessary and would needlessly impair the ability of patentees to enforce their rights against infringers.