October 7

Goodlatte’s Proposed Patent Reform: Good News/Bad News

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Goodlatte second discussion draftCongressman Bob Goodlatte’s (R-VA) “Second Discussion Draft” of proposed patent reform legislation, released in late September, is the most comprehensive of the various patent reform bills circulating on Capitol Hill.  Click here to read or download the draft. It incorporates (with significant changes) elements found in other proposed patent bills, including the SHIELD Act and the End Anonymous Patents Act.

There are six changes that represent substantially new laws, and many more changes that are incorporated under “Procedures and Practices to Implement and Recommendations to the Judicial Conference” and “Improvements and Technical Corrections to The Leahy-Smith America Invents Act.”

From the patent owner’s perspective (big and small), four of the six changes that are substantially new law are either neutral or good – one of them, in fact, doesn’t go far enough.  Two of the six, however, would substantially harm the interests of innovators and patent owners.  There is a seventh issue, in the “technical” section that is problematic.  The following discussion summarizes the key provisions, and adds our commentary on each:
 

  1. Pleading requirements: The bill would substantially increase the amount of information that needs to be initially filed in a lawsuit alleging patent infringement, including not only which patents are being infringed but which claims in the patents are being infringed, and an explanation of how the defendant’s product or service infringes the relevant claims.

    Commentary: This clause is clearly aimed at stopping the practices of “patent scam artists” who take advantage of the fact that it’s much cheaper to file a lawsuit than to engage in even the first round of defense.  We have no objection to this clause: it could help slow down the scam artists, while not harming legitimate patent owners who have all of that information available before sending a company a demand letter.  Minimal pleadings do not work in patent cases.  The complaint should contain enough detail that the entity accused of infringement can figure out what it is being accused of infringing. 
     
  2. Award of Legal Fees: Most of Europe has a simple rule regarding legal fees: the loser has to pay the winner’s reasonable legal fees.  In America at present in patent cases legal fees are only awarded in “exceptional circumstances,” such as when someone brings a lawsuit that has no merit whatsoever, or on the defense side when a company intentionally takes steps that would drive up legal fees to try and force a settlement at a lower cost.  Goodlatte’s bill makes a substantial change.  It makes awarding legal fees the default, "unless the court finds that the position of the nonprevailing party or parties was substantially justified or that special circumstances make an award unjust."

    Commentary: This provision is aimed at slowing down patent owners from filing lawsuits on the basis of weak patents or dubious infringement. The reasoning goes if they know they could have to pay the other side’s legal fees if they lose, they will be less likely to take a chance with a weak lawsuit.  It would also encourage companies accused of patent infringement to fight dubious lawsuits instead of settling, as they would know if the lawsuit is without merit they will get their legal fees back.

    We are all in favor of this provision.  Patent owners with strong patents in cases of clear infringement will clearly benefit from being able to recover their legal fees.  This proposal is an improvement over the fee-shifting proposed in the SHIELD Act which is blatantly biased against one particular class of patent owner.  While it’s an improvement, we don’t think this provision goes far enough: allowing an exception for “substantially justified” means lawyers will find ways to “substantially justify” why their client should not have to pay fees.  Getting a flimsy legal opinion that a patent is valid or that a product does not infringe should not be a basis for “substantially justified.”  It would be better to go to a straight “loser pays” system with very limited exceptions, as is done in Europe, the so-called “English rule.”  There should be clarity regarding the level of fees to be awarded.  One alternative would be tying the amount of fees recoverable to the claim amount or some other metric and having the judge set this amount at an early stage in the case; this would deter abuses on both sides.  What this should not become is a race to “bill more.”
     
  3. Recovery and Joinder of Interested Parties.  A lawsuit is between two parties – a plaintiff and a defendant.  This provision would be a radical departure – it would allow for dragging “interested parties” into a lawsuit.  If the non-prevailing party can’t pay costs, they may be recoverable from any “interested party.”  If the party alleging infringement has no interest in the patent other than asserting the patent (in other words it is a Non-Practicing Entity (NPE)), any “interested party” may be joindered to the lawsuit.  An “interested party is defined as one that “has a direct financial interest in the patent or patents at issue, including the right to any part of an award of damages or any part of licensing revenue.”  Law firms and people holding an equity interest who do not have any control over the civil action are excluded from being labeled “interested parties.”  In other words, it would cover your cousin Clyde if you decided to give him some portion of the settlement for whatever reason – he helped you out, or you just wanted to be nice to him. 

    Commentary: This would have a chilling effect on the ability of patent owners to marshal the resources they need to protect their intellectual property.  If you need to finance the licensing effort, why drag in the person that provided you financing?  If you find a bank that wants to support your licensing campaign, why should they be part of the litigation?  If a patent owner wants to sell her patent and keep an interest in licensing proceeds, why should that be discouraged?  Why should law firms be allowed to work on a contingency fee basis, but advisory firms and finance firms cannot?  Patent owners would end up receiving less favorable terms.  NPEs would pay other patent owners less for patents to make up for the fact that they are getting less favorable terms from advisory and finance firms.  Harming patent owners harms the incentives for innovation.  Much like the debate over who is an “affiliate” under SEC law promoted lengthy regulations and considerable litigation, this provision appears likely to provide more work for lawyers and judges and would further complicate an already complicated process.
     
  4. Discovery.  This one is a little technical, so we’ll provide some explanation.  What this provision says is if the court determines claim construction is required, discovery is limited to that required until the court has ruled on the issue.  Now for what that means.  There are two steps in analyzing a case of patent infringement, claim construction and a comparison of the infringing product to properly construed claims.  Claim construction is the process of determining the scope and meaning of specific words used in the claims of the patent.  This is a very important step.  If there is any ambiguity in exactly what is and what is not covered by a patent that ambiguity must be removed before you can decide whether a particular product infringes the patent or not. This provision says that if claim construction is required (it almost always is), then discovery is limited to issues relating to the claim construction until that step is completed.  This can be a big help to defendants because they don’t have to spend a lot of time and effort producing documents relating to the product until the boundaries of the patent have been established.

    Commentary: Although this provision could have the effect of slowing down the process of patent litigation – and delaying when a patent owner gets compensated for infringement – we believe it’s reasonable.  It reduces the burden of patent litigation since if the claim construction results in a narrow interpretation of the relevant claims such that the products clearly do not infringe the defendant will not have had to spend money on unnecessary discovery.
     
  5. Transparency of patent ownership. This provision would require a plaintiff to disclose to the Patent Office, the court, and every adverse party, the assignee of the patents at issue, any party with the right to sublicense or enforce the patents at issue, any entity that has a financial interest in the patents at issue (or the plaintiff), and the ultimate parent of any assignees.

    Commentary: As we said in our blog post “We Support the Goal of Ending Anonymous Patent Ownership,” we have no objection in general to transparency of patent ownership.  If someone wants to license a patent, it should be easy for them to find the owner.  But we do object to including “interested parties” in the disclosure when the goal is to joinder them to a lawsuit and make them responsible for recovery of legal fees in the event the patent owner loses the case, for the reasons cited above. 
     
  6. Customer suit exception.  This provision would allow for a stay of an infringement action against a customer if the same or similar suit has been initiated against a manufacturer.  This may have been stimulated by a case last summer when a patent owner was suing both manufacturers such as Cisco and end users such as Starbucks for infringing some WiFi patents. 

    Commentary: Even though this could be seen as an erosion of the rights of patent owners, we do not object to it.  It’s reasonable that if someone is suing an equipment manufacturer for patent infringement it can be assumed that in any resolution of the case it would include licenses that would cover end users’ use of the product.   Of course, the customer should be  bound by the findings of the court.  If the customer has materially modified the product, they should not be able to avail themselves of this provision. 
     
  7. Covered business method (CBM) patent reexamination.  The biggest change in the technical section of the proposed legislation is to make permanent the America Invents Act’s temporary process for post-grant opposition to covered business method patents.  It also changes the definition of patents that are covered to “a patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions.”

    Commentary: While this provision is buried in the “technical” section, it has substantial ramifications. None of them good.

    The America Invents Act (AIA) added new provisions for post-grant review of patents by the patent office. For the first nine months after a patent is issued – any patent – anyone who wants to can challenge a patent’s validity at the patent office.  The AIA also substantially changed an existing process known as inter partes review and left intact another patent office post grant review process known as ex parte reexamination.  The details of how the different review mechanisms work are not important to the issue at hand – the point is that there are already several ways that a patent can be challenged at the patent office.  Allowing yet another mechanism for a certain class of patents is unduly burdensome on patent owners.  It severely damages the rights of owners of business method patents, because someone infringing the patent could keep going back to the patent office for different kinds of review, dragging the process out and running up expenses for the patent owner while deferring the obligation to pay for using someone else’s intellectual property without permission. 

    We appreciate that having patents reviewed by the patent office is cheaper and less expensive than having the validity of a patent determined in court.  But it’s unreasonable to subject a patent owner to multiple reviews at the patent office.  We suggest allowing one review at the patent office – whether it’s a post grant review in the first nine months of a patent’s life, or an inter partes review or ex partes reexam, or CBM review – and that’s it.  We are already seeing some abuse of the system with real parties in interest encouraging other third parties to initiate review so that the real party in interest can avoid the consequences of bringing an inter partes review (IPR), which is primarily not getting a second bite at the apple later in court.  There is clearly a need for disclosure of “interest” in this provision—you should not be able to encourage a third party to institute the IPR and avoid the consequences if you lose.  Endless challenges to a patent’s validity – ex parte, IPR, CBM and in court—do nothing other than promote endless challenges and bigger legal bills.  There is a reason that over 100 large corporations recently wrote a letter to Congress opposing this legislation.  As to the specific concern that some financially-oriented business method patents are weak and should be subject to greater scrutiny, there’s a simple solution: make sure that patent examiners have the tools, training, and time they need so that only strong patents are issued in the first place.

Besides getting rid of the CBM review, with two additional changes this proposed legislation could be a positive thing: make the fee-shifting rule a true “loser pays” provision, and get rid of the joinder of interested parties.  Clearly the concern driving the joinder of interested parties is that an entity bringing patent litigation may not be able to pay the legal costs of the other side if it loses.  There are other ways to address that concern.

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