Patent Law Reform – Proceed with Caution

by Howard J. Klein

The passage of the America Invents Act (AIA) in 2011 stimulated renewed interest in how the law of patents should fulfill the Constitutional mandate to “promote the progress of…the useful arts” (Article I, Section 8, Clause 8). Recent interest in further patent law “reform” has focused on alleged abuses in the enforcement of patents by so-called “patent trolls,” entities (more formally referred to as “Non-Practicing Entities” or “Patent Assertion Entities”) that derive their income from enforcing patents, rather than from practicing the patented inventions. Consequently, a number of bills were introduced in the 113th Congress that purported to address the alleged abuses in patent enforcement. Only one bill, HR 3309 – Goodlatte, managed to pass in the House; none passed in the Senate. Because a nearly identical bill (HR 9) has recently been introduced in the House Judiciary Committee, it is worth considering whether certain of the “reform” provisions in the prior bill may be unneeded in view of recent developments, and may, in fact, create new problems.

Among the provisions in HR 9 that purport to address alleged abuses in patent infringement actions are the provisions for heightened pleading requirements for complaints alleging patent infringement, and for fee-shifting to require the non-prevailing party to bear the prevailing party’s attorneys’ fees and costs. It is appropriate to ask, however, whether recent Supreme Court decisions have attenuated (or even eliminated) the need for these measures. The decisions in Octane Fitness, LLC v. Icon Health & Fitness, Inc., 572 U.S. ___ (2014) and Highmark, Inc. v. Allcare Health Management System, Inc., 572 U.S. ___ (2014) loosen the criteria by which District Court judges may declare a patent case “exceptional” under 35 U.S.C. §285, thereby giving the judges much greater discretion to award attorneys’ fees and costs to the prevailing party. District Court judges, who already have the authority to weed out frivolous suits, almost certainly will use this enhanced authority under existing law to assess fees and costs not only in cases that are objectively meritless, but also in cases that are imprudently prosecuted, thereby achieving much of any needed fee-shifting without further legislation. Moreover, the threat of sanctions under Section 285, beyond those available under Rule 11, Fed. R. Civ. P., will impose a heightened level of self-discipline on patent litigants, thereby providing a salutary prophylactic effect.

Even if a legislative “fix” to patent infringement litigation is deemed appropriate, the provisions of the bill are particularly burdensome on all patent infringement plaintiffs, not just NPEs. For example, under HR 9, an infringement complaint would need to set forth specific facts relating to each accused product or process (“instrumentality”), including, for example, the name and model number (where available) of each accused instrumentality, and how each asserted claim specifically relates to each accused instrumentality. Many such facts may not be readily available to a patent owner before suit is filed, and would only become evident in response to discovery. A complaint would further need to: (1) specify the authority of the infringement plaintiff to assert each patent claim allegedly infringed, (2) describe the principal business of the plaintiff, (3) list all other complaints filed that allege infringement of the asserted patent(s) of which the plaintiff is aware, (4) specify whether any asserted patent has been declared by a standard-setting body to be essential or potentially essential to that body’s standard setting, and (5) state whether any government (US or foreign) has imposed licensing requirements on any asserted patent. The need for such detailed pleading requirements is unclear, since, under current law, to the extent that such information is relevant, it would be discoverable by the defendant. Ironically, NPEs are not likely to be deterred by the new pleading requirements, while individuals and small-to-medium entities (“SMEs”) likely will be.

Likewise, the fee-shifting provisions of the bill, by mandating an award of attorneys’ fees to the prevailing party unless the position of the non-prevailing party was reasonably justified in law or fact, may be overkill in light of the enhanced authority given to judges to declare a case “exceptional,” as noted above. It also presents its own set of problems, such as how to determine the “prevailing party” in a case in which the plaintiff wins on some issues and loses on others. Would this require a court to parse the award on a claim-by-claim basis? Would the reasonableness of a party’s position be determined objectively or subjectively? Resolving these issues would almost necessarily complicate patent litigation. Moreover, it is possible that this mandatory fee-shifting might stifle contingent fee arrangements, again to the detriment, primarily, of individual and SME plaintiffs.

Another provision of the bill would impose rigorous and ongoing disclosure requirements regarding the identity of any entity with a financial interest in the patent being enforced. The disclosure mandated by this provision far exceeds that which would be needed to establish the ultimate ownership of an asserted patent. Besides being needlessly burdensome, the mandated disclosure could lead to the revelation of confidential financial and licensing arrangements. To the extent that such information is relevant, it is readily discoverable under current rules, with appropriate protective orders to maintain needed confidentiality. Simply put, the need for this disclosure overkill has not been established, and its harm would likely far outweigh any benefit.

The bill would also undermine the provisions in the AIA that provide for post-grant challenges to the validity of a patent. Under current law, a party (“petitioner”) challenging patent validity administratively before the Patent Trial & Appeal Board (PTAB) “may not assert…in a civil action…that the [patent] claim is invalid on any ground that the petitioner raised or reasonably could have raised during the post grant review.” (Emphasis added.) The bill would strike the term “or reasonably could have raised.” Thus, a post grant review petitioner, having failed to invalidate a patent claim in the PTAB, would be able to challenge the same claim in district court using different arguments and evidence. This would deprive the PTAB decision of any semblance of finality, discourage settlement, and open the door to strategic gamesmanship on the part of an accused infringer.

To be sure, there are positive aspects to the proposed legislation. For example, it would require the PTAB, in post grant reviews and inter partes proceedings, to employ the same standard of claim construction as is used in civil actions, rather than the PTO’s “broadest reasonable interpretation” standard, as the AIA now provides. This consistency in claim construction would better serve the PTAB’s role in assuring that the USPTO grants patents with claims that would not be invalidated in civil actions. Other provisions, for example those directed to reducing discovery costs and extending the pilot program under which district court judges in designated judicial districts can request assignment to patent cases, should be readily accepted, if not warmly embraced.

In considering patent reform legislation, Congress should heed the counsel of former USPTO Director David Kappos: “Congress must ensure the IP system, which encourages companies to invest in R&D to develop new products and innovations, strikes the right balance between the interests of inventors and the public.” HR 9, like the Goodlatte bill passed in the House last year, does not strike that balance. Congress should certainly consider and pass meaningful reform in patent law, but it should take into account that the problem of “patent trolls” may be grossly overstated In view of the recent decline in patent litigation by NPEs as a result (at least in part) of validity reviews by the PTAB under the AIA. It should further consider whether anything more is needed to address patent enforcement abuse beyond the Section 285 powers granted by the Supreme Court to District Court judges. If Congress does these things, it is likely to strike the balance demanded by Mr. Kappos, and deserved by the stakeholders in our IP system.

Howard Klein is a founding partner of Klein, O’Neill & Singh, LLP, of Irvine, CA. He is a former member (2003-2006) of the Patent Public Advisory Committee. The views expressed are his own.

Mr. Klein’s article originally appeared at IP Law360, and it is reprinted here with permission of IP Law360.