Bloomberg BNA - House Considers Patent Litigation Reform Bill With Some Agreement But Controversy Likely
By Tony Dutra
Heightened patent infringement pleading was a big hit, expanding the covered business method challenge option took a big hit, and just about every other provision of the newest patent litigation reform bill came out somewhere in between during an Oct. 29 hearing of the House Judiciary Committee.
Committee Chairman Robert W. Goodlatte (R-Va.) introduced the Innovation Act (H.R. 3309), primarily aimed at curbing patent infringement litigation abuses but also covering quite a few unrelated issues, on Oct. 23 (206 PTD, 10/24/13).
Four witnesses generally supported the concepts of the bill though the phrase “the devil is in the details” was sprinkled throughout their written testimony. Arguably the issue that bothered other members of the Judiciary Committee, though, was the “loser pays” provision, awarding attorneys' fees and costs to the prevailing party in most cases, that did not arouse much concern among the witnesses.
Goodlatte's bill was temporarily upstaged at the beginning of the session. Reps. John Conyers Jr. (D-Mich.) and Melvin L. Watt (D-N.C.), joined by witness and former PTO Director David J. Kappos, touted the Innovation Protection Act (H.R. 3349), a bill intended to let the Patent and Trademark Office have unfettered access to the fees it collects (see separate story on the bill), with each saying that Congress could do more to fix problems in the patent system by passing that bill if nothing else.
By the end of the opening statements, though, Goodlatte seized the momentum again. Though colleagues and a couple of the witnesses urged the committee to proceed with more debate and caution, Goodlatte said, “We will proceed with all due concentrated deliberation.”
With 17 different committee members taking the opportunity to ask witnesses questions--substantially higher than usual on patent issues in the Judiciary Committee--the deliberation is likely to be contentious.
Most of the key provisions of H.R. 3309 are directed to problems generally associated with how some patent assertion entities use litigation as a weapon in abusive ways:
• Detailed pleading, addressing the perceived litigation abuse of filing a complaint with minimal information so as to require the alleged infringer to incur significant discovery costs just to determine exactly which products are alleged to infringe exactly which patent claims;
• Loser pays, directed to shifting attorneys' fees and costs to the prevailing party “unless the court finds that the position of the nonprevailing party or parties was substantially justified or that special circumstances make an award unjust”;
• Transparency, setting requirements to identify the real party in interest (RPI) to a patent right at the Patent and Trademark Office and allowing joinder of an RPI in litigation;
• Discovery cost shifting, adding new 35 U.S.C. §299A to limit “core” discovery prior to claim construction, require the requester of “additional” discovery to pay the expenses of the party providing it, and to otherwise--in Section 6 of the bill--make “suggestions” for district court case management that the Judicial Conference would be compelled to implement; and
• Customer-suit exception, addressing the abuse of a patent troll suing customers using an allegedly infringing product rather than suing the manufacturer that makes it.
But H.R. 3309 steps into non-troll territory as well, making it a broader patent reform bill than simply addressing patent troll behavior. Notable provisions discussed in the hearing were:
• Covered business method expansion, making permanent the AIA's “transitional program” for challenges to “covered business method” patents on any grounds, regardless of when issued, and expanding it by codifying a definition of covered business methods that the Patent Trial and Appeal Board presented in Paper 36 of SAP Am. Inc. v. Versata Dev. Grp. Inc., No. CBM2012-00001 (114 PTD, 6/13/13); and
• PTAB review, eliminating the “broadest reasonable construction” claim patentability standard at the PTAB for all post-grant challenges and requiring it to use the same standard used by district courts--the “ordinary and customary meaning to one of ordinary skill in the art.”
Sponsors, Bill Comparisons, Witnesses
Cosponsors of the bill include Judiciary Committee members Reps. Howard Coble (R-N.C.), Zoe Lofgren (D-Calif.), Lamar Smith (R-Texas), Jason Chaffetz (R-Utah), Spencer Bachus (R-Ala.), Tom Marino (R-Pa.), Blake Farenthold (R-Texas) and George Holding (R-N.C.). Two other cosponsors do not sit on the Judiciary Committee: Reps. Peter DeFazio (D-Ore.) and Anna Eshoo (D- Calif.).
Chaffetz and DeFazio are sponsors of a “loser pays” bill that would have gone farther than H.R. 3309 to shift attorneys' fees and court costs to losing patent assertion entities only (40 PTD, 2/28/13). Chaffetz did not attend the hearing.
Farenthold is cosponsor of H.R. 2639, the Patent Litigation and Innovation Act (133 PTD, 7/11/13), that would require more detailed pleading requirements for patent infringement actions. It also addresses discovery, end-user defendant stays, and sanctions. Cosponsor Rep. Hakeem S. Jeffries (D-N.Y.) is not a cosponsor on H.R. 3309.
The CBM definition is not as expansive as that proposed in Stopping the Offensive Use of Patents Act (H.R. 2766) (141 PTD, 7/23/13), proposed by Judiciary Committee members Reps. Darrell Issa (R-Calif.) and Judy Chu (D-Calif.).
The Obama administration also weighed in June 4 with an announcement of anti-troll executive actions and preferred legislative measures (108 PTD, 6/5/13). H.R. 3309 falls short of the president's request in that it does not contain a legislative solution that would stop patent trolls from sending demand letters to small business owners who allegedly use a manufacturer's infringing computing system or other product.
In addition to Kappos, now at Cravath, Swaine & Moore, New York (26 PTD, 2/7/13), the three other witnesses at the hearing were:
• Krish Gupta, deputy general counsel of leading data storage firm EMC Corp., Hopkinton, Mass.;
• Kevin Kramer, deputy general counsel for intellectual property at Yahoo! Inc., Sunnyvale, Calif.; and
• Robert Armitage, former general counsel at Eli Lilly& Co., Indianapolis.
General Agreement on a Few Issues
No witness contested Section 3(a) of the bill, which adds new 35 U.S.C. §281A to specify “Pleading requirements for patent infringement actions,” with 10 elements of the complaint required in varying levels of detail. Kramer repeatedly categorized it as “genuine notice pleading.”
Each also supported staging discovery so that most discretionary discovery would not take place until after claim construction--a point at which the outcome is more likely to be predictable.
On each of these two topics, the only concern raised--primarily by Kappos--was that the legislation must be clear that penalties for abuses should be bilateral. Defendants may be abusing the litigation by asserting counterclaims without support, or they may seek discovery as a delaying tactic, for example.
As to transparency, if anything, the witnesses were concerned that the bill did not go far enough. Rep. Theodore E. Deutch (D-Fla.), sponsor of H.R. 2024, the End of Anonymous Patents Act (97 PTD, 5/20/13), concentrated on that issue during his questioning. His bill had more extensive requirements for informing the PTO of RPI changes.
Joinder was slightly more controversial. Kappos noted the provision in the bill that makes a licensee subject to joinder and combined with a loser-pays outcome, can make a non-practicing patentee liable for the other party's court costs if its licensee loses.
The H.R. 3309 change that would require the PTAB to use the judicial standard for reviewing claims received a surprising amount of attention. Though Armitage cited the negative consequences of inconsistent decisions coming from courts and the PTO, others noted that the PTAB's procedures allow the patent holder to amend claims. If those claims are to have the presumption of validity, they said, the claims must undergo the same review standard for any claims that would be granted to a new patent application.
In his prepared remarks, Gupta noted that his firm holds a large patent portfolio but he spoke more about the frivolous patent infringement lawsuits litigated against the company.
His testimony was most persuasive for its examples of egregious behavior that was not compensated by a district court judge under the existing statutory provision for shifting attorneys' fees and costs, 35 U.S.C. §285. The provision requires an “exceptional case” finding by the court, which Gupta and others said was hard to satisfy under the current two-pronged standard--that a losing plaintiff's case was both objectively baseless and brought with bad faith.
Conyers, Watt and Rep. Henry “Hank” Johnson Jr. (D-Ga.) asked the committee to wait while the Supreme Court decides two cases on whether that standard is correct. Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., No. 12-1163, and Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 12-1184 (U.S., review granted Oct. 1, 2013). Watt seemed incredulous at one point that some witnesses thought that “the 535 members of the House and Senate are better qualified” than the high court to resolve the issue.
However, Armitage responded, “The Supreme Court is trying to decide what position the goalposts are in today, but this committee [with this bill] would move the goalposts,” by flipping the presumption in favor of awarding fees with the judge having to explain why the court did not do so.
The only other concern mentioned on the topic was that a loser-pays scheme would discourage small patent-holding inventors from filing lawsuits for fear that, despite having a legitimate case, a defendant with greater resources will ultimately win. Kramer discounted that concern, saying that the bill gives the judge the opportunity not to shift fees in “meritorious” cases.
The absence of a provision specifically intended to stop patent trolls from sending demand letters did not stop the committee members from repeatedly suggesting it was a problem that needed to be fixed. Only Kramer attempted to find support in the bill.
Goodlatte mentioned in his opening remarks that Martha Stewart fought back after receiving a demand letter by filing a declaratory judgment action against patent troll Lodsys. Martha Stewart Living Omnimedia Inc v. Lodsys Grp. LLC, No. 2:13-cv-01074-NJ (E.D. Wis., filed Sept. 25, 2013). Kramer argued that, with the potential for Lodsys to be stuck with Stewart's legal bills, it and other demand-letter senders will begin to think twice about the practice.
Customer-Suit Exception Muddled
Kappos was quite concerned about the customer-suit exception provision, considering that the relationship between the patent-holding manufacturer and the patent-licensing customer covers a broad range of possibilities. First, he said, the manufacturer may supply only a noninfringing component and the customer may be adding components into a system, and it is the system that is infringing. Second, he noted that there may be no recourse for a patent-holder when the manufacturer is a foreign firm not subject to liability for U.S. infringement.
Discussion of the customer-suit exception also took an unexpected turn. The general concern has been for the same type of party targeted by demand letters--an “innocent” coffee shop offering WiFi access to patrons, for example. Though that concern was mentioned here, both committee members and witnesses instead considered the problem of very large companies being the target of a lawsuit simply because they had the ability to pay a large infringement award while a small patent holder might not.
Issa devoted a good deal of his questioning to whether it was fair to sue retailers such as Safeway and Kroger for using technology--such as in-store network communications purchased from other companies and helping to operate a store--when neither is reselling the technology in any way.
Bad Day for CBM Expansion
Kappos's attack against changing the covered business method transitional program--in any way--was the strongest, but Armitage was not far behind. Even more damaging to the provision's inclusion in the bill, several committee members--including AIA co-author Rep. Lamar S. Smith (R-Texas)--focused on it, seemingly looking for holes in it.
Issa, sponsor of an even more expansive definition, was the only strong voice on the other side of the issue. He said that limiting the CBM definition to the financial services industry--as the AIA did--was, in fact, discriminatory in some ways, since overly broad patents could be found in any industry.
But Kappos and Armitage were key figures in the AIA's passage, and they repeatedly defended the compromise that went into that bill's final approval, including not only that CBM challenges would only be available for a limited time but would also be exclusively targeted to specific patents that, proponents argued, had not received adequate examination at the PTO.
Congress's Constitutional Authority
Section 5 of the bill on the customer-suit exception and Section 6 on court case management arguably are attempts by Congress to tell the judiciary how to conduct its business, and that drew considerable attention.
Goodlatte disagreed with the implication that the bill crosses the boundary of the constitutional separation of powers.
“The bill's provisions are designed to work hand-in-hand with the procedures and practices of the Judicial Conference, including the Rules Enabling Act, and the courts, providing them with clear policy guidance while ensuring that we are not pre-determining outcomes and that the final rules and the legislation's implementation in the courts will be both deliberative and effective,” he said in his opening statement.
But Watt said it “risked comity with the Judicial Conference.”
Most of Section 9 Ignored
Section 9 of the bill contains a number of other provisions, unrelated to patent troll issues, that were barely mentioned but have raised some controversy among stakeholders:
• Eliminate district court challenge, repealing 35 U.S.C. §145, which allows patent applicants who face rejections by the PTO to file a civil action in federal district court, rather than appeal to the Federal Circuit, under 35 U.S.C. §141.
• Limited PGR estoppel, correcting what some call a “scrivener's error” in the America Invents Act and others say was key to their agreement to the AIA, by eliminating the estoppel effect of post-grant review as to arguments that the petitioner “reasonably could have raised,” in 35 U.S.C. §325(e)(2).
• Patent term adjustment. Section 9(f) would codify the PTO's interpretation that patent term adjustment does not accrue after the applicant files a request for continued examination.