Patent Reform Series: Part 1 of 3 “The Innovation Act”

By Dennis W. Collins

This is the first installment of a three part series on the patent reform bills that are currently being debated in Congress. One of the most discussed bills that is being pushed through the House of Representatives is the Innovation Act. The Act was originally introduced by Representative Bob Goodlatte (R-VA) in the 2013 Congress, where it passed through the House, but failed to pass in the Senate. The Act was reintroduced into the current 2015 Congress by Goodlatte (R-VA) and passed by the House earlier this month with little controversy. This Act is being used to change the patent litigation environment in order to limit the prevalence of Non-Practicing Entity’s (NPE) or more popularly known, “patent trolls.” These NPE’s are companies that do not use their patents for anything other than to demand licensing fees for the patents, or threaten lawsuits.

Several major corporations, like Apple and Google, who are strongly advocating for the Innovation Act, hope that it will significantly change the current patent situation. The Act has received several cosponsors and the added support of President Barack Obama. The introduction of the Innovation Act is to address the increasing patent litigation taking place despite the signing of the Leahy-Smith America Invents Act (AIA) in 2011.

The Innovation Act introduces several provisions to protect against NPE’s. The Act raises the pleading requirements for a complaint in patent infringement cases. Historically, complaints have been notoriously vague when they are sent to the defendant. This leaves the defendant wondering what exactly she was being sued for and why. The provision for patent complaints requires the parties to supply a much more specific pleading under the Innovation Act. The party to file the complaint needs to disclose up front the entity they are representing. NPE’s have been infamous for hiding behind shell companies when filing law suits to protect the identity of their parent company. Under the Act, new patent complaints must include a claim chart that describes a theory of infringement for each asserted claim against each specifically referenced product. This could be both time consuming and costly for NPE’s, universities, and many smaller companies trying to assert their rights to a patent. The Innovation Act also could drag out the amount of discovery and time spent available to the parties in litigation, making it onerous and more costly for both parties.

The Act includes a cost and fee shifting provision, which raises the most concerns amongst innovators. This fee shifting requires a US District Court judge to award reasonable attorneys’ fees and expenses to the winning party. However, the court may take the position that the conduct of the losing party was reasonably justified by law and fact, or falls under special circumstances, and award no fees to the prevailing party. The Act also imposes a large increase in post judgment awards fees. Severe economic hardship to the inventor is an example of what falls under “special circumstances,” and the awarding of the attorneys’ fees must be unjust against the losing party to avoid the fees. The result is a shift of the burden of proof to the losing party showing they would be unjustly encumbered by attorneys’ fees.

Another important provision of the Act allows “interested parties” to be joined. According to the Act, the term “interested parties” is defined by a party that: is an assignee patent; has a right to enforce or sublicense the patent; has a direct financial interest in the patent, including the right to awards of damages or licensing revenue. Any parties involved will be personally liable to satisfy any awards of attorneys’ fees and expenses if the party who claims the patent prevails. Many patent owners believe this will decrease the value of their patents. The fee shifting will reduce the practicable ability of patent owners to pursue certain infringement cases, because of the possible risk of paying exorbitant attorneys’ fees and expenses if they fail. Proponents of the Act point to this provision being helpful for discouraging meritless or superfluous claims.

The final provision which raises many eyebrows is in what venue the suit can be brought. There are a few districts around the country where claims are dealt with much more leniently by judges. The Eastern District of Texas, well known for its leniency towards patent holders no matter how ridiculous the suit, was the most popular District Court in the nation for the claims to be brought, although the US District Court of Delaware is also very popular. The new provision forces the action to be brought only in a certain judicial district, according to certain qualifications. This district must include: (1) where the defendant has its principle place of business or is incorporated; (2) the infringement must have occurred in this district; (3) where the invention was created; (4) where significant research was done on the invention; (5) and where a physical facility has been established. The desired result is to stop frivolous suits brought by patent trolls who abuse the current system.

Unsurprisingly, there is no shortage of tangentially involved parties objecting to the passage of the Act. Qualcomm, Merck, Monsanto, and many large universities have criticized the Act for intruding too much on the current patent system. Their argument is that the bar is being lowered too much for patent rights. Higher education associations, such as universities, criticize the Act for discouraging the private sector from turning university research discoveries into inventions. With the increased risks in litigation with the shifting of fees, the universities lack the deep pockets that are necessary to enforce their patents. They argue that strong patent protection is necessary to insure that the rewards and benefits of the work the universities do is not at risk of being taken away from them. Many universities rely on the revenue from their licensed patents to supplement continued research and funding.

There are many parties interested in the fate of the Act. One side believes it is necessary in order to control for NPE’s; whereas the other side believes that the AIA of 2011 has already achieved the desired result of stopping patent trolls. The fee shifting provision was recently addressed in the Supreme Court decision in Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014). The Supreme Court lowered the bar to prove what is an “exceptional case” when referring to how the fees for the attorneys are shifted to the winning side. The court found that an exceptional case is one that is litigated in an “unreasonable manner” or is based on the “substantive strength” of the party’s position.

In another recent case, the Supreme Court has made it easier to seek attorneys’ fees in patent cases for the prevailing party. In Highmark, Inc. v Allcare Management Systems, Inc. 134 S. Ct. 1749 (2014), the Court held that appellate courts should give deference to district courts when deciding if the shifting of attorneys’ fees is “objectively unreasonable.” This asserts that the approval of an award of attorneys’ fees is a “matter of discretion” and to be reviewed only for an abuse of that discretion in the Federal Circuit. The result of this decision makes it much more difficult for the losing party to show that the awarding of fees was a mistake by the district court.

Silicon Valley and other select parts of the United States are deeply affected by the patent environment. Many venture capitalists and private investments rely heavily on technology based companies that use these patents to protect their ideas as money is invested to help companies grow. It is believed that by increasing the cost of patent enforcement, the patents will be devalued, thus reducing the amount of investment into technology companies made by venture capitalists.

The consequences of this Act could have a very sweeping effect on the current patent environment. Many patent holders and startup companies are very interested to see what the result will be, and if the Act will actually be signed into law. The best outcome of this national spotlight is that the patent troll problem is being noticed by the general public, and the acknowledgment that a much needed reform to the patent system is finally being addressed. Next up in the three part series is the discussion of the STRONG Act, the Senate’s response to the Innovation Act.

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