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VOLUME 10 ISSUE 12 | December 2013

Intellectual Property Report

The Latest In Patent Reform: The Innovation Act (H.R. 3309)

Over the past year, various lawmakers have floated a flurry of patent reform proposals aimed at curbing patent litigation abuse by so-called “patent trolls,” or non-practicing patent enforcement entities.1 President Obama weighed in on the topic, proposing several executive actions and legislative recommendations on patent reform.2 Baker Botts’ September Intellectual Property Report includes an article that summarizes these recent proposals.3

 

The groundswell of support for anti-troll legislation motivated the House Judiciary Committee to recommend H.R. 3309, dubbed "the Innovation Act" to the full House of Representatives on November 20, 2013. The Innovation Act, originally introduced by Rep. Goodlatte (R-VA) on October 23, 2013, represents one of the more comprehensive patent reform bills to date. The ostensible goal of the legislation, according to Rep. Goodlatte, is to “to address the abusive practices that have damaged our patent system and resulted in significant economic harm to our nation.”4

 

Totaling over 50 pages of reforms, the Innovation Act, would regulate patent litigation practice by increasing pleading standards, placing limitations on patent discovery, and providing cost-shifting mechanisms. Over the month since its introduction, the bill has faced growing criticism, particularly from members of the judiciary. Federal Circuit Chief Judge Randall Rader has urged caution with patent reform legislation, stating that the judiciary is better suited to address these issues.5 Another Federal Circuit judge has gone further, arguing that patent reform bills that include case management proposals potentially violate the Constitution’s separation of powers clause.6 Perhaps to address these judicial concerns, the amended version of the bill passed by the Judiciary Committee tones down many of the case management rule-making mandates from the original version.


In the face of this growing opposition, it remains unclear whether the Innovation Act will garner the necessary political support to gain passage in both the House and the Senate. With strong support from the President and bipartisan support in Congress, however, some form of patent legislation targeted at so-called “troll behavior” seems likely to pass. The Innovation Act includes many proposed reforms, including the following provisions:

  1. Heightened pleading standards;
  2. Burden shifting on awarding attorney’s fees;
  3. Limitations on discovery;
  4. New USPTO disclosure rules;
  5. Limitations on demand letters;
  6. Mandatory stay of actions against customers; and
  7. Changes to AIA post grant review estoppel rules

In view of its current progress in Congress, it is important to consider the implications of the bill’s many provisions before the bill becomes law. And, even if the Innovation Act is not the last word on patent reform, it is nevertheless representative of many of the types of reforms targeted at non-practicing entities that are currently being considered. Below, this article discusses these provisions of the bill and analyzes how they would alter current patent jurisprudence if enacted in current form.


1. Heightened Pleading Standards


The Innovation Act significantly increases the pleading requirements for patent infringement actions. Currently, the Federal rule governing pleadings “‘generally requires only a plausible short plain statement of the plaintiff's claim,’ showing that the plaintiff is entitled to relief.”7 In 2012, the Federal Circuit’s In re Bill of Lading opinion held that for patent infringement, the complaint need not “plead facts establishing that each element of an asserted claim is met” nor “even identify which claims it asserts are being infringed.”8 To state a claim for patent infringement, a complaint must merely follow Form 18 as set forth by the Federal Rules of Civil Procedure and include “a statement that defendant has been infringing the patent ‘by making, selling, and using [the device] embodying the patent.’”9


Under the Innovation Act, the Complaint Must Include A Detailed Description of Patent Infringement. The Innovation Act incorporates pleading requirements similar to rules for disclosing patent infringement contentions that are found in the Local Rules of many Federal District Courts.10 While such local rules typically require disclosure of infringement contentions early in the case (e.g., prior to the initial case management conference), the Innovation Act would require detailed infringement allegations to be incorporated in the complaint. In doing so, the Innovation Act would abrogate In re Bill of Lading and specifically abolish Form 18.11


The Innovation Act would require the complaint to include, for each accused instrumentality, an “identification of each claim of each patent . . . that is allegedly infringed,” the name or model number (if known), and a detailed explanation of where each element of the claim is found in the accused instrumentality.12


The complaint would also be required to explain, “with detailed specificity, how each limitation of each claim . . . is met by the accused instrumentality.”13 This requirement can be compared to requirements for initial infringement contentions in districts that enact local patent rules such as the Eastern District of Texas. In the Eastern District of Texas, for example, infringement contentions must state “specifically where each element of each asserted claim is found within each Accused Instrumentality.”14 Eastern District of Texas courts have also held that plaintiffs must explain “how [the] accused infringing products meet the claim language.”15


Under the Innovation Act, the Complaint Must Identify and Explain Any Missing or Inaccessible Information. The Innovation Act recognizes that in some cases, the information required to plead patent infringement with specificity may not be “reasonably accessible.” Even in such cases, the plaintiff is nonetheless required to include in the complaint “a description of any [such] information . . . , why such undisclosed information was not readily accessible, and the efforts made by such party to access such undisclosed information.”16

 

Under current local rules, defendants may move to strike deficient contentions or move for a more definite statement. The Innovation Act would give Defendants an additional weapon to use against patent plaintiffs that provide deficient infringement contentions—moving to dismiss the complaint for failure to state a claim upon which relief may be granted. Although it is unclear how strictly judges would interpret these new pleading requirements, the Innovation Act would nevertheless provide a potentially powerful mechanism for dealing with infringement contention deficiencies while making pleading more difficult for patent plaintiffs.


2. Burden Shifting on Awarding Attorney’s Fees


The Innovation Act would significantly rewrite the attorneys’ fees provision of Title 35. Section 285 of Title 35 governs awards of attorneys’ fees in patent cases, which only provides for attorneys’ fees only in “exceptional cases.” In determining whether a case is exceptional, the Federal Circuit has stated that a judge may “weigh intangible as well as tangible factors: the degree of culpability of the infringer, the closeness of the question, litigation behavior, and any other factors whereby fee shifting may serve as an instrument of justice.”17


As originally drafted, the Innovation Act would have required that a “court shall award, to a prevailing party, reasonable fees and other expenses incurred by that 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.”18 Perhaps in view of criticism that this language could have harsh results, the bill was amended prior to approval by the Judiciary Committee to require only that the non-prevailing party’s position be “reasonably justified,” as opposed to substantially justified.19 The amendment also added the proviso that “severe economic hardship to a named inventor” would be one situation where an award could be unjust. In view of the softening language (changing substantially to reasonably), several proponents believe that fees would be shifted in only the most egregious circumstances.20


Limited joinder for interested parties where fees have been awarded to defendants
. As originally drafted, the Innovation Act would have imposed new joinder rules applicable when the party asserting infringement “has no substantial interest in the patent or patents at issue other than asserting such patent claim in litigation.”21 The recent amendment to the bill substantially narrowed this provision making it applicable only in situations where a defendant has been awarded attorney’s fees and the patent plaintiff cannot cover the attorney fee award.22 The bill would also make a party joined under that provision potentially liable for any unsatisfied portions of such fee awards, subject to certain notice provisions.23


3. Limitations on Discovery


The Innovation Act significantly restricts non-claim construction discovery prior to any Markman ruling. As a general rule, “discovery shall be limited, until such ruling is issued, to information necessary for the court to determine the meaning of the terms used in the patent claim, including any interpretation of those terms used to support the claim of infringement.”24 In addition to placing a de facto stay of non-claim construction discovery until after Markman, the bill would mandate that the judiciary create additional rules to further limit discovery and provide cost-shifting mechanisms for discovery. As noted below, the current amendment to the act significantly relaxes the rule-making obligation of the Courts. The first iteration of the bill required the judiciary to implement the rules in question, but the current formulation leaves whether to implement the rules to the discretion of the judiciary.


Rules regarding “Core Documentary Evidence.” First, the Innovation Act introduces the concept of “core documentary evidence,” which the bill defines to include documents related to conception and reduction to practice, documents that show the technical operation of the accused products, invalidating prior art, licensing, profit, pre-suit knowledge, standards-setting organization commitments, and marking.25 As originally drafted, the bill contemplated that each party would be responsible for paying for its own “core documentary evidence.”26 The current amendment of the bill, however, softens that language and merely requires the judiciary to determine whether “and to what extent each party shall be entitled to core documentary evidence and shall be entitled to costs” of producing that evidence.27

 

Rules regarding electronic communications. As originally drafted, the bill contemplated that the exchange of electronic communication “shall occur after the exchange of initial disclosures and core documentary evidence.”28 The current bill merely states that the judiciary should determine “whether such discovery shall occur after the exchange of initial disclosures and core documentary evidence.”29 Under the current formulation of the bill, the judiciary is also to determine whether discovery should be in accordance with a procedure in which the default number of electronic custodians is five (5), the parties may alter this number by mutual agreement without leave of the court,30 and on a showing of “distinct need,” the Court is allowed to grant up to five additional custodians.31


Rules regarding discovery beyond mandated limits. Under the bill’s current formulation, the judiciary is required to determine whether, for any discovery beyond that, the party requesting production is responsible for all costs caused by that additional discovery.32 For such discovery, the judiciary shall determine whether the party seeking discovery must post a bond covering the expected costs or show it has the financial capacity to pay the expected costs.33


Rules regarding production of computer code. The judiciary is also to consider whether to implement a rule making computer code is available only on motion and for good cause.34 The discovery of such code, however, “shall occur after the parties have exchanged initial disclosures and other core documentary evidence.”35


4. New USPTO Disclosure Rules


The Innovation Act would impose new disclosure rules on plaintiffs that file patent infringement actions, including (with some exceptions) the identification of parties with particular interests in the patents to the USPTO: ‘‘(A) The assignee of the patent or patents at issue; (B) Any entity with a right to sublicense or enforce the patent or patents at issue; (C) Any entity, other than the plaintiff, that the plaintiff knows to have a financial interest in the patent or patents at issue or the plaintiff; (D) The ultimate parent entity of any assignee identified under subparagraph (A) and any entity identified under subparagraphs (B) and (C).”36


Penalties for non-compliance with disclosure rules. The Innovation Act would place penalties on plaintiffs who do not comply with these requirements, including limiting the recovery of increased damages under section 284 and attorneys’ fees under section 285 during any periods of non-compliance, as well as awarding discovery costs required to discover non-compliance with the disclosure requirements.37 This provision would make available a new defense to patent plaintiffs who do not, for example, disclose to the USPTO parties that possess certain third-party rights (as described above) under licensing arrangements with the patent owner.


5. Limitations on Demand Letters

 

The latest amendment to the Innovation Act added a section on demand letters, stating that “it is an abuse of the patent system and against public policy for a party to send out purposely evasive demand letters to end users alleging patent infringement.”38 The bill goes on to state that such letters “should be considered a fraudulent or deceptive practice and an exceptional circumstance when considering whether the litigation is abusive.”39 The bill then requires that a party seeking a finding of willful infringement “may not rely on evidence of pre-suit notification of infringement unless that notification identifies with particularity the asserted patent, identifies the product or process accused, 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.”40


6. Stays of Actions against Customers


The customer stay provision is designed to expand the currently available, but rarely enforced, “customer suit exception,” which provides for the stay on some instances where customers are sued based on a manufacturer’s equipment.41 The “customer suit exception” may apply “where the first suit is filed against a customer who is simply a reseller of the accused goods, while the second suit is a declaratory judgment action brought by the manufacturer of the accused goods.”42


The Innovation Act would apparently provide an expanded ability for customers to stay infringement suits based on their use of a manufacturer’s equipment. Under the Act, courts shall grant stays when ‘(1) The covered manufacturer and the covered customer consent in writing to the stay,’ ‘(2) The covered manufacturer is a party to the action or to a separate action involving the same patent or patents related to the same covered product or process,’ ‘(3) The covered customer agrees to be bound by any issues that the covered customer has in common with the covered manufacturer and are finally decided as to the covered manufacturer in an action described in paragraph (2).”43 The bill would also place certain timing restrictions on when the stay can be filed.44


7. Narrowing of Estoppel Effect of Post-Grant Review


The Innovation Act would also revise portions of the landmark America Invents Act (AIA), particularly with respect to the newly enacted Post-Grant Review. In particular, the AIA included an estoppel provision providing that that petitioner cannot assert in a civil action or at the International Trade Commission (ITC) “that the claim is invalid on any ground that the petitioner raised or reasonably could have raised during that post-grant review.”45 Recognizing the potentially broad application of this estoppel provision, the Innovation Act would strike “or reasonably could have raised” from the waiver provision, thus limiting the estoppel only to those grounds that were actually raised by the post-grant review.46


Conclusion


The Innovation Act provides a good example of the types of provisions that are being considered by Congress to curb alleged patent litigation abuse. If enacted, the Innovation Act would substantially change many aspects of patent litigation. Even if passed by the House, it is not yet known how the Innovation Act will fare in the Senate. With the momentum that appears to be behind this bill in the House, it is important to consider how its proposals will impact patent litigation and the patent system as a whole.

 

 

1See, e.g., Stopping the Offensive Abuse of Patents Act (STOP Act), H.R. 2766, 113th Cong. (July 18, 2013); Patent Litigation and Innovation Act of 2013, H.R. 2639, 113th Cong. (July 10, 2013); End Anonymous Patents Act, H.R. 2024, 113th Cong. (May 16, 2013).
2Press Release, Office of the Secretary, White House, FACT SHEET: White House Task Force on High-Tech Patent Issues (June 4, 2013), available at http://www.whitehouse.gov/the-press-office/2013/06/04/fact-sheet-white-house-task-force-high-tech-patent-issues.
3Steve Jugle, Patent Troll Behavior Continues to Attract Attention, Baker Botts Intellectual Property Report, September 2013.
4Press Release, Committee on the Judiciary, United States House of Representatives, Statement of Judiciary Committee Chairman Bob Goodlatte Full Committee Hearing on H.R. 3309: Improving the Patent System to Promote American Innovation and Competitiveness (Oct. 29, 2013).
5See Ryan Davis, Fed. Circ. Chief Calls For Caution On Patent Troll Bills, Law360.com (Nov. 4, 2013) (quoting Chief Judge Randall Rader as stating, “Because I have confidence in the ability of the judiciary to address these issues in a more flexible and thus just manner, I consequently encourage the legislative branch to proceed with great caution in attempting to solve specific and evolving problems with sweeping definitions”).
6See Ryan Davis, Troll Bills Would Usurp Courts' Power, Fed. Circ. Judge Says, Law360.com (Sept. 27, 2013) (quoting Federal Circuit Judge Kathleen O’Malley as stating, “It would violate the constitutional separation of powers for the legislative branch to tell the judicial branch how it should handle the cases on its docket, and many of the proposals ‘go way beyond where anyone should want Congress to tread.’”).

7In Re Bill of Lading Transmission and Processing Sys., 681 F.3d 1323, 1331 (Fed. Cir. 2012) (quoting Fed. R. Civ. P. 8(a)).
8Id. at 1335.
9Id. at 1334.
10See, e.g., Local Patent Rule 3.1(a), Federal District Court for the Eastern District of Texas, Appendix M.
11H.R. 3309 (Nov. 23, 2013), at § 6(c)(1) (abolishing Rule 18 and directing the Supreme Court to enact a Form consistent with the Innovation Act).
12Id., at § 3(a)(1) (amendments to Title 35 of the U.S.C. at 281A(a)(2)-(5)).

13Id. (emphasis added).
14Local Rule 3.1(a), Eastern District of Texas, Appendix M.
15Connectel, LLC v. Cisco Sys., Inc., 391 F. Supp. 2d 526, 528 (E.D. Tex. 2005) (emphasis added).
16H.R. 3309, at §3(a)(1) (amendments to Title 35 of the U.S.C. at 281A(b) (emphasis added)).
17Taltech Ltd. v. Esquel Enters., 604 F.3d 1324, 1329 (Fed. Cir. 2010).
18H.R. 3309 (dated Oct. 23, 2013), § 3(b)(1) (amendments to Title 35 of the U.S.C. at § 285 (emphasis added)).
19H.R. 3309 (dated Nov. 22, 2013), § 3(b)(1) (amendments to Title 35 of the U.S.C. at § 285 (emphasis added)).

20See Ryan Davis, Anti-'Patent Troll' Bill OK'd By House Judiciary Committee, Law360.com (Nov. 20, 2013).
21H.R. 3309 (dated Oct. 23, 2013), §3(c) (amendments to Title 35 of the U.S.C.at § 299(d) (emphasis added)).
22H.R. 3309 (dated Nov. 22, 2013), §3(c) (amendments to Title 35 of the U.S.C.at § 299(d) (emphasis added)).
23Id. at §3(b)(1) (amendments to Title 35 of the U.S.C.at § 285(a)).
24Id. at § 3(d)(1) (amendments to Title 35 of the U.S.C.at § 299A (emphasis added)).
25Id. at § 6(a)(3).
26H.R. 3309 (dated Oct. 23, 2013) at § 6(a)(2)(A).
27H.R. 3309 (dated Nov. 22, 2013) at § 6(a)(2)(A).
28H.R. 3309 (dated Oct. 23, 2013) at § 6(a)(2)(B).

29H.R. 3309 (dated Nov. 22, 2013) at § 6(a)(2)(B).
30Id. at § 6(a)(2)(B)(iii).
31Id. at § 6(a)(2)(B)(iv).
32Id. at §§ 6(a)(2)(B)(v); 6(a)(2)(C)(i).
33Id. at § 6(a)(2)(C)(ii).
34Id. at § 6(a)(2)(C)(v).
35Id.
36Id. at § 4(a)(3) (amendments to Title 35 of the U.S.C.at § 290(b)(1)).
37Id. at § 4(a)(3) (amendments to Title 35 of the U.S.C.at § 290(d)(2)).
38Id. at § 3(e).
39Id.
40Id.
41“Since the 1960s, the doctrine has been raised in fewer than seventy cases, and has been applied in just nineteen. The Federal Circuit has discussed the doctrine just five times in the last thirty years, and has affirmed its application only once.” Brian J. Love and James C. Yoon, Expanding Patent Law’s Customer Suit Exception, 93 B.U. L. Rev. (forthcoming 2013), p. 10.
42Spread Spectrum Screening LLC v. Eastman Kodak Co., 657 F.3d 1349, 1357 (Fed. Cir. 2011) (citing Kahn v. General Motors Corp., 889 F.2d 1078, 1081 (Fed. Cir. 1989)).
43H.R. 3309 (Nov. 22, 2013), at §3 (c) (amendments to Title 35 of the U.S.C.at § 296(d)).
44Id.
4535 U.S.C. § 325(e)(2) (emphasis added)

46H.R. 3309 (Nov. 22, 2013), at § 9 (b) (amendments to Title 35 of the U.S.C.at § 325(e)(2)).


 

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