During Hearing, Lee Identifies Provisions Of H.R. 9 Administration Does, Doesn't Support

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By Tony Dutra

April 14 — Patent and Trademark Office Director Michelle K. Lee testified before the House Judiciary Committee on April 14 that the administration continues to support—with some tweaks—most provisions of the Innovation Act (H.R. 9).

Lee offered support for fee-shifting, heightened pleading, stays of lawsuits against customers to let manufacturers take over, transparency of patent ownership and curbs on “demand letter” practices.

She did not, however, support a provision that would require that most discovery be postponed until after claim construction, and she asked that more work be done on a provision that would require joinder, which is intended to prevent “shell” entities from avoiding fee-shifting risk.

The full committee hearing follows two earlier IP subcommittee hearings on the bill, which was reintroduced in February after it stalled in the Senate last year.

The latest hearing was presumably held in anticipation of a markup session in the next few weeks, though the legislation's primary sponsor, Rep. Robert W. Goodlatte (R-Va.), acknowledged in his opening statement that some more work may be needed on some of the provisions.

“We will continue to work to perfect the customer stay provision and others, and we will work with interested parties to find reasonable solutions to the issue of demand letter abuse,” the Chairman of the Judiciary Committee said.

Lee underwent over two hours of questioning by 17 different members of the committee. A second panel of stakeholders was scheduled to follow.

Some Changes Likely in Markup

H.R. 9, introduced Feb. 5, is identical to a bill that passed the House in the 113th Congress but never was subject to vote in the Senate.

The bill generally covers alleged abuses by so-called patent trolls. It purports to fix those abuses, principally, by requiring more from the patent owner in pleading, less discovery before claim construction and, perhaps most hotly debated, awarding attorneys' fees to the prevailing party absent a “reasonable basis in law or in fact” for the losing party's argument.

As Goodlatte's opening statement noted, modifications are likely, but more in the way of clarification and narrowing than wholesale deletions of provisions.

Markup—“the sooner the better,” according to Rep. Darrell E. Issa (R-Calif.), when confronted by a Democratic colleague that changes must be made—appears likely to focus on places where the bill is perceived to overly burden “reasonable” patent owners who do not engage in troll-like behavior.

Lee's Tweaks to Key Provisions

Lee's written and oral testimony was attentive to those concerns. She identified the following agreements and differences with the specific provisions:

• Pleading. Section 3(a). The bill would heighten pleading requirements to be specific for patent infringement cases. Lee agreed that the patent owner must identify an infringing product or process as well a claim infringed—with an element-by-element mapping—but she would limit the requirement to a single claim, while the bill anticipates that all allegedly infringed claims be identified.

• Fee shifting. Section 3(b). The bill takes a motion for fees by the litigation winner and shifts the burden of presumption, so that the loser must defend the reasonableness of its case. Lee opposed the burden shift, saying that “the party seeking a fee award—the prevailing party—should bear the burden of demonstrating that it is entitled to such an award.” In oral testimony, she defended that as the rule of “American jurisprudence: You’re the party requesting something.”

• Joinder. Section 3(c). The bill addresses a problem with collection of attorneys' fees after the end of the case: when the patent owner is a shell company without funds, but sitting behind it is a consolidated patent assertion entity that would reap the benefits had the shell company won. Lee would prevent joinder of “passive investors”—a criticism of the bill is that venture capitalists, for example, would be drawn into the litigation, thus creating a disincentive for private investment in startups.

Lee would not give a definition to the term, preferring instead to phrase joinder possibilities as those who have “control or direction” over the litigation. In 2014, the Senate was working on text to so limit joinder, but failed to agree on a complete bill. Lee said that the Senate modification would have been acceptable.

One aspect of Lee's testimony here could be controversial, as members of the committee were generally reflecting concerns from universities fearful of being joined—i.e., and then being subject to paying attorneys' fees if their licensees fail. But Lee would not exempt universities, to the extent that they may have “control or direction” over the licensee's decision to file suit.

• Discovery. Section 3(d). The bill would move claim construction forward in every case, deferring discovery except in “special circumstances that would make denial of discovery a manifest injustice.” However, Lee said, “Claim construction is complex and it can be difficult to perform in a vacuum.” In many cases claim construction benefits greatly from “some understanding of validity and infringement issues via discovery,” she said.

She suggested that this may be one area where Congress should fall back on Section 6 of H.R. 9, which calls on the Judicial Conference to build the necessary flexibility into appropriate procedures and practices.

• Demand letters. Section 3(e). The abuse addressed here occurs prior to litigation, where a patent owner threatens to sue the customer of an off-the-shelf product. The bill addresses the problem by barring the patent owner from seeking treble damages for willful infringement if it initially sent a vague demand letter to the customer.

Lee agreed with that provision but asked that the bill go further. Currently, 18 states have enacted consumer protection laws to stop the demand-letter practice even if the case never goes to litigation. Lee asked for national uniformity on both what constitutes a violation—a letter that does not adequately identify to the recipient what product infringes what claims—and how it should be enforced.

• Transparency of ownership. Section 4.. Similar to the joinder provision, Section 4 seeks to expose the real party in interest to any litigation. Such a third party may have related patents or may already have a license with the alleged infringer's supplier, for example, resolving the lawsuit more quickly via settlement or dismissal.

Lee had a number of suggestions for improving the provision, including making the disclosure required the other way as well if the defendant counterclaims infringement of its patent. Transparency has been a thorny issue for the agency itself, in attempting to make disclosures to the office mandatory, and she suggested in response to a question at this hearing that the PTO could not get consensus, that the true impact of the abuse of hiding ownership is in litigation, and thus that Congress was the right place to solve the problem.

• Customer stays. Section 5. H.R. 9 addresses the practice of suing customers who buy off-the-shelf products rather than the manufacturer of those products. A court would stay the customer lawsuit in favor of a manufacturer defending against infringement in the same case or elsewhere. Lee would add a provision requiring the customer “to agree to be bound by the result of the manufacturer's suit.”

• PTAB procedures. Finally, Section 9 of H.R. 9 would make “technical corrections” to the 2011 America Invents Act, including telling the Patent Trial and Appeal Board that it should apply the same standard to construing claims in post-grant oppositions as do district courts, rather than the “broadest reasonable interpretation.”

Lee said that BRI goes hand-in-hand with the right to amend claims in these proceedings. She suggested only that if Congress wants the office to shift its standard, it should repeal the right to amend at the same time.

To contact the reporter on this story: Tony Dutra in Washington at adutra@bna.com

To contact the editor responsible for this story: Anandashankar Mazumdar at amazumdar@bna.com

Lee's testimony at http://pub.bna.com/ptcj/HR9HearingLee.pdf.

Hearing info at http://judiciary.house.gov/index.cfm/2015/4/hearing.