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Goodlatte and Leahy Begin Patent Reform Round Two With Legislation Discussion Draft

Tuesday, May 28, 2013

By Tony Dutra  

 

Piecemeal legislative efforts to address patent troll issues are apparently insufficient for the leaders of the judiciary committees in both the House and Senate.

Rep. Robert W. Goodlatte (R-Va.) released on May 23 a 38-page “Discussion Draft,” as yet unintroduced, involving changes in courts and at the Patent and Trademark Office, and with modifications to the 20-month-old Leahy-Smith America Invents Act of 2011, Pub. L. 112-29. The draft was circulated with the support of Goodlatte's counterpart in the other house, Sen. Patrick J. Leahy (D-Vt.)

“This discussion draft is the result of bipartisan, bicameral collaboration between Chairman Goodlatte and … Leahy,” according to a press release from Goodlatte's office accompanying the draft.

The release included a statement from Leahy stating, “I look forward to hearing constructive comments on it from all interested parties as I prepare legislation in the Senate.”

“This bill helps to address the issues that businesses of all sizes and industries face from patent troll-type behavior and aims to correct the current asymmetries surrounding abusive patent litigation,” according to the heading of a one-page list of talking points.

However, many of the bill's provisions--including a major one not mentioned in the talking points memo--are not troll-related, such that the draft as a whole reads more like a follow-up patent reform effort than a targeted approach to litigation issues.

Litigation Case Management

Four pieces of legislation purportedly directed to patent troll abuse have been introduced in the 113th Congress. All are referred to the judiciary committee of either the House or Senate. Undoubtedly, though, bills introduced by committee chairmen would take priority.

Goodlatte's draft overlaps with each of the other bills.

As to the specific problem of addressing litigation abuses, it maps most closely to the Patent Abuse Reduction Act (S. 1013) introduced May 22 by Sen. John Cornyn III (R-Texas).

But, whereas Cornyn would add sections to the Patent Act, Goodlatte's draft identified “rules and procedures to be considered” by the Judicial Conference of the United States.

There were differences between Goodlatte's draft and Cornyn's bill, but they addressed the same basic concepts:

• The requirements for pleading patent infringement would be expanded well beyond Form 18 of the Federal Rules of Civil Procedure. Cornyn's bill was specific; Goodlatte's draft stated only that the complaint should, “at a minimum, notify accused infringers of the asserted claim or claims, the products or services accused of infringement, and the plaintiff's theory for how each accused product or service meets each limitation of each asserted claim.”

• The real parties in interest as to the patent or the litigation result should be identified at the beginning of litigation.

• Discovery should be divided into “core documentary evidence” and “additional discovery.” The parties would be responsible for fees related to their own core evidence but would have to pay the other party the cost incurred meeting additional discovery requests. Both proposals would define e-discovery requests--“computer code or electronic communication, such as e-mail, text messages, instant messaging, and other forms of electronic communication”--as additional.

 

Cornyn's bill had more to say about forcing courts to move claim construction and any other dispositive issues ahead of discovery. Goodlatte did not address that point.

“Loser Pays” Fee Shifting

The draft had a different approach to “loser pays” bills currently before Congress. First, Goodlatte's approach would delete the words “in exceptional cases” from 35 U.S.C. §285, such that it would read: “The court may award reasonable attorney fees to the prevailing party.”

In contrast, the Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013 (H.R. 845, or the Shield Act), would identify a patent troll as the plaintiff early in litigation, force the troll to put up a bond, and, if it loses, to pay the defendant's costs (40 PTD, 2/28/13).

Cornyn's bill would not require the bond, and it shifts costs to the prevailing party, which could be either the plaintiff or defendant, as did Goodlatte's draft.

The Cornyn legislation also excluded shifting in “exceptional circumstances,” but more importantly, it allowed an exception if “the position and conduct of the non-prevailing party were objectively reasonable and substantially justified.”

With the current jurisprudence of the U.S. Court of Appeals for the Federal Circuit on sanctions, that exception could swallow the rule.

Cornyn did, however, go farther than the Shield Act by adding that a court may shift costs to a real party in interest if the actual party in suit cannot pay.

Encouraging Settlement

S. 1013 would further prohibit a court from changing its “loser pays” analysis if the parties settled.

Section 3 of Goodlatte's draft, on “Incentivizing Settlement in Patent Litigation,” went further on that point by laying out a process that would shift fees when a party refuses a settlement offer.

Under the proposal, any party could offer a settlement at least 10 days prior to trial. If the other party were to reject the offer and then if “the judgment, verdict, or order finally issued … is not more favorable to the offeree,” the party that offered the deal would be allowed to petition for costs and expenses. The court must shift costs in that case unless it would be “manifestly unjust” or if “the offeree's rejection of the offer was substantially justified.”

Identifying Real Party in Interest

The problem of patent trolls hiding the real party in interest to a patent or to a litigation award has resonated both in the administration and in Congress.

The PTO proposed new requirements for identifying an RPI with a similar concern that patent assertion entities--often disparaged as “patent trolls”--hide the true ownership of a patent for various licensing and litigation purposes.

The topic also was discussed in a December session on antitrust issues related to patent trolls, jointly held by the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice.

On May 16, Rep. Theodore E. Deutch (D-Fla.) introduced the End of Anonymous Patents Act (H.R. 2024) (101 PTD, 5/24/13). It would require notice to the PTO of RPIs upon patent issuance and maintenance, and on every ownership transfer. H.R. 2024 would make that recordation a requirement to be eligible for damages in litigation.

Section 4 of Goodlatte's proposal agreed with H.R. 2024 in approach at least, tying recordation to remedies. It would add a subsection to 35 U.S.C. §281--“Remedy for infringement of patent”--to require an “initial disclosure” of RPI upon filing the litigation.

But as to non-litigation-related RPI recordation, Goodlatte had a different trigger than the PTO and Deutch did. His draft would add 35 U.S.C. §263, “Disclosure of Information Related to Patent Ownership,” that would require recordation at the PTO for “[a]ny entity that sends 20 or more demand letters relating to a patent … during a 365-day period.”

For litigants, and those who send demand letters and subsequently file court actions, a court may enter monetary sanctions for failure to conform with the recordation requirements, and treble damages for willfulness would not be available.

Customer-Suit Exception

The demand-letter concern ties to another recent development often considered abusive patent troll behavior--accusing the real infringer's customers of patent infringement. That was a highlight of a recent hearing of the House Judiciary Committee's Subcommittee on Courts, Intellectual Property and the Internet (51 PTD, 3/15/13), which Goodlatte chaired before he became full committee chairman.

Section 5 of Goodlatte's bill would add a Patent Act provision on “Stay of action against customer.” A court would allow a “covered manufacturer” to intervene in any lawsuit against its customer and then grant the customer's motion to stay pending resolution of the case against the manufacturer.

However, the section would allow a number of exceptions to the requirement to stay, such as when the manufacturer is deemed unable to satisfy a damages judgment against it.

Repeal of Section 145

None of the other sections of the draft were relevant to patent trolls specifically.

Section 9 of Goodlatte's bill was titled “Improvements and Technical Corrections to the Leahy-Smith America Invents Act,” but its first subsection addressed a change to the Patent Act that was not discussed in hearings in Congress during the AIA debate, and despite the likelihood that it will be controversial, not identified in any of the 12 talking points.

The bill would repeal 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 U.S. Court of Appeals for the Federal Circuit, under 35 U.S.C. §141.

The controversy on this topic arose in light of the U.S. Supreme Court's decision in Kappos v. Hyatt, 132 S. Ct. 1690, 102 U.S.P.Q.2d 1337 (2012) (75 PTD, 4/19/12). The PTO was trying to limit the evidence that the applicant could present in court, but the high court held that Section 145 allows evidence subject only to usual evidence and civil procedure rules.

With the civil action option erased, all appeals would go to the Federal Circuit, which reviews only those facts in the record established during patent prosecution at the PTO. The intent, therefore, is to encourage full disclosure at the PTO, though arguably Goodlatte could have addressed that by limiting Section 145 rather than eliminating it.

Amending the AIA Post-Grant Challenges

Section 9(b) of Goodlatte's bill was an expected AIA amendment. Since the AIA's enactment, several stakeholders have argued that there was a “scrivener's error” in the provision on the estoppel effect of post-grant review, in 35 U.S.C. §325(e)(2).

Both of the AIA's sponsors--Leahy and Rep. Lamar S. Smith (R-Texas)--pledged to correct the error, but they have been challenged by other stakeholders who say the language reflected the patent reform compromise (02 PTD, 1/3/13).

Specifically, under the provision, a PGR challenger “may not assert either in a civil action … that the [patent] claim is invalid on any ground that the petitioner raised or reasonably could have raised during that post-grant review.”

Goodlatte's draft would strike “or reasonably could have been raised.” The effect would be to give an accused infringer more options in court to challenge patent validity.

A second amendment to both PGR and the AIA-enabled inter partes review related to how the PTO is supposed to construe claim terms: “as such claim has been or would be in a civil action to invalidate a patent under section 282, including construing each claim of the patent in accordance with the ordinary and customary meaning of such claim as understood by one of ordinary skill in the art, the prosecution history pertaining to the patent, and prior judicial determinations and stipulations relating to the patent.”

Covered Business Method Issues

Another amendment addressed the AIA's post-grant opposition procedure, which is the subject of the fourth bill that arguably addresses patent troll behavior and has already been introduced in Congress.

Sen. Charles E. Schumer (D-N.Y.) introduced S. 866 ostensibly aimed at trolls, but really addressing the kinds of patents--“the practice, administration, or management of an enterprise, product, or service”--trolls tend to favor (88 PTD, 5/7/13).

The bill would make permanent a provision of the America Invents Act--challenges to “covered business methods” at the PTO--under the expanded business method definition.

Goodlatte's bill does not go that far.

The CBM petition that has gone farthest to date in the new Patent Trial and Appeal Board is SAP America Inc. v. Versata Development Group Inc., No. CBM2012-00001. On Jan. 9, the PTAB released Paper 36 in the case, which analyzed in detail Versata's arguments that its patent claims were not directed to “covered business methods” per the definitions provided in Section 18(d)(1) of the AIA.

Goodlatte's draft bill simply stated that the Paper 36 analysis was correct. But, according to the PTAB paper, “the plain language of § 18(d)(1) is consistent with the legislative history and Senator Schumer's commentary” during the patent reform debate. And Schumer's commentary at that time was contested as being too expansive.

Other AIA-Related Amendments

A third AIA-related amendment was a “Codification of the Double-patenting Doctrine for First-inventor-to-file Patents.” The AIA moved the use to a FITF system for patent applications submitted on or after May 16, 2013, changing the definition of prior art under 35 U.S.C. §102 accordingly.

Goodlatte's bill clarified prior art determinations, according to the talking points page, “to ensure that patentees do not obtain multiple patents for what is basically the same invention and then sell those patents to different parties, requiring others to obtain multiple licenses from multiple parties to use the invention.”

Bankruptcy Effect on Licensees

Section 6(d) of Goodlatte's bill addressed another litigation issue not directly related to patent trolls, “Protection of Intellectual-property Licenses in Bankruptcy.” The issue arose in the context of recent litigation on Section 365(n) of the U.S. Bankruptcy Code, 11 U.S.C. §365(n).

Licensees do not want to lose rights to use patented technology if a patent licensor files for bankruptcy. A 1985 case rejected a licensee's attempt to retain its rights. Lubrizol Enterprises Inc. v. Richmond Metal Finishers Inc., 756 F.2d 1043, 226 U.S.P.Q. 961 (4th Cir. 1985).

Congress subsequently modified Section 365(n) to state that “the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor.” But issues remained in light of a German bankruptcy court's action in In re Qimonda A.G., No. 09-14766 (SSM) (Bankr. E.D. Va. Oct. 28, 2011).

Goodlatte's bill made clear that “section 365(n) applies to intellectual property of which the debtor is a licensor or which the debtor has transferred.”

According to the talking points memo, “This provision does not change existing law, and simply ensures that the courts follow U.S. law and not the laws of foreign countries.”

More Busy Work for the PTO

The AIA required nine studies and reports to be conducted by the PTO that were unfunded. Sequestration has now hit the PTO and almost $150 million in fees collected from the patent community will not be available to the agency as a result.

That fact did not stop Goodlatte from adding to the bill more tasks to the PTO's place “using existing resources.” Sections 7 and 8 would:

• require the PTO to “develop educational resources for small businesses to address concerns arising from patent infringement;

• expand the agency's “ombudsman” role to deal with abusive litigation practices as well;

• modify its website to provide information on patent cases in federal court;

• conduct a study related to “patent transactions occurring on the secondary market”;

• conduct a study on patents owned by the U.S. government; and

• assist the Government Accountability Office in its conduct of “a study on patent examination at the Office and the technologies available to improve examination and improve patent quality.”

 

Conyers, Watt Say AIA GAO Report Comes First

Challenges to the bill within the House IP subcommittee are likely. The hearings in the last year have shown a common desire to stop litigation abuses, but with different approaches to the problem.

On May 24, remarking on Goodlatte's draft, Democratic subcommittee members Reps. John Conyers Jr. (D-Mich.) and Melvin L. Watt (D-N.C.) issued a joint statement essentially saying that the prerequisite to “the appropriate legislative response” is another GAO requirement, commissioned by the AIA, “to study the consequences of patent litigation by non-practicing entities (NPEs) or patent assertion entities (PAEs) in consultation with the USPTO.”

After that report is published, “we will be in a better position to answer those questions,” they said.

However, the deadline for submission of that report passed by in September with no indication from either the GAO or the PTO of when it will be completed.

 


Text is available at http://pub.bna.com/ptcj/GoodlatteDraft13May23.pdf.

Talking points list is available at http://pub.bna.com/ptcj/GoodlatteDraftPoints.pdf.

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