House Judiciary Committee Approves Bill Targeting Patent Litigation Abuses

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By Tony Dutra  

Nov. 21 --After a nine-hour Nov. 20 markup session, the House Judiciary Committee approved a bill (H.R. 3309) that is largely directed to abuses in patent infringement litigation by so-called patent trolls.

The Innovation Act reported out of committee is only a slightly modified version of the manager's amendment distributed two days earlier by Committee Chairman Rep. Robert W. Goodlatte (R-Va.). That amendment removed what was arguably the most controversial provision in his original bill--an expansion of what counts as a “covered business method” (CBM), susceptible to challenge at the Patent Trial and Appeal Board (PTAB) on all grounds with no time restriction--and substantially toned down another--forcing the Judicial Conference of the United States to revise patent infringement case management rules and procedures.

The final vote of 33-5 does not accurately reflect that, as one after another amendment was offered, votes were almost completely along party lines.

The lack of bipartisan support is unusual for intellectual property legislation. As Sen. Patrick J. Leahy (D-Vt.) introduced a bill (S. 1720) in the Senate on Nov. 19 with considerably fewer provisions than H.R. 3309, reaching agreement between the parties on this topic could be difficult.

The session ended on a positive note, though, addressing the contentious “loser pays” provision in the bill. Rep. Hakeem S. Jeffries (D-N.Y.)’s last minute amendment--the committee worked on it during the markup session--made a change in the language that would add some limits to courts' shifting of fees to the prevailing party in a litigation. Goodlatte told reporters after the session that he suspected some of the Democrats on the committee changed their votes to favor the bill only after that modification.

But Ranking Member Rep. John J. Conyers Jr. (D-Mich.) dampened enthusiasm somewhat by contending that the change was one among many that still should be left to the rulemaking of the judiciary, rather than members of Congress.

Manager's Amendment

Goodlatte introduced H.R. 3309 on Oct. 23 (86 PTCJ 1275, 10/25/13) and the Judiciary Committee held a hearing on it on Oct. 29 (87 PTCJ 8, 11/1/13). In general, stakeholders seemed to support the bill's call for a heightened pleading standard in patent infringement complaints, to object to the proposal to expand the CBM challenge and make it permanent--it is currently set to expire in 2020--and otherwise to urge caution and deliberation before proceeding to markup.

In the manager's amendment, Goodlatte reduced the CBM provision--Section 9(e) of the bill--to a correction of the text of Section 18 of the America Invents Act (AIA), which enabled the “transitional program,” and authorization to the Patent and Trademark Office to waive the fee for filing a CBM challenge.

Opposition to the case management provisions--primarily in Section 6 of H.R. 3309--initially came from the judiciary, with Judge Kathleen M. O'Malley of the U.S. Court of Appeals for the Federal Circuit leading the charge (87 PTCJ 71, 11/8/13). Goodlatte subsequently defended Congress's authority to tell the Judicial Conference what a district court's rules and procedures should look like (87 PTCJ 15, 11/1/13), but members of the Judicial Conference wrote letters to Goodlatte and Conyers expressing its concern that the provisions conflict with the 80-year-old Rules Enabling Act.

The manager's amendment still says that the Judicial Conference “shall” implement rules and procedures “to address the asymmetries in discovery burdens and costs in any civil action arising under any Act of Congress relating to patents.” However, it no longer points to “requirements” for those rules but rather identifies “issues and proposals” that “should” be addressed.

The manager's amendment also made changes to specific sections--reducing slightly the specificity required to file a complaint of patent infringement in the subsection on heightened pleading, addressing an issue related to universities' liability in the combination of “loser pays” and joinder subsections, and clarifying estoppel effects on a defendant customer for litigation decisions made by the joined manufacturer of the allegedly infringing product.

Finally, the manager's amendment added to the original bill, with provisions that would expand the “Patent Cases Pilot Program” (Pub. L. 111-349) established in 2011 (81 PTCJ 208, 12/17/10), whereby 14 district courts funnel patent cases to specialized judges. The program was set to expire at the end of 2021. Goodlatte now introduced a provision that would extend it another 10 years.

He also added a study “to examine the idea of developing a pilot program for patent small claims courts in certain judicial districts within the existing patent pilot program mandated by Public Law 111-349.” A small claims patent court, or courts, has been under consideration for some time and revived lately (86 PTCJ 75, 5/10/13).

Stripped Version Fails

Just after the markup session started, Conyers and Rep. Melvin L. Watt (D-N.C.) introduced a trimmed down set of provisions they titled the Deceptive Patent Practices Reduction Act. It would have allowed for a small subset of the H.R. 3309 provisions, most notably transparency in patent ownership and stay of a lawsuit against a customer while a manufacturer takes over an infringement defense.

As Goodlatte noted in his opposition, Leahy's bill is a subset of H.R. 3309, but the Conyers-Watt substitute was an even further subset of Leahy's bill.

More important, the substitute would also create a Patent and Trademark Office “revolving fund” that would make fees collected from patent and trademark applicants and owners exclusively available for PTO funding. That issue is also covered by a separate bill (H.R. 3349) Conyers introduced on Oct. 28 87 PTCJ 10, 11/1/13.

“We have the same objective and the same goal, but we can't accomplish it through this bill,” Goodlatte said. He characterized the provision as a “poison pill,” because the House Appropriations Committee--which has consistently opposed losing control over the PTO's use of its collected fees--would have jurisdiction over funding and would thus have to consider the entire bill.

The Conyers-Watts substitute bill was defeated in a 19-14 vote, with no Republicans favoring it and only three Democrats against it: Reps. Zoe Lofgren (D-Calif.), Pedro R. Pierluisi (D-P.R.) and Suzan K. DelBene (D-Wash.). The PTO funding issue came up against as a single-issue amendment later, with those three changing their votes, but it was still defeated by a 17-13 vote.

As votes on various amendments proceeded, Republicans repeatedly were unanimous in taking whatever position Goodlatte took, and the Democrats, except for those three on occasion, were unanimous behind Conyers's positions.

Transparency Provision Unscathed

The only controversial sections of the bill that no amendment addressed were:

•  Transparency of patent ownership. Section 4 would modify 35 U.S.C. §290, “Notice of patent suits” to require updating the PTO's real-party-in-interest records upon filing a complaint in court, including the “ultimate parent entity.”

•  Scrivener's error fix. Though stakeholders involved in AIA negotiations disagree that there was a “scrivener's error” in the provision on the estoppel effect of post-grant review, 35 U.S.C. §325(e)(2), Section 9(b) of H.R. 3309 would eliminate estoppel in subsequent district court litigation on what “reasonably could have been raised” in the PGR proceeding.

 

Loser Pays

The provision most heavily discussed was the “loser pays” provision of H.R. 3309, Section 3(b), which would shift attorneys' fees and costs to the prevailing party “unless the court finds that the position and conduct of the nonprevailing party or parties were substantially justified or that special circumstances make an award unjust.”

Jeffries's amendment changed “substantially justified” to “reasonably justified in law and fact,” and it gave an example of a special circumstance, “such as severe economic hardship to a named inventor.” Only Conyers and Rep. Henry C. Johnson (D-Ga.) voted no in a 36-2 vote.

Jeffries's language tracked text from the Equal Access to Justice Act. Watt said that Jeffries's amendment moved in a positive direction, and that he was offering another amendment, borrowing from the EAJA, to move it further. It would have reduced any award if the prevailing party “engaged in conduct which unduly and unreasonably protracted the final resolution of the matter in controversy.”

Goodlatte spoke in opposition and Jeffries expressed support. It lost in a 21-17 vote along party lines.

Watt opposed loser pays generally in an amendment he had introduced earlier. He would have addressed the current situation where fees are rarely shifted, but not as substantially as the bill does. His amendment would have merely replaced the word “exceptional” from 35 U.S.C. §285, to read simply: “The court in appropriate cases may award reasonable attorney fees to the prevailing party.”

Goodlatte said that use of the word “appropriate” provides courts with “no guidance at all.” The vote to defeat that amendment was 23-12.

Pleading and Discovery

Rep. Sheila Jackson Lee (D-Texas)’s amendment that would have stricken Section 3--which includes pleading, joinder and discovery limit provisions as well--in its entirety lost on a voice vote.

Watt offered an amendment to Section 3 so that its provisions would only apply to cases brought in the 14 districts participating in the Patent Cases Pilot Program. Though the amendment was rejected, Goodlatte and Watt agreed with a suggestion by Rep. Darrell E. Issa (R-Calif.) that the study that is supposed to come out after five years of the program's operation will focus on how the bill's provisions have been implemented.

Other amendments addressed specific Section 3 subsections.

Jeffries's amendment would have established “pleading parity between plaintiffs and defendants,” creating a requirement for an alleged infringer's response with a similar level of specificity Section 3(a) calls for in the patent owner's complaint. Rep. Cedric L. Richmond (D-La.) also introduced an amendment that would have added to the heightened pleading requirements, requiring the plaintiff to disclose “the number of pending patent infringement suits it has brought.” Both were rejected.

Watt and Rep. Steven J. Chabot (R-Ohio) asked that the discovery limits imposed in Section 3(d) be left to the discretion of the district court judge.

“The amendment takes all of the teeth out of the section,” Goodlatte said, before a 21-8 vote, with only Lofgren and Pierluisi switching party sides, and Chabot not in the room to support Watt.

Case Management

Goodlatte repeatedly parried arguments that case management provisions generally and Section 6 in particular were encroaching on the independence of the judiciary.

“They have known about these problems for a long time,” Goodlatte said, referring to the judiciary. “They have chosen not to do something about it.”

Johnson would have stricken Section 6 in its entirety. His amendment was defeated 25-9. Rep. Robert C. Scott (D-Va.)’s amendment would have asked instead that the Judicial Conference study discovery and pleading concerns.

“Th[e provision] could be the first step toward repeal of the Rules Enabling Act,” Watt said in support of Scott, but four Democrats joined the Republicans in defeating the amendment 21-9.

Customer Stays

Section 5 of the bill addresses the abuse of a patent troll suing customers using an allegedly infringing product rather than suing the manufacturer that makes it. The provision allows the customer to join the manufacturer and requires the court to stay the action against the customer.

Jackson Lee's amendment would have limited a “covered customer,” one who would be eligible for a stay, to “a small business concern as defined under section 3 of the Small Business Act (15 U.S.C. 632).” It was rejected by voice vote.

Section 145 Repeal

Section 9(a) of H.R. 3309 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 Federal Circuit, under 35 U.S.C. §141. 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.

Jeffries would have deleted the provision repealing Section 145. Lofgren contended that Section 145 was an important safeguard, but Goodlatte argued that it was now outdated. Debate on the issue was contentious, particularly between Goodlatte and Watt.

The 19-13 vote against Jeffries's amendment was completely along party lines.

Demand Letters

The only significant addition to the manager's amendment approved in the markup session related to “demand letter” practices, whereby patent owners send vague or ambiguous letters by the thousands to small businesses, consumers and Internet application developers, asserting patent infringement and seeking royalty payments, threatening litigation otherwise.

Reps. Jason E. Chaffetz (R-Utah), Theodore E. Deutch (D-Fla.) and Spencer T. Bachus III (R-Ala.) introduced an amendment expressing the sense of Congress condemning as an abuse “purposely evasive demand letters to end users alleging patent infringement.”

Substantively, it would modify 35 U.S.C. §284 to bar an award for willful infringement to any patent owner who relies 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.”

The text is identical, though, to a provision in the original Senate bill in 2011 (81 PTCJ 369, 1/28/11) that ultimately was removed before the America Invents Act passed, and Goodlatte questioned whether that opposition would arise again.

Rep. Thomas A. Marino (R-Pa.) had an amendment reflecting a subset of the contents of the Demand Letter Transparency Act (H.R. 3540, which he co-sponsored with Rep. Jared S. Polis (D-Colo.) on Nov. 19, but he retracted it after speaking briefly about it at the markup session. He also withdrew a second amendment that would add a “claw-back” provision, allowing a recipient of a demand letter to recover funds paid to an patent owner if it is later determined that the letter was “materially fraudulent and sent in bad faith.”

However, his amendment calling for a one-year study by the PTO on the prevalence and potential harms posed by demand letters was approved by voice vote.

Reports

The burden on the PTO and Government Accountability Office to produce three reports, in Section 8 of H.R. 3309, was actually added to through the following amendments:

•  Business method quality study. Concern over business methods did not go away completely, as the committee approved an amendment offered by Issa requiring a study by the GAO that will “focus on examining the quality of business method patents asserted in suits alleging infringement.”

•  PTO small business efforts. Section 7 of H.R. 3309 calls for PTO outreach and education to small businesses. The committee agreed to an amendment by Richmond to “give special consideration to the unique needs of small firms owned by disabled veterans, service-disabled veterans, women, and minority entrepreneurs.”

 

Jackson Lee’s amendment that would have extended the time the PTO had to complete the studies failed by voice vote.

Possibly Open Items

Some other amendments were discussed and withdrawn by sponsors without coming to a vote, but appeared to have some potential to be reconsidered as the bill moves to the House floor:

•  Fee shifting. Marino's amendment would give courts the option to require, upon the motion of the defendant, a bond attached to discovery motions.

•  PTAB claim construction. Section 9(c) would eliminate the “broadest reasonable construction” standard at the Patent Trial and Appeal Board for post-grant challenges, and force the PTAB to use the “ordinary and customary meaning” standard used in district courts.

Lofgren was joined by Rep. R. Blake Farenthold (R-Texas) and Judy M. Chu (D-Calif.) in an amendment that would remove the change. Goodlatte accepted that the PTO has expressed concerns with the provision and agreed to work on modifying the language.

•  First-inventor-to-file prior art. Lofgren also asked for an amendment to clarify that prior art activities listed in 35 U.S.C. §102(a) qualify for the grace period in 102(b). It addresses a rulemaking from the PTO 85 PTCJ 543, 2/22/13 related to what constitutes a “disclosure” prior to filing a patent application.

“The current situation has really put a chill on the publication of scientific articles,” she contended. Goodlatte agreed that there was a problem but that attempts to resolve it to date have not reached consensus.

 


Pre-markup manager's amendment is available at http://pub.bna.com/ptcj/HR3309MgrAmendment13Nov20.pdf.

Leahy's bill is available at http://pub.bna.com/ptcj/S172013Nov18.pdf.

 

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

To contact the editor responsible for this story: Naresh Sritharan at nsritharan@bna.com