Debate Over Patent Litigation Bills Resumes Post-Recess

Bloomberg BNA’s Patent Trademark & Copyright Law Daily™is the IP industry’s premier news service, offering objective, timely,and reliable daily news coverage and commentary from leading IP law...

By Tony Dutra

Sept. 8 — Despite an intense lobbying battle around key provisions of pending patent legislation, stakeholders who discussed the issue at a Sept. 8 forum sketched out positions that were not too far apart.

Proponents of the fee-shifting, “loser pays” provision acknowledged, during a discussion hosted by the American Enterprise Institute's Center for Internet, Communications, and Technology Policy, that the U.S. Supreme Court's recent, more flexible standard has changed the landscape for awarding attorneys' fees, requiring some tweaking of the provision but without the perceived “mandatory” shifting in the House's Innovation Act (H.R. 9).

Opponents of the bills were willing to support the legislation if the “reverse trolling” issue—hedge funds challenging patents for a short-term stock drop—is resolved by Patent Trial and Appeal Board rule changes. But some of those changes are already under consideration by the board and at least one other—a change to the claim construction standard—does not appear to have significant opposition.

Regardless of the potential for compromises on some issues, it's not clear whether either the House or the Senate will act any time soon on measures pending in both chambers, as an array of stakeholders are pushing for legislative changes.

Moderator Michael M. Rosen of Fish & Richardson, San Diego, cautioned against optimism that Congress will pass a bill this year. He predicted that the AEI will be hosting another such session in 9 to 10 months to reevaluate the status of the proposals.

Tweaking, Not Eliminating Loser Pays Provision.

Four bills are in play, though most of the attention is focused on the Innovation Act (H.R. 9) in the House, and the Patent Act (S. 1137) in the Senate.

The two bills started out focused on problems caused by patent assertion entities (PAEs), allegedly abusing the patent system by filing dubious lawsuits intended to encourage a settlement by the alleged infringer, rather than face the high cost of litigation. The underlying basis for the legislation is to change the economics to eliminate this “arbitrage” situation.

The most debated provision on the subject would increase the likelihood of shifting attorneys' fees.

Rep. Robert W. Goodlatte (R-Va.), the sponsor of H.R. 9, has argued otherwise, but some panelists asserted that the bill would almost make such fee awards “mandatory.”

Laurie Self, vice president and counsel for government affairs at Qualcomm, argued that the Supreme Court effectively removed the need for the provision by loosening the standard for deciding that a particular case is worthy of fee-shifting and easing the burden of proof on a party seeking attorneys' fees, in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 2014 BL 118431, 110 U.S.P.Q.2d 1337 (2014).

Matthew Levy, patent counsel at the Computer and Communications Industry Association backs the bills in general, but agreed that the new standards have made a significant impact.

Levy turned the focus from mandatory fee-shifting. Lawmakers, he said, should ensure that alleged infringers are properly compensated—when a court makes a decision to award attorneys' fees.

Levy said legislators should concentrate instead on provisions that would ensure that discovery costs incurred by the prevailing party are included in the award, and further ensure that some real party in interest capable of paying the award is identified.

That problem arises because PAEs allegedly create “an empty company” to own the patent and file the lawsuit, having no other assets with which to pay the award.

Robert P. Taylor, owner and founder of RPT Strategies, San Francisco, and representing the National Venture Capital Association, was the strongest voice in the discussion against fee-shifting, in part because H.R. 9 presents it as “binary”—awarding all costs or none.

He argued that the startup firms he deals with are far more disadvantaged in initiating litigation if they know from the outset they are liable to pay $5 million or more in attorneys' fees to larger companies that simply refused to license the patent owner's technology.

Mike Godwin, general counsel at the R Street Institute, a “free market think tank” based in Washington, was not persuaded, though.

“There have to be some risks for people who decide to initiate a lawsuit,” he said. “We have to make it so it's not a game that you can walk away from easily. There’s no rule that somehow levels the playing field between bigger and smaller companies.”

Life Sciences Voices Against Reverse Trolling

The hedge fund abuse is known as “reverse trolling.” It is a recent phenomenon resulting in part from the major changes to the patent system implemented just four years ago under the America Invents Act.

The AIA created procedures intended to allow alleged infringers to fight patents in an administrative proceeding—most notably, inter partes review—at the Patent Trial and Appeal Board, rather than in court.

But Philip S. Johnson, senior vice-president for intellectual property policy and strategy at Johnson & Johnson, speaking on behalf of the Coalition for 21st Century Patent Reform—a diverse group of patent system users with a heavy representation from the life sciences industries—said that nobody expected the PTAB to create rules that were so heavily tilted against the patent owners.

The result has been a likelihood of patents being found improperly granted by the Patent and Trademark Office, and the hedge funds are allegedly taking advantage with a calculated strategy: Short a stock, file a petition challenging a patent, let the financial markets conclude that the PTAB is likely to invalidate it, and watch the stock drop.

Paul J. Hastings, chairman and chief executive officer of OncoMed Pharmaceuticals, Redwood City, Calif., supported the proposal that has been put forward by the Pharmaceutical Research and Manufacturers of America and the Biotechnology Industry Organization: Exempt patents underlying drugs approved by the Food and Drug Administration from IPR proceedings.

Levy said that there was no reason for the exemption because the PTAB has not invalidated any such drug patents yet; Hastings countered that drug companies are being forced to settle before a final PTAB decision just to get the stock back on track.

Johnson indicated he would be satisfied with changes to the PTAB review procedure that would provide more balance between patent owner and challenger—e.g., the opportunity for the patent owner to support its case with declarations and other evidence. But Levy noted that the PTO already has published a request for comments with many of the changes Johnson sought.

Johnson also supported the provision in the bills that would change the claim construction review standard—from “broadest reasonable interpretation” to a standard used in courts that is less likely to find a patent invalid—at the PTAB. Levy conceded that the change would be acceptable, but only because, he said, “it won't change anything.”

That view underlies Levy's overall point that legislation directed to the PTAB proceedings is unwarranted.

“No one has pointed to a decision that the PTAB has made that’s outrageous or even wrong,” he said.

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

Video of event at https://www.aei.org/events/a-comprehensive-look-at-patent-reform-in-the-114th-congress/.