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By Tony Dutra
June 11 — The House Judiciary Committee voted 24-8 on June 11 to approve a substantially modified Innovation Act (H.R. 9) targeting litigation abuses in patent-related cases.
All but one Republican voted in favor; the 14 Democrats were split.
The bill, like its counterpart in the Senate (S. 1137), is primarily intended to make it more difficult for patent owners to engage in “trolling” behavior—using patent law to receive payments independent of the merits of the asserted patents.
Both focus on changing the economics of patent infringement litigation that currently favors a patent assertion entity, whose lawsuit-related costs are low, seeking a settlement from a questionably infringing defendant whose suit-related costs would be very high if pursued on the merits to the end.
The committee generally endorsed the manager's amendment first put forward two days earlier by the bill's primary sponsor, Rep. Robert W. Goodlatte (R-Va.).
This version aligns the House approach more closely with a bill in the Senate (S. 1137) in several key areas.
But the June 11 markup prior to the vote did nothing to eliminate the key difference between the House and Senate bills as to litigation—a “loser pays” provision that makes shifting attorneys' fees far more likely in H.R. 9 than in S. 1137.
An amendment that would have aligned the two bills was defeated along partisan lines.
That is not so surprising in that the “loser pays” approach generates a partisan dispute independent of patent law, as trial lawyers generally see it as a move away from the “American system” where each party is almost always responsible for its attorneys' fees.
On the other hand, in a move likely to please typical targets of lawsuits filed by PAEs, the bill now includes a section limiting forum shopping—most likely in PAEs' preferred venue, the U.S. District Court for the Eastern District of Texas.
The bills differ also as to dealing with abuses outside the court. S. 1137 addresses the consumer fraud issue of a PAE sending a patent royalty “demand letter” to a small business or individual and threatening litigation—though rarely if ever following through—otherwise.
Goodlatte has deferred to the Energy and Commerce Committee on this point. That committee reported favorably the Trol Act (H.R. 2045) on April 29.
The H.R. 9 version approved June 11 did, however, add provisions to be roughly in sync with the Senate's approach on so-called “reverse trolling” at the Patent Trial and Appeal Board.
The bills' initial target was the litigation abuse of suing with the knowledge that the defendant was more likely to settle—regardless of the merits of the case—rather than incur the multi-million dollar expense of seeing the case through to the end.
Goodlatte has repeatedly said that a loser-pays provision is key to the legislation in that it changes the economics underlying the abuse.
Under H.R. 9, “The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party,” with the exceptions at the discretion of the district court judge only.
In contrast, S. 1137, reported out of the Senate Judiciary Committee June 4 with bipartisan support, says that the winner “shall bear the burden of demonstrating that the prevailing party is entitled to an award” of attorneys' fees”.
During the markup session, Rep. John Conyers Jr. (D-Mich.) first called the House approach “presumptive fee-shifting” and went farther later, saying: “This bill makes every bill a fee-shifting case.”
Rep. Henry C. “Hank” Johnson Jr. (D-Ga.) proposed an amendment, which would have replaced Section 3(b) of H.R. 9 with the S. 1137 text.
Goodlatte opposed, saying that the H.R. 9 text does not presume fee shifting and adding that the Senate's exception of “objectively reasonable” patent assertions is too permissive, resulting in few awards of attorneys' fees.
Two Democrats voted no; otherwise the 22-10 vote was along party lines.
A second target of the bills now is the “reverse trolling” abuse of PTAB proceedings—inter partes review, post-grant review and its cousin, covered business method review—whereby the patent owner is the abused party, rather than the abuser.
Given the high rate of patent challengers' success since those proceedings first became available in September 2012, hedge funds have been filing IPRs in particular solely to manipulate stock prices, and there are other reports of third parties demanding payments by patent owners, threatening an IPR or CBM challenge otherwise.
The manager's amendment maps to S. 1137 in terms of changes to PTAB proceedings—intended to make it easier for patent owners to defend there—in seeking to change the claim construction standard. It also would allow more evidence and stop serial challenges.
However, the Senate bill would make it easier for the patent owner to amend claims after the PTAB has instituted trial; H.R. 9 lacks that provision.
H.R. 9, via the manager's amendment, does goes further than S. 1137 in one respect, though.
It creates a standing requirement for petitioners: No PTAB challenge by parties owning a related financial instrument or who have demanded a payment from the patent owner. This approach is more aligned with a separate bill in the Senate—the Strong Patent Act (S. 632)—but not with S. 1137.
Rep. Jason E. Chaffetz (R-Utah) offered an amendment that would have deleted the entire section related to the PTAB changes, but his amendment was so sweeping, it would have taken out a number of other America Invents Act technical corrections that are generally noncontroversial.
He withdrew it, but not before Rep. Zoe Lofgren (D-Calif.), representing the Silicon Valley district where PTAB challenges have proven to change the balance of power in favor of high tech firms, said that she intended to pursue changes before the bill comes to the House floor.
Rep. Marian E. “Mimi” Walters (R-Calif.) introduced but then withdrew—given Goodlatte's opposition—an amendment that would exempt from PTAB proceedings those pharmaceutical patents approved by the Food and Drug Administration and subject to litigation procedures under the Hatch-Waxman Act.
The Senate Judiciary Committee expressed interest in the same provision—but an inability to come up with appropriate text—prior to its vote on S. 1137.
“I think everyone is on the same side [of Walters's view],” Goodlatte later said, but he said it was too complex to resolve in the markup session.
Other than fee-shifting, the following provides a picture of issues related to litigation in federal court of patent infringement assertions.
• Venue. The H.R. 9 manager's amendment added a new Section 3(g), not previously in either bill, limiting the venue where a domestic plaintiff may bring an infringement case.
Besides venue based on the defendant's location, the patent owner would be limited to courts in districts where the invention was conceived or where the patentee has a manufacturing presence.
The section was modified during markup—deleting an additional exemption for a patent owner with a “significant research and development” in the location—via an amendment proposed by Rep. Darrell E. Issa (R-Calif.) and claiming eight other sponsors. It was approved by voice vote.
• Pleading patent infringement. The manager's amendment ratcheted back the heightened pleading requirements of the bill as introduced, and in one area at least, is more lenient than S. 1137: The Senate version requires “identification of each claim” allegedly infringed; H.R. 9 now is more broadly worded to allow “identification of all claims necessary” to show the defendant what “is alleged to infringe any claim.”
But by the time of the vote, it appeared likely that the provision was likely to change.
Lofgren introduced and withdrew an amendment that would return to the original H.R. 9 language. Goodlatte appeared sympathetic.
“I am happy to consider whether there can be a higher standard,” he said, “and I will commit to working with you on it.” Four other committee members offered their support in making a change.
• Joinder. Section 3(c) of H.R. 9 tries to prevent cases where the plaintiff is a shell company that, should it lose, would not be able to pay the other side's attorneys' fees, if awarded. The manager's amendment creates exceptions disallowing joinder of university technology transfer organizations and those that have only “an equity or security interest” in the patents asserted.
More importantly, though, it tries to give a definition to the types of parties likely to abuse this aspect of litigation. It says that the defendant can challenge—as prospectively unable to pay—those without “a substantial interest” in the patent. And it defines those with substantial interest to be inventors or those who commercially practice or are “engaged in research and development” in the patented subject matter.
The provision was not challenged during markup.
• Discovery limits. The two bills are now in sync on the most controversial aspect of this provision. The manager's amendment dropped H.R. 9's original intent to require a claim construction hearing prior to significant discovery. The bills now allows a stay of discovery only to resolve motions to dismiss—per an amendment introduced by Rep. Douglas A. Collins (R-Ga.), including motions under Federal Rules of Civil Procedure 12(b)—or transfer the case or sever parties.
The Rule 12(b) addition was debated, however, and it appeared that Goodlatte was prepared, in fact, to lead a discussion on how it could be limited.
H.R. 9 goes further than S. 1137 in a different respect, though, with carve outs for when a preliminary injunction motion is made to prevent competitive harm and for Hatch-Waxman Act proceedings.
• Transparency of patent ownership. The bill now adds even more detail—it was already more onerous than the Senate equivalent—on the real parties in interest with respect to ownership of the patents asserted, but it again exempts Hatch-Waxman proceedings.
No committee member commented on this provision during markup.
• Customer suit stays. H.R. 9 Section 5 and S. 1137 Section 4 attempt to prevent the abuse of a patent owner suing a party that buys a product off the shelf, doesn't modify it at all, and puts it into use, when the manufacturer of the alleged infringing product is and wants to be the proper defendant.
Opponents of the original provision contended that it would have allowed parties that manipulate the off-the-shelf product, so as to infringe, to avoid liability. The new definitions of “covered customer,” “covered process” and “covered products are intended to close that loophole. The bills are now more or less in sync.
The committee approved a modification of this provision introduced by Rep. Lamar S. Smith (R-Texas), deleting a sentence related to the manufacturer's consent to the stay.
There were multiple amendments that would have carved out exemptions from several of the court-related provisions, but none succeeded.
Rep. David N. Cicilline (D-R.I.) introduced an amendment to exempt original inventors from the fee-shifting provision.
Johnson asked for the same exemption as to heightened pleading standards, customer stay provisions and fee shifting.
Rep. Scott H. Peters (D-Calif.) would have exempted small businesses and nonprofit organizations from the first two.
Rep. Sheila Jackson Lee (D-Texas) addressed pleading standards only and would have exempted instances where jobs would be lost.
The amendments either failed by voice vote or were withdrawn.
Conyers, the committee's ranking minority member, introduced an amendment that would implement his bill (H.R. 1832) that would remove the Patent and Trademark Office from the appropriations process and extend the PTO's fee-setting authority, currently expiring in 2018, for another 10 years.
Goodlatte repeated his long held opposition that the first part of the provision would be a “poison pill” because it imposes on the authority of the House Appropriations Committee. It was defeated in a partisan vote.
Conyers resubmitted an amendment with the fee-setting authority extension only, and that was approved by unanimous voice vote.
Issa introduced an amendment to extend by six years—to cover a laches period—the 2020 sunset date of the “covered business method” challenge enabled by Section 18 of the America Invents Act.
The amendment was defeated 18-13 in a bipartisan vote.
The program was originally designated “transitional” because of alleged faulty examination—far too easily granting patents on financial services applications—during the late 1990s and early 2000s.
Thus, by 2020 the CBM provision sponsors envisioned, the bad patents would have been cancelled. But Issa noted that, under 35 U.S.C. §286, patent owners can receive damages for up to six years after the alleged infringement.
Conyers and Rep. Suzan DelBene (D-Wash.) opposed the amendment primarily because, they said, the PTO's definition of a covered business method has gone well beyond financial services. Collins spoke against it because of a general opposition against treating one technology different from others.
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Text of manager's amendment at http://pub.bna.com/ptcj/HR9MA15June9.pdf.
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