For Whom the Bell Trolls, Episode II: The Judiciary Strikes Back

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1 Nvember 20, 2013 Fr Whm the Bell Trlls, Episde II: The Judiciary Strikes Back By Sctt F. Llewellyn, Wendy J. Ray and Rse S. Lee Patent refrm legislatin cntinues t be htly debated, bth in the public arena and befre Cngress. Federal Circuit Chief Judge Randall R. Rader recently said that Cngress shuld leave refrm t the curts, eching cmments by frmer Chief Judge f the Federal Circuit Paul Michel and Federal Circuit Judge Kathleen O Malley. But business interests cntinue t press fr actin by Cngress, cnsistent with effrts by the Executive branch and agencies t curb litigatin abuse. While legislatin cntinues t mve frward (as summarized belw), it remains unclear which (if any) f the prpsals will be put t a vte, r in what frm. Given the supprt f business, the Executive branch, varius agencies, and varius legislatrs, hwever, legislative actin seems likely, ntwithstanding the cncerns expressed by the judiciary. THE JUDICIARY WEIGHS IN On Nvember 1, during a keynte address t the Eastern District f Texas Bench Bar Cnference, Chief Judge Rader urged Cngress t refrain frm passing legislatin aimed at curbing litigatin abuse by patent trlls. Judge Rader seemed t recgnize that the patent system currently faces a crisis in cnfidence, driven in part by patent trlls attempting t btain settlements based n the cst f defense, rather than the merits. Judge Rader nnetheless indicated that he des nt supprt a legislative slutin, instead believing that judges are bestequipped t recgnize and address litigatin abuse. Judge Rader identified three ways in which the curts can address litigatin abuse: (1) increased use f summary judgment t dispse f meritless cases; (2) increased discretin fr district judges t determine which cases are exceptinal and thus warrant an award f fees; and (3) decreased litigatin csts, which prvide the leverage fr much litigatin abuse. A transcript f Judge Rader s speech is available at: pdf Judge Rader s statements are cnsistent with pinins recently expressed by ther members f the judiciary, including Judge Michel and Judge O Malley. On Octber 9, Judge Michel asserted that Cngress can t micrmanage litigatin effectively, and expressed cncerns that many f the prpsed litigatin refrms wuld weaken the patent system and interfere with judicial discretin. He reiterated his cncerns early this week during his keynte speech at Frdham Law Schl s IP Summit, urging lawyers t speak ut t stp the prpsed bills frm becming law and expressing supprt fr smart patent refrm by litigatrs wh understand hw the patent system wrks, nt by cngressinal staffers and lbbyists. A few mnths earlier, n September 17, Judge O Malley had gne even further, asserting that the prpsed legislatin culd vilate the cnstitutinal separatin f pwers, by encraching n the authrity f judges t manage their dckets. Just days ag (n Nvember 19), Mrrisn & Ferster LLP mf.cm Attrney Advertising

2 tw Demcratic members f the Huse Judiciary Cmmittee (Representatives Cnyers and Watt) expressed similar cncerns, stating that they ppsed legislatin that wuld encrach n the independence f the federal judiciary. A transcript f Judge O Malley s speech is available at: BUSINESS WEIGHS IN Despite the cncerns expressed by the judiciary, varius venture capitalists and businesses cntinue t lbby fr legislatin. Fr example, in a Nvember 6 letter t Cngress, venture capitalists endrsed several measures t prtect startups frm frivlus lawsuits, including (1) limiting the scpe f discvery t prevent patent assertin entities frm using litigatin csts t leverage settlements; (2) requiring plaintiffs t pay defendants legal fees in cnnectin with baseless suits; and (3) tightening pleading requirements fr patent cmplaints. Similarly, during a Senate Cmmerce Cmmittee hearing n Nvember 7, venture capitalists called fr rules requiring patent licensing demand letters t include mre infrmatin abut hw the patents-at-issue are allegedly infringed. Like these venture capitalists, a brad calitin f businesses (including Amazn and Ggle) supprts patent legislatin refrm. In a July 30 letter, the calitin urged Cngress t expand the Cvered Business Methd (CBM) prgram f the America Invents Act (AIA) t include all business methd patents, rather than just thse related t financial services, thereby increasing the number f patents subject t additinal review by the U.S. Patent and Trademark Office (PTO). Nt all businesses, hwever, supprt refrm. Fr example, sme cmpanies with a large number f patents (such as IBM and Qualcmm) have expressed cncerns regarding legislative prpsals that might make it easier t invalidate patents held by entities that are nt patent trlls r therwise engaged in litigatin abuse. AGENCIES WEIGH IN The PTO s Acting Directr, Teresa Stanek Rea, has expressed supprt fr patent refrm legislatin that wuld (1) make patent wnership infrmatin mre transparent; (2) allw curts t award attrneys fees in exceptinal cases; and (3) expand the AIA s CBM prgram. And the Federal Trade Cmmissin (FTC) annunced n September 27 that, t help cmbat litigatin abuse, it will begin an investigatin f patent trlls. The prbe will include the issuance f subpenas t twenty-five patent assertin entities seeking data abut their peratins, t develp a better understanding f hw patent assertin entities impact innvatin and cmpetitin. CURRENT LEGISLATIVE PROPOSALS Since ur last survey f legislative prpsals and related develpments (available at: several new patent refrm bills have been intrduced, including the Patent Transparency and Imprvement Act f 2013 (S. 1720), the Patent Litigatin Integrity Act (S. 1612), the Innvatin Act (H.R. 3309), the Stpping the Offensive Use f Patents Act (H.R. 2766), the Lawsuit Abuse Reductin Act f 2013 (H.R. 2655), and the Patent Litigatin and Innvatin Act (H.R. 2639) Mrrisn & Ferster LLP mf.cm Attrney Advertising

3 1. The Patent Transparency and Imprvement Act f 2013 (S. 1720) Intrduced: Nvember 18, 2013, in the Senate Judiciary Cmmittee by Senate Judiciary Chairman Patrick Leahy (D VT). Key prvisins: Real party-in-interest. Prvisins in the bill wuld require disclsure f real party-in-interest infrmatin in litigatin and t the PTO within three mnths after assignment. Custmer suits. The bill allws patent infringement suits against custmers t be stayed while the manufacturer litigates. Pst-grant review. The bill eliminates the AIA prvisin barring a pst-grant-review petitiner frm later asserting in a civil actin that a claim is invalid n any grund that the petitiner reasnably culd have raised during pst-grant review. The bill als requires the PTO t use district-curt claim cnstructin in pst-grant review and inter partes review prceedings. Bad-faith demand letters. The bill defines the sending f fraudulent r materially misleading demand letters in cnnectin with the assertin f a patent as an unfair and deceptive trade practice under Sectin 5 f the Federal Trade Cmmissin Act. Duble patenting. The bill cdifies the dctrine f duble patenting fr first-inventr-t-file patents. Bankruptcy prtectin. Prvisins in the bill bar a bankruptcy trustee frm terminating certain licenses, and hld the bankruptcy trustee t any cntractual bligatin t mnitr and cntrl the quality f a licensed prduct r service. Prvisins als add trademarks t the definitin f intellectual prperty in Title 11 f the Bankruptcy Cde. Status: The Patent Transparency and Imprvement Act f 2013 is currently in the Senate Judiciary Cmmittee. It is c-spnsred by Senatrs Mike Lee (R UT) and Sheldn Whitehuse (D RI). The White Huse has als signaled its supprt fr the Senate legislatin. Gene Sperling, directr f President Obama s Natinal Ecnmic Cuncil, stated n Nvember 18, 2013 that the bill is a big step in the right directin. Available at: 2. The Patent Litigatin Integrity Act (S. 1612) Intrduced: Octber 30, 2013, in the Senate Judiciary Cmmittee by Senatr Orrin Hatch (R UT). Key prvisins: The stated purpse f the Patent Litigatin Integrity Act is t lwer ecnmic incentives fr bringing frivlus patent suits thrugh fee-shifting. Attrneys fees. Prvisins in the bill wuld require curts t award attrneys fees t the prevailing party absent a shwing that the nn-prevailing party s psitin was substantially justified r there Mrrisn & Ferster LLP mf.cm Attrney Advertising

4 are special circumstances that wuld make an award unjust. The bill wuld als allw defendants t file a mtin requiring plaintiffs t pst bnds cvering fee awards. Status: The Patent Litigatin Integrity Act is currently in the Senate Judiciary Cmmittee. It was read twice and referred t the Senate Cmmittee n Octber 30, Available at: 3. The Innvatin Act (H.R. 3309) Intrduced: Octber 23, 2013, by Representative Bb Gdlatte (R VA), Chairman f the Huse Judiciary Cmmittee. It was c-spnsred at intrductin by Representatives Spencer Bachus (R AL), Jasn Chaffetz (R UT), Hward Cble (R NC), Peter DeFazi (D OR), Anna Esh (D CA), Blake Farenthld (R TX), Gerge Hlding (R NC), Ze Lfgren (D CA), Tm Marin (R PA), and Lamar Smith (R TX). Key prvisins: The prpsed bill cmbines a variety f prpsed amendments t the U.S. Patent Act several f which have been prpsed in prir bills int a cmprehensive legislative prpsal. Real party-in-interest. Prvisins in the bill require that parties asserting patents disclse t the curt, the defendant, and the PTO all entities having a financial interest in the asserted patents, as well as the asserting party s ultimate parent cmpany and any entity having enfrcement rights n the patents. The bill als impses an nging duty f disclsure t the PTO if changes t previusly disclsed infrmatin ccur. Discvery. The bill seeks t limit discvery prir t Markman hearings t infrmatin relevant t claim cnstructin, and includes prvisins allwing judges t make additinal rulings t stage discvery as they see fit. Parties wuld be required t pay their wn dcument prductin csts, but parties requesting irrelevant materials wuld als have t pay the ppsing party s prductin csts. Jinder. The bill wuld change prcedural jinder requirements t allw defendants t jin any interested party t the case. Interested party is defined as any assignee, entity with a right t sublicense, r entity with a direct financial interest in the asserted patent. Exceptins include attrneys representing parties r entities with an equity interest but n influence ver the actin. The prvisins als wuld nt apply if the party t be jined is nt subject t service f prcess, if jinder wuld deprive the curt f subject matter jurisdictin, r if jinder wuld create imprper venue. Custmer suits. Prvisins in the bill seek t address the practice emplyed by sme patent assertin entities f suing a prduct s end users fr using an allegedly infringing prduct. When a manufacturer intervenes in a case, a curt wuld be required t stay an actin brught against an end user if certain requirements are met. Pleading. The prpsal wuld require all plaintiffs in patent suits t disclse which claims are being infringed, and t specify which prducts are allegedly infringing and n what grunds. It wuld als require a plaintiff t describe its principal business and demnstrate its right t assert the patent Mrrisn & Ferster LLP mf.cm Attrney Advertising

5 Attrneys fees. The bill wuld require curts t award attrneys fees t the prevailing party absent a shwing that the nn-prevailing party s psitin and cnduct were substantially justified r there are special circumstances making an award unjust. Fees wuld be recverable frm all parties having a financial interest in the suit, rather than nly thse parties with an wnership interest in the patent. Cvered business methds. The AIA s CBM prgram permits parties charged with infringing a CBM patent t initiate a review prceeding at the PTO in which the validity f the patent may be challenged. Originally, the Innvatin Act wuld have eliminated the prgram s current 2020 expiratin date, and cdified the Patent Trial and Appeals Bard (PTAB) decisin interpreting CBM patents t include thse claiming inventins incidental t financial service. Representative Bb Gdlatte annunced n Nvember 18, hwever, that he wuld remve prvisins t expand the AIA s CBM prgram. Status: The bill is currently in the Huse Judiciary Cmmittee. Hearings were held n Octber 29, 2013, and the bill is set fr a vte n Nvember 20, Huse Judiciary Chairman Bb Gdlatte annunced n Nvember 18, 2013, that he will mark up the bill n Nvember 20, 2013, and published a manager s amendment shwing changes he will prpse at markup. The mst significant change in the manager s amendment is the remval f prvisins t expand the AIA s transitinal prgram fr CBM patents. Available at: Amendment available at: 4. The Stpping the Offensive Use f Patents Act (the STOP Act) (H.R. 2766) Intrduced: July 22, 2013, by Representatives Darrell E. Issa (R CA) and Judy Chu (D CA). Key prvisins: Cvered business methds. The purpse f the bill is t expand CBM Review at the PTO. The prvisins relating t cvered business methds are nearly identical t thse in the Patent Quality Imprvement Act (S. 866), discussed abve. Status: The STOP Act was referred t the Subcmmittee n Curts, Intellectual Prperty, and the Internet f the Huse Judiciary Cmmittee n September 13, It is c-spnsred by Representatives Jared Huffman (D CA), Betty McCllum (D MN), and Jasn Chaffetz (R UT). Available at: Mrrisn & Ferster LLP mf.cm Attrney Advertising

6 5. Lawsuit Abuse Reductin Act f 2013 (H.R. 2655) Intrduced: July 11, 2013, in the Huse Judiciary Cmmittee by Representative Lamar Smith (R TX). Key prvisins: Althugh nt a patent-specific bill, if enacted, the legislatin culd have a substantial impact n patent cases. Sanctins. Prvisins in the bill amend Federal Rule f Civil Prcedure 11(c) by essentially making sanctins mandatry fr vilatins f Rule 11(b) certificatins. In additin, the amendment wuld mandate that any sanctins cmpensate reasnable expenses f the ppsing party and permit additinal mnetary and nn-mnetary sanctins as apprpriate. Status: The Huse f Representatives passed the Lawsuit Abuse Reductin Act f 2013 n Nvember 14, The bill nw mves t the Senate fr cnsideratins. It is c-spnsred by Representatives Jasn Chaffetz (R UT), Blake Farenthld (R TX), Trent Franks (R AZ), Bb Gdlatte (R VA), Gerge Hlding (R NC), Jim Jrdan (R OH), and Tm Marin (R PA). Available at: 6. Patent Litigatin and Innvatin Act (H.R. 2639) Intrduced: June 10, 2013, in the Huse Judiciary Cmmittee by Representative Hakeem Jeffries (D NY). Key prvisins: Real party-in-interest. These requirements are similar t thse prpsed under the Innvatin Act (H.R. 3309) and the Patent Abuse Reductin Act (S. 1013). The Patent Litigatin and Innvatin Act, hwever, des nt require parties t disclse prir r pending litigatin. Discvery. The bill wuld allw curts t stay discvery until they have ruled n mtins t dismiss, mtins t transfer venue, and claim cnstructin issues. The bill als allws curts t expand discvery in extrardinary circumstances. Custmer suits. This prvisin is similar t the ne in the Innvatin Act (H.R. 3309), discussed abve. The principal distinctin is that the Patent Litigatin and Innvatin Act cvers nt nly cnsumers, but als entities that either resell r redistribute patented articles. Jinder. This prvisin f the bill is similar t the jinder prvisin in the Innvatin Act (H.R. 3309), discussed abve, thugh it des nt define the term interested party. It als requires parties t file a mtin fr jinder within 120 days f the first cmplaint, answer, r cunterclaim. Sanctins. Prvisins in the bill prvide patent litigatin defendants with additinal prtectin by making it easier fr judges t award sanctins fr abusive litigatin. Judges wuld be required t apply greater scrutiny in their analyses under Rule 11 f the Federal Rules f Civil Prcedure, and t include specific findings in the recrd as t abusive practices that take place during trial. The bill als Mrrisn & Ferster LLP mf.cm Attrney Advertising

7 requires judges t enfrce these sanctins against nncmpliant attrneys and their respective clients. Status: The Patent Litigatin and Innvatin Act was referred t the Subcmmittee n Curts, Intellectual Prperty, and the Internet f the Huse Judiciary Cmmittee n September 13, It is c-spnsred by Representative Blake Farenthld (R TX). Available at: 7. The Patent Abuse Reductin Act (S. 1013) Intrduced: May 22, 2013, in the Senate Judiciary Cmmittee by Senatr Jhn Crnyn (R TX). Key prvisins: The legislatin wuld make prcedural changes t several aspects f patent litigatin. Many f the prpsed changes, including thse related t real party-in-interest infrmatin, discvery, attrneys fees, and jinder, have been incrprated in the Innvatin Act (H.R. 3309). Status: The Patent Abuse Reductin Act was read twice and referred t the Senate Judiciary Cmmittee n May 22, It is c-spnsred by Senatr Charles Grassley (R IA). Available at: 8. The End Annymus Patents Act (H.R. 2024) Intrduced: May 16, 2013, by Representative Thedre E. Deutch (D FL). Key prvisins: The purpse f the bill is t add transparency t the patent system by requiring parties t reprt patent transfers and real party-in-interest infrmatin. Real party-in-interest. The bill requires the Directr f the PTO t develp regulatins relating t the disclsure f each entity having the legal right t enfrce a patent, its ultimate parent entity, and any entity having a cntrlling interest in the enfrcement f a patent. Such disclsures wuld be required f patent applicants upn the issuance f a new patent, payment f maintenance fees, and transfer f existing patents. Status: The End Annymus Patents Act was referred t the Subcmmittee n Curts, Intellectual Prperty, and the Internet f the Huse Judiciary Cmmittee n June 14, Available at: 9. The Patent Quality Imprvement Act (S. 866) Intrduced: May 6, 2013, by Senatr Charles E. Schumer (D NY) Mrrisn & Ferster LLP mf.cm Attrney Advertising

8 Key prvisins: Cvered business methds. The bill amends the AIA by making permanent a temprary prvisin allwing the PTO t review a patent after it has been granted. It als expands the scpe f cvered business methd patents eligible fr pst-grant review, frm business methd patents related t financial services t all business methd patents. Status: The Patent Quality Imprvement Act was read twice and referred t the Senate Judiciary Cmmittee n May 6, Available at: The Saving High-Tech Innvatrs frm Egregius Legal Disputes Act (the SHIELD Act) (H.R. 845) Intrduced: August 1, 2012, by Representatives Peter DeFazi (D OR) and Jasn Chaffetz (R UT). A secnd draft was intrduced n February 27, Key prvisins: The SHIELD Act fcuses n fee shifting. Attrneys fees. The bill mdifies the current fee-shifting prvisin, under which fee-shifting is limited t exceptinal cases. It allws a defendant t file a mtin t determine whether the plaintiff asserting a patent is an inventr r assignee f the asserted patent, a university r university-affiliated technlgy transfer assciatin, r a party that has therwise made a substantial investment in the patent. If the plaintiff is determined by the curt nt t meet ne f these cnditins, it must pst bnd in an amunt calculated t cver the recvery f csts by the defendant. Status: The SHIELD Act was referred t the Subcmmittee n Curts, Intellectual Prperty, and the Internet f the Huse Judiciary Cmmittee n April 8, It is c-spnsred by Representatives Kerry Bentivli (R MI), Tim Walberg (R MI), and Peter Welch (D VT). Available at: White Huse Recmmendatins On June 4, 2013, the White Huse utlined seven recmmended legislative actins and issued five executive actins intended t increase clarity and level the playing field fr innvatrs. Many f the legislative recmmendatins are already reflected in the prpsed bills circulating in Cngress, including: Real party-in-interest. The dcument recmmends legislatin that requires any party sending demand letters, filing an infringement suit, r seeking PTO review f a patent file, t update patent wnership infrmatin with the PTO. It als recmmends legislatin that enables the PTO r district curts t impse sanctins fr nncmpliance Mrrisn & Ferster LLP mf.cm Attrney Advertising

9 Demand letter disclsure. The dcument recmmends that legislative incentives be created t have patent demand letters filed publicly in a manner that is accessible t and searchable by the public. Attrneys fees. The dcument recmmends prviding district curts with mre discretin t award attrney s fees under 35 U.S.C. 285 as a sanctin fr abusive curt filings. Custmer suits. The dcument recmmends legislatin prtecting cnsumers and businesses frm infringement suits fr the use f ff-the-shelf prducts. It als recmmends that such suits be stayed when an infringement suit has been brught against the prduct manufacturer. ITC standards. The dcument recmmends legislatin adjusting the Internatinal Trade Cmmissin (ITC) standard fr btaining an injunctin t be cnsistent with the standard set by the Supreme Curt in ebay v. MercExchange. Cvered business methds. The dcument recmmends expanding the AIA s CBM prgram t include a brader categry f cmputer-enabled patents and permit a wider range f challengers t petitin fr review f issued patents befre the Patent Trial and Appeals Bard (PTAB). The executive actins differ significantly in their scpe and the prcesses required fr implementatin. Of the five executive actins, fur were tasked t the PTO. The PTO has psted a draft Strategic Plan, which incrprates the Administratin s executive actins, and is accepting cmments and feedback until Nvember 25, Making real party-in-interest the new default. The PTO will begin a rulemaking prcess t require patent applicants and wners t designate the ultimate parent entity in cntrl f the patent r applicatin when they are invlved in prceedings befre the PTO. Tightening functinal claiming. The PTO will prvide new targeted training t its examiners n scrutiny f functinal claims and develp strategies t imprve claim clarity, such as the use f glssaries in patent specificatins t assist examiners in the sftware field. A Sftware Partnership Meeting will be held n December 5, 2013, t bring stakehlders tgether t share ideas, experiences, and insights, and t prvide a frum fr infrmal discussin f tpics specific t the sftware cmmunity. Empwering dwnstream users. The PTO will publish new educatin and utreach materials, including an accessible, plain-english website ffering answers t cmmn questins asked by thse facing demands frm a patent assertin entity. Expanding dedicated utreach and study. The Department f Justice (DOJ), PTO, and FTC will expand their utreach effrts t stakehlders such as patent hlders, research institutins, cnsumer advcates, public interest grups, and the general public. This will include hlding events acrss the cuntry t develp new ideas and cnsensus arund updates t patent plicies and laws. The PTO has already expanded its Edisn Schlars Prgram t develp mre rbust data and research n issues bearing n abusive litigatin Mrrisn & Ferster LLP mf.cm Attrney Advertising

10 Strengthen enfrcement prcess f exclusin rders. The U.S. Intellectual Prperty Enfrcement Crdinatr (IPEC) is launching an interagency review f existing prcedures that Custms and Brder Prtectin and the U.S. Internatinal Trade Cmmissin use t evaluate the scpe f exclusin rders and wrk t ensure the prcess and standards utilized during exclusin rder enfrcement. The IPEC is als wrking t ensure that the prcess and standards utilized during exclusin rder enfrcement activities are transparent, effective, and efficient. A request fr public submissins was psted n June 20, 2013, and the cmment perid clsed n July 21, Available at: Cntact: Sctt F. Llewellyn (303) sllewellyn@mf.cm Abut Mrrisn & Ferster: We are Mrrisn & Ferster a glbal firm f exceptinal credentials. Our clients include sme f the largest financial institutins, investment banks, Frtune 100, technlgy and life science cmpanies. We ve been included n The American Lawyer s A-List fr 10 straight years, and Frtune named us ne f the 100 Best Cmpanies t Wrk Fr. Our lawyers are cmmitted t achieving innvative and business-minded results fr ur clients, while preserving the differences that make us strnger. This is MF. Visit us at Because f the generality f this update, the infrmatin prvided herein may nt be applicable in all situatins and shuld nt be acted upn withut specific legal advice based n particular situatins. Prir results d nt guarantee a similar utcme Mrrisn & Ferster LLP mf.cm Attrney Advertising