PATENT TROLL LEGISLATION How it could affect your IP portfolio

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1 Sughrue Mion, PLLC Washington, Tokyo, San Diego PATENT TROLL LEGISLATION How it could affect your IP portfolio Presented by John B. Scherling and Antony M. Novom 1

2 This presentation is for educational purposes only, and does not provide legal advice, or comment on the application of US law or USPTO regulations to any specific patent or application. The views expressed herein are not necessarily those of Sughrue Mion, PLLC or any of its clients. Patent Litigation is Increasing Recent data shows that the number of patent lawsuits filed by patent trolls is increasing. 2

3 General Definitions Non-Practicing Entity (NPE) Broadly refers to a company that owns patents but does not design or manufacture a product or use a process Covered entities include: Universities / Technology Transfer Offices Start-ups Research Institutions Individual Inventors General Definitions Patent Assertion Entities (PAE) Subset of NPE Typically synonymous with patent troll An entity that obtains patents primarily for obtaining license fees (not for producing and selling goods) An entity that obtains patents primarily for obtaining license fees (rather than to support the development or transfer of technology) 3

4 Recent Statistics Misleading Cotropia, et al. analyzed patent litigations from 2010 and 2012 (University of Illinois College of Law) [t]here has not been any explosion of non-practicing entity litigation between 2010 and 2012, as others have reported. differences between the years is likely explained by and attributable to a change in the joinder rules adopted in 2011 as part of the America Invents Act. The AIA included a revision to the joinder rules, which required lawsuits filed against multiple unrelated parties to be filed separately. Study by Cotropia, et al. Classified all patent holders into one of the following groups: University Individual inventor Large patent aggregator Failed operating or start-up company Patent holding company Operating company IP holding company owned by operating company Technology development company 4

5 Study by Cotropia, et al. Study by Cotropia, et al. 5

6 Study by Cotropia, et al. Litigation Reform Several Bills introduced to address increasing problem of abusive patent litigation: Goodlatte H.R.3309 ( Innovation Act ) passed by H.R. on 12/05/2013 Leahy S.1720 ( Patent Transparency and Improvements Act ) Cornyn S.1013 ( Patent Abuse Reduction Act ) Hatch S.1612 ( Patent Litigation Integrity Act ) Schumer S.866 ( Patent Quality Improvement Act ) Deutch H.R.2024 ( End Anonymous Patents Act ) Polis H.R.3540 ( Demand Letter Transparency Act ) DeFazio H.R. 845 ( S.H.I.E.L.D. Act ) Jeffries H.R ( Patent Litigation and Innovation Act ) Issa H.R ( S.T.O.P. Act ) White House Fact Sheet June 4,

7 Goodlatte H.R Section 3 Patent Infringement Actions 281A Pleading Requirements Initial complaint shall include a listing of: each patent that is allegedly infringed, each claim of each patent that is allegedly infringed, each accused process/product that allegedly infringes (including name/model number), how each limitation of each claim is met by the accused instrumentality, clear description of the principal business of accused infringer, list of each complaint filed that asserts any of the patents Adds to cost and subjects to greater scrutiny and motion practice? Amend complaint to include new info learned in discovery? Goodlatte H.R Section 3 Patent Infringement Actions 285 Fee Shifting The court shall award to the prevailing party reasonable fees and other expenses; UNLESS the court finds that the position and conduct of the nonprevailing party was reasonably justified or that special circumstances (e.g., economic hardship) make an award unjust. Upon motion of any party, the court shall require another party to certify whether or not the other party can pay an award of fees If unable to certify, the court may make a party that has been joined liable for the unsatisfied portion of the award. 7

8 Goodlatte H.R Section 3 Patent Infringement Actions 285 Fee Shifting If an asserting party later extends a covenant not to sue for infringement with respect to the patent, the party shall be deemed to be a nonprevailing party for purposes of awarding costs/fees. Is a loser-pays system going to encourage PAEs to file more suits? Will it discourage some patentees from filing suit? Goodlatte H.R Section 3 Patent Infringement Actions Joinder of Interested Parties If a party asserting a patent loses and is unable to pay costs/fees, the court shall grant a motion by the prevailing defendant to join an interested party. Interested party = any assignee, any party having a right to enforce or sublicense the patent, or any party having a financial interest (>5%) in the patent. DOES NOT include attorneys or law firms providing legal representation or individual investors/owners in party alleging infringement. Disclose non-ownership interests? 8

9 Goodlatte H.R Section 3 Patent Infringement Actions 299A Discovery If court determines that claim construction is required, discovery shall be limited to the terms requiring construction until a ruling is issued. The court may expand the scope of discovery as necessary to ensure timely resolution of the action. DOES NOT apply to discovery related to a preliminary injunction to redress harm arising from use, sale, or offer for sale. Will this throttle a judge s discretion to manage discovery according to the particular circumstances in a case? Goodlatte H.R Section 3 Patent Infringement Actions Demand Letters It is considered abuse of the patent system to send purposefully evasive demand letters to end users Must include information about the patent, what is being infringed, and how it is being infringed. 9

10 Goodlatte H.R Section 3 Patent Infringement Actions Demand Letters To establish willful infringement, a claimant may not rely on pre-suit notification unless the notification identifies: The asserted patent The product or process accused The ultimate parent entity of the claimant How the product or process infringes one or more claims Must be after a reasonable investigation or inquiry Kilopass Technology, Inc. v. Sidense Corp. Goodlatte H.R Section 4 Transparency of Patent Ownership Upon filing of the initial complaint, the plaintiff shall disclose to the PTO, the court, and each party: The identity of the assignee(s) of the patent; Any entity with a right to sublicense or enforce; Any entity having a financial interest in the patent The ultimate parent entity of any assignee This is an on-going duty Changes of info must be provided within 90 days 10

11 Goodlatte H.R Section 5 Customer Suit Exception 296 Stay of action against customer The court shall grant a motion to stay an action against a covered customer if: Covered manufacturer is a party to an action based on the same patent Covered customer agrees to be bound by any issues that the customer has in common with the manufacturer Motion must be filed within 120 days of first pleading The stay may be lifted if the action will not resolve an issue against the customer Customer direct infringement may be necessary to prove manufacturer's indirect infringement Goodlatte H.R Section 6 Procedures to Implement Discovery Electronic Communications Requests for production shall be specific and may not be a general request relating to product or business Must identify the custodian of the information, the search terms, and time frame Parties must cooperate to identify the above May not submit production requests to more than 5 custodians unless parties jointly agree Additional discovery available at expense of requesting party 11

12 Goodlatte H.R Section 7 Small Business Education/Access PTO must use existing resources to provide educational programs for small businesses about litigation abuse. Website information to notify the public when a patent case is brought in Federal court Searchable by patent number, patent art area, and entity. Requires USPTO to do more with no additional funding. Goodlatte H.R Section 8 Studies Study on Patent Small Claims Court Study on demand letters Study on quality of all business method patents to expand beyond financial CBM 12

13 Goodlatte H.R Section 9 Amendments to the AIA Estoppel fix for PGR rule Eliminates or could have raised Under the AIA, PGR presents harsher estoppel provisions than IPR since grounds that reasonably could have been raised is much broader in PGR. PGR is for any ground related to patent invalidity under 35 U.S.C. 282 [e.g., 101, 112, 102, 103], but IPR is for a ground related to patent invalidity under 35 U.S.C. 102 and 103 and on the basis of patents or printed publications Use of district court claim construction in PGR and IPR Each claim of a patent shall be construed as would be in a civil action If already construed by a court, the USPTO shall consider such construction Goodlatte H.R Section 9 Amendments to the AIA 106 Codification of Double-Patenting Doctrine Applies doctrine to first inventor to file patents Limits on Patent Term Adjustment Patent term is extended by 1 day for each day after the end of the 3-year period until issuance No B delay if applicant files an RCE Time Limit for Misconduct Proceeding Extends the time limit from 1 year to 18 months Current rule: the earlier of: (i) the date that is 10 years after the day on which the misconduct occurred; or (ii) 1 year after the date on which the misconduct was made known to an officer or employee of the PTO. 13

14 Leahy S Section 3 Transparency of Patent Ownership Initial Disclosure The court shall require a party asserting a patent to disclose to the court and to all adverse parties, any party known to have: A financial interest (of any kind) in the subject matter in controversy Any interest that could be affected by the outcome of the proceeding Leahy S Section 4 Customer Stay The court shall grant a motion to stay an action against a covered customer Covered manufacturer is a party to an action based on the same patent Covered customer agrees to be bound by any issues that the customer has in common with the manufacturer Motion must be filed within 120 days of first pleading The stay may be lifted if the action will not resolve an issue against the customer 14

15 Leahy S Section 5 Bad-Faith Demand Letters It is considered an unfair or deceptive act to send wide spread written communications alleging infringement if: Falsely threatening the seeking of judicial relief if compensation is not paid The assertions in the letter lack a reasonable basis in fact or law The content of the letter is likely to mislead a reasonable recipient by failing to include sufficient facts related to infringement The Federal Trade Commission shall enforce in the same manner Leahy S Section 6 Small Business Education/Access PTO must use existing resources to provide educational programs for small businesses about litigation abuse. Website information to notify the public when a patent case is brought in Federal court Searchable by patent number, patent art area, and entity. 15

16 Leahy S Section 7 Improved Post-Issuance Procedures Estoppel fix for PGR rule Eliminates or could have raised Use of district court claim construction in PGR and IPR Each claim of a patent shall be construed as would be in a civil action If already construed by a court, the PTO shall consider such construction Leahy S Section 8 Protection of IP Licenses in BK Ensures patent and TM licenses are not eliminated during bankruptcy cases. Section 9 Codification of Double-Patenting Doctrine Applies doctrine to first inventor to file patents 16

17 Leahy S Section 10 Technical corrections to AIA Corrections to language related to inventor oath/dec, priority benefit of applications, rejections based on art, etc. Time Limit for Misconduct Proceeding Extends the time limit from 1 year to 2 years Leahy S Section 11 Reports Study on Patent Small Claims Court Study on quality of all business method patents to expand beyond financial CBMs 17

18 Cornyn S Section 2 Pleading Requirements Initial complaint, counterclaim, or cross-claim shall include a listing of: each patent that is allegedly infringed, each claim of each patent that is allegedly infringed, each accused process/product that infringes (including name/model number), how each limitation of each claim is met by the accused instrumentality, description of the principal business of accused infringer, list of each complaint filed that asserts any of the patents Adds to cost and subjects to greater scrutiny and motion practice? Necessary to disclose multiple times? Cornyn S Section 2 Pleading Requirements Initial complaint, counterclaim, or cross-claim shall include a listing of: whether the patent is subject to licensing term or pricing commitments identity of any party who owns, co-owns, is an assignee, has an exclusive licensee, or has a right to enforce the patent; any entity having a financial interest in the patent; a description of any agreement or other legal basis for a financial interest 18

19 Cornyn S Section 3 Joinder of Interested Parties The court shall grant a motion by a party defending an infringement claim to join an interested party if the defending party shows that the interest of the plaintiff is limited primarily to asserting the patent in litigation. Interested party = any assignee, any party having a right to enforce or sublicense the patent, or any party having a financial interest in the patent. DOES NOT include attorneys or law firms providing legal representation. The court may deny the motion due to lack of service or if joinder would render jurisdiction or venue improper. Cornyn S Section 4 Discovery Limits If court determines that claim construction is required, discovery shall be limited to the terms requiring construction until a ruling is issued. The court may expand the scope of discovery as necessary to ensure timely resolution of the action. The court may expand the scope of discovery to resolve a motion. Additional discovery only available at expense of requesting party 19

20 Cornyn S Section 5 Costs and Expenses The court shall award to the prevailing party reasonable costs and expenses including attys fees; UNLESS the court finds that the position and conduct of the nonprevailing party was reasonably justified or that exceptional circumstances make an award unjust. If the non-prevailing party is unable to pay reasonable costs and expenses, the court may make the costs and expenses recoverable against any interested party. Hatch S Section 101 Fee Shifting The court shall award to the prevailing party reasonable fees and other expenses, including attys fees; UNLESS the court finds that the position and conduct of the nonprevailing party was reasonably justified or that special circumstances make an award unjust. 20

21 Hatch S Section 201 Motion for a Bond Upon motion by a defendant, the court may order that the party alleging infringement post a bond sufficient to ensure payment of the accused infringer s reasonable fees and expenses Factors considered by court Whether bond would hinder unrelated activities of plaintiff Whether plaintiff is a university or non-profit technology transfer office Whether plaintiff is a named inventor Schumer S. 866 Section 2 Improvements to CBM Patents Expands AIA to allow USPTO to review the validity of all business method patents, not just those related to the financial sector. Strikes a financial product or and insert an enterprise, product, or. Creates more work for the USPTO without any additional funding? Eliminates 8-year sunset provision for review of CBM 21

22 Deutch H.R Section 2 Disclosure of Patents Requires the USPTO to develop regulations relating to the disclosure of each entity having the legal right to enforce a patent, its ultimate parent entity, and any entity having a controlling interest in enforcement. Must be disclosed at issuance, payment of maintenance fees, and transfer of existing patents Must record changes to the above within 90 days Failure to comply may result in limited damages collect only from date on which the requirement is met. Polis H.R Section 2 Disclosure of Information Any entity that sends 20 or more demand letters during any 365-day period shall disclose to the USPTO the identity of: Each patent with confirmation that the entity that sent the letter is the owner of the patent, and is the last-recorded owner at the USPTO Any entity having the right to license the patent and any obligation to license The ultimate parent of the entity The number of entities receiving a demand letter Any case that has been filed by the entity regarding the patent Any IPR or PGR related to the patent 22

23 Polis H.R Section 2 Disclosure of Information Failure to comply May be subject of monetary sanctions by a court to cover cost incurred by the adverse party resulting from the failure to meet the requirements Ongoing Duty to Correct or Supplement Any changes in the disclosed information must be provided within 20 days of the change Exemptions Does not apply to original inventor(s) or universities Polis H.R Section 2 Disclosure of Information Demand Letter Database USPTO and FTC are required to establish a publicly available and searchable database of demand letters May be redacted upon motion by recipient Ongoing Duty to Correct or Supplement Any changes in the disclosed information must be provided within 20 days of the change Exemptions Does not apply to original inventor(s) or universities 23

24 Polis H.R Section 3 Demand Letter Requirements Must identify: each patent that is allegedly infringed, each claim of each patent that is allegedly infringed, each accused process/product that allegedly infringes (including name/model number), how each limitation of each claim is met by the accused instrumentality, clear description of the principal business of accused infringer, list of each complaint filed that asserts any of the patents any IPR/PGR for the asserted patents How the recipient can access the database That the recipient is not required by law to respond to the letter Polis H.R Section 4 Penalties A recipient who believes the demand letter has not met the requirements may submit to the USPTO in writing which requirements were not met and any other relevant information Upon finding that the demand letter has not met the requirements, the USPTO will notify the patent owner that the patent will be voided unless a fee is paid within 3 months of the notice. The Director may accept the fee provided that the delay in fulfilling the requirement(s) is shown to be unintentional or unavoidable. 24

25 DeFazio H.R. 845 Section 2 Recovery of Litigation Costs Any party may file a motion to determine whether the party asserting the patent is an inventor, assignee, university or technology transfer office, or a party that has made a substantial investment in the patent If the court determines that the plaintiff does not meet at least one of the criteria, the court shall require the plaintiff to post a bond to cover costs by defendant Jeffries H.R Section 2 Pleading Requirements Initial complaint shall include a listing of: each patent that is allegedly infringed, each claim of each patent that is allegedly infringed, each accused process/product that allegedly infringes each claim (including name/model number), how each limitation of each claim is met by the accused instrumentality, a description of the rights of the party asserting the patent including a description of the principal business of the party, any co-owners, assignees, licensees 25

26 Jeffries H.R Section 3 Joinder of Interested Parties If a party asserting a patent loses and is unable to pay costs/fees, the court shall grant a motion by the prevailing defendant to join an interested party. DOES NOT include attorneys or law firms providing legal representation. The court may deny the motion due to lack of service or if joinder would render jurisdiction or venue improper. Jeffries H.R Section 4 Stay of Action Against Secondary Party The court shall grant a motion to stay an action against a secondary party if: Primary party consents in writing Secondary party agrees to be bound by any issues that the customer has in common with the primary party Motion must be filed within 120 days of first complaint in the action of the primary part During the stay, the secondary party is treated as a non-party 26

27 Jeffries H.R Section 5 Stay of Discovery The court shall stay discovery until after the court has ruled on: motion to dismiss, motion to transfer venue, and construction of terms if deemed necessary by the court. The court may expand the scope of discovery as necessary to ensure timely resolution of the action. During the stay, all parties shall treat all relevant evidence as if they were subject to a request for production under FRCP. Jeffries H.R Section 6 Sanctions for Abusive Litigation Upon final adjudication of the action, the court shall include in the record specific findings regarding compliance by each party and each attorney If the court finds that a party violated any of the requirements of Rule 11(b) of FRCP, the court may impose sanctions on party or attorney The court shall give the party notice of the finding and the opportunity to respond 27

28 Jeffries H.R Section 2 Sanctions for Abusive Litigation The court may award to the prevailing party reasonable fees and other expenses in exceptional cases. No substantive change to this section Issa H.R Section 2 Improvements to CBM Patents Expands AIA to allow USPTO to review the validity of all business method patents, not just those related to the financial sector. Strikes a financial product or and insert an enterprise, product, or. Expansion of Pro Bono Program at USPTO Requires the USPTO to support IPLAs to assist financially under-resourced resellers, users, implementers, distributors, or customers of an allegedly infringing product or process Eliminates 8-year sunset provision for review of CBM 28

29 White House Fact Sheet Designed to protect innovators from frivolous litigation and ensure the highest-quality patents Executive Actions Real Party-in-Interest is New Default requires USPTO to begin rulemaking process to require applicants and owners to regularly update ownership information Tightening Functional Claiming new targeted training of examiners on scrutiny of functional claims in the context of software Empowering Downstream Users new education and outreach materials in a website offering answers to parties facing demands of PAEs Expanding Dedicated Outreach and Study bring experts into the USPTO to develop more robust data and research on issues related to abusive litigation Strengthen Enforcement Process of Exclusion Orders launch interagency review of International Trade Commission (ITC) and Customs and Border Protection (CBP) White House Fact Sheet Legislative Recommendations Require patentees and applicants to disclose real party-in-interest when sending demand letters, enforcing a patent, or seeking PTO review of a patent Permit more discretion in awarding fees to prevailing parties in patent litigation Expand the USPTO s transitional program for CMB to include all computer-enabled patents Protect off-the-shelf use by consumers and businesses and stay judicial proceedings against such consumers when an action is brought against a vendor, retailer, or manufacturer Change the ITC standard for obtaining an injunction Demand letter transparency to curb abusive suits Ensure the ITC has flexibility in hiring qualified Administrative Law Judges 29

30 Summary Chart PAEs Software and Business Methods FRAND Goodlatte H.R Leahy S Real Party in Interest Discovery Joinder Customer Suits Pleading Attorneys' Fees Demand Letters Real Party in Interest Customer Suits Demand Letters Studies CBM Studies CBM Pleading Discovery Bankruptcy Cornyn S Real Party in Interest Discovery Attorneys' Fees Joinder Hatch S Attorneys' Fees / Bond Requirement Schumer S. 866 CBM Deutch H.R Real Party in Interest Polis H.R Real Party in Interest Demand Letters Sanctions DeFazio H.R. 845 Attorneys' Fees / Bond Requirement Jeffries H.R Real Party in Interest Customer Suits Sanctions Joinder Discovery Issa H.R CBM White House Fact Sheet (June 4, 2013) Real Party in Interest Demand Letter Disclosure Attorneys' Fees Customer Suits ITC Standards CBM Functional Claiming ITC Standards Adapted from 30