Innovation Act of 2013: Taking Aim at Patent Trolls

written by James Klobucar, Esq., Patent Attorney at Gearhart Law

Innovation Act of 2013: Taking Aim At Patent Trolls

Just recently, patent reform legislation was introduced to Congress by a bipartisan group led by House Judiciary Committee Chairperson Bob Goodlatte (R-Va). The bill (H.R. 3309) is being tentatively referred to as the “Innovation Act of 2013.” The bill aims to build upon patent reforms introduced in the America Invents Act (AIA) which went into full effect this past March of this year. One of the main points of focus of the bill is on “non-practicing entities” (NPEs), aka “patent assertion entities” (PAEs), aka “patent trolls.” Contrary to the name, these are not creatures dwelling under a bridge looking for a hand out…well…errrm…

The term “patent trolls” refers to firms that do not invent or manufacture products but rather acquire extensive patent portfolios through purchase or licensing. The “trolls” then turn around and attempt to collect licensing fees or threaten with the filing of infringement suits (hint: they almost never do). For example, have you ever scanned a document and emailed it? A questionable patent was granted covering this action some years ago (originally filed in 1997). A firm has recently been mailing demand letters nationally attempting to collect thousands of dollars in licensing fees from people, typically small business, for implementing such practices. These letters are often vague as to what was infringed, and also make it hard to ascertain who is the patent owner making this assertion. In fear of costly litigation (potentially millions of dollars) businesses will settle the “case” for a nominal fee. Thus, the aim of the legislation is primarily directed to solving the question:

“How do we stop these “trolls” from partaking in what amounts to thinly veiled extortion?”

The answer, at least in part, is below in a summary of the most relevant sections of the bill in its current form (via U.S. House Judiciary Committee):

Section 3. Patent infringement actions:

1) Heightened initial pleading requirements – provides for enhanced initial pleading requirements that would require a patentee to identify the patents and claims infringed upon, and requires more specificity as to exactly how they are infringed.

2) §285 Fee Shifting — aligns fee shifting in patent cases with the standard that is used for awarding fees against the U.S. under the Equal Access to Justice Act (28 U.S.C. §2412(d)). The EAJA was enacted in 1980, and there is now a well-developed body of case law explaining what “substantially justified” means in the fee-shifting context. The standard is reasonably fair and predictable and is reliably enforced. The provision also allows for limited joinder of parties (ex: parent entity) to satisfy a fee-shifting award.

3) Joinder provision – allow courts to join (add) parties that have an interest in the patent or patents at issue.

4) Discovery in patent cases – gives courts ability to limit discovery until claim construction occurs.

Section 4. Transparency of Patent Ownership:

1) Upon filing the initial complaint the plaintiff is required to provide parties, the Court and the PTO with basic information about the patent (ex: ultimate parent entity, parties with a financial interest, etc.). Also requires the patentee to keep that information updated for the life of the patent.

Section 5. Customer-suit exception:

1) Allows a manufacturer to intervene in a suit against his customers, and allows the action to be stayed as to the customer, if both the manufacturer and customer agree. The goal is to allow a manufacturer/supplier to intervene and stay cases against downstream alleged infringers, provided that there is an adequate remedy against the intervener. The provision accounts for indemnity agreements and helps prevent gamesmanship. (Such suits tend to be coercive and are an abusive patent litigation tactic).

The above provisions all contribute to helping to stop patent trolls. By focusing heightened pleading requirements, allowing the prevailing party to collect attorneys fees in litigation, and limiting discovery (often the most costly part of patent litigation), patent trolls would be wise to think twice about their actions.Additionally, it aims to unmask the shell companies (virtually nameless entities with very few assets) many trolls use to hide the true identity of the patent owner and to shield themselves from potential judgments against them.

However, while all seems well on the surface, the bill does have its faults. The bill, currently, does nothing to stop the mass mailings of the aforementioned demand letters, and there is the distinct possibility it could adversely affect legitimate patent plaintiffs. For example, the demand letters are often sent to small businesses that are not familiar with the patent laws and may not have the means to consult a patent attorney. Surely, the federal government cannot prevent people from using the mail; however, the states may be able to play a role in such deterrence. The legislation could also deter legitimate claims of infringement. The fee shifting (losing side pays winners attorneys fees) is required unless it is determined the non-prevailing party was “substantially justified or special circumstances make the award unjust.” Therefore, you may feel strongly about your case, but are you willing to bet a potential fee shifted $1 million dollar plus defense bill on it?

This is definitely a step in the right direction, but much work remains to be done. It’s a matter that you will want to follow closely. Your rights as an inventor/entrepreneur depend on it.

Further Reading

Innovation Act (H.R. 3309)

Section by Section Summary of H.R. 3309

Patent Assertion and U.S. Innovation – June 2013