Patent Reform Bills Target Patent Trolls

The Supreme Court, in Bell Atlantic v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), held that a civil complaint must plead “enough factual matter” to make the claim “plausible on its face.” While they appear to apply to patent cases, Form 18 of the Appendix to the Federal Rules of Civil Procedure requires pleading only minimal details for patent complaints. The Federal Circuit considered the effect of Twombly/Iqbal on pleading requirements for patent cases, and held that a patent infringement complaint need only comply with Form 18. See, K-Tech Telecomm. v. Time Warner Cable, 714 F.3d 1277 (Fed.Cir. 2013). The patent reform bills seek to heighten pleading requirements.

The STRONG Patent Act simply eliminates Form 18, relying on Twombly/Iqbal to require greater detail in patent complaints.

The PATENT Act and the Innovation Act go further and require patent complaints to identify: the asserted patent(s) and claims; the accused instrumentality; how the accused instrumentality infringes; other complaints based on the same patents; and, for indirect infringement, the acts alleged to contribute to or induce infringement. The PATENT Act also requires identification of the patent's assignee, the ultimate parent of the assignee, entities with a right to enforce the patent, and all entities with a financial interest in the patent. The Innovation Act also requires a description of the principal business, if any, of the plaintiff.

These bills impose pleading requirements arguably greater than are required by Twombly/Iqbal. Requiring such detail, especially on the infringement contentions, may seem burdensome, case law already requires patentees to conduct a pre-filing inquiry, including claim construction and comparison of the claims with the accused product. Antonious v. Spalding & Evenflo Cos., 275 F.3d 1066, 1074 (Fed.Cir. 2002).

The deterrent effect of heightened pleading requirements is likely minimal, since most savvy patent trolls thoroughly investigate their positions before filing suit. As such, they are well-equipped to comply with heightened pleading requirements.

Venue

A disproportionate number of patent cases are filed in the Eastern District of Texas because of that district's perceived pro-plaintiff reputation. Current venue rules allow plaintiffs to establish venue by merely setting up an office in the district. The Innovation Act would make venue proper only in districts where the defendant has a facility related to the infringement or where the patented invention was developed. Most of the cases filed in the Eastern District would not satisfy these venue requirements. Patent trolls would have to expend additional resources pursuing cases in multiple jurisdictions, as opposed to forcing numerous defendants to come to a district where they may have little or no connection. It may also force them to litigate in a defendant's home jurisdiction.

Unfortunately, this would also affect individuals or small companies. These patentees would have to sue where the alleged infringer is located, rather than litigate in a forum where infringement is occurring, such as their home forum. This could be more costly, and may present the small patent owner with a distinct tactical disadvantage of litigating in the defendant's home court. It would also be contrary to the venue provision of 28 U.S.C. '1394, which establishes venue for patent cases in districts where a defendant has committed acts of infringement.

Discovery Limits

Patent trolls leverage the high costs of document discovery for quick settlements. Because of this, the reform bills limit discovery.

Both the PATENT Act and the Innovation Act separate discovery of “core” and “noncore” documents. The PATENT Act makes the producing party responsible for costs associated with core documents. But, the requesting party is responsible for costs and attorneys' fees for noncore documents. The Innovation Act also requires the party requesting noncore documents to post a bond sufficient to cover the costs of discovery or establish it is a large enough company to pay. By separating categories of documents, costs for discovery of largely irrelevant documents may be avoided. Yet, given that “core” versus “noncore” documents are not defined (except for excluding electronic communications such as email), practical application of the provisions is uncertain.

The PATENT Act further stays discovery pending resolution of motions to transfer venue or sever accused infringers. The Innovation Act stays most discovery other than that necessary for claim construction until after a claim construction ruling. Both bills allow limited discovery related to a preliminary injunction motion. Staying discovery until after claim construction may eliminate substantial costs since claim construction decisions are often case dispositive.

Fee Shifting

Both the PATENT Act and Innovation Act attempt to lessen abusive patent litigation by making an award of the other party's reasonable attorneys' fees potentially more likely. The PATENT Act provides that non-prevailing parties must pay reasonable attorneys' fees if their positions were not “objectively reasonable,” and requires a plaintiff to identify interested parties, certify it has sufficient funds to satisfy a fee award, and describe its primary business. The Innovation Act similarly awards attorney fees and “other expenses” to the prevailing party unless a judge finds the non-prevailing party's position was “reasonably justified in law and fact.”

This reverses the current rule where attorney fees are available to a defendant only in “exceptional cases.” While intended to discourage patent trolls, it is more likely to dissuade individual inventors or small businesses from enforcing their patents, especially against larger entities. Many patent trolls are experienced enough to have developed a facially plausible infringement position. What is “objectively reasonable” or “reasonably justified in law and fact,” however, may create too much risk for a small patent owner to enforce its patent against a large company that is likely to incur substantial costs and attorneys' fees.

Demand Letters and Willful Infringement

A finding of willful infringement exposes an infringer to up to treble damages, as well as attorneys' fees. Since patent trolls by definition do not practice the patent, knowledge of the patent, which is required for willful infringement, is often established through a pre-suit demand letter. Such demand letters, like complaints, have typically been intentionally vague ' generically asserting infringement without providing many details.

To combat this, both the PATENT Act and Innovation Act require demand letters to identify the patent, accused products, infringement contentions, and the ultimate owner of the patent before they can be used to demonstrate willfulness or calculate damages. The PATENT Act also requires, among other things, a description of the plaintiff's principal business, identification of other complaints asserting the patents, and identification of persons with a direct financial interest in the action.

The PATENT Act and the STRONG Patents Act (which does not set forth requirements for the demand letter) also make the sending of demand letters in bad faith a FTC violation. As such, a violation may subject a patent troll to civil penalties. Proving “bad faith,” however, would seem very difficult absent a smoking gun document.

These requirements will likely not present a substantial obstacle to patent trolls. Rule 11 already requires a pre-filing inquiry by an attorney filing a complaint, and the proposed changes merely require the party to divulge the results of the inquiry early on. While a thorough analysis of the patent and defendants' products will need to be conducted before sending a cease-and-desist letter, today's patent trolls are generally very sophisticated, so the required analyses in the proposed patent reform bills are often already part of their overall strategy.

Conclusion

Many of the proposed patent reforms will make patent trolls fully investigate their claims before threatening their target defendants and, under the new venue requirements, may stop them from dragging defendants into unfavorable jurisdictions. Nonetheless, it seems unlikely that the proposed reforms will actually halt or significantly reduce abusive patent litigation, and may actually make it harder for individuals and small businesses to protect their patent rights against large corporate entities.

Joseph M. Kuo is a partner in the IP Practice Group of Arnstein & Lehr LLP. He may be contacted at [email protected].

On Sept. 16, 2011, the America Invents Act (AIA) became effective, including provisions directed at non-practicing entities, commonly known as “patent trolls.” Many believe, however, that patent trolls are still a plague, and that more must be done to curtail abusive patent litigation. This has led to the introduction of several patent reform bills:

• “Protecting American Talent and Entrepreneurship Act” (PATENT Act) (S. 1137);
• “Innovation Act” (H.R. 9); and
• “Support Technology and Research for Our Nation's Growth Patents Act of 2015” (STRONG Patents Act) (S. 632).

While there are other more narrow bills, these cover numerous patent reform issues. This article addresses some of the more interesting provisions relevant to patent troll litigation.

Pleading Requirements And Early Disclosures

Complaints by patent trolls often provide defendants with few details about the case other than identifying a patent and alleging that the defendant is making, using, or selling an infringing product or practicing a patented method. For example, the claims asserted and the reasons behind the allegations are rarely identified.

The Supreme Court, in Bell Atlantic v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), held that a civil complaint must plead “enough factual matter” to make the claim “plausible on its face.” While they appear to apply to patent cases, Form 18 of the Appendix to the Federal Rules of Civil Procedure requires pleading only minimal details for patent complaints. The Federal Circuit considered the effect of Twombly/Iqbal on pleading requirements for patent cases, and held that a patent infringement complaint need only comply with Form 18. See, K-Tech Telecomm. v. Time Warner Cable, 714 F.3d 1277 (Fed.Cir. 2013). The patent reform bills seek to heighten pleading requirements.

The STRONG Patent Act simply eliminates Form 18, relying on Twombly/Iqbal to require greater detail in patent complaints.

The PATENT Act and the Innovation Act go further and require patent complaints to identify: the asserted patent(s) and claims; the accused instrumentality; how the accused instrumentality infringes; other complaints based on the same patents; and, for indirect infringement, the acts alleged to contribute to or induce infringement. The PATENT Act also requires identification of the patent's assignee, the ultimate parent of the assignee, entities with a right to enforce the patent, and all entities with a financial interest in the patent. The Innovation Act also requires a description of the principal business, if any, of the plaintiff.

These bills impose pleading requirements arguably greater than are required by Twombly/Iqbal. Requiring such detail, especially on the infringement contentions, may seem burdensome, case law already requires patentees to conduct a pre-filing inquiry, including claim construction and comparison of the claims with the accused product. Antonious v. Spalding & Evenflo Cos., 275 F.3d 1066, 1074 (Fed.Cir. 2002).

The deterrent effect of heightened pleading requirements is likely minimal, since most savvy patent trolls thoroughly investigate their positions before filing suit. As such, they are well-equipped to comply with heightened pleading requirements.

Venue

A disproportionate number of patent cases are filed in the Eastern District of Texas because of that district's perceived pro-plaintiff reputation. Current venue rules allow plaintiffs to establish venue by merely setting up an office in the district. The Innovation Act would make venue proper only in districts where the defendant has a facility related to the infringement or where the patented invention was developed. Most of the cases filed in the Eastern District would not satisfy these venue requirements. Patent trolls would have to expend additional resources pursuing cases in multiple jurisdictions, as opposed to forcing numerous defendants to come to a district where they may have little or no connection. It may also force them to litigate in a defendant's home jurisdiction.

Unfortunately, this would also affect individuals or small companies. These patentees would have to sue where the alleged infringer is located, rather than litigate in a forum where infringement is occurring, such as their home forum. This could be more costly, and may present the small patent owner with a distinct tactical disadvantage of litigating in the defendant's home court. It would also be contrary to the venue provision of 28 U.S.C. '1394, which establishes venue for patent cases in districts where a defendant has committed acts of infringement.

Discovery Limits

Patent trolls leverage the high costs of document discovery for quick settlements. Because of this, the reform bills limit discovery.

Both the PATENT Act and the Innovation Act separate discovery of “core” and “noncore” documents. The PATENT Act makes the producing party responsible for costs associated with core documents. But, the requesting party is responsible for costs and attorneys' fees for noncore documents. The Innovation Act also requires the party requesting noncore documents to post a bond sufficient to cover the costs of discovery or establish it is a large enough company to pay. By separating categories of documents, costs for discovery of largely irrelevant documents may be avoided. Yet, given that “core” versus “noncore” documents are not defined (except for excluding electronic communications such as email), practical application of the provisions is uncertain.

The PATENT Act further stays discovery pending resolution of motions to transfer venue or sever accused infringers. The Innovation Act stays most discovery other than that necessary for claim construction until after a claim construction ruling. Both bills allow limited discovery related to a preliminary injunction motion. Staying discovery until after claim construction may eliminate substantial costs since claim construction decisions are often case dispositive.

Fee Shifting

Both the PATENT Act and Innovation Act attempt to lessen abusive patent litigation by making an award of the other party's reasonable attorneys' fees potentially more likely. The PATENT Act provides that non-prevailing parties must pay reasonable attorneys' fees if their positions were not “objectively reasonable,” and requires a plaintiff to identify interested parties, certify it has sufficient funds to satisfy a fee award, and describe its primary business. The Innovation Act similarly awards attorney fees and “other expenses” to the prevailing party unless a judge finds the non-prevailing party's position was “reasonably justified in law and fact.”

This reverses the current rule where attorney fees are available to a defendant only in “exceptional cases.” While intended to discourage patent trolls, it is more likely to dissuade individual inventors or small businesses from enforcing their patents, especially against larger entities. Many patent trolls are experienced enough to have developed a facially plausible infringement position. What is “objectively reasonable” or “reasonably justified in law and fact,” however, may create too much risk for a small patent owner to enforce its patent against a large company that is likely to incur substantial costs and attorneys' fees.

Demand Letters and Willful Infringement

A finding of willful infringement exposes an infringer to up to treble damages, as well as attorneys' fees. Since patent trolls by definition do not practice the patent, knowledge of the patent, which is required for willful infringement, is often established through a pre-suit demand letter. Such demand letters, like complaints, have typically been intentionally vague ' generically asserting infringement without providing many details.

To combat this, both the PATENT Act and Innovation Act require demand letters to identify the patent, accused products, infringement contentions, and the ultimate owner of the patent before they can be used to demonstrate willfulness or calculate damages. The PATENT Act also requires, among other things, a description of the plaintiff's principal business, identification of other complaints asserting the patents, and identification of persons with a direct financial interest in the action.

The PATENT Act and the STRONG Patents Act (which does not set forth requirements for the demand letter) also make the sending of demand letters in bad faith a FTC violation. As such, a violation may subject a patent troll to civil penalties. Proving “bad faith,” however, would seem very difficult absent a smoking gun document.

These requirements will likely not present a substantial obstacle to patent trolls. Rule 11 already requires a pre-filing inquiry by an attorney filing a complaint, and the proposed changes merely require the party to divulge the results of the inquiry early on. While a thorough analysis of the patent and defendants' products will need to be conducted before sending a cease-and-desist letter, today's patent trolls are generally very sophisticated, so the required analyses in the proposed patent reform bills are often already part of their overall strategy.

Conclusion

Many of the proposed patent reforms will make patent trolls fully investigate their claims before threatening their target defendants and, under the new venue requirements, may stop them from dragging defendants into unfavorable jurisdictions. Nonetheless, it seems unlikely that the proposed reforms will actually halt or significantly reduce abusive patent litigation, and may actually make it harder for individuals and small businesses to protect their patent rights against large corporate entities.

Joseph M. Kuo is a partner in the IP Practice Group of Arnstein & Lehr LLP. He may be contacted at [email protected].