The Innovation Act of 2012 - A preliminary assessment

With litigation and demand letters by "patent trolls" also known as non-practicing entities (NPEs) or patent assertion entities (PAEs) increasingly in the news in recent years, state legislators and attorneys-general, business advocacy groups, the White House, and several House and Senate members have intensified efforts to fashion measures that would thwart abusive behavior.

One such attempt, the "Innovation Act of 2012" introduced in October by Rep. Bob Goodlatte (R-Va.), deserves careful consideration. Some of its features are attractive; others are problematic.

The bill seeks to "address the issues that businesses of all sizes and industries face from patent troll-type behavior and aim to correct the current asymmetries surrounding abusive patent litigation." The bill passed the House of Representatives late last year by a 325-91 vote, but now faces an uphill battle in the Senate, where Judiciary Committee Chairman Patrick Leahy (D-Vt.) and many of his colleagues on the committee have expressed serious reservations about certain provisions and have mulled their own piecemeal legislation.

The following are the various components of the Goodlatte bill and my preliminary assessments thereof:

• Pleading requirements

The bill would heighten current pleading requirements by compelling the patent-holder to identify the specific claims of the patent it believes are infringed and to provide a chart explaining "with detailed specificity, how the terms in each claim...correspond to the functionality of the" product accused of infringing the patent. Superficially, this sounds like an onerous task designed to deter plaintiffs from filing patent cases. But since virtually every district court mandates infringement contentions at some point during the course of a patent litigation, all that the Goodlatte bill does is accelerate that process. . (It doesn't even do that in most cases, as patentees generally prepare detailed drafts of such charts prior to launching suit to satisfy their Rule 11 obligations). .

One caveat: in software cases, the patent-holder often requires the defendant's confidential business information, such as software code, in order to present its infringement case. Currently, the patentee can access these materials during discovery, but under the Innovation Act, it would have to prepare its infringement charts without the benefit of this information. The Goodlatte bill offers some relief to the patentee, who is obligated to provide "a description of any information...that is not disclosed, why such undisclosed information was not readily accessible, and the efforts made by such party to access such undisclosed information." In addition, it would be helpful to give the patentee the express right to later modify its infringement contentions, once discovery gets underway, to include the confidential information it gleans from the defendant.

The Innovation Act also requires the patentee to provide, in the body of its complaint, a list of all other complaints it has filed involving the same patents, as well as a statement about whether any of those patents is "essential to any standard-setting body," such as the MPEG family of video encoding standards so critical to the transmission of information and consumer content. These all appear to be reasonable obligations, although I defer to my colleagues with greater experience with the standard-essential patents for a fuller assessment.

• Fee shifting

The most controversial provision of the Innovation Act pertains to awards of attorney's fees. Currently, victorious parties receive fees only in "exceptional" circumstances, such as fraud, inequitable conduct, willful infringement, or egregious misbehavior during litigation. The Goodlatte Bill would turn this default rule on its head:

The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, unless the court finds that the position of the nonprevailing party or parties was substantially justified or that special circumstances make an award unjust.

Inhibiting frivolous lawsuits is a laudable goal, but this provision goes too far. First, by shifting the burden of proof onto the losing party, courts will have to examine the justification of each and every case. Currently, it's somewhat rare for the prevailing party to actually seek fees. But if they are awarded as a default, those losers confronted with penalties sometimes well into seven figures will always file motions trying to establish substantial justification or special circumstances.

Second, this stringent provision may backfire, as it won't be just patent trolls who pay but, at times, the legitimate companies who occasionally are found to infringe PAE patents. In those instances, the defendants will be the losing parties, and unless they can show justification, they will be the ones paying out millions in fees.

Third, the bill erodes our unique "day-in-court" justice system, moving it closer to the "loser-pays" model prevalent abroad.

Instead, it would better to soften the "exceptional circumstances" required under current law to award fees to something more like a "substantially unjustified" standard. This would deter frivolous claims without fundamentally altering our system.

• Discovery and claim construction

The Goodlatte bill would effectively suspend all discovery until the claim construction process plays out. Specifically:

discovery shall be limited, until such [claim construction] ruling is issued, to information necessary for the court to determine the meaning of the terms used in the patent claim, including any interpretation of those terms used to support the claim of infringement

Thus, essentially no discovery document production, depositions, or written requests would take place prior to the court's issuance of a Markman ruling; the case would be put virtually on hold until the claims are construed. The only exceptions would involve situations, like pharma cases, where speedy resolution is mandated by federal law, or if the parties file motions that require limited discovery.

Because claim construction so often single-handedly decides a case, it makes sense to front-load litigation to construe the claims early on. But nothing in the Innovation Act requires the court to entertain claim construction briefing and oral argument at the beginning of the case, and given a busy schedule, the judge would have little incentive to do so, which means the case would simply gather dust for months or even years. Moreover, along with the requirement that the patentee file infringement contentions along with its initial complaint without access to confidential information, the discovery provision of the Goodlatte bill could result in the construction of claims that wind up irrelevant to the case or even the failure to construe claims later discovered to be important.

To resolve these problems, it makes sense to require courts to engage in the claim construction process within a few months of the filing of the case. Also welcome would be an exception to the discovery freeze that would enable the patentee to seek limited discovery into confidential information about the accused products sufficient to enable it to more precisely identify the claims it believes are infringed.

• Real party in interest

The Goodlatte bill would also require greater transparency in patent cases by requiring an identification of all "interested parties."

the court shall grant a motion by a party defending against an allegation of infringement of a patent claim to join an interested party if such defending party shows that the party alleging infringement has no substantial interest in the patent or patents at issue other than asserting such patent claim in litigation.

The law defines "interested parties" to include assignees of the patents, anyone with a right "to enforce or sublicense" them, and anyone with "a direct financial interest in the patent or patents at issue, including the right to any part of an award of damages or any part of licensing revenue." Thus, the defendant can bring into the suit the "real" party in interest, namely, any entity enjoying certain substantial rights in enforcing or reaping the benefits of the patent at issue. In addition, the Innovation Act would require the patentee to identify to the Patent Office any and all interested parties, as well as the "ultimate parent entity" controlling them. This would encompass naming all partners with larger than a 5% stake in a partnership (and all officers in a corporation) falling under the "interested party" rubric.

These provisions of the Goodlatte bill are simple, common-sense proposals that would promote transparency in patent litigation. There may be ambiguity about how to define the various terms in the bill ("interested," "financial interest," "ultimate parent entity"), they should be fleshed out over time.