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The Anti–Innovation Patent Act of 2015

Peter J. Toren

This a guest contributor article written by Peter J. Toren. Mr. Toren is a partner in the Washington D.C. law firm of Weisbrod, Matteis and Copley, PLLC, where he specializes in patent litigation and protecting intellectual property rights. He was formerly a federal prosecutor with the Computer Crime & Intellectual Property Section of the Justice Department.

Patent rights in the United States have been steadily eroding for a number of years. Decisions by the Roberts’ Supreme Court and the four-year old America Invents Act have substantially weakened the rights of patent owners. Now, Congress is on the verge of passing major revisions to the Patent Act, which, if enacted, would be a blunder of historical proportions and would pose a threat to American innovation.

Large corporations have been able to convince Congress and the public, through a well-funded, organized and misleading PR campaign, that innovation is being threatened by patent trolls, entities that abuse the system by extorting settlements and bringing frivolous lawsuits. But, in fact, the opposite is true. Without strong patent protection, venture capitalists and other investors will no longer want to risk investing in companies whose value is based on technology that is difficult to protect under U.S. patent law. Many large universities that depend on revenue from licensing their patents will face significant financial shortfalls. Technology will suffer and jobs will be lost. The true beneficiaries of the change will be large deep-pocketed companies, which ironically obtained much of their market share through aggressive use of the patent system, and now do not want to pay small entities for patent licenses.

At a basic level it is not clear whether there is even a legitimate issue that needs to be addressed. Ostensibly, the PATENT Act in the Senate and the Innovation Act in the House are aimed to curb the practice of patent trolls, which, among other things, has allegedly caused a surge in patent litigation and, consequently, imposes unnecessary costs on legitimate businesses.

But there’s no evidence that patent litigation is on the upswing or that large corporations are suffering from having to pay off patent trolls. According to a May 20, 2015, patent litigation survey released by Pricewaterhouse Coopers, the number of patent cases filed in 2014 dropped 13%, compared with 2013, after doubling between 2009 and 2013. The report specifically credits the Supreme Court’s recent decisions for the decline in patent litigation and use of Inter Partes Reviews, which were created by Congress as part of the America Invents Act. There is no reason to expect that the decrease in patent litigation in 2014 is an anomaly – it’s likely we will see a further drop in litigation. In addition, according to the study, the median patent infringement damages’ award was $2 million, 45% less than in 2010 and the second-lowest in 20 years.

To make matters worse, however, the proposed legislation is not narrowly targeted at the problem of patent trolls, assuming there is even such a problem. The proposed legislation is much broader and there are at least three areas of concern that will severely curtail the patent rights of startups, single inventors and universities, and that would hurt the economy.

First, both the Senate and the House bills require a degree of pleading in patent complaints far beyond the “plausibility” standard required by a recent Supreme Court decision and would require that patent complaints include a claim chart illustrating the theory of infringement for each asserted claim against each accused product. This may make it impossible for many plaintiffs to bring suit because the full extent of infringement is often difficult to determine solely from publicly available information and without formal discovery where there are multiple infringing products. That kind of due diligence would obviously be expensive – perhaps prohibitively so – for companies without deep pockets.

It would also mean that patent complaints involving multiple patents, claims and products could end up being hundreds of pages long, making it even more difficult and time consuming for federal judges to deal with. And it would lead to extensive motion practice and delays over the sufficiency of pleadings, which would be very costly for both parties and would impose a greater burden on the already over-taxed federal judiciary.

Second, the Innovation Act would require that all discovery, except discovery necessary to construe the meaning of claim terms, be stayed until after the court has ruled on the meaning of the claims of the patent. Congress apparently hopes that this provision will reduce discovery costs by forcing settlements earlier in the litigation based on a ruling soon after the filing of the complaint. At present, judges can decide when to conduct such a hearing. Under the proposed legislation, parties will know the likelihood of infringement without having to go through extensive discovery. Unfortunately, this reflects a basic misunderstanding by Congress of patent litigation. In reality, it is simply impossible for the parties to identify which claim terms should be construed without, at least, basic discovery about the accused technology. Requiring the parties to brief claim construction near the outset of litigation will result in them arguing about the definition of almost every claim term which will create even more work for the courts and unnecessary expense for the parties.

In addition, since it often takes courts months to decide claim construction, and the litigation will likely be continued awaiting a decision, it will delay the outcome and increase the already lengthy average duration of a patent case. Many major patent jurisdictions, including the Northern District of California, have adopted local patent rules that require early exchanges of infringement and invalidity contentions, and that the parties engage in basic discovery about the accused products and prior art, before a relatively early claim construction. Congress has not considered whether staying all discovery until after a claim construction ruling is more efficient than the local patent rule approach. In fact, there is nothing in the Congressional record to suggest that Congress has even considered the efficacy of the local patent rule approach.

Third, history shows that strong patent protection leads to more innovation by creating a financial incentive for investment in new technology. Parties are more likely to invest in new technology where they are more likely to obtain a high return. Conversely, venture capitalists and private investors are less likely to invest in companies where the technology created cannot be adequately protected. But that is exactly what the Innovation and PATENT Act would do by significantly increasing the cost of enforcement, which would devalue patents and, in turn, lead to the reduction of investment in new-technology based companies and the loss of American jobs.

Under the terms of the Innovation Act the losing party would have to pay the attorney’s fees of the prevailing party, unless the court finds that the positions taken by the losing party were objectively reasonable. This is a giant step beyond the PATENT Act that would allow a court to award attorney’s fees to the prevailing party if the position or conduct of the non-prevailing party was not objectively reasonable and, thus does not create a presumption of fee shifting. In either case, though, it alters the “American rule” that attorney’s fees should be borne by the respective parties absent exceptional circumstances. It ignores the recent Supreme Court decisions giving district courts greater discretion to award attorney’s fees. Indeed, courts have recently begun to grant more motions seeking attorneys’ fees. Fee shifting will likely deter legitimate owners of enforcing their patent rights by making the risk of enforcement prohibitively high.

Smaller companies also will be less financially able to enforce their patent rights. In order to finance a patent enforcement proceeding now, small firms with limited resources often turn to “funders” that agree to cover costs and expenses in return for a share of the recovery. The PATENT Act would let the defendant join individual “interested parties,” who have a financial interest in the patent, such as funders, and would make them personally liable to satisfy any award of attorney’s fees and expenses if the party owner cannot pay the award. This provision is likely to dry up most sources of patent litigation funding making it even harder, if not impossible, for small companies and individuals to assert their patent rights against infringers. In essence, by creating disincentives to enforce patent rights, Congress is providing certain large businesses with royalty free licenses.

The bills pending in Congress go far beyond what is necessary to address the limited abuse of the system by patent trolls. According to Dana Rohrabacher, (R-Calif.), the Innovation Act is “actually anti-innovation” and “in reality makes it harder for small inventors to protect their patents and easier for big corporations to steal them.” He added: “In all my years [in Congress] I have never seen a bill so deserving of the description crony capitalism.”

The proposed legislation would make it vastly more expensive, risky and slower to litigate a patent case. The value of patents and the incentive to invest in new technology will decline. The winners here would be large companies and corporations that will find it much easier to willfully ignore patent rights and be freed from having to pay royalties to patent owners. Apart for small patent owners, the loser will be the American public that will be deprived of jobs and new technology.