In Part I, we looked at the alleged elements of damage caused by Patent Assertion Entities (“PAEs”, sometimes called “patent trolls”).  We looked also at the magnitude of this damage, which is said to run to $80B-$90B/year.  The open question, asked at the end of Part I, is, “What policies or changes could reduce or eliminate the negative impacts of PAEs while retaining at the same time the positive aspects of PAE litigation?”  Or perhaps restated, “How can we eliminate the negative impacts of patent litigation while retaining the positive aspects of the patent system, such as those noted by President Lincoln?”

In 2011, there was signed into law the America Invents Act (“AIA”), the most significant change in the U.S. patent statute since the Patent Act of 1952. Despite the many changes introduced in the AIA, the problem of PAE litigation continues.  There have been many statements and proposals, from both the White House and the Congress, about what to do.  Bearing in my mind that the key objective seems to be preventing the supposed misuse of patents while maintaining financial incentives for invention, how likely is it that these proposals will contribute to achieving the objective?  Let’s look at some of the key proposals, organized by chronology from the acquisition of a patent, to patent infringement litigation, to post-litigation remedies.

 

 

Group I – Raising the Quality of Patents:
The low-quality of many patents is a major problem, probably the most serious problem confronting the IP system today.  Although many people have pointed at software and business method patents as the main trouble, the fact is that quality is a problem in all kinds of patents related to Information & Communication Technology (“ICT”).  This was the main theme of the book TRUE PATENT VALUE: Defining Quality in Patents and Patent Portfolios.  In a different blog, I will focus on the specific deficiencies in patent quality today, but for now, let us focus on the proposals to improve patent quality, listed as proposals (1)-(4) above.

Lack of clarity is indeed a major problem in patent drafting today.  One solution, proposed by the White House, is “requiring or encouraging a glossary of specialized software terms to be submitted with the patent application and/or designating a default glossary”[n.1].  Ignoring the obvious difference between “requiring” and “encouraging”, my strong view is that (1) is a step in the right direction.  In case after case in the book TRUE PATENT VALUE, it was the lack of a definition for a key claim term that created the main dispute between the plaintiff and the defendant, and that lowered the value of the patent.  We can say this about Uniloc v. Microsoft, lesson 3-2-3 (“generating means” undefined); i4i v. Microsoft, lesson 3-3-3 (“distinct and separate” not defined); Broadcom v. Qualcomm, lesson 4-1-2 (“different” not defined); Philips patent US 5,606,539, lesson 6-1-1 (“transmission medium” undefined), and others.  Another problem with drafting, a subset of the general problem of insufficient clarity, is “shifting terminology”, where one term is used in different ways within a text[n.2].  This specific problem would also be alleviated by an accepted glossary applicable to the key claim terms in the patent.

Many patent drafters define particular key claim terms used in the drafts.  A few drafters, although in my experience not many, include glossaries or a list of key terms at the start of the written description.  As I stated in TRUE PATENT VALUE, it is impossible to anticipate every single term that can arise in litigation of a patent, but the drafter must make this attempt, and must explain clearly these terms.  The use of a glossary is one way to define the key terms in a patent.

Advanced education for patent examiners to allow them to more effectively identify prior art, proposal (2) above, and allowing the PTO to hire qualified Administrative Law Judges, proposal (3) above, are clearly good things, and not controversial.  These are really budgetary questions[n.3].

The White House has also suggested, in proposal (4), “a wider range of challenges to petition for review of issued patents”[n.4].  This is not objectionable in itself, but the AIA created a new procedure for inter partes review, which by all accounts is proving to be very popular.  That procedure, plus the continuing reexamination procedure, may be sufficient, unless a strong need is shown for an entirely new procedure to challenge issued patents.

Group II – Unfair Expansion of Patent Liability to Innocent Parties:
Most people would probably agree that patent liability should not extend to “innocent parties”.  Who are these people?

The patent statute permits an infringement lawsuit against anyone who:

• makes;

• uses;

• sells or offers to sell; or

• imports into the U.S.

an invention that has been patented by another person[n.5].

The problem here does not seem to be make/manufacture, or sell/offer to sell, or import.  The problem is the concept of “use”.  Until very recently, the great majority of patent law suits, and particularly those initiated by PAEs, were against what might be called broadly “technology companies” – software developers, hardware developers, system integrators, and network service providers (such as telephone companies and Internet Service Providers).  Truly it would be difficult to consider any of these companies “innocent parties”.  They have not done anything wrong, they are not “guilty parties”, but they are or should be technologically savvy, they should understand patents, and the great majority even have their own R&D arms.  It is these people in particular to whom the patent laws are directed.  These people benefit from the development, sale, and use of technology, and they should be able to deal with the patent problems associated with such technology.

However, lawsuits in the recent past are being directed at industries other than high-tech, such as retail, automotive, financial services, and consumer products[n.6].  When these people buy products and services, either as consumers, small businesses, or even larger businesses that are not really “technology companies”, they rely upon the sellers for their right to use the products.  After all, who would buy a product knowing, or even fearing, that its use would infringe patents and lead to patent infringement liability?  These people, in some cases the most recent targets of PAEs, are in a sense “innocent parties”.  They are analogous in the patent world to people in the commercial world known as “holders in due course” – that is, people who provide real value (products or services) in exchange for checks or other negotiable instruments.  The holder in due course does not know there is a problem with the check, has no real way of checking it, and is presumed not liable if he or she transfers the check to another party where it is later dishonored[n.7].

The White House has proposed, in Legislative Recommendation #4, to “protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product used off-the-shelf and solely for its intended use”[n.8].  The principle of this kind of protection is very positive, and the question is, “What form will the protection take?”  There have been several proposals[n.9], although the exact form of protection is not yet entirely clear.

“Unfair expansion” might also include vague and conclusory demand letters.  “We have reason to believe you may be infringing patent A,BCD,EFG”, or even, “We have reason to believe you are infringing one or more of our patents in the product/technology area of __________”.  Proposal (7) is to make such demand letters public – to file them, organize them, and make them accessible and searchable by the public[n.10].

I suggest two difficulties with proposal (7).  First, how exactly would this proposal contribute toward the goal of eliminating the negative effects of patents, while maintaining the benefits?  Changing demand letters, that is, requiring that the letters state, for example, which products infringe which claims, might indeed reduce some of the negative effects of patent litigation, but that is far beyond simply publicizing the letters.  Publication might embarrass some of the patent holders, but public embarrassment is not a worthy objective of public policy, and does not advance the main goal of patent reform.

Second, how does proposal (7) accord with patent rules related to demands for declaratory judgment?  By judicial decisions[n.11], demand letters that seem to threaten legal action or assert a legal claim against a party may also allow that party to run to court to receive a “declaratory judgment” (really, a declaration by the court) either that the patent is invalid or that the threatened party does not infringe the patent.  Patent owners do not want to be dragged into a court and at a time not of their choosing.  For this reason primarily, patent owners are deliberately vague in their demand letters.  They do not want to create “actual controversy” that would allow the threatened party to run to court.

Would the main goal of patent reform truly advance by telling patent owners, on the one hand, “You must make deliberately make vague your demand letters in order to avoid lawsuits initiated by defendants against you”, and the other hand to say, “You must now publish these vague demand letters”?  Proposal (7) is obviously intended to strike plaintiffs, against patent owners, but it also seems to be fundamentally unfair.  To goal of patent reform should NOT be to discourage patent litigation, but only to discourage frivolous litigation or litigation based on vague, low-quality patents.  To the best of my understanding, proposal (7) does not promote this goal.

Group III – Patent Litigation is Difficult and Expensive:
Civil litigation in general is expensive, but it seems to be true that patent litigation in particular is much more expensive than most other kinds of litigation[n.12].

Part of the complexity simply cannot be resolved, and must be accepted.  In patent litigation, the issues in dispute tend to involve technology, often complicated technology, which will require special effort, special experts with technology expertise, and lawyers conversant with technology as well as with law and civil procedure.  It’s fair to say that no matter what reforms are undertaken, patent litigation is likely to be relatively more expensive, in some cases much more expensive, than other civil litigation.

This does not mean that nothing can be done to reduce the complexity and cost of patent litigation.  At least three proposals have been made.  Proposal (8) is that the “real party in interest” must be revealed; at multiple points in the acquisition and enforcement of a patent, the true ownership of the patent must be updated at the PTO database, where it will be accessible to the public[n.13].  There are two problems with this proposal.  First, how exactly will it contribute to the goal of maintaining the positive aspects of the patent system while eliminating or restraining then negative aspects?  Or to restate the question, how exactly does the system benefit by a defendant knowing the real party in interest?  Clearly the defendant can benefit, by pressuring the plaintiff or by threatening counter-suit, and yes, that helps the defendant, but how does that benefit the patent system?  Second, in other areas of business and law, property owners can go about their business through corporations or other entities that maintain their privacy.  Why should patent owners be at a disadvantage vis-à-vis owners of other kinds of property?  If there were a question of tax fraud, that would be an issue, but no such question seems to arise here, and again, the proposal is not directed at the government versus a private party (which can arise in a tax case) but rather at one private party versus another private party (where proposal (8) seems to favor the defendant over the plaintiff).  The presumption should be the owners of patents will not be treated worse than other property owners, barring a compelling reason for different treatment, which at least for now does not appear.

Proposal (9) would require specificity in the complaint.  Again, the principle should be that patent owners are not to be treated differently than owners of other property, barring some compelling reason (not evident here) for different treatment.  However, here the principle supports proposal (9), though it opposed proposal (8).  In the vast majority of litigation areas, a plaintiff must plead specific details so that the defendant clearly understand the charge or claim.  In patent infringement litigation, a relatively general complaint is allowed in which the plaintiff states the patent(s) and claim(s) infringed by various product(s) or service(s), but in which there is no requirement for any showing, theory, or allegation why the allegedly infringing product meets each specific limitation of the allegedly infringed claims.  Proposed legislation H.R. 3309 in the U.S. House of Representatives, requires a pleading to include the parties, patents, claims, and products or services, plus “where each element of each claim…is found within the accused instrumentality” and “with detailed specificity, how each limitation of each claim…is met by the accused instrumentality”[n.14].

It would be difficult to oppose the theory of proposal (9).  Conclusory pleadings, of the nature, “Defendant X’s product Y infringes this claim”, are simply not sufficient.  There should be some statement of how the product or service infringes.  This is likely not to be a significant time burden on the plaintiff, since even the most basic analysis of an infringement includes a “claim chart” comparing each element of the claim to a corresponding feature of the infringing product or service.  In such cases, the plaintiff can simply transfer the claim chart, with some explanation, into the complaint.

Is there a downside to implementing proposal (9)?  The claim of additional work for the plaintiff is simply not credible[n.15].  A plaintiff could say that such a proposal would allow it to reveal its case, but that really is the point of court pleadings.  A plaintiff might fear that such pleadings would limit its action, but courts should allow reasonably flexibility for amending pleadings based on newly discovered information.  A plaintiff might fear revealing confidential information, but the proposed law includes a provision (section 3(e) for protecting the confidentiality of information.  I see the opposing arguments, but personally I find them not persuasive, and I therefore would support proposal (9).

Proposal (10) calls for amending civil proceedings in patent infringement cases.  Section 6 of the proposed statute directs the Judicial Conference of the U.S. (a group of very senior Federal judges) to create new rules for civil discovery in patent cases[n.16].  This section is complicated, and will not be reviewed in detail here, except to note that the judges are to formulate new rules about, among other things, permitted discovery of material, discovery of emails and other electronic messages, posting of bonds to cover costs of disclosing information, discovery of computer code, and other.  The final rules have not yet been formed, so extensive comment is premature, but if these rules are different from the discovery rules in other Federal cases, the proposers must justify why patent cases should be treated differently than all other Federal cases[n.17].

Group IV – Post-Litigation Remedies are Biased in Favor of Plaintiffs:
Proposal (11) calls for requiring the International Trade Commission (“ITC”) to use traditional considerations for granting an injunction – in other words, to bind the ITC to the same rules applicable to the courts[n.18].

Many of the key differences between court litigation and litigation before the ITC are explained in TRUE PATENT VALUE at pp.150-154.  One major difference is that the courts are bound by judicial precedent, including the Supreme Court decision in eBay v. MercExchange (2006), which requires the courts to apply in patent cases the traditional four-factor test for granting an injunction.  After this case was decided, the percentage of court cases in which the winning plaintiff received an injunction fell from 95% to 75%.  The ITC is part of the Executive Branch of government, and is not part of the judicial system.  Both before and after eBay, winning plaintiffs at the ITC gained injunctions in 100% of cases.  Proposal (11) is to subject the ITC to the rule of eBay[n.19].  Proposal (11) would apply the same rules to the ITC, with the intention of reducing the percentage of winning plaintiffs who would receive injunctions from the ITC.

Could this proposal (11) work?  As explained in TRUE PATENT VALUE, the two reasons the ITC and the courts have operated differently is first, that the ITC, unlike the courts, cannot award damages, and second, the ITC is part of the Executive Branch while the courts are part of the Judicial Branch.  Proposal (11) essentially eliminates the second reason.  However, as explained in the book, if the ITC finds infringement but does not order an injunction, the ITC would be saying in essence, “Yes, the plaintiff is right and the defendant is wrong, but in the circumstances there is nothing we can do about it”.  There will be a tremendous temptation for the ITC to apply the four-factor test to find for an injunction in as many cases as possible, even in close to 100% of such cases.  The courts, which can order damages instead of or in addition to an injunction, will be much less inclined to order an injunction.  Alternatively, if the ITC applies the traditional test to find no injunction in a significant percentage of cases in which the plaintiff wins, why should plaintiffs turn to the ITC at all?  Yes, the ITC is faster than most Federal courts, but not faster than all of them, and certainly not in every case.  Further, the ITC’s orders can apply only to products that have been or will be imported, whereas courts may hear arguments both for these products and for entirely domestic products.  If the ITC must apply the same standards as the courts, why would a plaintiff use the ITC at all?  Perhaps it would be more honest to simply say, “From now on, the ITC may not hear patent cases”. It is not clear to me that proposal (11) is workable.

Proposal (12) would give the courts greater discretion in awarding court costs to the winning party in a patent litigation[n.20].  Generally, courts in the U.S. are reluctant to require losing plaintiffs to pay the legal costs of winning defendants.  This does happen sometimes, but it is not favored.  In the U.S., parties are considered to be entitled to their day in court, and barring some kind of fraud or abuse, the parties generally are not required to pay the costs of the other side.  This is certainly a laudable objective, but it also encourages lawsuits, particularly lawsuits where the plaintiff may have a weak case and but is not deterred by the threat of having to pay the defendant’s costs.  The question is, “How can we balance the desire to give parties their day in court, while not encouraging frivolous lawsuits?”

Proposal (12) does not try to seek a balance.  35 United States Code sec. 285 currently provides, in its entirety, “The court in exceptional cases may award reasonable attorney’s fees to the prevailing party”.  The proposal would change the section to read:

The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection to a civil action…relating to patents, unless the court finds that the position and conduct of the nonprevailing party…[was] reasonably justified in law or in fact…or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust [in which case the court may compel another party joined to the suit to pay the winner’s expenses]”[n.21].

Proposal (12) is simply a revolution.  Any other characterization is hard to justify.  Whereas before the presumption was not to award fees, and the burden to overcome was “an exceptional case”, now the presumption is to award fees “and expenses”, unless the loser was found to be “justified” or unless the loser cannot pay (in which case someone else may pay).  This is an enormous change.  It properly applies both ways – that is, the losing plaintiff must pay the defendant, but similarly the losing defendant must pay the plaintiff.  However, despite a surface equality, this provision in fact favors defendants greatly.  If a defendant chooses to fight by going to court, it faces possible damages and an injunction, so the additional costs of the plaintiff, even if a few million dollars, are not likely to be significant.  Many plaintiffs, on the other hand, are relatively small companies or even individuals.  They will be deterred from suing, because now, as opposed to the past, they may be liable for millions in attorney’s fees, expert witnesses, and other costs, incurred by a winning defendant.

A regime in which the presumption is that a losing party pays is not the standard approach in U.S. litigation, and on that ground alone must arouse suspicion.  However, it is not clear that all of the consequences of proposal (12) would be bad.  In fact, some, perhaps many, frivolous lawsuits might be foregone if the plaintiff must pay defendant’s costs.  In fact, there is likely to be a much greater emphasis on bringing stronger cases, meaning a greater emphasis on obtaining high-quality patents (which increases the chance of a plaintiff winning) and on filing for infringement of portfolios of patents rather for infringement of a single patent (since a portfolio tends to be very much stronger than even the best individual patent).  These consequences appear to be positive.  On the other hand, some plaintiffs will be deterred from bringing suit on strong patents, due to the risk of losing.  And without doubt the balance of power in settlement negotiations will shift in the direction of the defendants, even for infringing defendants.  These consequences are negative, and it is not clear, on balance, if proposal (12) would have an overall positive or overall negative impact on the patent system.  Critically important will be the manner in which the courts interpret the phrase, “unless the court finds that the position and conduct of the non prevailing party or parties were reasonably justified in law and fact…”  The courts may interpret this vital phrase to strike the balance between awarding fees in frivolous cases, but withholding fees in reasonable cases (even if the plaintiff loses the reasonable case).  What will actually happy?  In the well-known colloquial phrase, “the jury is still out”.  If proposal (12) is enacted, we will need to wait to see how the courts

CONCLUSIONS:
There are several large and relatively powerful groups who are unhappy with Patent Assertion Entities for actions that are perceived to be unfair and over-aggressive.  These groups are promoting an agenda, with many proposals, that will on balance shift power away from the PAEs and toward defendants.  Some of these proposals appear positive, some definitely not, as discussed above.  Only actual experience will show how the proposals play out in practice.

One thing is certain, however. With the shift created by these proposals, the emphasis on “high quality” in patents and patent portfolios will not only continue, but will in fact grow much stronger.  The theme of this book, TRUE PATENT VALUE, is that true value in patents is based on the intrinsic quality of the patents, and intrinsic quality is based on all the characteristics discussed in the book.  If the only patents brought in litigation were “high-quality” patents, there would be no need for these reforms, but now that the reforms are occurring, only the “high-quality” patents and portfolios will thrive in the new age.

NOTES:
[n.1] “White House Task Force on High-Tech Patent Issues; Legislative Priorities and Executive Actions”, Renee Dopplick, June 4, 2013.  See also “FACT SHEET: White House Task Force on High-Tech Patent Issues”, June 4, 2013, Executive Action #2, “Tightening Functional Claiming”, in which it is said that the PTO will “develop strategies…to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field.”  The White House singles out software as an area that has “overly broad [functional] claims”.

[n.2] “Shifting terminology” is an enormous problem with claim quality. There are many forms of shift, and these are defined in the glossary of TRUE PATENT VALUE.  The term itself, with examples, is discussed at many points in the book.

[n.3] Educating examiners to find prior art, particularly for software patents (2), is stated in the Dopplick article (note 1 above).  Hiring of Administrative Law Judges, proposal (3), is part of the FACT SHEET, White House Legislative Recommendation #7.

[n.4] Expanded review of patents, particularly “business method patents”, is White House Legislative Recommendation #3, as noted in the FACT SHEET.

[n.5] These categories are from the section of the patent statute at 35 United States Code sec. 271(a).

[n.6] “Patent Trolls by the Numbers”, Assistant Professor Colleen Chien of Stanford Law School, March 14, 2013, p.3, available at http://patentlyo.com/patent/2013/03/chien-patent-trolls.html.

[n.7] Of course this is a severe simplification of the process, but the basic principle holds.  A party who does not know and cannot be expected to know of a problem with the check is not liable if the check is later returned unpaid.

[n.8] FACT SHEET, White House Legislative Recommendation #4.

[n.9] The White House has proposed, in the FACT SHEET, Legislative Recommendation #4 (“stay of judicial proceedings” against vendors, retailers, and manufacturers) and Executive Order #3 (“empowering downstream users” with new education material and an easy-to-understand Web site answering frequently asked questions).

[n.10] FACT SHEET, White House Legislative Recommendation #6.

[n.11] The issue of declaratory judgment in patent cases is very complex, and clearly beyond the scope of this blog, but the reader could take note of a few main cases, such as MedImmune, Inc. v. Genentech, Inc. (Supreme Court, 2007), and SanDisk, Corp. v. STMicroelectronics, Inc., (Federal Circuit, 2007).

[12] American Intellectual Property Law Association (“AIPLA”) Response U.S. patent office’s “Request for Comments on a Patent Small Claims Proceeding in the United States”, April 30, 2013.  A table of costs appears at p.2 of this document, summarizing a survey by the AIPLA on costs of pursuing patent litigation.  For claims above $25M, the costs are large, but for claims below $25M the costs are truly gargantuan in comparison to the money at stake.  Here is the table of average costs, according to the survey:

[13] FACT SHEET, Executive Action #1.

[14] H.R. 3309 in the House of Representatives, December 9, 2013, section 3(5), adding a new provision to the patent statute to be numbered and named “Sec. 281(A). Pleading requirements for patent infringement actions”.  It is also worthwhile to review a summary of the “Innovation Act (H.R. 3309; 113th Congress)”, published on wikipedia at http://en.wikipedia.org/wiki/Innovation_Act_%28H.R._3309;_113th_Congress%29, and last viewed on February 13, 2014.  See also Bill Summary and Status, 113th Congress (2013-2014), H.R. 3309, http://thomas.loc.gov/cgi-bin/bdquery/z?d113:h.r.3309, last reviewed on February 13, 2014.

[n.15] There are of course cases in which the plaintiff does not perform such an analysis, but it is frankly difficult to feel much sympathy for such a plaintiff.  The claim chart is the basic building block of any infringement analysis, and should be done if not in all cases, certainly in the overwhelming majority of cases.

[n.16] H.R. 3309, section 6, and see the discussion of section 6 in the Bill Summary and Status.

[n.17] New rules have been proposed for all Federal cases. “ACC Advocates for Changing Federal Discovery Rules”, February 20, 2014, viewable at http://www.corpcounsel.com/id=1202643811095/ACC-Advocates-for-Changing-Federal-Discovery-Rules?slreturn=20140203051448 (last reviewed on March 3, 2014).  See also “Preliminary Draft of Proposed Amendments to the Federal Rules of Bankruptcy and Civil Procedure”, August, 2013, http://www.uscourts.gov/uscourts/rules/preliminary-draft-proposed-amendments.pdf, and particularly pp.289-328 (last viewed on March 3, 2014).  These proposed rules face scrutiny of both the Judicial Conference and the Congress, but whatever the final rules may be, the question remains: Why should patent infringement cases be treated differently than other Federal cases?

[n.18] FACT SHEET, Legislative Recommendation #5.

[n.19] In fact, the White House proposal states specifically, “Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange to enhance consistency in the standards applied at the ITC and district courts”, Legislative Recommendation #5 in the FACT SHEET.

[n.20] FACT SHEET, Legislative Recommendation #2.

[n.21] Text of H.R. 3309, December 9, 2013, sec. 285.