Guest Post: Technical Detail in Senate PATENT Act Could Have Major Impact in Eastern District of Texas Patent Litigation

Guest Post by Christian E. Mammen.  Dr. Mammen is a litigation partner in the San Francisco office of Hogan Lovells.

The recently-introduced PATENT Act (S. 1137) tracks, in substantial part, many of the reforms proposed in the House’s Innovation Act (H.R. 9). However, the PATENT Act differs in several ways from the Innovation Act. Many of the differences between the two bills have been discussed elsewhere at length.   This article focuses on just one feature of the PATENT Act, which has some potentially far-reaching implications for patent litigation in the Eastern District of Texas, the nation’s most popular patent litigation forum.[1]

Discovery is one of the most costly and time-consuming phases of patent litigation. In patent litigation brought by NPEs, the burdens of discovery are asymmetrical, with the burden falling more heavily on the accused infringer. Particularly where the NPE-plaintiff acquired the patent on the secondary market, it will have few or no documents to produce relating to the invention process, patent-related products, or the like. The cost of discovery, which falls disproportionately on accused infringers, can motivate those accused infringers to settle patent litigation for valuations based on the cost of avoiding further litigation, rather than on the value of the patented technology.

To address this issue, the Innovation Act initially proposed that discovery be stayed until the court issues a claim construction ruling. However, this proposal was in tension with widely accepted practices concerning discovery prior to claim construction. For example, a 2008 Federal Judicial Center report indicated that most courts surveyed held claim construction after at least some fact discovery, and Berkeley Law Professor Peter Menell’s Patent Case Management Judicial Guide (2d ed. 2012), explains, “it is only by knowing the details of the accused product and the relevant prior art that the parties are able to determine which claim terms need construction.” Further, many courts have now adopted Patent Local Rules that require early production of infringement contentions and related documents, and invalidity contentions and related documents, and it is not clear whether those disclosures would also be stayed under the Innovation Act.[2]

Presumably in order to balance these competing concerns, the PATENT Act also includes the idea of a discovery stay in early phases of patent cases, but changes the triggering event. Rather than staying discovery until claim construction, the PATENT Act would stay discovery only while any one of three pre-answer motions is pending: (1) motions to dismiss, (2) motions to transfer venue, or (3) motions to sever accused infringers.

At first glance, this proposed scheme is a bit puzzling, since all three types of motions are typically filed – and resolved – early in the case, generally before discovery even starts.[3] Under the Federal Rules of Civil Procedure, discovery is stayed until the parties have held an initial conference concerning case management under Fed. R. Civ. P. 26(f). The Rule 26(f) conference generally happens about 3-4 months after the case is filed.

However, on closer examination, the PATENT Act’s proposed discovery stay has the potential to disrupt the status quo in one important circumstance. While there is a general preference that motions to transfer venue be brought as quickly as possible (generally before the answer is filed—indeed, the PATENT Act would only stay discovery when such motions are “filed prior to the first responsive pleading”), some courts delay resolution of these motions, and the PATENT Act’s stay of discovery would remain in place until the court rules on the motion. Furthermore, if the motion to transfer venue were filed sequentially after a motion to dismiss—a not implausible scenario under plausible readings of the PATENT Act—the filing date of the venue transfer motion could approach the date of the Rule 26(f) conference, thus extending the discovery stay well into the case’s discovery period. And if the court delays ruling on the motion, the commencement of discovery could be significantly delayed as well.

Famously, the Eastern District of Texas has gained a reputation for deferring rulings on venue transfer motions until the case is substantially advanced. As the Federal Circuit observed in one recent case challenging the Eastern District of Texas’ ruling on a transfer motion, “This case is a prime example of the importance of addressing motions to transfer at the outset of litigation … Congress’ intent to prevent the waste of time, energy and money and to protect litigants, witnesses and the public against unnecessary inconvenience and expense may be thwarted where, as here, defendants must partake in years of litigation prior to a determination on a transfer motion.” In re EMC Corp., 501 Fed. Appx. 973, 975-976 (Fed. Cir. 2013) (citations omitted).

Data recently obtained from Lex Machina indicates that, on average, when motions to transfer cases out of the Eastern District of Texas are granted, the ruling comes in 143 days, or about 4½ months. But when such motions are denied (meaning the case remains in the Eastern District of Texas), the ruling languishes for an average of 225 days, or 7½ months. According to Lex Machina, there were 33 cases in the Eastern District of Texas between January 1, 2010 and May 1, 2015 in which a venue transfer motion was pending for over a year before being ruled on – and only five of those longest-pending motions were ultimately granted in whole or in part. [4]

Particularly for Eastern District of Texas cases in which transfer is denied, the PATENT Act’s proposed discovery stay would prevent the start of discovery for up to 7-10 months from filing. This could have several effects. Without any other changes to the status quo, it could significantly clog the docket with discovery-stayed cases. Additionally, it will provide defendants with a strong incentive to file venue transfer motions, probably as late as possible before the start of discovery, in order to maximize the discovery-stay effect. Alternatively, the court could respond by substantially speeding up its rulings on venue transfer motions.

It is difficult at this time to say whether the drafters of the PATENT Act intended this particular scenario. But if they did, it is very clever indeed, and it will be interesting to watch it play out.

UPDATE: On June 10, Rep. Goodlatte introduced a Manager’s Amendment to the Innovation Act that scales back its proposed discovery stay. Like the PATENT Act, it would stay discovery during the pendency of pre-answer motions[5] to transfer venue or to sever claims or dismiss parties (but it does not provide for a stay pending motions to dismiss).[6] Additionally, the Manager’s Amendment would require the court to rule on any such motion before the court issues a case management order under Federal Rule of Civil Procedure 16. In view of the deadlines specified in the Federal Rules of Civil Procedure, the discovery stay in the Manager’s Amendment would normally only last for a maximum of three to four weeks (from the Rule 26(f) conference until the case management order issues). But it would also (albeit in a roundabout way) require courts to provide timely rulings on venue motions.

[1] In 2014, an estimated 32% of all patent infringement cases, and 48% of all NPE patent cases, were filed in the Eastern District of Texas.

[2] The Innovation Act is silent on whether early Patent Local Rule disclosures would be blocked by such a stay. However, the PATENT Act explicitly exempts from its proposed discovery stay early exchanges of infringement and invalidity contentions (whether by local rule or interrogatory).

[3] “Motions to dismiss” presumably refers primarily to pre-answer motions brought pursuant to Rule 12(b) of the Federal Rules of Civil Procedure, including motions based on lack of jurisdiction, failure to state a claim, improper venue or improper service. Such motions must be brought within 21 days of service of the summons and complaint, and are frequently resolved substantially before the Rule 26(f) conference. Actually, though, “motion to dismiss” is ambiguous, and could also refer to other procedures, such as a motion to dismiss brought by a plaintiff pursuant to Rule 41(a)(2). It is not immediately clear, however, what purpose would be served by staying discovery pending a plaintiff’s Rule 41 motion to dismiss.

“Motions to sever accused infringers” evidently refers to motions to sever a claim or drop a party for misjoinder under Rule 21. While such motions should ordinarily be brought as soon as practicable, on its face, Rule 21 motion permits the court to provide such remedies “at any time, on just terms.” Although not fully analyzed here, motions to sever could potentially provide leeway for the same kind of procedural gamesmanship described in this article in relation to venue transfer motions.

[4] Complete data on file with the author.

[5] During the committee markup on June 11, the committee approved a further amendment, permitting stays to be triggered by such motions if they are filed “within 90 days of service of the complaint” rather than “before a responsive pleading is due.”

[6] The Manager’s Amendment remains silent on the status of early disclosures under Patent Local Rules.

Sarnoff: Derivation and Prior Art Problems with the New Patent Act

In a new Patently-O Patent Law Journal essay, Professor Joshua Sarnoff (DePaul) highlights a set of important problems in the Leahy-Smith America Invents Act. The essay, titled Derivation and Prior Art Problems with the New Patent Act focuses primarily on the elimination of 35 U.S.C. § 102(f) and its implications regarding the patentability of material that was either wholly or partially derived from another source.

Professor Sarnoff writes: 

Legislation sometimes is enacted that obviously requires either immediate revision or creative administrative and judicial interpretation. The new Leahy-Smith America Invents Act's derivation and prior art provisions fall in that category. Whether or not the move from a first-to-invent to a first-inventor-to-file system is viewed as good policy and as authorized by the Constitution, the particular changes made to the prior art provisions may not prevent or invalidate patents on inventions derived from others, i.e., when the applicant has obtained knowledge of an invention from another, original inventor and then files for a patent on the same or a similar invention. In particular, obvious inventions made with unauthorized derived knowledge will now be patentable, given the elimination of prior art section § 102(f). Absent creative interpretations by the U.S. Patent and Trademark Office (PTO) and the courts, the new derivation proceedings will not prevent a first filer from obtaining a patent even if the first filer's invention is merely an obvious extension of information derived from another. Further, the new act adds a narrow and poorly understood category of prior art that may generate years of needless litigation to re-settle the currently well-understood boundaries of the public domain. I discuss these problems in detail below.

There is some hope that Congress and the Administration will take Professor Sarnoff's concerns to heart.

Read the article: Joshua D. Sarnoff, Derivation and Prior Art Problems with the New Patent Act, 2011 Patently-O Patent Law Review 12 at /media/docs/2012/10/sarnoff.2011.derivation.pdf.

Prior Patently-O Patent Law Journal Articles include:

Patent Reform Act of 2010: Proposed First-to-File Statute

35 USC 100 Definitions

    (g) The terms ‘joint inventor’ and ‘coinventor’ mean any 1 of the individuals who invented or discovered the subject matter of a joint invention. 

    (h) The term ‘joint research agreement’ means a written contract, grant, or cooperative agreement entered into by 2 or more persons or entities for the performance of experimental, developmental, or research work in the field of the claimed invention.

    (i)(1) The term ‘effective filing date’ of a claimed invention in a patent or application for patent means—

            (A) if subparagraph (B) does not apply, the actual filing date of the patent or the application for the patent containing a claim to the invention; or 

            (B) the filing date of the earliest application for which the patent or application is entitled, as to such invention, to a right of priority under section 119, 365(a), or 365(b) or to the benefit of an earlier filing date under section 120, 121, or 365(c). 

        (2) The effective filing date for a claimed invention in an application for reissue or reissued patent shall be determined by deeming the claim to the invention to have been contained in the patent for which reissue was sought. 

    (j) The term ‘claimed invention’ means the subject matter defined by a claim in a patent or an application for a patent.

35 USC 102 Conditions for patentability; novelty

    (a) NOVELTY; PRIOR ART.—A person shall be entitled to a patent unless—

        (1) the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention; or

        (2) the claimed invention was described in a patent issued under section 151, or in an application for patent published or deemed published under section 122(b), in which the patent or application, as the case may be, names another inventor and was effectively filed before the effective filing date of the claimed invention.

    (b) EXCEPTIONS.—

        (1) DISCLOSURES MADE 1 YEAR OR LESS BEFORE THE EFFECTIVE FILING DATE OF THE CLAIMED INVENTION.—A disclosure made 1 year or less before the effective filing date of a claimed invention shall not be prior art to the claimed invention under subsection (a)(1) if—

            (A) the disclosure was made by the inventor or joint inventor or by another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or 

            (B) the subject matter disclosed had, before such disclosure, been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor. 

        (2) DISCLOSURES APPEARING IN APPLICATIONS AND PATENTS.—A disclosure shall not be prior art to a claimed invention under subsection (a)(2) if—

            (A) the subject matter disclosed was obtained directly or indirectly from the inventor or a joint inventor;

            (B) the subject matter disclosed had, before such subject matter was effectively filed under subsection (a)(2), been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or

            (C) the subject matter disclosed and the claimed invention, not later than the effective filing date of the claimed invention, were owned by the same person or subject to an obligation of assignment to the same person.

    (c) COMMON OWNERSHIP UNDER JOINT RESEARCH AGREEMENTS.—Subject matter disclosed and a claimed invention shall be deemed to have been owned by the same person or subject to an obligation of assignment to the same person in applying the provisions of subsection (b)(2)(C) if—

        (1) the subject matter disclosed was developed and the claimed invention was made by, or on behalf of, 1 or more parties to a joint research agreement that was in effect on or before the effective filing date of the claimed invention; 

        (2) the claimed invention was made as a result of activities undertaken within the scope of the joint

research agreement; and (3) the application for patent for the claimed invention discloses or is amended to disclose the names of the parties to the joint research agreement.

    (d) PATENTS AND PUBLISHED APPLICATIONS EFFECTIVE AS PRIOR ART.—For purposes of determining whether a patent or application for patent is prior art to a claimed invention under subsection (a)(2), such patent or application shall be considered to have been effectively filed, with respect to any subject matter described in the patent or application— 

        (1) if paragraph (2) does not apply, as of the actual filing date of the patent or the application for

patent; or 

        (2) if the patent or application for patent is entitled to claim a right of priority under section 119, 365(a), or 365(b), or to claim the benefit of an earlier filing date under section 120, 121, or 365(c), based upon 1 or more prior filed applications for patent, as of the filing date of the earliest such application that describes the subject matter.

35 USC 103. Conditions for patentability; nonobvious subject matter

A patent for a claimed invention may not be obtained, notwithstanding that the claimed invention is not identically disclosed as set forth in section 102, if the differences between the claimed invention and the prior art are such that the claimed invention as a whole would have been obvious before the effective filing date of the claimed invention to a person having ordinary skill in the art to which the claimed invention pertains. Patentability shall not be negated by the manner in which the invention was made.

35 USC 291. Derived patents

    (a) IN GENERAL.—The owner of a patent may have relief by civil action against the owner of another patent that claims the same invention and has an earlier effective filing date if the invention claimed in such other patent was derived from the inventor of the invention claimed in the patent owned by the person seeking relief under this section

    (b) FILING LIMITATION.—An action under this section may only be filed within 1 year after the first publication of a claim to an invention that is the same or substantially the same as the earlier applicant’s claimed invention.

35 USC 135. Derivation proceedings

    (a) INSTITUTION OF PROCEEDING.—An applicant for patent may file a petition to institute a derivation proceeding. The petition shall set forth with particularity the basis for finding that an earlier applicant derived the claimed invention from the petitioner and, without authorization, filed an application claiming such invention. Any such petition may only be filed within 1 year after the first publication of a claim to an invention that is the same or substantially the same as the earlier applicant’s claimed invention, shall be made under oath, and shall be supported by substantial evidence. Whenever the Director determines that a petition filed under this subsection demonstrates that the standards for instituting a derivation proceeding are met, the Director may institute a derivation proceeding. The determination by the Director whether to institute a derivation proceeding shall be final and nonappealable.

    (b) DETERMINATION BY PATENT TRIAL AND APPEAL BOARD.—In a derivation proceeding instituted under subsection (a), the Patent Trial and Appeal Board shall determine whether the earlier applicant derived the claimed invention from the petitioner and, without authorization, filed an application claiming such invention. The Director shall prescribe regulations setting forth standards for the conduct of derivation proceedings.

    (c) DEFERRAL OF DECISION.—The Patent Trial and Appeal Board may defer action on a petition for a derivation proceeding until 3 months after the date on which the Director issues to the earlier applicant a patent that includes the claimed invention that is the subject of the petition. The Patent Trial and Appeal Board also may defer action on a petition for a derivation proceeding, or stay the proceeding after it has been instituted, until the termination of a proceeding under chapter 30, 31, or 32 involving the patent of the earlier applicant.

    (d) EFFECT OF FINAL DECISION.—The final decision of the Patent Trial and Appeal Board, if adverse to claims in an application for patent, shall constitute the final refusal by the Office on those claims. The final decision of the Patent Trial and Appeal Board, if adverse to claims in a patent, shall, if no appeal or other review of the decision has been or can be taken or had, constitute cancellation of those claims, and notice of such cancellation shall be endorsed on copies of the patent distributed after such cancellation

    (e) SETTLEMENT.—Parties to a proceeding instituted under subsection (a) may terminate the proceeding by filing a written statement reflecting the agreement of the parties as to the correct inventors of the claimed invention in dispute. Unless the Patent Trial and Appeal Board finds the agreement to be inconsistent with the evidence of record, if any, it shall take action consistent with the agreement. Any written settlement or understanding of the parties shall be filed with the Director. At the request of a party to the proceeding, the agreement or understanding shall be treated as business confidential information, shall be kept separate from the file of the involved patents or applications, and shall be made available only to Government agencies on written request, or to any person on a showing of good cause.

    (f) ARBITRATION.—Parties to a proceeding instituted under subsection (a) may, within such time as may be specified by the Director by regulation, determine such contest or any aspect thereof by arbitration. Such arbitration shall be governed by the provisions of title 9, to the extent such title is not inconsistent with this section. The parties shall give notice of any arbitration award to the Director, and such award shall, as between the parties to the arbitration, be dispositive of the issues to which it relates. The arbitration award shall be unenforceable until such notice is given. Nothing in this subsection shall preclude the Director from determining the patentability of the claimed inventions involved in the proceeding.


Guest Counterpoint by Prof. Sichelman: The Innovation Act’s Fee-Shifting is Biased against Patent Holders and Will Likely Increase PAE Activity

Ted Sichelman is a Professor of Law and Director of the Technology Entrepreneurship and Intellectual Proerty Clinic and Center for Intellectual Property Law & Markets at the University of San Diego School of Law. 

Representative Bob Goodlatte’s bill, HR 9 (the “Innovation Act”), has been receiving much attention in the press and on the Hill. The Innovation Act is largely identical to the one (HR 3309) that passed the full House in late 2013, so of all the pending patent reform bills, it is likely to receive the most play in Congress this term.

The Innovation Act includes what seems to be a neutral fee-shifting provision. Specifically, it would require a court to “award, to a prevailing party, reasonable fees and other expenses … unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.”

Unfortunately, many commentators have focused the issue of whether this provision creates a presumption in favor of fee-shifting without carefully considering the many affiliated provisions in the bill. These additional provisions are particularly important because—contrary to the language quoted above—they significantly skew the effects of fee-shifting against patent holders. Given this lopsided effect, the fee-shifting provisions would probably increase patent assertion entity (PAE) activity. As I explain further below, this is because the provisions would most likely substantially reduce PAEs’ costs of acquiring patents.

A close reading of these additional fee-shifting provisions makes their skewed nature readily apparent. Take, for instance, the provision for “interested” third-party liability. It essentially makes those with a “direct financial interest in the patent . . . damages [award] or . . . licensing revenue” liable in the event a losing patent holder cannot pay a fee award (subject to certain exclusions). By its terms, the third-party liability provision only benefits “a prevailing party defending against an allegation of infringement of a patent claim” (emphasis added). So while third-party liability is quite expansive for those affiliated with losing patent holders, it is nonexistent for those affiliated with losing accused infringers.

Beyond discriminating against patent holders, the third-party liability provision further discriminates against non-practicing patent holders. Third-parties may only be joined in the event that the “prevailing party shows that the nonprevailing party has no substantial interest in the subject matter at issue other than asserting such patent claim in litigation.” This limitation would clearly capture non-practicing entities (NPEs), at least those who do not perform any R&D—although whether and when R&D is sufficient to meet the “substantial interest” threshold is undefined in the statute and thus unclear. If fee-shifting is truly designed to reduce low-quality suits, there is little basis to limit third-party liability only to NPEs. Anyone who has litigated knows that practicing entities, like NPEs, bring both strong and weak suits. There is a substantial economic interest in preventing frivolous suits regardless of the plaintiff’s business model.

Another example of the skewed nature of HR 9 is that settlement counts as a win for the accused infringer when the patentee “unilaterally extends to [the accused infringer] a covenant not to sue for infringement,” unless the patentee could have voluntarily dismissed the action without a court order. My understanding from experienced litigators is that these unilateral covenants tend to occur when the patent holder simply runs out of money and cannot continue to litigate. In this case, courts will often force the patent holder to provide a covenant not to sue in exchange for allowing it to drop the action. Presumably a patent holder providing such a covenant would sometimes not be able pay a fee award, which—if the patent holder is non-practicing—would allow the court to impose judgment on qualifying “interested” third-parties. On the other hand, if an accused infringer goes bankrupt, leading to a default judgment, the patent holder cannot join interested third-parties of the accused infringer when attorneys’ fees are owed.

The upshot of these provisions is to massively skew fee-shifting against the interests of patent holders, leading to an asymmetric risk that would very likely cause risk-averse inventors and assignees to avoid directly enforcing their patents, sometimes even strong ones. This is especially so because patent litigation is highly uncertain and costly, and the relevant test in the provision is the fairly open-ended “reasonably justified in law and fact” standard. Indeed, “reasonable fees and other expenses” in patent cases can be quite high—in large cases, well over $5 million—which would generally be a huge sticker shock to small companies and individual inventors with limited resources. Even a small percentage chance of a paying these fees could deter risk-averse inventors and assignees. In my personal experience running and dealing with many startups and individual inventors, they often are very risk averse when it simply comes to paying their own litigation expenses, much less the opposing party’s fees.

Oddly, the asymmetric nature of the Innovation Act’s fee-shifting provision may have the very opposite effect of what it purports to achieve by reducing so-called “patent troll” suits. As others have argued, the reason is straightforward: PAEs can more easily absorb the risk of bringing suit in the face of potential fee-shifting than startups and individuals. As I already pointed out, startups, individual inventors, and small companies are generally highly risk-averse patent holders. They would therefore fear liability being imposed on them for the direct enforcement of their patents (or if they simply retained an “interest” in a patent that was enforced by a third-party). As such, they would be more likely to sell their patents outright to PAEs instead of retaining a percentage in the litigation (as is standard today).

In fact, PAEs and their funders have already become savvy in this regard and often use single-purpose litigation entities with passive equity investors who cannot “influence, direct, or control” the litigation, removing these investors from liability under the Innovation Act. This approach makes the risk that the plaintiff would not be able to pay fee awards even more acute, leaving the original inventors on the hook if they retain a percentage stake of the proceeds (or probably even an equity stake in the single-purpose entity, because arguably the inventors can “influence” the litigation via their direct involvement). Indeed, even large companies and universities that monetize their patents via PAEs may decide to sell their patents outright to these PAEs, rather than retain a percentage stake, because of the unnecessary risk of placing their assets on the line. (Although the Innovation Act contains an escape valve whereby third parties can renounce all interest in the patents and avoid liability, it must be done very soon after a complaint is filed, which makes it of little use in a typical PAE deal.)

This shift from percentage deals to outright purchases would likely substantially drive down PAE patent acquisition costs. Because independent inventors and startups are risk averse—and some larger companies and universities likely are as well—these entities would expand the number of patents available for direct purchase by PAEs. This would likely push costs low enough that PAEs could afford to acquire much larger pools of patents, thereby increasing PAE assertions and reducing funds remitted back to original inventors and assignees.

Conversely, even though the Innovation Act is highly biased in favor of accused infringers, a risk-neutral PAE or large practicing patentee may be able to extract greater settlements from risk-averse accused infringers, such as startups and small companies, by credibly threatening to take a strong case to trial. This is contrary to the poorly reasoned analysis by organizations such as the Electronic Frontier Foundation, which wrongly assumes that PAEs are “patent trolls” that file “weak” suits and also seemingly forgets small companies are regularly sued by larger competitors. Thus, the Innovation Act’s fee-shifting provisions could very well hurt small companies and startups that are defendants accused of infringement.

In sum, the gains from the Innovation Act’s fee-shifting provision, may simply go to large, risk-neutral companies, regardless of whether they are the Intellectual Ventures or Ciscos of the world, just as scholarly analysis has shown how fee-shifting operates in other areas of the law. Perhaps that is why it is not a coincidence that the Intellectual Property Owners Association , which is dominated by large companies, does not oppose it, while the National Venture Capital Association effectively does oppose it. Like the America Invents Act, the Innovation Act’s fee-shifting provisions would probably shift today’s innovation footprint away from the radical and disruptive (associated more with startups and individuals) towards the incremental (associated more with large, established companies).

There is no solid evidence that the potential benefits of the Innovation Act’s biased fee-shifting provision would outweigh its likely substantial costs. These costs could be so large that that even if we include the touted benefits from all of the other provisions in the Innovation Act, some of which could prove useful, I doubt the Act is worth it. In the very least, we should not impose radical and potentially very costly changes in the patent system without very good evidence. As such, anyone who cares about innovation as a whole should oppose the Innovation Act as it stands.

Doctrinal Precedence Among the Hatch-Waxman Act, the Patent Act, and the Sherman Act

Guest post by Professor Brett M. Frischmann (Benjamin N. Cardozo School of Law)

On March 25, 2013, the Supreme Court will hear oral arguments in Federal Trade Commission v. Watson Pharmaceuticals, Inc., a case concerning reverse payment settlements of patent litigation.  The court granted cert on the following issue:

Whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held).

In this brief post, I suggest a way to decide the issue in a manner that resolves the apparent tensions between the Hatch-Waxman Act, the Patent Act, and the Sherman Act. To my knowledge, the argument I make does not appear explicitly in the briefs, although Scott Hemphill made a related argument in his 2006 NYU Law Review article, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem.

Hatch-Waxman should be given substantial priority in the analytical framework that courts employ when resolving antitrust claims about reverse payment settlements of patent litigation. Here is why. Both antitrust law and patent law are general-purpose, industry-agnostic legal regimes. Antitrust law regulates competition generally. It aims to sustain competition and constrain anticompetitive practices, and it does so with very general legal prescriptions that courts must apply in a wide range of different contexts. Patent law aims to encourage innovation by giving inventors the right to exclude others from a patented invention. Patent law also consists of very general legal prescriptions that the PTO and courts must apply in a wide range of different contexts. In both antitrust and patent, sector-specific, industry-specific, or even context-specific rules do arise over time in the courts or agencies. But the statutory law enacted by Congress is general-purpose.

Hatch-Waxman is special-purpose and industry-specific, and it also happens to be last-in-time. Congress enacted Hatch-Waxman to accomplish specific ends through specific means. Of course, Hatch-Waxman is a complex regulatory regime, and there are various tradeoffs reflected in the law that may have been necessary to get it passed. But Hatch-Waxman primarily aimed to induce competition in drug markets when such competition is feasible, and one of the central means for accomplishing this end is litigation over patent validity.1 Thus, Hatch-Waxman envisioned two particular types of competition—first, competition in courts between owners of drug patents and generic drug companies, and second, competition in drug markets between brand firms and generics. Reverse payment settlements stifle both types of competition.

What do I mean when I say that Hatch-Waxman should be given substantial priority in the analytical framework that courts employ when resolving antitrust claims about reverse payment settlements of patent litigation? The antitrust-patent interface has been the source of substantial consternation—how do we resolve tensions that might arise among competing legal principles and values? Regardless of how one comes out on how to resolve or understand the interface, it is largely irrelevant to this particular set of issues. Hatch-Waxman replaces general patent law in this context. As a result, it supplies the relevant principles and values, and it significantly narrows the range of relevant arguments that a court should entertain in an antitrust suit. Simply put, broad claims about principles and values derived from patent law should not carry much, if any, weight. For example, claims about the impact of reverse payment settlements, or their prohibition, on patent law's "incentives to innovate" are red herrings. Similarly, arguments about weak vs. strong patents are also red herrings because there is nothing in Hatch-Waxman itself that draws a distinction between weak and strong. (It is worth noting that even for "really strong" patents, litigation over patent validity also provides the public with greater certainty about the validity of those patents.) Finally, claims about the general judicial economy of encouraging settlement are also irrelevant because Hatch-Waxman directly employs litigation as a means to facilitate competition.

Antitrust scrutiny of reverse payment settlements of patent litigation need not get bogged down in discussions of patent law or judicial economy. Congress has spoken clearly and specifically and chosen to use patent litigation as a means to induce competition. Reverse payment settlements of patent litigation are precisely the sort of agreements that antitrust law directly regulates, usually through a rule that says such agreements are per se unlawful. An agreement not to compete in the forum specified by Hatch-Waxman is no different than competitors expressly agreeing not to compete in any other market; it looks like various types of cases where per se illegality is generally accepted as a legitimate rule (e.g., bid rigging, market division).

Accordingly, the Supreme Court could reasonably declare reverse payment settlements of Hatch-Waxman-based patent litigation per se unlawful. Alternatively, the Court could declare the settlements in question presumptively unlawful and then put the burden on the defendants to rebut the presumption.

Reverse payment settlements stifle both types of relevant competition noted above. Competition of the first type (competition in courts between owners of drug patents and generic drug companies) is always stifled. The same might be said about competition of the second type (competition in drug markets between brand firms and generics), although some argue that settlements sometimes may increase competition of the second type where a patent would be found valid (if actually litigated) because the settlement allows the generic company to enter the market earlier than otherwise would be the case. Presumably, the Court should choose between per se illegality and presumptive illegality based on its evaluation of this argument.

If the Court takes this latter route, the types of evidence and arguments relevant to rebutting the presumption should be limited substantially by Hatch-Waxman. As noted above, Hatch-Waxman specifies the types of relevant competition and if given the priority it deserves, it would preclude various generic arguments from being made.

===

FN1: As Scott Hemphill put it, "the Hatch-Waxman Act is a deliberate effort to promote consumer access through litigated challenges." See C. Scott Hemphill, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem, 81 NYU L. Rev. 1553 (2006), available at http://ssrn.com/abstract=925919. He goes on: "Since litigation is the instrument by which the regulatory arrangement accomplishes its ends, it is difficult to argue that an end-run on the instrument is consistent with the scheme." Much of the argument I am making derives from ideas in Scott's article and conversations we have had over the years.

Guest Post: Publishing Design Patent Applications: Time to Act

Gary L. Griswold

Mr. Griswold is a Consultant residing in Hudson, WI and was formerly President and Chief Intellectual Property Counsel for 3M Innovative Properties Company. The essay reflects the views of the author. He wishes to thank Bob Armitage and Mike Kirk for their excellent contributions to the essay.

Overview

Design patenting has come of age. According to a recent World Intellectual Property Organization (WIPO) study, the filing of design patent applications more than doubled between 2004 and 2011.[1] The stakes in design patent litigation today can be enormous. One commentator on the recent Apple-Samsung iPhone IP wars noted, “After operating in the intellectual property backwaters for years, design patents took center stage in the epic battle.”[2]

Enterprises of all sizes have come to recognize the value to be had from securing patents on their innovative designs. This also means that more businesses now need to consider whether design patents of others might impair their freedom to operate when placing a new product on the market.

Unlike conventional (“utility”) patent applications, design patent applications are not subject to the “publication” provisions that were placed in the U.S. patent law in 1999 with the enactment of the American Inventors Protection Act (AIPA). Utility patent applications, with a few exceptions, must all be published and made publicly available within 18 months after filing.[3]   However, all design patent applications are required to be kept in secret in the United States Patent and Trademark Office (USPTO) until the patent issues on the application.

Today this secrecy can have significant and negative consequences – for the design’s creator and for those who commit resources to manufacture a similar product before the issuance of the design patent. Unlike most utility patents today, the first inkling that a patent is being sought on a new product’s design may come with grant of a design patent, in other words come at the end of the examination process in the USPTO.

The growing importance of design patents suggests that this exclusion from publication with respect to design patent application publication should be rectified by Congress. This can best be done by requiring that all pending design patent applications be made available to the public by publishing these applications at 6 months after the date that they were originally filed.

Doing so would put the public on notice, shortly after the design patent application is filed, that a new product’s design may be protected. The growing prominence of design patenting, as well as other developments in the law since 1999, now make it timely for Congress to act.

Background

Two major pieces of patent legislation over the past 15 years have worked to make the U.S. patent law operate with vastly greater transparency, predictability and simplicity. The AIPA, with its requirement that most new non-design patent filings must be published at 18-months after their original filing dates was followed by a host of even more significant patent reforms. These were contained in the Leahy-Smith America Invents Act (AIA) of 2011.[4]

Key provisions of the AIA were designed to allow inventors to accurately assess whether they could secure – or had secured – a valid patent. For utility patents, access to earlier-filed patent applications comes though the AIPA’s publication provisions. Clearly, since some patents can take years to issue, holding earlier-filed patent applications in secrecy in the United States Patent and Trademark Office (USPTO) until a patent issued meant that an inventor might mistakenly invest based on the apparent validity of a patent that might then evaporate upon the issuance of a patent on a never-published, earlier-filed patent application.

The AIA also sought to assure that members of the public could more effectively participate in the patenting process. It allowed members of the public to be involved in the determination of whether a claimed invention in a patent application can be validly issued as a patent, both before the patent issues and after the patent issuance.

If action is taken promptly after a pending patent application is published, the AIA permits a member of the public to make a “pre-grant submission” of relevant prior art that the patent examiner handling the patent application must consider in deciding whether a patent should issue on the application.[5] These submissions, most notably include the earlier-sought patent applications of other inventors that have been published under the AIPA’s provisions.

In addition, the new “post-grant review” or “PGR” provisions of the AIA permit a member of the public to raise in a USPTO proceeding any issue of a patent’s validity that could be raised in court by someone accused of infringing the patent. However, these PGR provisions, like the pre-grant submission provisions, require that an individual act promptly. In this case, the PGR petition must be filed within nine months of the issue date of the patent that is being opposed.

Given the formidable requirements for requesting a PGR, most individuals making a PGR request will benefit from advance notice that a patent is about to issue. This notice, of course, is automatic when the patent application has been published under the AIPA’s provisions.

The manner in which the AIA built upon the AIPA’s provisions, both with pre-grant submissions and with post-grant review, work to benefit patent owners and their potential competitors alike. However, while these new pre-grant and post-grant provisions technically apply both to design and utility patents, the lack of any “publication provision” for design patents means that these provisions are now significantly less effective for designs.

The Rationale for Excluding Design Patents from the AIPA Publication Provisions No Longer Makes Sense

When the AIPA was enacted, there were two significant exceptions to the rule that pending applications for patent would be published and made publicly accessible. First, these provisions allowed inventors seeking only U.S. patents to opt-out of the publication requirement. This was done for inventors interested in patent protection only for the U.S. market on the assumption that at least some of them might not want their inventions publicly disclosed if they were ultimately not going to be able to receive a valid patent. However, for almost all such inventions, marketing the invention necessarily discloses to the public what the invention is and, in fact, discloses much more about the invention to the public than would normally be found in an inventor’s patent application if published.

Thus, this rationale, particularly today, makes little sense. The inventor can be “protected” from public disclosure by opting-out of the publication provisions of the AIPA only in the situation where the invention is never commercialized and essentially has no economic value, or in the limited situations where the invention can be effectively practiced as a trade secret. Consequently, it is a protection that seldom affords any economic value to the inventor.

Under the AIA, the publication of an invention in a pending patent application provides an inventor with a guarantee that no one else will be able to successfully secure a patent on the same or a similar invention based on an application filed after the inventor’s patent filing. Where someone subsequently files for a patent, the earlier-filed application limits the later-filing inventor to validly patenting only subject matter both novel and non-obvious over what was disclosed in the earlier-filed application.

Design patents were totally excluded from the 18-month publication provisions. The rationale for the design patent exclusion can be found in the legislative history of the AIPA: “Since design applications do not disclose technology, inventors do not have a particular interest in having them published.” That statement, whatever its validity then, was made before design patenting came of age and has little relevance today, as evidenced by the litigation between Apple and Samsung.

Another reason given for the design exception was that “The Hague Agreement Concerning the International Registration of Industrial Designs” was being revised and that any change to the design patent law should await the outcome of that exercise. That outcome is now clear; Congress has acted to remove the exception for design patents filed under The Hague Agreement.[6]

Yet another reason that design patents may have been left out of the mix when the publication provisions of the AIPA were being drafted was the short pendency of a design patent application. “Pendency” is the time taken by a patent examiner between filing and issuance of the design patent. With pre-grant submissions of prior art and post-grant review under the AIA now in place, that relatively shorter pendency before the Patent Office for design applications versus utility applications makes it much more important to have design applications not only published, but published quite promptly, i.e., at six months from the patent filing.[7]

The last reason Congress may have excepted design patents from publication is that some manufacturers may not have wanted the designs for new products to be prematurely disclosed, prior to market introduction.[8] Under the AIA, however, the filing of a design patent application assures that no similar designs can be patented based upon a later-filed design patent application. In addition, early publication puts competitors on notice that there is a “patent pending” on the design so that they dare not copy the design without the risk of infringing a subsequently issued design patent. Instead of a problem for manufacturers, pre-grant publication carries with it undeniably important benefits.

In addition to the “notice” function that arises from publishing a design patent application, inventors whose design patent applications publish secure yet another benefit under the AIPA. They can qualify for “provisional rights” – that is the right to collect reasonable royalty damages from anyone who uses the design during the period from the date the user received notice of the published design application until issuance of the patent on the design.[9] This again reflects the upsides of publication, much potential gain with a negligible prospect of incurring any pain.

Conclusions

The AIA increased the openness and transparency of the patent system by providing for pre-grant submissions and post- grant review. These provisions work to protect the public against patents that lack valid claims – and similarly protect the inventor from making investments in reliance on patents that could never be successfully enforced. Those aspects of the AIA are premised in part on the publication of pending patent applications.   Whatever reasons can be cited for excluding design patent applications from these important provisions of the AIPA, such reasons now have only historic significance. Today, all design patent inventors deserve equal treatment. The availability of the benefits of publishing pending design patent applications should not depend on where a design patent inventor seeks patent protection.

In sum, the agreement to allow publication of design patent applications filed by U.S. inventors under The Hague Agreement represents a significant step by the United States toward achieving the open, transparent 21st century patent system contemplated by the AIPA and AIA. The increase in design patent application activity – and the prominence of design patent enforcement efforts – renders this a perfect time to remove the exclusion from publication of those design patent applications filed only in the United States.

 

[1] According to WIPO, in 2012, “the 1.22 million industrial designs contained in applications grew by 17%—the highest growth on record.” http://www.wipo.int/export/sites/www/freepublications/en/statistics/943/wipo_pub_943_2013.pdf, at p. 4.

[2] See http://designpatentattorney.com/wp-content/uploads/2013/01/Carani-Lanslide-Article-Design-Patents-Take-Center-Stage-Jan-Feb-2013.pdf.

[3] Most utility patent applications must be published under the AIPA’s publication provisions. The time period set for publishing utility patents is 18 months after the initial patent filing date. 35 U.S.C. § 122(b).

[4] The United States adopted a so-called first-inventor-to-file system as the principle for determining what subject matter can represent “prior art” to a claimed invention. Also, a number of subjective and non-transparent aspects of the rules on patenting were removed.

[5] Because prior art can be submitted to the USPTO anonymously, members of the public and competitors of the applicant are normally comfortable in making such submissions. Since the processing time is shorter for design patent applications than that of utility patent applications, a narrower time window (e.g., before the earlier of a notice of allowance and the later of (1) the first rejection or (2) 2 months after publication) would be necessary for submitting third party submissions.

[6] The implementing legislation for the Geneva Act of The Hague Agreement has been enacted by the United States and rules for its implementation are being finalized by the USPTO. Once the rules are completed, the formal process for membership will be initiated and completed. The Common Regulations Under the 1999 [Geneva] Act and the 1960 Act of The Hague Agreement provide for publication of international applications six months after the date of the international Registration (which occurs upon receipt by WIPO of the international application). This publication of the international application will be considered a publication in the U.S. under 35 USC 390. The U.S. will not allow deferral of publication. Thus, any concerns related to the early publication of design patent applications as a policy matter have already been decided by Congress in favor of publication.

[7] As with utility patent applications, the public may well be aware of better prior art for design patent applications than the USPTO. If design patent applications were published, interested members of the public could submit prior art to the USPTO with the result that any issuing design patents would have been more thoroughly examined, benefiting both the applicant and public.

[8] Because of the speed of issuance, design applications filed only in the U.S. would need to be published 6 months after their U.S. filing date. Any concern with timing of publication relative to commercialization would seem to be handled by a 6 month period between filing and publication, which mirrors The Hague Agreement, and the relatively rapid grant (typically 15 months) of design patents.

[9] By providing that publication under The Hague Agreement will be deemed a publication under 35 USC 122(b), the implementing legislation (35 U.S.C. 390) makes such design patent applications eligible for provisional rights under 35 USC 154(d).

Patent Reform Act of 2007

On April 18, 2007, bipartisan legislators in both the Senate and House of Representatives introduced sweeping patent reform measures in legislation termed the Patent Reform Act of 2007. The reform measures include the following provisions: 

  • First-to-file rights and elimination of interference proceedings;
  • Reform to make it easier to file a patent application without the inventor’s cooperation;
  • Limitation of damages to only the economic value of the improvement as compared to the prior-art;
  • Specific limitations on when damages may be trebled for willfulness;
  • Post-grant opposition proceedings and a reduction in the litigation estoppel effect of reexaminations;
  • Limitations on patent venue;
  • Authority to the PTO director to create further regulations.

Although couched in terms of the importance of patents and patent quality. The thrust of many of the measures are clearly directed at “limiting litigation abuses.”  The two versions (Senate and House) are appear virtually identical in substance.

Analysis:

  • Inter Partes Reexamination: Many patent litigators have warned clients against filing inter partes reexamination requests because of the litigation estoppel created by by 35 USC 315(c). That provision estopps later validity challenges on grounds that a third party “raised or could have raised” during the reexamination.  The Patent Reform Act would limit the estoppel to only issues actually raised — striking the “could have raised” language.

Legislative Documents:

Congressional Players:

  • The Senate version was introduced by Senators Leahy, Hatch, Schumar, and Cornyn
  • The House version was introduced by Representatives Berman, Smith, Conyers, Coble, Boucher, Godlatte, Zoe Lofgren, Issa, Schiff, Cannon, and Jackson-Lee

Lobbying Players:

  • www.innovationalliance.net (Tech Companies who want strong patents)
  • www.ipo.org (Industry group — Formerly supported strong IP rights — now a consensus builder — noting that “the battle-of-the-industries description of patent reform is simplistic and sensationalist.”)
  • www.phrma.org (Big Pharma: Strong patent rights)
  • www.patentsmatter.com
  • www.patentfairness.org (“Over-broad patent grants stifle future innovators, while unjustified lawsuits that aim to extort settlements”)
  • www.aipla.org (Group of lawyers who are, for the most part, unwilling to take a stand)
  • www.bsa.org (Microsoft, Apple, HP — all supporting dramatic patent reform that curbs litigation in favor of the more genteel cross-licensing).

Who is writing about patent reform:

News & PR:

Call for Papers:

  • I would like to publish a couple of well written editorials on patent reform within the next two weeks. Feel free to submit yours to dcrouch@gmail.com.

Comparison of the Current U.S. First-to-Invent System with the First-Inventor-To-File System Proposed in the Patent Reform Act of 2011 (S.23)

Guest Post By Prof. Ann McCrackin, Stephen Brodsky, and Amrita Chiluwal. Prof. McCrackin is Director of the Patent Prosecution Program at the Univ. of New Hampshire School of Law (formerly Franklin Pierce Law Center). Mr. Brodsky and Ms. Chiluwal are both 2011 JD Candidates at the Univ. of New Hampshire School of Law.

The Patent Reform Act of 2011 ("S.23") is now being considered by the full U.S. Senate. One of the provisions of S.23 would replace the current first-to-invent ("FTI") system with a first-inventor-to-file ("FITF") system. Some of the differences between these two systems are outlined below in order to help understand the changes in Sec. 2 of the S.23 Bill. For simplified illustrative purposes, Parties ("A" and "B") and their invention ("Widget") will be used below.

First-to-Invent

The current U.S. system is a first-to-invent ("FTI") system. Under the FTI system, the first party to invent is entitled a patent on that invention upon filing for a patent application (as long as all of the other patentability requirements are met). Even if the first party to invent is not the first to file, that party could still be entitled to the patent rights. In situations where there are multiple inventors of the same invention, the determination as to who is entitled to the patent rights is made during an interference proceeding. Interference proceedings are administrative proceedings held at the USPTO that legally determine the first inventor. However, there are time constraints on interference proceedings, e.g., typically a party cannot bring an interference proceeding on an invention after a patent has issued on that patent. Therefore, the first person to file would get the patent unless another person is able to prove prior invention in an interference proceeding.

The following examples involve two parties who claim the same invention in an FTI system:

(more…)

New Patent Legislation: Innovation Act of 2013

By Dennis Crouch

Representative Bob Goodlatte (R-VA) with the bipartisan support of ten other members of the House has introduced a new set of proposed patent reforms currently tiled the “Innovation Act.” (H.R. 3309) The proposed bill includes a number of provisions disparate provisions that would have a substantial impact on patent enforcement, procurement, and ownership. Some of the changes include severe increases in the requirements associated with filing a patent infringement complaint; Major statutory limitations on discovery; Elimination of the patent applicant option of filing a civil action to obtain a patent under Section 145; Forcing the USPTO to use standard claim construction (rather than BRI) in post-grant proceedings; Introduction of a new Double-Patenting rule; etc. the 50+ page bill is somewhat complex and, as Hal Wegner wrote, “[e]very organization impacted by patents must carefully study the Goodlatte bill for hidden features or suffer the consequences.” [Text][Sectional-Analysis]

Major Proposed Changes include the Following:

  1. A heightened pleading requirement for filing patent infringement claims, including a particularized statement “with detailed specificity” as to “how the terms in each [asserted] claim … correspond to the functionality of [each] accused instrumentality.” A brand-generic infringement action under § 271(e)(2) need not comply with the heightened pleading requirements. In addition, the Judicial Conference would be ordered to modify the form complaint for patent infringement to reflect the heightened pleading.
  2. An assumption that attorney-fees will be awarded to a prevailing party. The new provision would require an award of fees “unless the court finds that the position of the nonprevailing party . . . was substantially justified or that special circumstances make an award unjust.” On its face the provision is largely party-neutral with two caveats. First, the provision allows prevailing-accused-infringers to collect fees from non-plaintiffs who have a substantial interest in the patent-at-issue in the case. Second, the provision indicates that a patentee who extends a covenant-not-to-sue to the other party will be deemed a non-prevailing party and thus subject to attorney fees.
  3. Discovery will be limited until after a ruling on claim construction. In addition, the US Judicial Conference would be ordered to develop rules “to address the asymmetries in discovery burdens and costs in any civil action [relating to patents].”
  4. Transparency of Ownership. As a new required disclosure, the patentee in an infringement litigation must disclose anyone with a financial interest in either the patents at issue or the patentee and must additionally disclose the “ultimate parent entity” of the patentee. In the appropriate Federal Regulations, an ultimate parent entity is ethereally defined as “entity which is not controlled by any other entity.”
  5. Stay for Customer Suits. When both a manufacturer and its customer are sued for infringing the same patent, customer suit would be stayed so long as the customer agrees to be bound by the results of that case.
  6. IP in Bankruptcy. Under the new law, when a foreign company goes bankrupt, its trustee would no longer have the power to cancel licenses associated with US patent rights.
  7. No Civil Action to Challenge PTO. The new law would eliminated the civil action option found in 35 U.S.C. § 145. Patent applicants refused by the patentee would rather only have the option of appealing directly to the Federal Circuit.
  8. Shrinking Post-Grant-Review Estoppel. Under the current law, a post-grant review proceeding creates an estoppel against the petitioner later arguing in other forums “any ground that the petitioner raised or reasonably could have raised during that post-grant review.” 35 U.S.C. § 325(e). The new law would narrow that estoppel only to grounds actually raised.
  9. Patent Office Claim Construction. During Post-Grant Reviews and Inter Partes Reviews, the new law would require the patent office to use the ordinary “district court claim construction” law, that is, “construing each claim of the patent in accordance with the ordinary and customary meaning of such claim as understood by one of ordinary skill in the art and the prosecution history pertaining to the patent.”
  10. Double Patenting. There is some potential that the judicially created obviousness-type double patenting doctrine was eliminated by the recently implemented first-to-file regime. The new law would codify that doctrine.
  11. Covered Business Method Patent Review. The AIA creates an option for third parties to attack patents covering non-technological “covered business method” innovations through the use of a new post-grant review proceeding. The new law would somewhat restrict the scope of CBM review to only cover first-to-invent patents (rather than pre-AIA patents) as defined in Section 3(n)(1) of the AIA. The new law would also, inter alia, codify the USPTO’s somewhat broad definition of “financial product or service” described in the Versata case.
  12. Patent Term Adjustment. The new law would eliminate any patent term adjustment for “B delay” occurring after an applicant files a request for continued examination. This change would have a significant impact on the patent term of a large number of issued patents. The amendment proposes to be effective with regards to any “patent application or patent” pending on the Act’s date of enactment. (Note – it is unclear what it means for a “patent” to be “pending” in this context.)
  13. Federal Jurisdiction over Patent Cases. Although not a statutory change, the new law would make the “clarifying” statement that: “The Federal interest in preventing inconsistent final judicial determinations as to the legal force or effect of the claims in a patent presents a substantial Federal issue that is important to the Federal system as a whole.”

The PATENT Act of 2015

Earlier today, Senator Grassley (R-Iowa) introduced the bipartisan Protecting American Talent and Entrepreneurship Act of 2015 (PATENT) Act.  The PATENT Act is a revised version of prior proposed legislation that addresses some of the most severe criticisms of those proposals.  It’s also well situated to move forward, as it’s supported by leaders from both parties.  From the bill’s summarv (Sec. 1 is the title and table of contents; Sec. 2 are definitions; if the formatting is messed up, click the link for the original source):

SEC. 3. PLEADING AND EARLY DISCLOSURE REQUIREMENTS: Form 18 is
eliminated. Plaintiffs must identify each patent and claim allegedly infringed,
which products or processes are infringing, and describe the alleged infringement.
Allows plaintiffs to describe information in general terms if it is not accessible to
them. Clarifies that pleadings can be amended and allows for confidential
information to be filed under seal. Exempts 271(e) (Hatch-Waxman and biosimilars)
proceedings. Requires plaintiffs to make additional disclosures to the court and the
PTO about the plaintiff and the asserted patents shortly after filing.

SEC. 4. CUSTOMER STAY: Allows a case against a customer to be stayed while
the manufacturer litigates the alleged infringement, provided that the
manufacturer is involved in a lawsuit in the US involving the same issues. The
customer stay is available only to those at the end of the supply chain, who are
selling or using a technology that they acquired from a manufacturer, without
materially modifying it. Allows for a stay to be lifted where it would cause undue
prejudice or be manifestly unjust.

SEC. 5. DISCOVERY LIMITS: Requires a court to stay expensive discovery
pending resolution of preliminary motions—specifically motions to dismiss, transfer
venue, and sever accused infringers. Gives a court discretion to allow limited
discovery necessary to resolve these motions or a motion for a preliminary
injunction, or if it finds that additional discovery is necessary to preserve evidence
or otherwise prevent specific prejudice to a party. Allows parties to consent to be
excluded from discovery limitations. Exempts Section 271(e) (Hatch-Waxman and
biosimilars) cases. Clarifies that timelines for responsive pleadings provided by the
Federal Rules of Civil Procedure are not altered, and nothing prohibits a court from
ordering or local rules from requiring the exchange of contentions.

SEC. 6. JUDICIAL CONFERENCE DISCOVERY REFORMS: Requires the
Judicial Conference to develop rules or procedures to address additional issues
involving discovery in patent cases. These include to what extent each party is
entitled to “core documentary evidence” and if they should be responsible for the
costs of production, and other issues involving discovery sequence and scope. Asks
the Judicial Conference to implement case management procedures for patent
cases.

SEC. 7. FEES AND RECOVERY: Provides that reasonable attorney fees will be
awarded if a court determines the position or conduct of the non-prevailing party
(plaintiff or defendant) was not objectively reasonable, unless special circumstances
make an award unjust. The winner must show that the non-prevailing party’s
position was not objectively reasonable and the judge must make a ruling for fees to shift – this is not a presumptive fee shifting rule. Fee shifting extends to cases
where a party attempts to unilaterally withdraw from a case on the eve of a trial.
Keeps 271(e) (Hatch-Waxman and biosimilars) proceedings under current law.
Fee Recovery: Requires a plaintiff to identify interested parties in the litigation,
and provides a process for a court to recover fees where the abusive litigant is
judgement-proof. If a plaintiff cannot certify it has sufficient funds to satisfy a fee
award, it must notify interested parties, who can opt out of their interest. Permits a
court to exempt institutions of higher education and qualifying parties in the
interest of justice.

SEC. 8. PRE-SUIT NOTICE/DEMAND LETTERS: Prevents vague patent
infringement demand letters from being preludes to litigation by requiring that
certain information be included in order for the letter to be considered evidence that
subsequent infringement was “willful”. If the required information is not in the
written notice, the recipient’s time to respond to a later complaint is extended by 30
days.

SEC. 9. ABUSIVE DEMAND LETTERS: Provides that, if someone violates Section
5 of the FTC Act in connection with patent assertion and has engaged in
widespread demand letters abuse, civil penalties for FTC rule violations will attach.
The provision does not impinge on legitimate licensing activity or expand the
authority of the FTC.

SEC. 10. TRANSPARENCY: Requires patent holders to disclose to the PTO
whenever there is an assignment of interest in the patent that results in a change of
ultimate parent entity. If a patent holder fails to disclose, it will not be able to
recover increased damages of attorney fees (unless this would be manifestly unjust).

SEC. 11. IP LICENSES IN BANKRUPTCY: Makes clear that as a matter of public
policy, US courts will not recognize the action of a foreign court to unilaterally
cancel a license to a US patent or trademark if the licensor goes bankrupt. Extends
current protection of licensees of US patents in bankruptcy to trademarks.

SECTION 12. SMALL BUSINESS PROVISIONS: Directs the PTO to develop
educational resources for small businesses targeted in patent suits and to provide
support to companies named in infringement actions. Instructs PTO to create a
section on its website that will list pending patent cases, so that recipients of
demand letters and defendants in lawsuits can more easily identify ongoing
litigation that may relate to their case.

SEC. 13. STUDIES: Provides for three studies on 1) the secondary market for
patents; 2) the possibility of a pilot program for a patent small claims program: and
3) business method patent quality.

SEC. 14. TECHNICAL CORRECTIONS: Technical corrections and improvements
to the AIA.

SEC. 15. EFFECTIVE DATE: Date of enactment except as otherwise provided.

SEC 16. SEVERABILITY: Should any portion of the law be held invalid, this
provision allows the rest to stand.

The full text of the bill is available here: http://www.judiciary.senate.gov/imo/media/doc/PATENT%20Act.pdf

(Entirely unrelated but also in Sen. Grassley’s Instagram feed: a few hours later he met with my Dean and the Deans of the University of Iowa College of Engineering and Division of Continuing Education.)

Publishing Design Patent Applications: Time to Act

Guest Post by Gary L. Griswold.  Mr. Griswold is a Consultant residing in Hudson, WI and was formerly President and Chief Intellectual Property Counsel for 3M Innovative Properties Company. The paper reflects the views of the author. He wishes to thank Bob Armitage and Mike Kirk for their excellent contributions to the paper.

Last summer I wrote a paper[1] with this same title explaining why now is the time to commence universal publication of all design patent applications filed in the United States. Indeed, recent events have made this the perfect time to legislate such transparency.

The United States has now deposited its instrument of ratification of the Geneva Act of the Hague Agreement Concerning International Registration of Industrial Designs. The Geneva Act will enter into force, in respect to the United States, on May 13, 2015. The Final Rules were published by the USPTO on April 2, 2015. U.S. applicants will be able to file under Hague, have their Hague-filed applications published by the International Bureau of the World Intellectual Property Organization at 6 months from filing, and be eligible following such international publication for provisional rights to recover a reasonable royalty under 35 U.S.C. 154(d).

For the reasons stated in my earlier paper, all U.S. design applicants—not just Hague applicants—should have the benefits that come from this type of universal examination transparency. Transparency places design patent applicants into the driver’s seat, able to head off those that may be tempted to copy a product incorporating the published design. They can develop a filing plan which meets their circumstances and know exactly when their application will be published making provisional rights available.

Importantly, the published application will produce an immediate prior art effect retroactive to its filing date once published—for both anticipation and obviousness purposes. Thus, those who would subsequently seek to obtain patents on the same design or obvious variants would be blocked.

Armed with the knowledge from published pending patent filings, competitors will have the opportunity at an early point in their commercialization process to design away from designs covered by published claims. They can thereby avoid the potential exposure under provisional rights, as well as the potential for post issuance infringement liability for the infringer’s total profits (35 U.S.C. 289).

The public will benefit from the opportunity to provide input into the examination process. Public input during the examination phase carries with it the promise of a higher quality examination and more certain patent validity. Competitors will have the ability to provide patent examiners with prior art that might otherwise not surface or be overlooked.

This is possible because the America Invents Act (AIA) offers a brief time window after publication of an application for public submissions of prior art to patent examiners. The limited duration of this opportunity assures that the speed of examination is not negatively impacted. Public input of this type can have the collateral benefit of lessening the likelihood that a PGR or IPR will be initiated based upon missed or overlooked prior art during the patent application filing and examination process.

Publication of domestic design patent applications should occur, as it does for international design patent applications under Hague, six months after the U. S. filing. In my earlier paper, I explained the reasons that 18 month publication used for utility patent application publication is inappropriate for design applications. The short examination pendency before design applications mature into issued patents dictates that design patent applications be published at six months.

Understandably, concerns over this move to transparency have been expressed by those who have grown comfortable with the pre-Hague status quo. Adapting to any new regime requires adjustments to new opportunities and new challenges. Utility patent practitioners have blazed the trail here, having gone through a major change-in-practice drill with the America Inventor’s Protection Act (AIPA) and AIA. In the end, the transparency that early publication would provide and the benefits that it would offer to clients argue strongly for professionals to embrace this change.

An important goal of the patent system is to promptly and efficiently grant valid patents on inventions that stimulate marketplace innovation. Publishing design patent applications advances that goal.

[1] Griswold, Gary L., Publishing Design Patent Applications: Time to Act¸ Patently-O (August 24, 2014), available at https://patentlyo.com/patent/2014/08/publishing-design-applications.html and IPO L.J. (August 26, 2014), available at http://www.ipo.org/wp-content/uploads/2014/08/design_patent_gg_article.pdf

Mark-Up and Commentary on the Patent Law Treaties Implementation Act of 2012

By Dennis Crouch

I have posted a draft Mark-Up and Commentary on the Patent Law Treaties Implementation Act of 2012.

Download it here: patentlyo.com/PLT.pdf.

At this point, the mark-up is very much a draft. I will release a more final version once the bill is enacted. President Obama is expected to sign the bill into law at least by December 21, 2012.

The following is my introduction to the document:

* * * * *

On December ___, 2012, President Obama enacted the Patent Law Treaties Implementation Act of 2012, Public Law No 112-___ (S. 3486).

The new law is designed to implement two patent law treaties:

(1) The Geneva Act of the Hague Agreement Concerning the International Registration of Industrial Designs adopted at Geneva on July 2, 1999 (“Hague Agreement”) and

(2) The Patent Law Treaty (“PLT”).

Both treaties were ratified by the Senate without opposition in 2006, and both are intended to simplify the formal obligations and reduce costs for American rights-holders when seeking patent protection outside the United States. A corollary result is that that treaty implementation also eases the obligations of foreign rights-holders when seeking patent protection within the United States.

The Hague Agreement

Implementation of the Hague Agreement creates an international design application that can serve as the basis for filing industrial design applications in countries around the world. The new provisions are codified in ten new sections of the Patent Act and a handful of amendments within the statute. See 35 U.S.C. §§ 381 – 390. In addition to the added statutory language, the USPTO is also required to “perform all acts connected with the discharge of its duties under the treaty.” 35 U.S.C. 382. One such obligation is to forward any international application to the International Bureau of WIPO who would then publish the application. Currently, most international design applications are filed directly with WIPO. However, it seems that the US structure will likely encourage applicants to file the international application in the US first.

The international design application is roughly the design parallel to the international utility patent application known as the PCT application. This should significantly reduce the cost of obtaining design protection in additional countries. Although the Hague Agreement is an important step, global industrial design laws vary widely. The next relatively small step toward harmonization would be to rationalize the various rules and laws regarding drawings in design patent applications. Drawings are especially important for design rights because those drawings typically define the scope of rights being claimed. At this point, harmonization on this front does not necessarily require further negotiations within the Hague Agreement but could instead be accomplished through bilateral and multilateral agreement between the various offices administering the design rights.

For domestic applicants, the new law extends the term of design patents by an extra year to 15-years as calculated from the design patent’s date of issuance. In the US, no maintenance fees are due and so design patents tend to remain in force for their entire 15-years unless subject to any terminal disclaimers.

International design patent applications are published soon after filing. However, an applicant can delay the publication for up to 30-months. Upon publication, those design applications will be considered prior art as of the application filing date. The publication will also create the prospect of provisional rights under 35 U.S.C. 154(d)(1) to allow a patentee to collect back-damages against unauthorized pre-issuance usage of the design by someone with actual knowledge of the pending application. For several reasons, provisional rights been only marginally useful for utility patent holders. However, there is some expectation that provisional rights will be more useful for design patent holders because (1) the patents more often cover products released on the market during the application period; (2) design inventions are more often copied but those copies easier to identify; and (3) design patents are more rarely amended during prosecution.

Patent Law Treaty

The Patent Law Treaty is a procedural treaty that is designed to limit formal and procedural requirements that countries can place on patent applicants and patentees. The Patent Law Treaty also provides a particular filing date standard.

The key change is that a utility application will now be given a filing date even if filed without claims. 35 U.S.C. 111. The quasi-requirement of drawings is also removed from the filing date requirement. Thus, the filing date requirement will now read as follows: “The filing date of an application shall be the date on which a specification, with or without claims, is received in the United States Patent and Trademark Office.” Id. Some applicants will rely upon this change to reduce the immediate transaction costs of moving from a provisional application filed without claims to a non-provisional application that previously required claims.

Purpose

This volume is intended to serve as helpful tool in understanding implementation of the new provisions of the law and should be especially helpful for those wanting to understand how the law has changed.

Patent Reform Act of 2011: An Overview

LeahyThe Patent Reform Act of 2011 (S. 23) was introduced on January 25, 2011 by Senator Leahy (D-VT) who was joined by eight co-sponsors (all from the Judiciary Committee) that include Senators Coons (D-DE), Franken (D-MN), Grassley (R-IA), Hatch (R-UT), Klobuchar (D-MN), Kyl (R-AZ), Lieberman (I-CT), and Sessions (R-AL). The bill was referred to the Senate Judiciary Committee which unanimously approved the bill. The House of Representatives will likely move more slowly. Although House Judiciary Committee chair Rep. Smith (R-TX) co-sponsored the similar Patent Reform Act of 2009, Rep. Issa (R-CA) is the “patent expert of Congress” and has only tentatively supported the reform bills in the past. [UPDATE –  Most Recent Version of S. 23 2/11/11]

PatentLawImage080First-Inventor-to-File: The reform measure would move the US further toward a first-to-file system. Each patent application would be given an “effective filing date,” and the patentability will be judged on whether any prior art was available prior to the filing date. One-year grace period would remain in effect, but only for the inventor’s own disclosures (and disclosures derived from the inventor). Obviousness will also be judged as of the effective filing date. Inventors will no longer be able to swear behind prior art nor will they be able to establish priority in an interference proceeding. A new creation in the bill is a “derivation proceeding” that would operate only in times where an original inventor alleges that a patent applicant derived the invention from the original inventor’s work.

PatentLawImage081Damages: Patent defendants have argued that courts often treat damages issues as afterthoughts with little procedural control. The proposed amendment would add specific procedures and checks on how a judge manages the damages portion of a case. The amended statute would require that a court “identify methodologies and factors that are relevant to the determination of damages” and that “only those methodologies and factors” be considered when determining the damage award. In addition, prior to the introduction of damages evidence, the court would be required to consider either party’s contentions that the others damage case lacks a legally sufficient evidentiary base. In addition, the statute would require a judge to bifurcate the damages portion of a trial if requested “absent good cause to reject the request, such as the absence of issues of significant damages or infringement and validity.” Oddly, the proposed statute seemingly bars a judge from amending the discovery schedule or any “other matters” based upon the trial sequencing.

PatentLawImage082Enhanced Damages: Although we often discuss enhanced damages for willful infringement, the current Patent Act is not explicitly limited to situations involving willful infringement. Rather, Section 284 simply states that “the court may increase the damages up to three times the amount found or assessed.” Over the years, Federal Circuit precedent has limited the statute to only situations where the infringer’s actions were at least objectively reckless. The amended statute would codify that holding with the words “Infringement is not willful unless the claimant proves by clear and convincing evidence that the accused infringer’s conduct with respect to the patent was objectively reckless. [I.e., that] the infringer was acting despite an objectively high likelihood that his actions constituted infringement of a valid patent, and this objectively-defined risk was either known or so obvious that it should have been known to the accused infringer.” The statute also makes clear that accusations of willful infringement must be pled with particularity (following FRCP 9(b)); that proof of knowledge of patent is insufficient to establish willful infringement; that a pre-lawsuit notice of infringement cannot itself establish willfulness unless the notification is fact specific in explaining the infringement; that the failure to obtain the advice of counsel (or to present that advice to the jury) “may not be used” to prove willull infringement or inducement of infringement; and that damages subject to trebling are only those accrued after the infringement became willful; and that in a “close case” there will be no willful infringement (here, the statute requires a judge to “explain its decision” and to make a decision prior to the issue being tried by the jury).

Third-Party Challenges to Patent Rights: The bill includes three expanded ways that a third party can use the USPTO to challenge a patent: Pre-Issuance Third-Party Submissions; Third-Party Requested Post-Grant Review; and Inter Partes Post Grant Review.

Pre-Issuance Third-Party Submissions: Under the amendment, third parties would be allowed to submit any printed publication along with a description of the relevance to the USPTO to be considered during the examination of a pending patent application.

Third-Party Requested Post Grant Review: A post grant review proceeding would be created (similar to our current reexamination proceeding) that could be initiated by any party. The review would allow a third party to present essentially any legal challenge to the validity of at least one clam. A major limitation on the post grant review is the request for review must be filed within nine-months of issuance.

Inter Partes Review Proceedings: Once the nine-month window for post grant review is expired, a party may then file for “inter partes review.” This new system would replace inter partes reexamination and would be limited to consideration of novelty & obviousness issues based on prior art patents and printed publications. (It appears that third-party requested ex parte reexamination would remain a viable option as well).

False Marking: A large number of false patent marking cases have been filed in the past year. The bill would eliminate those lawsuits except for ones filed by the US government or filed by a competitor who can prove competitive injury.

PatentLawImage083Oath: The bill would make it easier for a corporation to file a substitute inventor’s oath when the inventor is non-cooperative.

Best Mode: Although an inventor will still be required to “set forth” the best mode for accomplishing the invention, the statute would be amended to exclude failure of disclose a best mode from being used as a basis for invalidating an issued patent. The PTO will still have a duty to only issue patents where the best mode requirement has been satisfied.

Fee Setting Authority: The PTO would be given authority to adjust its fees, but only in a way that “in the aggregate” recover the estimated costs of PTO activities. Along this line, a new “micro” entity would be created that would have additional fee reductions.

Patent Reform Act of 2007

On April 18, 2007, bipartisan legislators in both the Senate and House of Representatives introduced sweeping patent reform measures in legislation termed the Patent Reform Act of 2007. The reform measures include the following provisions: 

  • First-to-file rights and elimination of interference proceedings;
  • Reform to make it easier to file a patent application without the inventor’s cooperation;
  • Limitation of damages to only the economic value of the improvement as compared to the prior-art;
  • Specific limitations on when damages may be trebled for willfulness;
  • Post-grant opposition proceedings with a reduction in the litigation estoppel effect;
  • Limitations on patent venue;
  • Authority to the PTO director to create further regulations.

Although couched in terms of the importance of patents and patent quality. The thrust of many of the measures are clearly directed at “limiting litigation abuses.”  Although a detailed analysis has not been completed, the two versions appear virtually identical.

Legislative Documents:

Congressional Players:

  • The Senate version was introduced by Senators Leahy, Hatch, Schumar, and Cornyn
  • The House version was introduced by Representatives Berman, Smith, Conyers, Coble, Boucher, Godlatte, Zoe Lofgren, Issa, Schiff, Cannon, and Jackson-Lee

Lobbying Players:

  • www.innovationalliance.net (Tech Companies who want strong patents)
  • www.ipo.org (Industry group — Formerly supported strong IP rights — now a consensus builder)
  • www.phrma.org (Big Pharma: Strong patent rights)
  • www.patentsmatter.com
  • www.patentfairness.org (“Over-broad patent grants stifle future innovators, while unjustified lawsuits that aim to extort settlements”)
  • www.aipla.org (Group of lawyers who are, for the most part, unwilling to take a stand)
  • www.bsa.org (Microsoft, Apple, HP — all supporting dramatic patent reform that curbs litigation in favor of the more genteel cross-licensing).

Who is writing about patent reform:

News:

Patently-O plans to publish a couple of well written editorials on patent reform within the next two weeks. Feel free to submit yours to dcrouch@gmail.com.

Patent Reform Act of 2009

Patent reform legislation has now been introduced in both the House and the Senate. The provisions call for major reforms and mirror much of the proposed legislation from 2008. If anything, this is not a consensus Bill. File Attachment: SenateBill.pdf (116 KB) File Attachment: HouseBill.pdf (180 KB)

Proposed changes in the Senate Bill include:

  • First to File: Moving to a first-to-file system that credits invention based on the filing date of the patent application rather than on the date of actual invention.   The provision eliminates the one-year grace period for most cases. Thus, any independent third-party publication prior to filing is considered prior art regardless of the date of invention. Likewise, secret prior art (102(e)) cannot be ‘sworn behind’ based on prior invention. This provision obviously hurts folks who delay in filing patent applications.
  • Damages: Must look to the invention’s “specific contribution over the prior art” to determine damages. There is an interesting provision that a reasonable royalty may be calculated as the price of licensing a “similar noninfringing substitute in the relative market.” In some cases, this could push damages to zero if the noninfringing substitute is in the public domain. The provision also codifies that treble damages are limited to instances where a judge finds that an adjudged infringer recklessly continued to infringe after receiving particularly specified written notice sufficient to create declaratory judgment jurisdiction and without relying on reasonable advice of counsel.
  • Expanded Reexamination Proceedings: Reexaminations may be requested based on published prior art, or evidence of prior public use or sale in the US. Inter partes reexaminations would begin to look more like court cases and would be heard by administrative patent judges. The Bill would clarify that parties would be estopped from filing inter partes reexamination requests after a district court judgment.
  • Additional Post Grant Review: Within 12 months of issuance, a third party can file a cancellation petition based on any ground of invalidity (rather than simply prior art). The post grant reviews would also be conducted by the administrative patent judges.
  • Pre-Issuance Submissions: Third parties can submit prior art during examination of the patent as well as a statement regarding the relevance of the art. The art should be submitted the latter of (1) six months after publication or (2) before the first office action on the merits.
  • Patent Litigation Venue: “A party shall not manufacture venue by assignment, incorporation, or otherwise to invoke the venue of a specific district court.” Venue is only proper were (a) defendant is incorporated; (b) defendant has its principle place of business; (c) where the defendant is permanently located and has committed substantial acts of infringement; or (d) where the plaintiff resides if the plaintiff is a nonprofit or individual inventor. The court should transfer venue to avoid evidentiary burdens when transfer can be accomplished without causing undue hardship to the plaintiff.”
  • Interlocutory Appeals: The Federal Circuit will have jurisdiction over interlocutory appeals of claim construction when approved by the lower court.
  • Administrative Patent Judges: The BPAI would become the Patent Trial and Appeal Board (PTAB). Interferences would be gone, however they would be replaced by derivation proceedings as well as reexamination and post-grant trials.
  • PTO Powers: The PTO has power to set its fees, including reducing fees.
  • Oath: Easing the rules to more easily allow rights-holders to file patent applications on behalf of the inventor.
  • Federal Circuit Judges: Making legal it for a Federal Circuit judge to reside more than 50 miles from DC.

As you can see, this is very much the type of reform that companies like Google would like to see. Google is regularly faced with charges of patent infringement and rarely sues for infringement. Some of these changes will benefit the system as a whole, but it is clear that this is not “balanced” reform. The damages provision will almost certainly reduce patent awards. And, perhaps equally important, the damages provision provides adjudged infringers a real cause to appeal jury awards if they did not directly follow the expert testimony.

I believe that the expanded use of reexaminations and post grant review and prior art submissions will be beneficial, and I have faith that the administrative patent judges will be able to handle their newfound responsibilities. That said, these provisions provide challengers with new ways to attack patent rights.

The plaintiff bar in the Eastern District of Texas is quite good, and defendants are doing what they can to escape from their grasp. The venue provision moves in that direction and would thus weaken the value of patents.

The trick with the first to file system is to realize that it is not about some mythical race to invent between competitors. Rather, it is about keying the priority on the date of filing the application rather than the date of invention or even one year prior to filing. This provision weakens patent rights because more materials will be considered prior art. It is possible to switch to a first-to-file system without eliminating the grace period so dramatically – this legislation does not, however meet that standard.

The Bill is sponsored by both Senators Leahy (D-VT) and Hatch (R-UT). Representative Conyers (D-Mich) introduced parallel legislation in the House, the legislation is largely similar, but does contain some differences. (I have not reviewed the House version in detail). Some opposition has already formed. Reps Manzullo (R-IL) an Michaud (D-ME) issued a joint press release titled “New patent bill encourages IP theft, destroys American jobs.” Their focus was on the damages provision.

There are some changes from the 2008 legislation.

  • The Bill does not require that all applications be published at 18 months.
  • Applicants would not be required to search prior art.
  • The 2009 Bill allows public use or sale in the US to be reasons for challenging patents.
  • CHECK 21 provisions are gone.
  • Fee Diversion is allowed in the 2009 Bill. (Oddly, Leahy explained that PTO Examiners perfer a system of fee diversion)
  • The 2009 Bill does not address inequitable conduct.

Links:

Pride in Patent Ownership Act

by Dennis Crouch

A bipartisan pair of Senators have proposed the “Pride in Patent Ownership Act.”  The premise is that if you own a patent, you should be proud to own the patent — and actually record your ownership interest.  The bill pushes this pride by requiring patent owners to record their ownership with the kicker that those who fail to record lose their right to punitive damages for any infringement that occurs prior to recordation.

If a patentee fails to comply … no party may recover, for infringement of the applicable patent in any action, increased monetary damages under section 284 during the period beginning on the date that is 91 days after the effective date of the issuance, assignment, grant, or conveyance with respect to the patent, as applicable, and ending on the date on which that issuance, assignment, grant, or conveyance is properly requested to be recorded.

[Read the proposed legislation here].

The proposal also adds requirement anytime patent preparation, prosecution, or maintenance fees (including attorney fees) are paid by a “governmental entity, including a foreign governmental entity.”   The applicant needs to provide a statement “describing the amount and source of funding” provided by the governmental entity.  The provision would also retain the rule that an unrecorded interest is “void as against any subsequent purchaser or mortgagee” who purchases without notice of the prior conveyance.

The bill is co-sponsored by Senators Leahy (D) and Tillis (R) who are the chair and ranking member of the Senate Judiciary Committee’s Subcommittee on Intellectual Property.

Senator Tillis: “The public has a right to know who is a patent’s true owner. Patents provide a limited term monopoly against the public, and it’s in the public’s interest and benefit to know who owns that monopoly. I’m a strong supporter of patent rights, but those rights have to be balanced against the public’s interest. This commonsense bill will achieve that goal and I look forward to working towards its passage this Congress.”

Senator Leahy: “One of the fundamental underpinnings of the patent system is transparency. In exchange for the exclusive rights over an invention granted by a patent, the public has a right to know who owns the rights to particular inventions. We are working to ensure a fair innovation system for small businesses, non-profits, and independent entrepreneurs who have a right to know, without expensive litigation, who has the exclusive patent rights over a particular invention.”

The pair also proposed a second proposal that they call “Unleashing American Innovators Act.” The proposal focuses primarily on outreach mechanisms for new entrants into the patent space and would also require a new Southeast Regional Office — perhaps in Sen Tillis’s home city of Charlotte.

For those who don’t know. Sen. Tillis was a computer systems specialist who worked for Wang Labs., PWC, and IBM (although mostly in management).

Antitrust: Court Should Not Consider Potential Patent Validity in Sherman Act Analysis

PatentlyOImage013In re Ciprofloxacin Hydrochloride Antitrust Litigation (E.D.N.Y. March 31, 2005)

Bayer produces Cipro® (ciprofloxacin hydrochloride) and is assignee of U.S. Patent No. 4,670,444, which claims the active ingredient and its generic equivalents.

Hoping to produce a generic version, Barr Labs filed an ANDA requesting permission to produce the drug before the expiration of the patent — arguing that the patent was invalid and unenforceable. (Paragraph IV certification). Bayer then sued Barr for infringement.  The two companies eventually settled.  Under the settlement agreement Bayer paid Barr $398 million and Barr agreed to amend its ANDA to a Paragraph III certification, which would permit it to market the drug only after the patent expires.  The settlement agreement included an “out” for Barr in the case that the patent was subsequently declared invalid or unenforceable.

In the wake of the settlement, a class of buyers sued Bayer and Barr for antitrust violations under the Sherman Act, arguing that the exclusion-payment scheme is a form of anti-competitive conduct falling under Section 1 of the Act using a rule of reason analysis.  The district court, however, sided with Bayer, finding that there was no impermissible anticompetitive effect because the agreement did not extend beyond the “zone of exclusion” of the patent. 

Here, plaintiffs have failed to demonstrate anticompetitive effects in the market for ciprofloxacin because, although the Agreements undoubtedly restrained competition, they did not do so beyond the scope of the claims of the ‘444 Patent. The ‘444 Patent allows a zone of exclusion within the bounds of its claims.

Further, the court held that the “potential invalidity of the claims” could not be used to diminish the protection that the patent offers against Sherman Act claims.

This result is compelled by the presumption of validity Congress accorded patents and the destabilizing effect on patent law that a contrary decision would work. Any readjustment of the competing interests affected by exclusion payments is a matter better addressed by Congress than the courts.

Because the plaintiffs were unable to prove the first element in the rule of reason analysis (anticompetitive effect), defendants cannot be liable for the alleged antitrust violations.

Calvert Crary, a litigation analyst who writes the highly informative LitigationNotes sees this decision as falling in line with the March 8, 2005 11th Circuit decision in Schering-Plough v. FTC, but predicts that these decisions may result in a complete undermining of Hatch-Waxman.

[T]hese decisions, if broadly adopted, will decimate the statutory mechanisms of the Hatch-Waxman Act that remove barriers to price competition arising from invalid or inapplicable drug patents. (From Crary’s report on Kos Pharma v. Barr Labs).

< ?xml:namespace prefix ="" o />Mark Lemley is a law professor at Stanford, but he has also been quite involved with a number of patent appeals over the past several years.  In an e-mail, Professor Lemley argues that the Cipro court is “entirely wrong-headed” in this case.  In his view, this decision essentially creates a rule that allows obvious cartels regardless of the strength of the patent.

[The court] cites the 6th Circuit and [Schering-Plough v. FTC] for the proposition that we don’t want to enquire into patent validity in an antitrust case.  That’s true enough.  But those courts found the exclusion payment illegal without having to inquire into patent validity.  By rejecting the per se approach, and also rejecting any inquiry into the merits, the court has essentially created a rule of per se legality for a pretty obvious cartel.  No matter how weak the patent claim is, or how obviously the payment is a means of artificially maintaining a monopoly, under the court’s reasoning it will be permissible.  This is an abdication of antitrust responsibility.

In a recent paper, Lemley, along with Professors Herbert Hovenkamp and Mark Janis argue that “exclusion payments that exceed litigation costs should be deemed illegal per se.”  According to their analysis, there is “no legitimate reason for such payments, and the most likely reason . . . is anticompetitive.”  The three professors book, entitled IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law is available at Amazon.com.

 

 

Links:

Guest Post: White House “Patent Troll” Report Challenged under the Federal Information Quality Act.

By Ron D. Katznelson

A letter to Congress from 51 professors of law and economics argues that “the net effect of patent litigation is to raise the cost of innovation and inhibit technological progress.”  In response, an equally strong letter to Congress from other 40 professors of law and economics expresses “deep concerns with the many flawed, unreliable, or incomplete studies about the American patent system that have been provided to members of Congress.”  The response letter defends the patent system and notes a pattern of analytical flaws in some studies underlying the 51 professors’ letter, listing basic empirical analysis reliability criteria that such studies fail to meet.  Are criteria for reliable empirical analysis fungible? Should our patent policy turn on a “they said – they said” contest?

The answer must be a resounding NO.  It turns out that the government has developed detailed criteria, requirements and standards for reliable empirical analysis and information quality.  Because the public disproportionately relies on information disseminated by the government, the government holds itself to substantially higher standards than those used by private parties or non-government entities in disseminating information on the internet or in academic journals, with its high variability in accuracy and reliability.  Congress enacted the Information Quality Act (“IQA”) in order to ensure that information disseminated by government agencies meet the standards of “quality, objectivity, utility, and integrity.” 44 U.S.C. § 3516, note.  Information disseminated by the government for reliance by government and the public must be “presented in an accurate, clear, complete, and unbiased manner.”  The IQA forbids agencies from endorsing or approvingly disseminating information of substandard quality from third-parties.

The Office of Management and Budget (“OMB”) promulgated guidelines for agencies to comply with the IQA, including the Bulletin for Peer Review and the Standards and Guidelines for Statistical Surveys.  These quality standards are quite specific.  For example, they set criteria for presentation and substantive balance and objectivity, transparency of data and methods, conditions under which peer-review is required, design of survey frames and sample coverage, minimum survey response rates below which specific bias analyses are required, etc.  Virtually all government agencies, including the Executive Office of the President, are subject to these guidelines and standards.  Under the IQA, agencies are required to establish administrative procedures enabling “affected persons” “to seek and obtain correction of information maintained and disseminated by the agency that does not comply with [the OMB IQA] guidelines;” agencies have established a 60-day period for their review and corrective action in response to such requests.  Agency responses to such petitions are not judicially reviewable because the IQA establishes no Article III standing for petitioners.  However, the President and OMB regulations require agency compliance with the IQA.

Whereas 51 professors, relying on works that do not meet the IQA standards, can freely publish and argue (as they have) that patent litigation inhibits technological progress, the government is precluded from doing so.  But that is exactly what the White House has done in contravention of the IQA by publishing its “patent troll” report known as the Patent Assertion Entities (“PAE”) Report.  It relies on many of the works cited by the 51 professors’ letter, without even having conducted an IQA pre-dissemination review—a basic first-level IQA requirement.  For these reasons, I have filed with the White House a petition under the IQA, requesting correction and removal of this PAE Report from all government websites.

My Petition shows that the PAE Report contravenes the IQA because it expressly relies on third-party information that does not meet the IQA standards.  The sources relied on by the PAE Report purport to document patent litigation rates, quantify the private and social costs of patent litigation, survey “victims” of PAE litigation, and show the purported adverse effects of PAE activities.  This information includes studies that have undergone no peer review; that have relied on opaque or erroneous methods and surveys; that lack objectivity; and lack practical utility.

To achieve agency compliance with identifiable IQA standards, my Petition concludes with 21 specific requests for correction supported by evidence and arguments.  My Petition provides a compendium of detailed analyses of fundamental flaws surrounding data and methods used in eight commonly cited studies purported to document PAE harms, upon which the PAE Report relies.

Examples of some of the PAE Report’s assertions failing the IQA are:

  • that PAEs take advantage of the patent litigation cost asymmetries to force settlements and that they have an incentive to drag out litigation; my Petition shows that this allegation lacks supporting evidence and merely relies on a citation to a reference that does not exist, therefore failing to meet the IQA;
  • that the social costs of PAEs patent litigation is $83 billion per year; my Petition shows in detail that the Bessen et al. paper upon which the allegation relies is erroneous, biased and fraught with fundamental analytical flaws and the information fails to meet the IQA standards;
  • that the direct costs to defendants of PAE litigation are $29 billion per year; my Petition shows that the Bessen & Meurer paper upon which the allegation relies, incorrectly defines “costs” and is based on a biased and opaque sample in a flawed survey that fails to meet the IQA Survey Standards;
  • an allegation of a “dramatic rise” in PAE litigation and that PAEs brought 62% of all patent suits; my Petition shows that the Chien blog post upon which the allegation relies, fails to meet the IQA because (i) it is irreproducible by independent qualified parties since it is based on secret data and methods, and is financially supported by parties that have an interest in the outcome of the study, and (ii) because it lacks objectivity by failing to even mention the effects of the AIA joinder provisions on the surge in the number of suits;
  • that 40% of technology startups targeted by PAEs suffered a “significant operational impact;” my Petition shows that the survey upon which the allegation relies fails to meet the IQA because the only thing known about the sample frame is its purposeful bias against NPEs. Solicitations (i.e., “trolling”) for the survey were made by entities that are “critical of the patent system,” encouraging respondents to participate in order to send a message to Congress—not to conduct bona fide research.

I also show (including through FOIA revelations) that the PAE Report’s secret author, a patent law professor, dominated its content by her own works, and those substantially reflecting her views.  The White House omitted some in-text citations to the professor’s works from the bibliographic reference list and falsely attributed her survey results to a news reporter.  Together, these errors had the effect of concealing the dominance of this professor’s works in the PAE Report.  But where the professor’s own publications elsewhere strike a balance by at least acknowledging and crediting references with views opposing her own (see Petition, Sec. 5.5.1), it appears that the White House overruled her approach, as the PAE Report generally fails the objectivity requirement of the IQA.  It lacks objectivity both on presentation and substance, because it focuses only on the ostensible negative aspects of NPEs or PAEs.  The IQA “objectivity” standard requires analysis that also includes the salutary economic benefits of patent enforcement, or the positive role of NPEs as intermediaries—analysis that is entirely omitted.

The results are troubling.  For example, the PAE Report disseminates this sweeping conclusory economic assessment: “the losses caused by excessive litigation [include] lost value to consumers who are not able to buy innovative products, and reduced income for workers whose pay is lower because they are unable to work with more productive new processes.”  Absolutely no evidence or other bases are cited in support of this allegation.  Ironically, the stark failure to meet the IQA standards may produce the opposite result of that intended by the proponents of patent reform.  For example, estimates of the number of NPE demand letters based on extrapolation from one extreme outlier case (see Petition at 41) are so fantastic that they undermine the credibility of the legitimate efforts to address a genuine (but infrequent) problem of abusive demand letters.

The Petition and supporting material may appear to some readers as cumbersome and repetitive.  This may be so because it is written to overcome the burden on the petitioner of establishing non-compliance with the IQA, including the requisite particularized requests for correction.  Stay tuned to see what corrective action the White House may take.

Link to the full IQA Petition for Correction

Patent Reform Act of 2007: Preliminary Notes and Comment Part I

This post provides some initial notes from my first read-through of the proposed legislation. More information regarding the proposal is available at an earlier post here.

  1. Top Secret Development: The proposed legislation was developed in-secret by a closed-group representing industry organizations.  As it turns out, however, the major big-industry players are not all on-board and neither are groups of would-be patent plaintiffs. The end-result is a bill that is heavily tilted toward providing additional avenues for challenging patent validity and for reducing the power of all patents.  In that sense, the Bill is a gift to potential defendants. In the end, the legislation is so one-sided that it is quite unlikely to move forward without a complete overhaul.
  2. No Grace Period?: The proposed first-to-file has been contentious for many years.  Proponents of the change talk about how Interference proceedings are an awful process and first-to-file avoids that problem. A first-to-file system automatically awards the patent to the first applicant who submits the patent application.  The proposed legislation, of course, does far more than ease resolution of interference disputes.  The proposal shifts all focus from an invention date to the “effective filing date” and in-the-process eliminates the US one-year grace period.  Notably, the grace period would still be intact for the inventor’s own disclosure. 
  3. Joint Research avoids Anticipation: The grace period is also still intact for disclosures made by the patent assignee — a provision clearly favoring companies with larger research-arms.  In addition, there is still a one-year filing grace-period for disclosures made by parties to a properly-written joint research agreement. 
  4. Public Use and On Sale Activity outside of the US would now be considered prior art.  This is probably justified by recently expanded extraterritorial effect of patent enforcement.
  5. Damages a new floor: The new damages proposal is very specific and sets a new (lower) floor for damages. Under the proposal, courts must conduct a reasonable royalty analysis focused at the “patent’s specific contribution over the prior art.”  The statutory language surrounding this analysis appears to be complex enough to occupy dozens of CAFC opinions explaining the proper methods of determining the economic value of the difference between the invention and the prior art.  Reasonable royalty does, however, remain only a floor — although according to the statute, it must now be calculated (even if going after lost-profits). (Jury Trial Issues?)
  6. Clear Path to Avoid Willfulness: Adios Treble Damages.  The patent community spends a considerable amount of time discussing willful infringement and the associated enhanced damages. The current patent statute, however, does not mention willful infringement allowing for additional theories for enhancing damages.  The amendment would limit treble damages only to cases where willfulness is found based on clear and convincing evidence of either (1) notice of how particular acts infringed particular claims or (2) intentional copying with knowledge of the patent or (3) continuing to sell the infringing product after being adjudge an infringer.  “Good faith” by the infringer avoids willfulness. Although the ‘rules’ regarding increased damages have been becoming ever more stratified, this statute removes the vast majority of the current leeway given to courts and juries.
  7. Bifurcation of Trials: Many defendants believe that juries are biased simply by hearing that they are accused of willful infringement. The reforms would bar a patentee from even alleging willfulness until after the patent has been found valid and infringed.
  8. Inter Partes Reexamination: Many patent litigators have warned clients against filing inter partes reexamination requests because of the litigation estoppel created by by 35 USC 315(c). That provision estopps later validity challenges on grounds that a third party “raised or could have raised” during the reexamination.  The Patent Reform Act would limit the estoppel to only issues actually raised — striking the “could have raised” language.

Patent Reform: Innovation Act of 2015

by Dennis Crouch

On February 5, 2015, Rep. Goodlatte reintroduced his patent reform bill: the Innovation Act.  Co-sponsors already include the bipartisan group of Reps. Defazio, Issa, Nadler, Smith, Lofgren, Chabot, Eschoo, Forbees, Pierlusi, Chaffetz, Jeffries, Marino, Farenthold, Holding, Johnson, Huffman, Honda, and Larsen.

Read the Bill: Innovation Act 2015

The bill as introduced includes the following provisions:

  • Heightened Pleading Requirements: Significant raising of the pleading requirement for patent cases.  A patent holder filing an infringement lawsuit – at the time of filing – would need to include a set of infringement charts showing how each limitation of each asserted claim in each asserted patent is found within each accused product or instrumentality.  However, the plaintiff would not be required to complete the entire chart if the infringement is not readily available after a reasonable amount of pre-filing due diligence.  Form 18 would also be eliminated.  Pharmaceutical companies filing infringement actions under 271(e)(2) wouldn’t need to comply.  The approach here raises some separation of powers concerns (ordering the Judicial Conference to act). The Judicial Conference has also already moved to eliminate Form 18 in a way that would implicitly increase pleading requirements. Those changes are expected to take-effect December 2015.  However, the Judicial Conference changes do not go nearly as far as the legislative proposal here.
  • Presumption of Attorney Fees:  Under the new law, a court would be required to award attorney fees and “other expenses” to the prevailing party unless a judge “finds that the position and conduct of the nonprevailing [was] reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.  This flips the current rule where attorney fees are only available in “exceptional cases” and instead replaces it with a roughshod version of the “English Rule.”  In cases where the patentee is undercapitalized, the law would allow the court to pierce the corporate veil and make investors and other ‘interested parties’ pay the attorney fee award.  Unlike the English system, the proposal here does not place any limits on the potential fee award other than it be “reasonable.”  In my view, an improvement upon this would be to set reasonableness early-on based upon an estimation of the case value.
  • IPR Claim Construction: Rejecting the Federal Circuit’s recent Cuozzo decision, the Bill would require the USPTO to construe claims in post-issuance reviews (IPR/PGR/CBM) in the same manner as would be done by a district court and “in accordance with the ordinary and customary meaning of such claim as understood by one of ordinary skill in the art and the prosecution history pertaining to the patent.”  And, if a court has already construed the claim then the PTO must “consider such claim construction.”  This particular change is one that favors patentees.
  • Discovery Limits:  The bill would limit discovery in litigation until after a claim construction ruling (if one is necessary for the case).  For cases where claim construction is dispositive, this ruling has the potential of reducing costs. It also will create further pressure on courts to conduct early claim construction decisions.   At the same time, the approach seems to increase the likelihood that a court will separate the claim construction decision from its summary judgment decision (which would likely require further discovery) except, perhaps in cases involving definiteness under Section 112(b).  Additionally, discovery of non “core” documents would also be severely limited, and anyone asking for discovery would need to first either (a) post a bond sufficient to cover the expected costs of additional discovery or (b) be a large enough company.
  • Willful Infringement:  Willful infringement can lead to treble damages, but the Bill would limit the applicability of pre-suit demand letters for proving willfulness unless  the demand letter identifies: (1) the patent in question; (2) the ultimate parent entity that owns the patent; (3) the accused products; and (4) how the product infringes at least one claim of the patent.
  • Transparency of Ownership: In any lawsuit, the patent owner must disclose “the ultimate parent entity” of any assignee of the patent. Further, the patentee will be under an ongoing duty to update the USPTO of any change in ownership, including ultimate parent entity within 90-days of any change. Failure to keep-up the information results in no enhanced damages or attorney fees for the patentee in litigation and an award of attorney fees to the defendant who spent money researching the actual ownership information.
  • Stay of Customer Suits: In limited cases, the courts will stay customer lawsuits when the manufacturer of the accused product steps up to challenge the patent.
  • Foreign Bankruptcy: The bill would stop the practice of a bankruptcy executor canceling US IP licenses in foreign bankruptcies.  This is already barred for U.S. bankruptcies under 365(n) of the Bankruptcy code.
  • Codifying Double Patenting: The bill would codify a double patenting regime that would seemingly replace the obvousness-type double patenting system developed by the courts. The proposal would particularly allow prior filings by overlapping inventors to count as prior art unless a terminal disclaimer is filed.