by Dennis Crouch
House Judiciary Chairman Bob Goodlatte has released a new version of a "discussion draft" of proposed legislation focusing attention on "abusive" litigation tactics. In a major way, the Bill is focused on making it more difficult for patentees to enforce their patents and is designed to put additional financial risk on patentees who lose in court. Members of both the House and Senate are looking for constituent input on this topic. Senator Leahy is also likely to distribute a draft bill within the next month or so.
1. Raising Pleading Requirements for Allegations of Patent Infringement
Under current Federal Circuit precedent, a patentee pleading patent infringement can file a bare-bones complaint that basically only indicates the patent at suit and the general activity by the defendant that leads to the infringement accusation. In Iqbal and Twombly, the Supreme Court generally raised the pleading standards and federal courts now require significantly more factual assertions in complaints than they did a few years ago. However, the Federal Circuit found that patent infringement complaints fall within an exception that allows less-informative pleadings so long as they comply with Form 18 of the FRCP. The court has applied the higher Iqbal standards to other pleadings such as defenses and counterclaims raised in an answer and especially focused on allegations of inequitable conduct.
The bare-bones approach of Form 18 leaves tremendous wiggle. And, patentees typically do not identify, for instance, (1) which claims of the patent are being asserted, or (2) what products or services of the defendant are allegedly infringing. The amendment would essentially tell patentees that patent infringement must be pled with particularity. And, at least the patentee must identify those two important elements listed above (if known). In addition, the proposal in its current form asks for a claim chart showing "where each element of each claim . . . is found within the accused instrumentality" and a description, "with detailed specificity, how the terms in each claim … correspond to the functionality of the accused instrumentality." The complaint would also be required to list all other cases where the patent has been asserted and identify whether the patents at issue are subject to any FRAND commitment.
One exemption that appears throughout the proposal is that these changes do not apply when an innovator drug company is suing a would-be generic manufacturer. Rather, throughout the proposal an exception is made for cases where the cause of action arises under 35 U.S.C. § 271(e)(2) (the typical statutory provision invoked in innovator-generic patent litigation).
Federal courts have been using a "notice pleading" system since the 1930's – requiring a "short and plain statement of the claim showing that the pleader is entitled to relief." FRCP 8. It would be interesting to see some pre-1938 complaints and consider whether the apocryphal tale that "fact pleading" was actually much more comprehensive. But the changes appear to move the patent world into the world of fact pleading. The idea behind notice pleading is to provide the accused with sufficient notice of the claim without unduly burdening the plaintiff or creating overly formalistic rules. However, for at least some cases, the current standard does not provide sufficient notice for an accused infringer to actually understand what the patentee is claiming. In addition to providing better notice, the proposed legislation would also significantly raise the burden of filing a patent infringement complaint.
The statute also requires that the Judicial Conference propose rules that would eliminate Form 18 as it stands and create a new form that complies with the new factual pleading described above.
How the courts will likely solve this problem before Congress takes action: The courts recognize that the current pleading standard is too low in patent cases (including a likely majority of Federal Circuit judges). To deal with this the court basically has two options: (1) amend Form 18 through the Judicial Conference procedures; or (2) decide that the court is not bound by Form 18.
2. Award Attorney Fees for Prevailing Parties – And Against All Interested Parties
The new bill creates a presumption in favor of attorney fees being awarded to the prevailing party. Unlike other proposals during the past couple of years, the discussion proposal here is not overtly biased against patent assertion. Rather, the attorney fee statute (§ 285) would require courts to award "reasonable fees and other expenses" to the prevailing party "unless the court finds that the position [of the losing party] was substantially justified or that special circumstances make an award unjust."
Now, in order to ensure that patent holding companies are able to pay as losing party, the provision allows for attorney fee recovery against "interested parties" that have been joined under new provision 299(d). Under 299(d), interested parties include assignees, anyone with a right to sue, anyone with a right to sublicense, and anyone with a direct financial interest in the patents. However, neither ordinary contingency fees attorneys nor equity owners of the patentee qualify for joinder despite their obvious financial interests.
3. Limit Discovery in Patent Cases.
For many reasons, patent lawsuits are hotly litigated and the discovery process is long+expensive. The discussion bill provides for particular limits on discovery prior to claim construction. Under the proposal, a court would be barred from allowing discovery prior to a claim construction decision (except for discovery necessary for claim construction).
In addition, the bill would require the judicial conference to propose a number of limits on discovery that have the potential of significantly changing the process of patent some litigation.
4. Additional Initial Disclosures for Public Release
Under current law, information on each patent lawsuit is sent to the USPTO and placed on public record there. The proposed legislation would extend that program by requiring the patentee in an infringement lawsuit to disclose (1) any assignees of the patent; (2) any entities with the right to enforce or sublicense the patent; (3) any entity with a financial interest in either the patent or the plaintiff; (4) the ultimate parent entity of any of the entities named.
In addition, the law would mandate updates of assignee information for all patents within 90-days of any change of assignee.
5. Exception for Customer Lawsuits that Allows for Stay of those Actions
Sometimes alleged infringement is simply based on the defendant's use of an infringing product. The proposed legislation would require a court to stay actions against such customers pending resolution of the case against the manufacturer. However, the grant of stay requires that the customer agrees that the court decisions in the manufacturer suit will become res judicata have preclusive affect against the customer.
6. Foreign Bankruptcy Effect on US Patent License
Business bankruptcy and reorganization is sometimes mind-bending. Bankruptcy trustees are generally authorized to choose whether to reject or enforce (assume) any of the contracts that were binding on the debtor at the time of bankruptcy filing. However, the Bankruptcy code significantly reduces that power when the contract involves the a license of the debtor's intellectual property rights. 35 U.S.C. §365(n). One issue that has arisen lately is the impact of foreign bankruptcy on the debtor's US intellectual property rights holdings. The proposed bill protect the creditor-licensees in those cases so that an IP owner's foreign bankruptcy cannot be used to unilaterally cancel one of its licensee's US IP rights. To be clear, 365(n) applies to US IP rights, but not Trademark rights or state-law rights other than trade secret rights.