From the Hill

Patent Troll (PAE) Legislation Rolls On

Hayden W. Gregory

©2014. Published in Landslide, Vol. 6, No. 4, March/April 2014, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

This column has taken on an apparent trend recently in addressing the same topic in successive editions of Landslide® magazine. The May/June 2013 edition contained an overview of the role that the Section of Intellectual Property Law has played in the development of ABA amicus curiae briefs in the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit in cases that impact intellectual property law. That topic enjoyed a repeat appearance in July/August, when areas of IP law and specific cases in which the ABA contributed amicus briefs were discussed in some detail. The September/October edition zoomed in for an even tighter focus on just two cases that were then under development for ABA amicus participation.

Following that three-part treatment of IP amicus activity, patent troll legislation stepped up for multiple edition treatment.

PAEs Past

As expected following the six-year journey toward patent law reform that was successfully completed with the enactment of the America Invents Act (AIA) during the 112th Congress, 2013 and the 113th Congress opened with very little attention to IP legislation. Relatively few bills were put forward, but if by late summer 2013 one was looking to identify an IP Bill of the Month for the preceding months, it is likely that most of the winners would be bills designed to curb abusive litigation practices by so-called “patent trolls,” or “Non-Practicing Entities” (PAEs). Accordingly, sensing that PAE legislation was about to receive serious congressional attention, in the November/December edition of Landslide, this column looked back at earlier unsuccessful congressional forays into patent troll legislation, and offered some observations on why those efforts came to naught. We noted that a primary cause for failure seemed to lie in the attempt to fashion a legislative response that focused on business structure, rather than conduct. Providing less favorable treatment to a patentee who sues to enforce a patent but who is not making use of the technology claimed by the patent may succeed in identifying and sanctioning the intended targets—those who acquire and hold patents for the sole purpose of pursuing extortionist settlements and judgments—but it also ensnares completely legitimate patentees that do not produce and market a product, such as universities and R & D firms that license but do not practice their inventions.

PAEs Present

As anticipated, Congress has moved to serious consideration of PAE legislation, and the January/February edition of the magazine reported on the run-up to and House passage of H.R. 3309, the “Innovation Act,” by a vote of 325–91 on December 5. That From the Hill column included a description of the major provisions of H.R. 3309, as well as discussion of contentious issues that were debated as the bill moved through a hearing, Committee markup, and debate, amendment, and final passage in the House.

H.R. 3309 moved from introduction to final passage in just six weeks, which must be near record speed for a bill of such substance and importance. By way of comparison, the America Invents Act gestated for more than six years from conception in 2005 to signing into law by President Obama in September 2011. Granted that the AIA is more significant and complex than H.R. 3309 and the other PAE bills, but not 10 times more significant or complex.

At first it appeared that the PAE legislation in the Senate might move at the same horrendous pace as the House bill. The vehicle for Senate action, S. 1720, the “Patent Transparency and Improvements Act of 2013,” was introduced by Senate Judiciary Committee Chairman Patrick Leahy on November 18. Leahy promptly scheduled a hearing on the bill, which was held less than a month later, and indicated that, as was the case with the House bill, one hearing would suffice before the bill was scheduled for Senate voting. However, the December 17 hearing revealed that a number of Committee senators were reluctant to move ahead at such a fast pace. In their opening statements or in dialogue with the witnesses, at least six senators separately called for more hearings and other outreach to hear from additional interested parties.

Before any bill can be sent to the president for signing into law, it must be passed in identical language by the House and the Senate. This reconciliation process can be deferred until each body has passed its own independently developed bill, at which time representatives of each body are appointed to meet in a joint conference committee to work out the differences and to report back a common text for the legislation. However, while no conference committee can be appointed before both bodies have passed a bill, there is no requirement for such an appointment once both have done so, or even that both the Senate and the House pass bills before reconciliation begins.

The final stages in the development and enactment of the America Invents Act demonstrate this point. In the 109th, 110th, and 111th Congresses, the House and the Senate each developed comprehensive patent reform bills, with each body acting separately and with no attempt at reconciliation. At the beginning of the 112th Congress in January 2011, Chairman Leahy had his new bill for the 112th Congress ready at the starting gate, and the Senate passed S. 23 even before a House bill had been introduced. Rather than following the usual practice of developing its bill for the 112th Congress starting with its last version in the 111th, the House incorporated 90 percent of the Senate bill into its own bill, amended it further, and sent it to the Senate, where it was accepted and passed without further amendment, thereby avoiding a need for a conference committee or sending the bill back to the House for further work. Processes such as these involving “pre-conferencing” and “amend and send back” offer more flexibility and present fewer procedural pitfalls than the formal conference committee mechanism for resolving differences between the two houses.

PAEs Future

As Congress moves ahead with PAE legislation, it seems unlikely that the narrowing of differences between the House bill as passed and the Senate bill as introduced will be deferred until the Senate has completed work on and passed its bill. Those differences are great, beginning with the fact that the House bill is much more comprehensive, as even the most cursory examination reveals. The 60-page H.R. 3309 is exactly twice the length of its Senate counterpart.

H.R. 3309 as passed by the House and sent to the Senate addresses problems of PAE abusive litigation practices by writing special rules of procedure applicable in all patent infringement suits and in most stages of those suits. S. 1720 contains far fewer legislative prescriptions to the courts of rules and procedures that must be applied in patent cases. Historically, authority and responsibility for developing rules of procedure for federal courts has been carried out in the judicial branch of government, and the judiciary finds the legislative encroachment called for in H.R. 3309 to be not only bad policy, but a potential threat to constitutional separation of powers. The congressional authors of the legislation display an equally strong conviction that Congress is clearly empowered to establish federal courts and to prescribe rules of procedure to be applied by the courts, and that the legislation in question is a necessary and proper exercise of that authority.

As the Senate moves forward to the development of its final bill, it is therefore quite important to watch if, how, and to what extent this disparity in legislative prescription versus judicial discretion is narrowed. Several of the provisions in question that are not contained in S. 1720 are found in other Senate bills, including bills authored by members of the Judiciary Committee. For example, S. 1720 calls for no statutory prescription of discovery rules such as those prescribed in H.R. 3309 and which have drawn strong opposition, including from the Judicial Conference of the United States and the ABA. However, similar discovery rules are provided for in S. 1013, a bill by Senator John Cornyn, a senior member of the Judiciary Committee whose views are certainly going to be heard. It therefore seems reasonable to expect that the final Senate bill will to some extent move in the direction of the House bill’s more prescriptive approach.

Those Damnable Demand Letters

The resolution of another dimension of “one bill has and one does not” to watch relates to provisions found only in the Senate bill. Section 5 of S. 1720, captioned “Bad Faith Demand Letters,” addresses a major motivating factor behind the push for this legislation. Some PAEs are alleged to be employing overly aggressive tactics in sending letters demanding royalty payments to hundreds or thousands of businesses that are selling or merely using a product with allegedly infringing components. Patent infringement is a strict liability cause of action, with no requirement that a seller or user of the product in question played a role in or even knew of the introduction of the infringing feature into the product. This vulnerable legal position combined with the prohibitive costs of defending against a suit for infringement, even if the defense is successful, turns recipients of these PAE demand letters into low-hanging fruit to be plucked for extortionist settlements.

S. 1720 identifies practices that constitute bad faith demand letter enforcement and deems these activities to be violations of rules prohibiting unfair or deceptive acts or practices, triggering the enforcement powers and mechanisms of the Federal Trade Commission. Proponents claim this to be the right way—targeting the abusive acts and actors—as opposed to the wrong way of changing the rules of procedure for all patent cases in order to sanction a small subset of litigants who abuse the process.

Shifting Rules on Fee Shifting

Fee shifting—requiring a losing party to pay attorney fees of the prevailing party—is still another important issue relating to PAE litigation that is addressed in one of the two major bills under consideration but not in the other. Fee shifting enjoys growing support as a strategic measure to deter nuisance lawsuits that seek to force defendants into settlements in which a licensing fee is paid to the PAE plaintiff.

U.S. courts generally apply the American Rule, which holds that each litigant must pay its own way. Section 285 of the federal patent statute provides a limited exception to the American Rule, in that courts are authorized in their discretion to award attorney fees to a prevailing party “in exceptional cases.”

H.R. 3309 calls for a mandatory award of attorney fees to a prevailing party in patent litigation, unless the court finds that the position and conduct of the nonprevailing party “were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.”

S. 1013, introduced by Senator Cornyn on May 22, 2013, and S. 1612, which Senator Hatch introduced on October 30, also provide for mandatory awards to prevailing parties, with exceptions similar to those in H.R. 3309.

The White House has also weighed in with support for expanded fee shifting in PAE litigation, although that support does not appear to include mandatory awards. Its June 4, 2013, announcement of a number of executive actions and legislative recommendations to address PAE abusive practices included a proposal to “[p]ermit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases).”

Opponents argue that replacing a permissive “may award” with a mandatory “shall award,” would effectively repeal the American Rule in patent cases, or at least that the Rule would be substantially modified to create a presumption in favor of such an award. Supporters of the proposals maintain that although the use of the operative term “shall award” suggests that award is mandatory, the exceptions of “reasonably justified” and “special circumstances” leaves courts with sufficient discretion to decline such an award.

As a result of Federal Circuit precedent, it has become increasingly difficult for prevailing defendants to be awarded attorney fees under § 285. Absent litigation misconduct, a prevailing party seeking fee shifting must show both that the nonprevailing party’s position was objectively baseless and that the nonprevailing party brought the infringement claim in subjective bad faith. The highly demanding standard for the award of fees to defendants under § 285 is under review in the Supreme Court in Octane Fitness, LLC v. Icon Health Fitness, Inc.

Stakeholders in the legislative battle are in sharp disagreement on the wisdom of going so far as to make fee shifting mandatory in patent cases. However, there does seem to be general agreement that the Federal Circuit’s interpretation and application of the current authority of courts to award attorney fees to the prevailing party is unduly restrictive. In fact, even the Federal Circuit itself may be moving away with its more restrictive application of the requirements for establishing that a case is exceptional and therefore eligible for a fee shifting award.

In Kilopass Technology v. Sidense Corporation, decided December 26, a panel of the court reviewed Supreme Court precedent and prior Federal Circuit panel decisions that establish the requirements for finding a case exceptional. Both Judge O’Malley in her opinion for the court and Chief Judge Rader in a concurring opinion concluded that the subjective bad faith requirement is being applied with too much rigor and insufficient flexibility. Instead of requiring a showing of subjective bad faith in addition to and independent of establishing that the nonprevailing party’s case was objectively baseless, both would have bad faith considered together with objective baselessness in light of the totality of the circumstances. Judge O’Malley felt bound by previous panel decisions to retain a requirement that subjective bad faith be shown. Chief Judge Rader opined that those previous panel decisions are inconsistent with still earlier precedent that applied a single totality of the circumstances test, to which he would return. Rader found this earlier precedent in decisions of the Supreme Court, decisions of the regional circuits interpreting an identical “exceptional case” requirement in trademark law, and in the Federal Circuit’s own earlier decisions.

In the Octane Fitness case pending in the Supreme Court and in the Federal Circuit’s seemingly new look at fee shifting under § 285, courts have the opportunity to provide some relief to the pressure built up for legislation to expand the award of attorney fees to prevailing patent litigants. Consideration of recent history of the interplay between legislative reform effects and contemporaneous judicial decisions on subjects of such reform informs us that courts can make valuable contributions. Unlike Congress, courts cannot decline to decide an issue presented because it is too hot to handle. During the years of development leading to the enactment of the America Invents Act, courts addressed and found workable solutions to difficult problems regarding injunctions, damages, and venue.

Perhaps similar contributions can be made in responding to problems that inspire the current PAE legislation. Judicially-based resolutions to issues such as fee shifting could have the additional salutary effect of engendering greater confidence in members of Congress that the judiciary can step up to the plate and actually solve problems.

We know from experience that the judiciary can make such a contribution in its core function of adjudicating legal disputes. However, the PAE-inspired legislation presents an equal if not greater opportunity for contribution to a solution on the procedural or process side of the equation. The judiciary may be justified in opposing congressional intrusion into the details of court procedure and management by asserting that Congress itself gave courts responsibility for such matters. However, pointing to the Rules Enabling Act and telling Congress “Don’t Tread on Me” is not an acceptable response, not politically and probably not as a constitutional concept. Congress having giveth the rule making authority, Congress can taketh away.

Hayden W. Gregory

Hayden W. Gregory is legislative consultant for the ABA Section of Intellectual Property Law in Washington, D.C.