Will Patent Reform Legislation Curb “Abusive” Litigation? – A Look at Fee-Shifting and Enhanced Pleading Under H.R. 9 and S. 1137

This article appeared in the August 5, 2015 Edition of The Legal Intelligencer

Patent reform is again looming on the horizon. Legislators are again focused on curbing the “abusive” litigation practices of patent trolls. The House and the Senate have released competing legislation this year, respectively identified as the Innovation Act (H.R. 9; introduced by Representative Bob Goodlatte (R-VA)) and the PATENT Act (S. 1137; introduced by Senator Chuck Grassley (R-IA)). While the legislative process for these bills is still in its infancy, there appears to be significant agreement between the two governing bodies regarding many issues, which suggests the question is not if, but when patent litigation reform legislation will be enacted. This article summarizes these respective pieces of legislation with respect to two approaches intended to make “abusive” litigation strategies for patent trolls more difficult: fee-shifting and enhanced pleading requirements, and compares them to the recent decisions from the Supreme Court which appear to be directed at handling these same issues.

Fee shifting—Amendment of 35 U.S.C. § 285

Our last article explored the enhanced prospect of fee-shifting arising from the Supreme Court’s decision in, e.g., Octane Fitness LLC v. Icon Health & Fitness Inc., 134 S. Ct. 1749 (2014). Briefly, Octane lowered the standard for recovering attorneys’ fees for an “exceptional” case under 35 U.S.C. § 285. “[A]n ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.” Octane, 134 S. Ct. at 1756. Notably, we found that the year of decisions following Octane resulted in dramatically increased filings and grants of motions for awards of attorneys’ fees.

From the provisions in the Innovation Act and the PATENT Act regarding fee shifting, it is clear that Congress believes that the fee shifting provision of the current patent laws—35 U.S.C. § 285—requires further work to address abusive patent troll litigation. In particular, both pieces of legislation include language geared towards making fee awards more likely. We have not seen any changes in the proposed Acts that would indicate an acceptance that the Supreme Court cases have addressed the problem perceived by the legislators. The Innovation Act and the PATENT Act take competing views on the degree of “cure” required.

Under the Innovation Act, fees would be presumptively granted to the prevailing party–unless the losing party’s conduct is “reasonably justified” or “special circumstances” warrant no fee-shifting. This burden shift represents a paradigm shift from the conventional American Rule, where each side pays their own fees. Patent litigation has long been subject to a statutory exception for cases deemed “exceptional” in which fees may be awarded if warranted.

The PATENT Act takes a more conservative approach with respect to fee awards that is more in line with the American Rule and the current patent litigation landscape. Under the PATENT Act, it is the burden of the prevailing party to request fees and then demonstrate that the losing party’s conduct or position was “not objectively reasonable.” A recent Managers’ Amendment by the Senate Judiciary Committee to the Patent Act clarified that “special circumstances” for not awarding fees include “undue economic hardship” to an inventor or university.

Both Acts contain somewhat differing provisions aimed at preventing patent trolls from avoiding fee awards by suing under shell companies devoid of any assets to satisfy such an award. The Innovation Act permits a prevailing party that received a fee award to join another “interested party” (i.e., has an ownership interest, financial interest, or other rights in the asserted patents) to the litigation if the losing party cannot pay the fees. “Upon motion” of any party, the court “shall require” the other party to certify whether it will be able to fulfill a fee award under this subsection.

The PATENT Act takes a more prospective approach, requiring a plaintiff whose “primary business is the assertion and enforcement of patents” to certify at the outset of the litigation that it has sufficient funds to satisfy an award of attorney’s fees. The plaintiff must also provide notice to any “interested party” that the interested party may be liable for satisfying a fee award if the plaintiff cannot. Interested parties are given the opportunity to give up their interest in the litigation to avoid such liability (e.g., if the interested party does not agree with the manner in which the case is being litigated).

Both of the proposed Acts permit the recovery of fees where the plaintiff unilaterally dismisses the action and offers a covenant not to sue. This change would clarify the scope of “prevailing party” under 35 U.S.C. § 285 to include such an instance.

Heightened Pleading and Elimination of Form 18

A hallmark of a patent troll is a complaint crafted to meet the barest pleading requirements without actually identifying which claims (of the often numerous claims asserted from one or multiple often complex patents) or any theory as to how the accused product meets the asserted claims. While Fed. R. Civ. P. 11 requires all plaintiffs to undertake this analysis before bringing suit, patent trolls often obscure such information to reduce the chance of an early resolution on the merits.

This strategy has been somewhat insulated, primarily because patent trolls are able to take advantage of the presently prevailing “notice pleading” standards, informed by Fed. R. Civ. P. Form 18, “Complaint for Patent Infringement,” (which merely requires identification of the asserted patent and a general description of the accused product). While several district courts have somewhat countered the minimal information required for a pleading by instituting local rules or standing orders which require the early (e.g., prior to or at the outset of discovery) disclosure of detailed patent infringement contentions, this practice is not universal throughout the circuits.

Form 18 is conventionally believed to be at odds with the heightened pleading requirements set out by the U.S. Supreme Court in Bell Atlantic v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009). While Form 18 will be abolished as of December 1, 2015 pursuant to action by the Supreme Court, both Acts not only confirm the elimination of Form 18, but require that any party alleging infringement “shall include” in its pleading, to the extent known,

each patent and claim allegedly infringed;
the accused instrumentality;
the name or model number of each accused instrumentality or, if none, a description of the accused instrumentality;
a description of the elements of each claim allegedly infringed and how the accused instrumentality infringes the elements; and
in cases of indirect infringement, a description of the acts that are alleged to contribute to or induce infringement.

Thus, both Acts would require at the pleading stage information presently delayed—to the patent troll’s advantage—until a later stage. Finally, the Innovation Act includes a few notable differences from the PATENT Act in that it requires that the complaint describe the plaintiff’s principal business as well as a list of prior litigations concerning the asserted patent(s).

Conclusion

While similar attempts at patent litigation reform (including a 2013 version of the Innovation Act) have stalled in the past, the similarity between the subject matter of the Innovation Act and the PATENT Act demonstrate growing bipartisan support. Significant amendments to the patent laws, including those presently proposed with respect to fee awards and pleading standards, have the potential to drastically alter the face of patent litigation. As a result, the provisions of these two bills merit close attention as they continue to move through Congress. If enacted, several open questions remain regarding potential unintended consequences: How will the resulting new legislation affect non-troll patent litigation (which can be as contentious as troll cases)? Will fee awards become the norm? Will heightened pleading standards result in more early dismissals, additional motion practice, including motions to amend the pleadings/add claims following discovery, or some combination of both? Stay tuned.