Even as a bitterly divided Congress finds itself unable to take action on a long-term budget, entitlement programs, tax reform and immigration, one area commands intense attention from both parties — reform of patent litigation. On Dec. 5, just as the current session of Congress was ending, the House of Representatives passed, with significant bipartisan support, the Innovation Act, designed to discourage abusive patent litigation. At the same time, the Senate is actively considering the Patent Transparency and Improvements Act aimed at many of the same perceived problems.
The impetus for this activity is widespread criticism of the practices of “patent trolls,” or, to use a more neutral term, “patent monetization entities” — vehicles formed to purchase patent rights and assert claims against alleged infringers. For all the controversy they have aroused, there is no accepted definition clearly separating a “troll” from traditional entities created to enforce and license patent rights, such as patent pools, joint ventures and vehicles established by universities.
And there is debate over whether trolls are a significant problem. A study recently published by the University of California Hastings College of the Law entitled “The AIA 500 Expanded: Effects of Patent Monetization Entities” concludes that trolls initiated over half of all patent suits filed in 2012. On the other hand, an August 2013 Government Accountability Office report found that the majority of infringement cases were filed by manufacturing companies.
Beyond the sheer volume of claims, trolls have been criticized for unfair litigation conduct. In a June 2013 New York Times op-ed, Randall Rader, the outspoken and articulate chief judge of the U.S. Court of Appeals for the Federal Circuit, accused trolls of “costing defendants and taxpayers tens of billions of dollars each year and delaying justice” for litigants. Rader complained that trolls have huge litigation advantages that allow them to press questionable claims. Because they don’t make or distribute products, they are immune to counterclaims, have few documents or witnesses and don’t fear that litigation will disrupt an ongoing business. (Of course, similar arguments could be made about typical class action litigation.)
LACK OF HARD EVIDENCE
Defenders of trolls contend, however, that these entities allow patent owners without the resources to pursue litigation to derive value from inventions. It can also be argued that, as profit-making enterprises, trolls have little incentive to pursue weak patent claims. Nor does any hard evidence show the negative impact of troll suits on innovation or legitimate business activity.
There is little doubt where Congress stands on these issues. In 2011, it overwhelmingly passed the America Invents Act, which, among other things, restricts joinder in patent infringement cases. The rule was a response to the perception that trolls sometimes joined dozens of unrelated defendants in a single suit to raise defense costs and coerce settlements. The Obama administration apparently shares such sentiments. A July 2013 White House report criticized trolls’ “focus on aggressive litigation” and unfounded infringement claims.
The Innovation Act continues that approach, featuring a laundry list of provisions aimed at trolls. Instead of allowing traditional notice pleading, it requires that a patent infringement plaintiff specifically identify infringing processes and products, responding to concerns about vague and overbroad claims. It mandates an award of attorney fees to prevailing parties unless the conduct of the losing party was reasonably justified or special circumstances, such as severe economic hardship, make such an award unjust. It also significantly limits discovery, particularly the production of electronic communications.
The Patent Transparency and Improvements Act under consideration in the Senate includes several provisions that are similar to portions of the Innovation Act, requiring disclosure of all parties with ownership interests in patents that are the subject of litigation, encouraging stays of infringement claims against customers in favor of litigation defended by manufacturers, and making bad-faith demand letters an unfair and deceptive practice that may be pursued by the Federal Trade Commission.
Some observers have greeted this rush of activity with alarm. In a September 2013 speech, Federal Circuit Judge Kathleen O’Malley argued that legislative rules governing discovery, sanctions and case management improperly interfere with the prerogatives of the federal courts. (Of course, statutes like the Private Securities Litigation Reform Act of 1995 have imposed similar procedural rules to curb abuses in securities litigation.)
The need for legislation may have been reduced, moreover, by recent decisions of the U.S. Supreme Court and the Federal Circuit that have cut back on injunctive relief, restricted venue rules and tightened requirements for damage awards, making troll-initiated litigation less attractive. The Supreme Court’s forthcoming ruling in Alice v. CLS Bank, concerning the rules for patentability of software-based and business-method inventions, may accelerate this trend.
Despite these concerns, given Congress’ interest in these issues, it is likely that some version of patent “reform” ultimately will pass. That said, the best answer to the “problem” may be to improve the quality of patents issued by the Patent Office, and continue to strengthen the new procedures for patent application examination and post-grant review. Vague, overbroad and weak patents are breeding grounds for litigation abuse. Correspondingly, fair enforcement of valid patents — even by “trolls” — is unlikely to injure innovation.
Lewis R. Clayton is a litigation partner in the New York office of Paul, Weiss, Rifkind, Wharton & Garrison and cochair of the firm’s intellectual property litigation group. Jennifer H. Wu, an associate with the firm, assisted in the preparation of this article.