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Patent reform is likely in 2015. Here’s what it could look like

The head of the House Judiciary Committee, Rep. Bob Goodlatte (R-VA), said on Tuesday that a bipartisan bill to fix America’s dysfunctional patent system failed this spring after it ran into the “DC version of quicksand known as the Senate,” but that 2015 will be a different story.

Speaking at an intellectual property event, Goodlatte — who was the House sponsor of the doomed bill known as the Innovation Act — suggested that the new Republican majority in the Senate will ensure that the new version of the law passes. This would be a different outcome than last time around when Sen. Harry Reid (D-NV) sandbagged the bill, which had the support of President Obama, reportedly at the behest of patent trolls and trial lawyers.

A patent scholar Dennis Crouch notes, the question is how far the new law will go. In particular, real reform will depend on changing the economic asymmetries in patent litigation that allow trolls to flourish, and that lead troll victims to simply pay up rather engage in costly litigation.

Here are some measures we are likely to see under the Goodlatte bill, according to Crouch and legal sources like IAM and Law.com (subscription required):

  • Fee-shifting: Right now, trolls typically have nothing to lose by filing a lawsuit since they are shell companies with no assets. New fee-shifting measures, however, could put them on the hook for their victims’ legal fees.
  • Discovery limits: Currently, trolls can exploit the discovery process — in which each side must offer up documents and depositions — by drowning their targets in expensive and time-consuming requests. Limiting the scope of discovery could take that tactic off the table.
  • Heightened pleading requirements: Right now, patent trolls don’t have to specify how exactly a company is infringing their technology, but can simply serve cookie-cutter complaints that list the patents and the defendant. Pleading reform would force the trolls to explain what exactly they are suing over, and give defendants a better opportunity to assess the case.
  • Identity requirements: This reform proposal is known as “real party of interest” and would make it harder for those filing patent lawsuits (often lawyers working with private equity firms) to hide behind shell companies, and require them instead to identify themselves.

Crouch also notes the possibility of expanded “post-grant” review, which gives defendants a fast and cheaper tool to invalidate bad patents at the Patent Office rather than in federal court.

While these measures appear to be commonsense, they still failed last time around, in part due to a lobbying push by trolls — including the creation of a new PAC by notorious troll Intellectual Ventures.

While such pressure could also derail a new bill, patent reform advocates have also expressed another worry: that the Republicans could overplay their hand. This could occur if Republicans attempt to use patent reform as a vehicle to push far-reaching tort reform, which is a cause dear to many conservatives but that could lead to a pushback from the trial bar and consumer advocates.

10 Responses to “Patent reform is likely in 2015. Here’s what it could look like”

  1. Richard Falk

    Fee Shifting

    From 2005 to 2011 there were NO fee shifting awards under the old impossible standard for bad litigation. Since the Supreme Court Octane Fitness decision, there were 8 fee shifting awards in just 4 months. So to claim that judges in the past had the power to shift fees is an incredibly deceitful statement — technically true, but withholding materially important information one would need to know to make an informed decision.

    Not only fee shifting, but sanctions prior to the 2011 Eon-Net case were very rare except in cases of serious litigation misconduct such as destruction of documents. The following is a representative case from 2009 that showed the typical unwillingness of courts to impose sanctions for cases without merit where, after nearly a year, the plaintiff could not produce a Preliminary Infringement Chart that identified “how each accused product’s functionality contributes to infringement” and yet sanctions were denied though “it is a close call”:

    http://sites.google.com/site/271patentblog/Home/DiagnosticSystemsvSymantec.pdf

    You can get a glimpse into the contents of settlement agreements by seeing what happened after the case above (see the first paragraph of section (b) Litigation in the following link) where settlement agreements may contain a license of existing patent portfolios with a covenant not to sue. This poor company was sued again by another shell company subsidiary of the same plaintiff patent troll (they ultimately settled again in 2012):

    http://www.sec.gov/Archives/edgar/data/1050446/000119312512067605/R15.htm

    Simply pursuing a weak case has not resulted in sanctions or fee shifting until very recently. This situation started to change with Eon-Net at the CAFC in 2011 and more substantially with Marctec, Highmark, and Raylon in 2012 and of course Alice and Octane Fitness and other cases at the Supreme Court in 2014.

    Fee shifting is completely pointless against patent assertion entity (PAE) plaintiffs who have set up shell companies with no assets (beyond the patent being asserted) nor revenues from which to pay fees or penalties. Also, the “interested parties” provisions in proposed legislation will also be pointless because the PAEs will simply set up foreign subsidiaries owning the domestic shell companies thereby creating a jurisdictional corporate veil.

    Why Sanctions Are Rare

    The reason why sanctions against attorneys are rare is disclosed in this recent speech from a CAFC Judge two months ago that exposed biases that are normally unspoken:

    http://fstp-expert-system.typepad.com/files/21-k.-omalley_keynote-address-ipo-2013.pdf

    “With respect to the Rule 11 proposals and the asserted desire for more sanctions, I believe what you really want is not more sanctions, but more fee shifting. Having been a district judge, I know that, while sometimes you must do it, it is difficult to sanction lawyers. Most of us that have been on the district bench were also practicing lawyers, and we know that people make mistakes, we know that lawyers can be pushed in certain directions by their clients, and we know that they do not usually intend to step over the line. And we know that a sanction can destroy a lawyer’s career.”

    Fighting Back is Futile

    If a plaintiff with a weak case does come across a defendant willing to fight to the end to prove their case in court, the plaintiff can simply drop the case as has occurred twice against Kapersky Labs:

    http://en.ria.ru/business/20120626/174253507.html

    http://eugene.kaspersky.com/2013/10/02/the-patent-trolls-can-be-defeated-just-never-give-up/

    In that first case, it cost Kapersky Labs 3-1/2 years of distraction and $2.5 million in legal fees being the only one of 35 companies who refused to settle while in the second case it cost them 2-1/2 years of distraction and an undisclosed amount in legal fees (probably at least $2 million) being the only one of 55 companies who refused to settle and in neither case were there any fee shifting nor sanctions. This is why many companies settle — it’s simply not worth fighting weak cases when it costs so much compared to the price of settlement. Such settlements are almost always private with NDAs preventing anyone (other than the parties to the case) seeing the terms.

    But that is not the end of the story. On 10/18/13, Kaspersky Labs filed a lawsuit for declaratory judgment against Device Security who had sent them a demand letter dated 9/18/13. Also on 10/18/13, Kaspersky Labs was sued by Uniloc. So now they have two active lawsuits from patent assertion entities. Other companies who have a policy of always fighting back, such as Twitter and Newegg have not stemmed the tide of patent assertion entity lawsuits against them (as shown by a Pacer search and correlation of cases against known patent assertion entities).

    East District of Texas

    You should look at the latest statistics comparing the EDTX to other districts processing patents. For the 12-month period ending September 30, 2013, the percent going to jury trial in EDTX excluding No Court Action and Before Pretrial when most settlements occur was 42.4%, far higher than in any other district and the percentage of summary judgments is far lower than any other district (CDCA is low, but has fewer patent cases). Furthermore, the stats on summary judgments underestimate the problem in EDTX because one has to file a motion for leave to file summary judgment:

    https://www.eff.org/deeplinks/2014/07/why-do-patent-trolls-go-texas-its-not-bbq

    PAE Business Model

    Not every PAE is the same, but some practiced a “volume licensing” business model where attorneys were hired on contingency to primarily obtain money from negotiated settlements with hidden terms via non-disclosure agreements. Until recently, there was virtually no fee shifting and minimal sanctions so with hardly any penalties for pursuing cases with little or no merit it is no surprise why this activity occurred since there was so much money to be made. I am not talking about the volume demand letters such as from MPHJ (which most recipients ignored), but the filing of lawsuits and pursuing cases against many hundreds of defendants each year by large PAEs some of whom are public companies. It is not that every case is without merit. In fact, a few cases are so strong that for one PAE just 3 case-defendants represented half of the revenue in one quarter. The rest (over a hundred case-defendants) represented less than $500,000 per defendant and many of these cases were weak (I researched many of them). Basically, the model is one of quantity over quality.

    Civil Litigation Abuse In General

    I believe that the core problem really has very little to do with the type of entity. There is nothing wrong with PAEs themselves and they provide a strong counterweight to the power of large corporations against small inventors. The problem is one of civil litigation abuse and has simply moved from one legal area to another as Defendant’s strategy, the legislature, or the Courts have set limits to the abuses. Some examples include the following:

    Auto Insurance Fraud – stopped when insurance companies jointly stopped their practice of automatically settling even questionable cases for a fixed amount
    Securities Class Action – reduced some with Private Securities Litigation Reform Act of 1995 (PSLRA), reduced more when William Lerach went too far, but still at a rate of roughly 160 or so per year
    CA Section 17200 – multiple legislative and court actions somewhat reduced abuse but Proposition 64 reduced abuse the most
    CA Prop 65 – abuse reduced by legislative reform and more is forthcoming
    Federal ADA especially in CA – reduced some with legislation, but more with CA supreme court ruling on fee shifting
    Patent Marking – stopped with a Court ruling and with AIA
    Medical Malpractice – significantly reduced with legislation capping pain and suffering awards

    The latter was timed with the emergence of the rise in patent litigation in what has been called “From PI to IP”:

    http://mcsmith.blogs.com/eastern_district_of_texas/files/IP.pdf
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1878966

    A 2008 survey of trial lawyers:

    http://www.abajournal.com/files/Survey_Press_Release_Final.pdf

    was summarized by the task force Chairman who stated that “the costs and burdens of discovery are driving litigation away from the court system and forcing settlements based on the costs, as opposed to the merits” and 83% of respondants agreed that “Litigation costs drive some cases to settle that should not settle on the merits”. This is not a new problem and solutions should not be patent-specific nor Plaintiff-specific (Defendant attorneys can abuse the system as well).

    Patent litigation abuse is just the most recent bubble in civil litigation abuse though it is the most costly to society due to its volume. Whatever reforms that are made should also address civil litigation abuse more generally, especially focusing on attorney conduct. Attorneys are the entrée into the legal system and should be held responsible for abuse. As was pointed out by the CAFC in Eon-Net v. Flagstar Bancorp, “But an attorney, in addition to his obligation to his client, also has an obligation to the court and should not blindly follow the client’s interests if not supported by law and facts.”

  2. Staff Staffer

    ‘bill to fix America’s dysfunctional patent system’

    plain English translation: bill to legalize invention theft by large infringers

    “patent reform”…America Invents Act, vers 1.0, 2.0, 3.0…

    “This is not a patent reform bill” Senator Maria Cantwell (D-WA) complained,
    despite other democrats praising the overhaul. “This is a big
    corporation patent giveaway that tramples on the right of small
    inventors.”

    Senator Cantwell is right. All these bills do is legalize theft. Just because they call it “reform” doesn’t mean it is. The paid puppets of banks, huge multinationals and China continue to brain wash and bankrupt America. If you tell a lie often enough and can dupe others to repeat that lie, eventually it is accepted as fact. As Mark Twain said, ‘truth is not hard to kill, and (that) a lie well told is immortal’. Those who use the amorphous phrase ‘patent troll’ expose themselves as thieves, duped, or doped and perpetuate the lie.

    They should have called these bills the America STOPS Inventing Act or ASIA, because that’s where they’re sending all our jobs. These changes are killing our small and startup firms and the jobs they would have created. The present bill (vers 1, 2, 3, etc) is nothing less than another giveaway for huge multinationals and China and an off shoring job killing nightmare for America. Even the leading patent expert in China has stated these bills will help them steal our inventions.

    Patent reform is a fraud on America. These bills will not do what they claim they will. What they will do is help large multinational corporations maintain their monopolies by robbing and destroying their small entity and startup competitors (so it will do exactly what they paid for) and with them the jobs they would have created. For the last several years now they have been ransacking and looting small entities taking everything they can carry. They have already damaged the US patent system so that property rights are teetering on lawlessness. These bills will only make it harder and more expensive for small firms to get and enforce their patents. Without patents we cant get funded. In this way large firms are able to play king of the hill and keep their small competitors from reaching the top as they have. Yet small entities create the lion’s share of new jobs. According to recent studies by the Kauffman Foundation and economists at the U.S. Census Bureau, “startups aren’t everything when it comes to job growth. They’re the only thing.” Meanwhile, the large multinationals ship more and more jobs overseas. These bills are a wholesale destroyer of American jobs.

    Small entities and inventors have been given far too little voice on this bill when one considers that they rely far more heavily on the patent system than do large firms who can control their markets by their size alone. The smaller the firm, the more they rely on patents -especially startups and individual inventors. Congress and Obama tinkering with patent law while gagging inventors is like a surgeon operating before examining the patient.

    Those wishing to help fight big business giveaways and set America on a course for sustainable prosperity, not large corporation lobbied poverty, should contact us as below and join the fight as we are building a network of inventors and other stakeholders to lobby Congress to restore property rights for all patent owners -large and small, and the jobs they bring.

    for a different/opposing view on patent reform, please see…
    http://truereform.piausa.org/default.html
    http://piausa.wordpress.com/
    http://humanevents.com/2014/10/22/depriving-property-rights-is-patently-offensive/
    http://townhall.com/columnists/eriktelford/2014/10/22/google-leverages-patent-reform-for-crony-ends-n1908760
    http://washingtonexaminer.com/patent-reform-like-most-reforms-in-the-end-benefits-the-biggest-guys-with-the-best-lobbyists/article/2524033

  3. Fee shifting is a BAD IDEA.
    First, judges already have this power to shift fees if a patent suit is deemed frivolous enough, and you yourself have even written about instances this has happened Roberts, declaring it a “good day for innovation and bad day for trolls” (wording is not exact, but close enough. No time to research your blog at the moment). So,
    1) fee shifting is not necessary. Judges already have this power.

    Not only would making Fee Shifting the law of the land be a first in the legal world,
    2) fee shifting would hurt small inventors merely trying to protect their rights.
    Those who have deeper pockets, like the Google’s and Apple’s and Samsungs of the world, would just gleefully continue to infringe and put “excess legal bullying” in their budget. Rather than recognize the rights of a small patent holder, they will just drown him/her in court in legal fees. And if the small patent holder loses, then not only does he/she bear the costs of his own legal fees, but must then take on the costs of the defendant’s legal fees. Due to this risk, small patent holders WITH VALID RIGHTS CANNOT AFFORD TO PROTECT THEIR OWN RIGHTS.

    3) Because of 2), this would set off a very bad legal precedent that could eventually then trickle down into other areas. If fee shifting is the way patent suits work, then why not have fee shifting in other types of law suits. Then whomever has the bigger bank would always win. And this is the very reason the legal system exists: to protect truth, not protect the richer. Even if the truth is protecting someone small/poor, as long as their claim(s) of oppression by the defendants (not matter how rich) are valid and true.

    Therefore,
    4) Fee shifting would not be patent reform at all. It would be patent DEFORM.

    Again, Roberts, before you start toting your “patent reform” articles all around when proposed legislation comes out, you must ask yourself this fundamental question:

    Would [whatever proposed legislation] hurt small inventors in their pursuit of protecting their patent rights against large entities equally and fairly? Because if the [whatever proposed legislation] does put a disadvantage against small inventors in their pursuit to protect their rights, this is NOT patent reform, and it starkly is at odds of what the patent system was designed to do.

    • Thanks for the comment, Mike, but these are not *my* patent reform ideas that I’m toting – they appear instead to be the emerging consensus, and the backbone of Goodlatte’s proposal! As for the idea that we can just leave fee-shifting to judges, SCOTUS’s Octane ruling does provide some hope in this regard

      But, unfortunately, too many fee-shifting decisions will remain in the hands of the judges in your neck of the woods — East Texas, where patent trolling is still a cottage industry! It would be safer to pass legislation, don’t you think?

      • 1) More legislation when judges already have the power? No, not a good idea to make a law to permanently strip equal rights away from small inventors, without looking at it on a case by case basis, which is what judges currently are doing. Fee shifting is not good. Not everyone is funded by silicon valley funds like you are.

        2) Here you go again trying to circumvent the issue by focusing on the messenger and not the actual message. Wouldn’t you be assuming too much by doing a geo-lookup on my IP address, when there are things called VPNs, proxies, and the Tor network, making an IP address not 100% deterministic. East Texas is not my neck of the woods. Must I resort to using such things to mask my IP in order to help you stop your assumptions so you can focus on the issue at hand and not on who delivers the message?

        Truth exists in the message, not in the deliverer.

      • Also, if they are not your patent reform ideas, and if you see that it is not actual reform, wouldn’t you be doing a disservice to your readership by continuing to call it “reform” when you know deep down that this provision would not be reform? Some areas might be reform, sure, and label them as such. But others, clearly not. Fee shifting as the law of the land is definitely NOT reform. Wouldn’t it be your moral duty to report/call it appropriately?

        This is what good discussion is all about. Finding the good ideas, while eliminating the bad.

      • >> … but these are not *my* patent reform ideas that I’m toting …

        And I’ll also point out I never said such thing. I said “before you start toting your ‘patent reform’ ARTICLES”. I did not say these were your ideas. But there are your articles, and you have a responsibility to your readership. If you don’t agree that one of the “reform” ideas actually contributes to true reform, then, in your ARTICLES, please don’t tote the idea(s) as reform. Praise the good and scorn the bad.

        And here I stated 4 legitimate reasons why Fee Shifting is bad, of which you haven’t yet replied in how you disagree with those reasons.

    • @Rath. You are mistaken. First, a patent does not grant the patent holder any right to produce anything. Rather, it excludes others from producing your invention. Moreover, producing and inventing are entirely two different disciplines. Second, a patent is not “for life”. A patent grant has a limited term.

      This type of system encourages innovation while also protects inventors from monopolistic entities who steal. Because, in return for making an invention a public piece of art (by the inventor’s publishing of his/her patent application), the inventor is making the invention available for public use after the term expires. In exchange, the inventor has exclusive rights for a fixed term to his invention, and can use this time for production, licensing, sharing with business to enhance their current products, etc. So everyone, no matter how large or small, has a fair shot at protection, and future contribution.

    • Patents aren’t “for life,” they are already for limited terms as you suggest – 20 years from filing. By the time they’re granted, that works out to about 12 – 17 years of term. Then, it’s all public domain. Patents increase the public domain by giving everyone – not just big corporations with huge manufacturing facilities – the incentive to make a better mousetrap. Design is not manufacturing, and forcing every designer to be a manufacturer is silly and counterpriductive. For example, an architect invents a building by designing it on blue prints, but we don’t require every architecture firm to also be a GC. Even supposedly anti-patent manufacturing powerhouses, like Apple and Google, understand this. That’s why your iphone says “designed by Aple in California, made in China.”

      This goes for all of you folks spitting acid about patents – get educated before you join this selfish witchhunt by big companies. You are on the wrong side of history. Patents have been around for millennia, and quite a bit of thought and policy is behind them – moreso than the big corporations that have been attempting to wipe them out — they simply don’t like getting sued for stealing inventions. Nobody does, but this is America, and we want new people – even your grandma – to design new things – not just existing manufacturing powerhouses.