Double down

US legislators gathering for the start of the new Congress in early January could have been forgiven a sense of déjà vu as they considered their prospective agenda. A second package of patent reforms is on the to-do list of the US political establishment, less than four years after President Obama signed the America Invents Act into law. In fact, given that the latest revisions can be traced back to the short-lived SHIELD Act proposed in 2012, patent legislation in one form or another has been under debate in Washington DC since the Patent Reform Act, the precursor of the America Invents Act, was tabled back in 2005.

In an innovation-based economy where the number of patents has skyrocketed, particularly in the software field, the patent system has never been under such intense scrutiny – and the stakes have never been higher. As happened with the America Invents Act, deep-pocketed interests are prepared to sink millions of dollars into trying to shape the conversation.

But there are two major differences between the two rounds of reforms. First, a far broader group of stakeholders is now involved, including retailers and other Main Street businesses that may not own patents themselves, but have become targets in patent assertion campaigns. Second, the focus has shifted from patents per se to the litigation around them.

That the most egregious forms of patent litigation abuse should be stopped is something that all sides can agree upon. How this should be achieved is another matter entirely. To those advocating a wholesale package of reforms – such as those set out in the Innovation Act, which sailed through the House of Representatives in December 2013 – sweeping legislation is crucial to stem the worst excesses.

Those on the other side, voicing caution or outright opposition to further reforms, contend that a relatively small number of changes would remedy the problem, and that calls for wider measures are being driven by the underlying agenda of some in the tech community to weaken patent rights and neutralise the threat posed by non-practising entities (NPEs).

“I think that part of the purpose of the patent system should be to advantage those that actually want to do something with their patents,” says Matt Levy, patent counsel for key tech advocacy group the Computer and Communications Industry Association (CCIA). Levy’s comment shows that for some, the debate is as much about patent philosophy as it is about litigation strategy.

Once again as happened with the America Invents Act, as the debate plays out on Capitol Hill, so the context has started to evolve. A series of Supreme Court rulings in 2014 addressed key issues such as fee shifting in patent cases, indefiniteness in patent claims and patentability standards – all decisions broadly in support of the pro-reform camp’s position. The Judicial Conference – which brings together some of the country’s leading judges to review and revise guidelines for US courts – announced in October that pleading requirements would be heightened, another goal of the reformists. Finally, as 2014 drew to a close, the number of patent suits being filed began to fall. And with the Senate now under Republican control, it is clear that the landscape has changed significantly.

Inside the Washington beltway

There is no doubt that in 2013 and through the first half of last year, the momentum was firmly with the pro-reform movement. In late 2013, as Congressman Bob Goodlatte, chairman of the House of Representatives Judiciary Committee, steered his Innovation Act through the lower chamber with considerable bipartisan support (it was passed by a vote of 325 to 91), it seemed inevitable that a bill would be approved before last November’s mid-terms.

Goodlatte’s proposed statute included heightened pleading requirements; steps to make infringement complaints less vague; fee-shifting provisions; limitations on discovery; protection for end users caught up in infringement litigation between patent owners and manufacturers; provision for full identification of the claims being asserted in a case; and a requirement to disclose the real party of interest in a case. It was, in large part, a package of measures which the pro-reform camp had coalesced around.

In the first five months of 2014 Goodlatte’s counterpart in the Senate, Senator Leahy, spearheaded the legislative effort with key input from Republican Senator Cornyn and Democratic Senator Schumer. The end result was known as the Schumer-Cornyn compromise.

However, that compromise never made it out of committee. In May last year a visibly frustrated Leahy announced that he was shelving the reform. Senator Reid, the leader of the upper chamber at the time (he subsequently lost that position to Republican Mitch McConnell in the recent mid-terms), had effectively stopped the proposed legislation in its tracks after a coalition of trial lawyers, pharmaceutical companies and universities voiced concerns.

“I’m furious with what happened,” Leahy told a newspaper in his home state of Vermont. “We worked so hard to get a coalition. Harry Reid and a couple of others said, ‘We won’t let it come to the floor.’ I think that’s wrong, but I’m not going to give up.”

The trial lawyers lobby is a crucial pillar of support for the Democrats and its fears over the reforms – in particular, the proposed extension of fee shifting – led many to believe that these had swayed Reid. “It would never have been a unanimous vote [in favour of the legislation] out of the Judiciary Committee, but it would have had bipartisan support,” insists Levy. “It would then have been hard for Reid not to bring it to the Senate floor for a vote, so he knew that the best way to get rid of it was to kill it in committee.”

Such was the speed with which the legislation had moved through the Republican-controlled House and been picked up by the Senate that it appeared that the anti-reform camp was poorly prepared for the fight – especially so soon after the America Invents Act had come into effect. “I think they were asleep at the switch,” reflects one Hill aide. Today, however, nothing could be further from the truth.

Figure 1. Patent cases filed in 2013-2014 by month

Source: Lex Machina

Battle lines drawn

On K Street in the US capital, the downtown thoroughfare that is to lobbying what Wall Street is to finance, it was almost possible to see the battle lines being drawn in early December. The Innovation Alliance – a DC-based advocacy group that includes the likes of Qualcomm, InterDigitial and Tessera – brought together a broad church of interested groups, including representatives from the pharmaceutical, biotech and medical devices sectors, and from six university associations, to write to key members of Congress, urging them to exercise caution as they considered the next stages of patent legislation.

“There have been several major judicial and administrative developments in patent law since the last time your committees fully considered those issues and drafted proposed legislation,” their letter stated. “As a result of these developments, we are even more concerned that some of the measures under consideration over the past year go far beyond what is necessary or desirable to combat abusive litigation.”

“Taken together,” it continued, “these judicial and administrative developments, and the plunge in the patent litigation rate, have fundamentally changed the landscape under which patent legislation should be considered.” That view echoes comments that Professor Mark Lemley of Stanford Law School made to the IAM blog in October last year. “I think the need for legislative reform is a lot less right now than it was a year ago,” he said.

The letter from the Innovation Alliance and pharma and university sectors was clearly intended to coincide with Deputy Director Michelle Lee’s December 10 nomination hearing before the Senate Judiciary Committee to take over as head of the US Patent and Trademark Office. Senator Dick Durbin even referred to the letter as he questioned Lee on her nomination, asking whether she supported the message to slow down on reform. “I couldn’t agree more that the patent landscape is changing dramatically,” she said, in a response that at least partially distanced her from any perception that she is closely tied to the pro-reform tech lobby. “All of this needs to be taken into account as we carefully and cautiously determine what changes need to be made. We need balanced, meaningful reform.”

Those pushing most strongly for legislation have not been idle either. In mid-January a new coalition, United for Patent Reform, was launched, bringing together a range of tech giants such as Google and Facebook, retailers including Macy’s and JCPenney and other interested groups such as the National Association of Realtors and the restaurant lobby. The new group will provide the pro-reform camp with a mouthpiece in Washington and an on-the-record voice in the media.

Legislation, of course, is not written in a vacuum and it is not unusual for changes outside of Congress, particularly in the courts, to shape the debate. The Innovation Alliance letter made a point that those advocating caution are keen to press home: as the circumstances have now changed, fundamental revisions to the system are not needed – or at least, not yet.

At the heart of this changed context is the US Supreme Court. The country’s highest judicial body heard six patent cases during its 2013/14 term, but the full implications of its rulings did not become clear until after Leahy had called off the reform in May. Their impact is now being felt on the Hill. “A lot of the conversation will be shaped by those Supreme Court decisions and there will be some who say, ‘Why don’t we just codify what they’ve said?’” acknowledges one aide on the House side.

Figure 2. Patent cases filed in 2011-2014 by year

Source: Lex Machina

While the Supreme Court’s judgment on patentability in Alice Corp v CLS Bank may have garnered the most headlines, its two decisions on fee shifting will likely have the greatest influence on the current discussion. They are particularly relevant because many DC insiders regard fee shifting as the issue which will prove most contentious in the new Congress. In Octane Fitness v ICON Health & Fitness and Highmark Inc v Allcare Health Management Systems the nine Supreme Court justices essentially lowered the bar on when the losing side in litigation should pay the winner’s fees.

Although the statutory language – which says that fees can be shifted only in “exceptional cases” – remains unchanged, the early indications are that these decisions have already had an impact. According to research by regulatory analysis company MLex, between April (when the Supreme Court opinions were handed down) and October last year, district courts issued at least 50 fee-shifting decisions, awarding lawyers’ fees in 18 of them, or 36%. By contrast, fees were awarded in just six cases between 2010 and 2012.

This represents a significant jump; but the data should be considered with a number of caveats. First, this is a very small set of cases to consider; and as the author of the research, Amy Miller, herself points out, there could be a lag between the Octane and Highmark rulings being handed down and them affecting litigants’ behaviour. In other words, the number of suits in which fees are shifted might fall as parties with particularly weak cases opt either not to litigate or to seek a settlement instead.

But what if, by April this year, it emerges that the rate at which fees are being shifted has stayed roughly the same? Will that change the discussion on Capitol Hill? It shouldn’t, insists one Senate aide: “While it’s good that fees are being shifted in more cases, it’s still an unusually high threshold.”

For the pro-reform camp, it is not simply about the number of cases in which fees are shifted, but also about the threat that this presents. “I would still expect fee shifting in a small percentage of cases,” suggests Levy. “The purpose is to change the leverage and change the calculation that a ‘troll’ makes when it considers bringing a case. Up until Octane, they could bring a suit with very weak arguments almost with impunity.”

Louis Foreman, CEO, Edison Nation

Loser pays could be “devastating to individual inventors who might be locked out of the court process”

On the flipside, the risk of fee shifting is daunting to those calling for a slower pace of reform. “I think we need to be really careful about loser pays,” warns Louis Foreman, the CEO of Edison Nation, who has become a spokesperson for the small inventor community. “It could be devastating to individual inventors who might be locked out of the court process.”

Foreman describes the prospect of fee shifting as “scary”, but cautions that if it is ultimately introduced, any statute should include “a bright line between what is a case brought in bad faith and a good-faith one”.

One view worth considering is that of Rudolph Techsler, the lawyer from St Louis-based firm Harness Dickey who secured victory for Octane Fitness in the Supreme Court. “There’s only one place to go from Octane, which is the English system, and I think you need to be very careful about that approach,” he says, referring to the much higher incidence of loser pays in England and Wales. “The vast majority of American companies are SMEs, and if you’re a small company bringing a case against a big company which is going to cost $5 million, the big company is not going to be discouraged in that scenario. I’m not saying don’t do it, but Congress has to be careful because the companies lobbying for reform aren’t going to be hurt by fee shifting.”

That fee shifting has become such a hot-button issue should come as no surprise; the risk of having to pay out for some very expensive lawyers if a case doesn’t go your way is enough to give anyone the chills. But its significance in the wider political scene only adds to the sensitivity.

Senator Patrick Leahy

Now the ranking member on the Senate Judiciary Committee (he was formerly chairman), Leahy remains a key figure in achieving a consensus on any reform package

Would fee shifting in patent cases pave the way for the Republicans to introduce similar reforms in other areas, such as personal injury or medical malpractice? This is a prospect that strikes fear in the heart of the trial lawyers lobby and is one of the factors that helped to scupper the reform last year.

Leahy and others have made the point that because the patent laws have included a fee-shifting element for years (even if it was seldom used), and the trademark and copyright statutes include similar provisions, this is an area where the courts are likely to continue making an exception.

Aaron Cooper, of counsel, Covington & Burling

“I think [introducing fee-shifting in other areas] would be just as heavy a lift if the Innovation Act were enacted tomorrow as if it were not”

“I think [introducing fee shifting in other areas] would be just as heavy a lift if the Innovation Act were enacted tomorrow as if it were not,” argues Aaron Cooper, former counsel to the Senate Judiciary Committee and now of counsel at Covington & Burling. A heavy lift it may be; but many suspect that the Republicans will at least try nonetheless.

Decline and fall

While the courts have been weighing in on issues such as fee shifting, one of the key statistics underpinning the debate has begun heading in an unexpected direction. According to data provider Lex Machina, in September 2014 the rate at which patent cases are filed had dropped by 40% on the figure for the previous year. Filings remained depressed through October and November, before picking up in December. Overall, the number of new cases filed in 2014 was down 18% compared with 2013, from 6,083 to 5,010. Patent Freedom recorded a similar decline – and one that was much more pronounced in the second half of 2014.

The relentless increase in litigation has been a key driver of the pro-reform narrative. The numbers in recent years have been skewed thanks to the America Invents Act, which changed the joinder rules so that plaintiffs must now file separate cases against multiple defendants which are accused of infringing the same patent, rather than wrapping them up in a single suit.

Research conducted by Lex Machina comparing litigation when individual defendants are split out and counted separately reveals that the trend remained broadly flat from 2010 to 2013. There was a spike in 2011 prior to implementation of the America Invents Act, but most of that is down to a rush of filings immediately before its entry into force.

Figure 3. Cases filed (counting every case once for each defendant), 2005-2013, by year

Source: Lex Machina

The increase in suits triggered by the new joinder rules is something that the anti-reform camp is usually quick to highlight. But as the Lex Machina figures bear out, there is no doubt that for the last four years, patent litigation has been at a historic high – effectively doubling since 2005, if defendants are counted individually.

As with the jump in fee-shifting cases, the question is now: how does a continued fall in litigation filings affect the arguments on Capitol Hill? Cooper, who was counsel to the Senate Judiciary Committee through much of the America Invents Act legislative process, insists that the debate is more than just a numbers game. “I tend to look at these issues not in terms of how much litigation there is now compared with five or 10 years ago, because I can spin those numbers to make either policy argument; but rather about whether the way the statute is set up enables abuse – and whether there are ways to limit the abuse without creating unintended consequences,” he says.

“I think despite all the changes from the Octane and Highmark decisions, from the Judicial Conference and some of the action around customer stay in the courts, there is still a role for Congress to play in both flagging the issue for district courts, which might not otherwise be looking at these issues, and implementing specific policy changes that make it less likely that the end user will be sued,” he adds.

In Cooper’s view, the changes in the market will likely push the opposing sides towards the middle ground. He has a former aide’s optimism about the legislative process, insisting that the forces at play are more likely to lead to a consensus and, ultimately, a bill that can secure the required votes in the Senate.

Senator Chuck Grassley

Following the mid-term elections, Grassley is now chairman of the Senate Judiciary Committee and is charged with getting a bill to the Senate floor

A change of control

Perhaps more important for the prospects of patent reform than changes in the courts and falling litigation rates was the result of the mid-term elections, which gave the Republicans control of the Senate and, therefore, a majority in both chambers of the US Congress. Its bloc of senators is still short of the magical 60-vote mark – the point at which a party can pass legislation without the threat of a veto from the other side – but the shift in power obviously alters the dynamic.

In Washington, it does not necessarily follow that control of both houses means that a party can do whatever it wants; as some DC insiders like to point out, sometimes corralling a majority is much harder than controlling a minority party.

But with 54 senators, the Republicans need only a handful of Democrats to join them to pass any bill; and since the change in control, the influence of the trial lawyers lobby has been reduced. For a new Senate leadership keen to prove its clout, patent reform represents a real chance of landing something on the president’s desk to be signed into law.

Congressman Darrell Issa

As the new head of the Sub-committee on Courts, IP and the Internet in the House of Representatives, Issa has become a much more influential player in the reform debate

The mid-terms also led to several key changes in the committees, where most legislation takes shape. The leadership of the Senate Judiciary Committee passed to Republican Senator Chuck Grassley, who took over from Leahy. In the House of Representatives, Republican Congressman Darrell Issa now heads the Sub-committee on Courts, IP and the Internet; as part of his remit, he has been handed responsibility for patents by Goodlatte.

Although Issa voted for the Innovation Act, he could choose to review the Goodlatte bill and propose changes. His appointment certainly gives him the opportunity to flex his policy-making muscles in an area in which, as the owner of 37 patents, he is personally invested.

While most DC insiders do not expect Issa to propose anything that is far removed from the Innovation Act, his rhetoric has included plenty of patent posturing. “As sub-committee chairman, my priorities include advancing a strong bipartisan bill to address abusive patent practices by ‘patent trolls’ which harm our economy’s real innovators,” he announced in early December, in a statement concerning his appointment.

For those who have been following the legislative process, Issa’s choice of words may have jarred. Many on the Hill, such as Goodlatte, have moved away from the ‘patent troll’ tag as a noun, preferring to use it to describe particular abusive behaviour. This is because there is still little consensus on what the term actually means; one man’s ‘troll’ may be another’s individual inventor trying to license a patent to a large corporation.

If there is a problem for Congress, it is that those filing suspect infringement cases can exploit the expense of the litigation system as leverage. Some action has already been taken to address the worst abusers. In early November the Federal Trade Commission announced that it had reached a settlement with MPHJ Technology Investments to bar the patent assertion entity (PAE) from “making deceptive representations when asserting patent rights”. This is the first time that the FTC has taken action against a PAE under its consumer protection authority.

MPHJ, together with its law firm Farney Daniels, had allegedly sent more than 16,000 letters to small businesses claiming that they were infringing MPHJ’s patents relating to network computer scanning technology.

For many, MPHJ has become one of the most egregious examples of a ‘troll’ and the FTC was quick to trumpet its success in bringing the PAE to book. However, according to a November 6 article in the New York Times, which reported on the settlement, the FTC confirmed that just two businesses had agreed to licences with MPHJ, while not one of the thousands that did not ended up with a lawsuit served against it. Whichever way you use the label, that is spectacularly unsuccessful ‘troll’ behaviour.

This leads to the question of whether broad legislative action, such as that set out in the Innovation Act or what was being considered in the Senate, is necessary to solve a problem that could be contained by clamping down on specious demand letters and providing customers or end users with some protection from the courts. There may not be one silver bullet to address the problems of the patent system, as one Senate aide points out; but a whole magazine of measures risks harming something that appears to be self-correcting many of its most pressing problems.

This is what members of Congress will need to consider as they debate the merits of further reform. Of course, if they come up with a legislative solution that one side feels does not adequately answer its demands, the patent community might find itself back in the policymakers’ crosshairs. Most legislators, you suspect, would probably prefer to avoid another case of déjà vu all over again.