Congress Holds Additional Hearings on Patent Reform, Protecting Innovation and the American Economy

Yesterday, April 14, 2015, the House of Representatives Judiciary Committee held a full committee hearing on the “Innovation Act” (H.R. 9). This bipartisan legislation was re-introduced by Chairman Bob Goodlatte (R-VA) in February of this year to address the problem of abusive patent litigation. It is the same legislation that passed the House in 2013, and builds on the reforms that went into effect in 2012 as part of the America Invents Act.

Key Takeaways

1. Committee members are open to additional proposals to ensure that the provisions of the Innovation Act do not have unintended consequences of stifling innovation and restricting legitimate enforcement by patent owners. 
2. Markups of the bill will be forthcoming by Committee members. 
3. Meaningful and balanced reforms are still needed to curtail frivolous litigation, strengthen the patent system, and foster economic competitiveness.

Chairman Goodlatte opened yesterday’s hearing by discussing the modernization of the patent laws and how the Innovation Act targets current abusive litigation practices rather than specific types of entities, for example, those commonly referred to as “patent trolls.” Chairman Goodlatte emphasized that the Innovation Act is not meant to devalue patent rights but to improve the patent system. Additional testimony is being taken into consideration to ensure the Innovation Act is a balanced bill that protects property rights and innovation.

Jerrold Nadler (D-NY) addressed the public, requesting input on how to improve the Innovation Act so that it provides strong patent protection for creativity but does not impose too great a burden on legitimate patent plaintiffs. He expressed concern that the legislation is not perfect and that it is important to strike a balance on the cost and benefit of the provisions so there will be no unintended consequences.

Darrell Issa (R-CA) also addressed the public, explaining his view of our current “epidemic of innovation” with more and more patents issuing each year. He stressed the need for reforms and not just for litigants and the courts, but also for inventors and the Patent Office. In his view, issued patents need to have more specific and certain disclosures so that innovation will come from working around inventions described in narrow patents.

The Honorable Michelle Lee, Under Secretary of Commerce for Intellectual Property and Director at the United States Patent and Trademark Office, was the first panel speaker. She commented on the Innovation Act’s provisions to curtail abusive patent litigation, and identified the key provisions that are supported by the Patent Office.

The Patent Office is a proponent of fault based fee shifting for unreasonable or unjustified cases where the burden of proof rests on the requester; more specific infringement details in the complaint, including an element by element analysis for at least one claim of each patent; reducing the majority of (but not all) discovery until after a Markman decision; tightening venue restrictions by requiring meaningful business ties to the selected forum; and staying litigation against customers and end-users of off-the-shelf products in favor of litigation against the product manufacturer. The Patent Office also generally supports other provisions of the Innovation Act such as patent ownership transparency and reforms directed at demand letters.

Her Honor also discussed the recent initiatives undertaken by the Patent Office to make improvements to gain confidence in the patent system. The Patent Office has obtained input on post grant proceedings and is considering new and revised rules to ensure that IPR proceedings are efficient and fair. She expects these studies to be completed by the end of year and emphasized that the Patent Office is focused on patent strength and enhancing quality through long term initiatives.

The second panel of speakers at yesterday’s hearing included Kevin Kramer, Vice President, Deputy General Counsel for Intellectual Property at Yahoo!; Robert A. Armitage, Former Senior Vice President and General Counsel at Eli Lilly & Co.; David M. Simon, Senior Vice President, Intellectual Property at Salesforce.com; and Hans Sauer, Deputy General Counsel for Intellectual Property at Biotechnology Industry Organization.

These stakeholders provided industry perspectives on the need for a solution that encourages innovation and discourages abuse of the patent system. Some affirmed the provisions in the Innovation Act, and others proposed specific revisions. Suggested revisions included deferring discovery until after any venue motions are decided instead of waiting until after claim construction; mandating initial disclosure requirements in local patent rules as an alternative to heightened pleading standards; narrowing the broad estoppel provisions for post-grant review proceedings; and harmonizing the standards of review on validity during IPR proceedings to give deference to the patent owner and require “clear and convincing” evidence to invalidate patent claims.

It is clear that a balanced approach to any legislation is needed to address stakeholder desires and concerns for innovation and enforceable patents.

This was the third in a series of recent hearings held by the Senate and House Judiciary Committees on patent reforms.

On March 18, 2015, the Senate Committee on the Judiciary held a hearing on The Impact of Abusive Patent Litigation Practices on the American Economy. Senator Chuck Grassley (R-IA) spoke out against the abusive and deceptive tactics used by companies who assert poor quality patents to demand financial settlements, which is having a harmful effect on the U.S. economy. He expressed the need for a balanced approach that preserves legitimate patent rights and valid enforcement tools while deterring those who prey on and extort from innocent businesses. Senator Patrick Leahy (D-VT), a leader in effecting significant changes to the U.S. patent system through the America Invents Act, gave real-world accounts of businesses that have been impacted by abusive litigation practices, highlighting the need for meaningful legislation that will provide effective reform.

The witnesses at this Senate hearing were Brad Powers, General Counsel at KINZE Manufacturing, Inc.; Hans Sauer, Deputy General Counsel for Intellectual Property at Biotechnology Industry Organization; Steven E. Anderson, Vice President and General Counsel at Culver Franchising System, Inc.; Dr. Michael R. Crum, Vice President for Economic Development and Business Engagement at Iowa State University; and Krish Gupta, Senior Vice President and Deputy General Counsel at EMC Corporation.

These witnesses represent businesses from different industries, some of which have patent portfolios and rely on enforcement, and others who have only been subject to patent hold-up. There was a consensus of support for the ability of individual inventors and legitimate patent holders to produce and protect their intellectual property, but also an expressed need for patent litigation reform that promotes incentives for innovation and shuts down the exploitation and abuse of the patent system.

One example of an abusive tactic involving proceedings before the Patent Office was explained with respect to the biotechnology industry. There, stock market manipulation in connection with threatened IPR proceedings has lead to settlement payments by companies who wish to avoid unwarranted patent challenges and falling company stock prices. Another example of the impact abusive patent litigation is having on companies was given in the context of contract negotiations with suppliers and service providers. In the farming industry, such negotiations now routinely include discussions regarding the allocation of liability and defense responsibility in the event that a patent is asserted against a product, and more time and effort is being spent developing these contracts rather than on new inventions that will increase productivity and efficiency.

Stakeholder testimony was also provided on the evolving patent landscape given recent judicial and administrative actions. Some stakeholders believe that narrowly targeted legislation developed in the context of this changing landscape can provide the necessary balance for the patent system. For example, it would not be necessary to establish a fee-shifting presumption post-Supreme Court decisions in Octane Fitness and Highmark since that would diminish judicial discretion. It was also suggested that heightened pleading standards, discovery limitations, and patent disclosures will unnecessarily burden legitimate patent owners and prevent efficient and early resolution of cases. However, other stakeholders believe that only Congress can effect necessary changes, and the recently proposed changes to the Federal Rules and Supreme Court decisions are insufficient to fully address the patent abuse problem.

A webcast of the March 18, 2015 Senate hearing and the witnesses’ statements are accessible here.

On March 25, 2015, the House of Representatives Judiciary Subcommittee on Courts, Intellectual Property, and the Internet held a hearing on Patent Reform: Protecting American Innovators and Job Creators from Abusive Patent Litigation.

House Judiciary Committee Chairman Bob Goodlatte’s opening remarks focused on the need for reforms to prevent abuses of the patent system that divert capital resources that otherwise would be used to create new jobs, fund R&D, and develop new technology. He recognized the importance of preserving valid patent enforcement tools and patent property rights, while targeting abusive behaviors that lead to litigation extortion and negatively affect innovation and economic growth.

The witnesses at this hearing were Mark Griffin, General Counsel at Overstock.com; Kathryn Underwood, President and CEO of Ledyard National Bank; Todd Moore, Founder and CEO of TMSoft, LLC; and Bryan Pate, CEO of ElliptiGO, Inc.

The first three witnesses shared the story of how their companies deal with abuses of the patent system ranging from “spend and defend” strategies to compromises that result in the payment of settlement fees. Each of these companies promoted legislative reforms aimed to curb the abuses they face. These reforms include requiring that demand letters contain greater specificity, raising pleading standards, prioritizing suits against manufacturers, conducting early Markman hearings and focused fact discovery, strengthening fee-shifting options, and providing the Patent Office with discretion to waive filing fees for post-grant review proceedings.

The fourth witness also supported patent reforms, including providing the Federal Trade Commission and State Attorney Generals with wider latitude to address abusive demand letters as unfair trade practices and ensuring the Patent Office has necessary resources to issue robust patents, but expressed concerns over the provisions in the Innovation Act (H.R. 9). From the perspective of a patent-based technology start-up, ElliptiGO expressed the need to clarify the customer stay provision so that patent owners are not prevented from defending their businesses against unfair infringement by foreign and domestic actors, revise the fee-shifting provision to balance the risks and rewards of litigation so that small companies can still enforce their patents, narrowly define “interested party” to avoid exposure to personal liability for company stakeholders and investors, and reduce heightened pleading and discovery requirements that increase expenses for small companies seeking to enforce patents.

Here the consensus from innovators and small businesses is that legitimate patents, legitimate licensing and legitimate enforcement are supported. What needs to be fixed are the harms from litigation opportunists who exploit the patent system and seek to extract value not by productive use or licensing of patents, but by litigation.