The INNOVATION Act and Patent Reform Considerations for Universities and Research Institutions
04/29/15 Jessica L. Lewis
Summary of Key Points
There are multiple efforts pending in Congress to revise the laws around patents, including the INNOVATION ACT, the STRONG Patents Act, and the TROL Act. The INNOVATION Act is generally considered to be the least favorable to universities and other research institutions because (i) joinder reforms would make it possible to drag university licensors into patent litigation, and (ii) fee shifting provisions could make patent enforcement unduly risky for institutions without vast litigation resources. Favorably to universities and other research institutions, the STRONG Patent Act would (i) allow broader enforcement of method patents by removing the divided infringement defense that a licensee can assert when the steps of the patent process are not practiced by a single entity, and (ii) reduce the potential for patent invalidation through post-grant proceedings by changing the post-grant standard for review from "broadest reasonable interpretation.” Similarly favorable to universities and other research institutions is the TROL Act, which focuses on curbing patent demand letters by classifying demand letters containing misrepresentations and sent in “bad faith” as unfair trade practices under the Federal Trade Commission Act.
I. The INNOVATION Act
On February 5, 2015, Rep. Bob Goodlatte (R-VA) reintroduced the INNOVATION Act to the House. Like Rep. Goodlatte’s original bill, the INNOVATION Act of 2015 (H.R. 9) is aimed at reducing litigation costs and curbing abuses in patent litigation. Reflecting the view that patent litigation abuses, including frivolous lawsuits by non-practicing entities (NPEs) or “patent trolls,” are rampant and so egregious that dramatic measures are needed to curtail them, the INNOVATION Act offers bold reforms. For example, the INNOVATION Act would amend Section 284 of the Patent Act 1 to require a patent holder claiming willful infringement to identify “with particularity” the asserted patent, the allegedly infringing product or process, the real party of interest (“the ultimate parent entity”), and how the product or process infringes a patent claim. In addition, the INNOVATION Act sets limits on the extent of pre-trial discovery, provides a mandatory stay of litigation against a customer if the customer agrees to be bound by the results of a suit against the manufacturer, and expands the “customer suit exception” to protect users of an allegedly infringing product or process from being sued in place of the manufacturer.
The most controversial reforms of the INNOVATION Act are the fee-shifting and joinder provisions. Signaling concern that the Supreme Court's Octane Fitness2 and Highmark3 standards for awarding attorney fees under Section 285 of the Patent Act4 don’t go far enough to promote fee shifting and to curb abusive litigation, the INNOVATION Act would require courts to award attorneys’ fees and costs to the winning party in patent cases. The INNOVATION Act also provides for involuntary joinder of “interested parties.”
II. Implications for Universities and Other Research Institutions
While the INNOVATION Act’s reforms are intended to curb abusive litigation tactics of the so-called patent trolls, patent practitioners and litigators who represent universities and other research institutions are acutely aware that the INNOVATION Act could make it more difficult and expensive for patent holders to defend their rights in good faith. NPEs encompass universities, technology transfer offices associated with universities, start-up firms that lack manufacturing and distribution capabilities, and individual inventors who license their inventions to others. Following reintroduction of the INNOVATION Act to the House, dozens of universities and professional associations including the Biotechnology Industry Organization (BIO) joined forces to applaud Rep. Goodlatte’s efforts to bring about much needed patent reforms but to highlight provisions of the bill most likely to harm patent holders that lack extensive litigation resources and that use revenue from their intellectual property to advance science and the useful arts. In a February 24, 2015 letter to Chairman Grassley, Ranking Member Leahy, Chairman Goodlatte, and Ranking Member Conyers, it was asserted that “much of the patent legislation currently being discussed in Congress, including the Innovation Act, H.R. 9, goes well beyond what is needed to address the bad actions of a small number of patent holders, and would instead make it more difficult and expensive for patent holders to defend their rights in good faith.” 5 The joinder and fee shifting reforms are particularly worrisome for universities and similarly situated patent holders. “The impact of fee-shifting would be magnified by proposed provisions calling for involuntary joinder, which could force universities and inventors into paying damages for actions of third parties over which they had no control. In some cases, such damage awards could devastate technology transfer operations.”6 Moreover, the INNOVATION Act provides a loophole that will allow companies that back “patent trolls” to avoid joinder and liability for a fee award. Specifically, the Act provides that courts “shall deny” a motion to join an interested party so long as that party “renounces . . . any ownership, right, or direct financial interest” in the patent. For “an interested party” that is a university licensor, ownership and financial interests in the patent are not so easily renounced in the interest of avoiding joinder and fee award liability.
Assuming that the INNOVATION Act’s reforms pose a unique threat to this class of patent holders, it raises the question of whether it’s possible to tailor legislative efforts to curb abusive patent litigation practices without unduly burdening universities, non-profit technology transfer organizations, and their licensees. What would such narrowly tailored legislation look like? The answer may be found in two other patent reform bills currently under consideration in the House and Senate.
II. The Patent Reform Trilogy
Introduced in the Senate on March 3, 2015, the ‘‘Support Technology and Research for Our Nation’s Growth Patents Act of 2015’’(S. 632) 7 or the ‘‘STRONG Patents Act of 2015’’ offers reforms that reflect the view that patents are unduly weakened by post-grant opposition proceedings before the Patent Trial and Appeal Board (PTAB) and that abusive demand letter practices can be effectively curbed with enhanced damages provisions and a presumption of patent validity in PTAB proceedings. By removing the PTAB practice of interpreting patent claims under the “broadest reasonable interpretation” standard and aligning federal court and PTO proceedings, the STRONG Patents Act may deter some PTAB challenges. It also includes other provisions that are somewhat narrowly tailored to address the so-called “patent troll” problem. For example, the STRONG Patents Act provides for divided infringement (removing the requirement “that the steps of the patented process be practiced by a single entity”8) and leaves out fee-shifting and involuntary joinder provisions. In view of these differences, the STRONG Patents Act arguably is less likely than the INNOVATION Act to unintentionally weaken technology transfer and university research and is considered to be the most “pro-patentee” reform bill to date.
A third alternative patent reform bill was introduced to the House earlier this month. On April 13, 2015, Congressman Michael Burgess (R-Tex.), Chairman of the Commerce, Manufacturing, and Trade Subcommittee of the House Energy & Commerce Committee, introduced the “Targeting Rogue and Opaque Letters Act of 2015’’ (TROL) Act. 9 The TROL Act defines what constitutes a demand letter sent “wrongly and in bad faith” and, thus, an unfair trade practice subject to enforcement under Section 5 of the Federal Trade Commission Act. According to Congressman Burgess, by classifying misrepresentations in demand letters as unfair trade practices, the TROL Act “offers a balanced solution to this pressing problem, targeting bad actors without compromising a strong patent system that is necessary to protect innovation and job growth.” In addition, the TROL Act would preempt all state laws relating to the assertion of patent rights, thus standardizing the piecemeal state-by-state approach10 to addressing abusive demand letters, but preserves the authority of State attorneys general to enforce state versions of the FTC Act and authorizes state attorneys general to enforce the provisions of the TROL Act. Moreover, the TROL Act would establish an “affirmative defense” -- the letter sender can avoid liability by demonstrating that no statements, representations or omissions were “made in bad faith.”
On April 22, 2015, the House Commerce, Manufacturing and Trade Subcommittee Wednesday voted along party lines (ten Republicans in favor and seven Democrats opposed) to approve the TROL Act with a single amendment. Notably, the subcommittee adopted an amendment offered by Subcommittee Chairman Congressman Burgess to replace the affirmative defense with a narrower “bona fide defense” adapted from the Fair Debt Collection Practices Act. Under the amended defense provision, the sender of a demand letter can avoid liability if they can prove that the unfair trade violation was a bona fide mistake.
Higher education associations have responded favorably to the TROL Act’s reforms. For example, the Association of American Universities (AAU) and the Association of Public and Land-grant Universities (APLU) released a joint statement indicating support for the TROL Act, asserting that the legislation “appropriately employs a practical approach to combating patent troll practices, including by authorizing the Federal Trade Commission to use its authority even more effectively to treat such demand letters as an abusive, deceptive, and potentially fraudulent business practice.” 11 Also in favor of the TROL Act are member companies of the Coalition for 21st Century Patent Reform (including 3M, Bristol-Myers Squibb, Caterpillar, ExxonMobil, General Electric, Procter & Gamble, Johnson & Johnson, and Eli Lilly)12 and the Innovation Alliance (including Dolby Laboratories, QUALCOMM, Tessera, and InterDigital).13 Many of these companies and industry coalitions co-signed a letter to the House Judiciary Committee, objecting to the INNOVATION Act as unnecessary in the wake of legal measures that have reined in the worst patent litigation abuses.14 Vocal opponents of the TROL Act include the United for Patent Reform Coalition, of which GM, Google, Walmart and other retail, lodging, and automotive industry groups are members.
Given the attention being paid to patent reform litigation legislation introduced in the 114th Congress, we’re likely to see substantive changes to existing patent law -- changes intended to address the perceived problems caused by entities that engage in abusive or deceptive patent litigation tactics. It remains to be seen, however, which provisions of these three patent reform proposals will ultimately prevail.
1 35 U.S.C. § 284.
2 Octane Fitness LLC v. Icon Health & Fitness Inc., 134 S.Ct. 1749 (2014).
3 Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S.Ct. 1744 (2014).
4 35 U.S.C. § 285.
5 Letter to Chairman Grassley, Ranking Member Leahy, Chairman Goodlatte, and Ranking Member Conyers, February 24, 2015.
7 S. 632, Support Technology and Research for Our Nation’s Growth Patents Act of 2015, March 3, 2015.
8 35 U.S.C. § 271(j).
9 H.R. ___, Targeting Rogue and Opaque Letters (TROL) Act, April 13, 2015.
10 State laws addressing abusive demand letters have been enacted in twenty states: Alabama, Georgia, Idaho, Illinois, Louisiana, Maine, Maryland, Mississippi, Missouri, New Hampshire, North Carolina, North Dakota, Oklahoma, Oregon, South Dakota, Tennessee, Utah, Vermont, Virginia, and Wisconsin.
11 AAU-APLU Joint Statement on the Targeting Rogue and Opaque Letters (TROL) Act, released April 16, 2015 (www.aau.edu/policy/article.aspx?id=16124).
12 See www.patentsmatter.com.
13 See innovationalliance.net.
14 See Patent Law Reform Bill to Stop Trolls Could Stifle Innovation, Washington Times, Feb. 5, 2015, Washington Times, available at http://www.washingtontimes.com/news/2015/feb/5/patent-law-reform-bill-to-stop-trolls-could-stifle/?page=all.