From the Alliance

May. 6, 2015

Innovation Alliance Priority Positions on S. 1137, the Senate Protecting American Talent and Entrepreneurship (PATENT) Act

Patent rights are essential to the innovation ecosystem and continued prosperity of the United States. Intellectual property intensive industries are worth nearly $9 trillion of U.S. GDP and support nearly 40 million jobs nationwide. Startups generate 10 percent of all new U.S. jobs every year. Patent licensing is also a critical competitive advantage in international trade: U.S. patents generated $45 billion in licensing revenue in 2013, more than the value of any other country’s total IP licensing revenue.

Without strong enforceable patents, larger companies can ignore the rights of smaller companies and imitate their ideas without paying for them. We see this phenomenon in countries like China, where patent rights are not enforced and therefore not effective to prevent copying. For young, quickly growing startups, taking away the ability to protect their inventions from infringers would be devastating or fatal. Aside from having to compete against infringing products, venture capital and other investors will not take the risk of investing in companies whose value is based on technology that is unlikely to be protected under U.S. patent law. 

Patent law has changed dramatically in the past year. The U.S. Supreme Court decided six patent cases in 2014 that make it harder to enforce patents, the Judicial Conference adopted changes to the Federal Rules of Civil Procedure that would hold patent cases to heightened pleading standards, and the Federal Trade Commission and state attorneys general have increasingly asserted their authority to protect consumers from abusive patent demand letters. More than 2,700 petitions have been filed under a new administrative procedure called inter partes review (IPR) to challenge patents at the U.S. Patent and Trademark Office (USPTO) in a faster and cheaper procedure than litigation. And 78 percent of those cases have been decided against the parent holder, an unintended consequence of the America Invents Act.

With 70 percent of patents challenged in court being invalidated under Alice v. CLS Bank, nearly 80 percent of patents being invalidated in IPR proceedings, and Supreme Court cases making it harder to prove infringement, easier to prove invalidity, and riskier to assert patent rights, Congress should not pile on by making it harder to plead patent cases, harder to obtain discovery, harder to hold the culpable party responsible, and even riskier still to seek to defend one’s rights.

While we welcome improvements in the PATENT Act over legislation introduced in the Senate last year with respect to issues such as discovery and demand letters, and over patent legislation now pending in the House (H.R. 9), the Innovation Alliance believes that several of the provisions are overbroad and would jeopardize the value and enforceability of all U.S. patents, and as a result, risk serious damage to the economy and future of U.S. innovation.

Stay of judicial proceedings (sec. 4). The PATENT Act contains a provision that directs courts to stay judicial proceedings against so-called covered customers who are accused of patent infringement based on a covered product or covered process, in favor of cases against covered manufacturers. While the drafters of the bill have claimed that “this provision protects customers” who “simply have purchased off the shelf,” the legislative text is much broader: under S. 1137, the actual language of the definitions potentially cover any party in a chain of commerce, even those device manufacturers and product designers who profit most from infringement, so long as some “manufacturer” exists further up the supply chain. These provisions, though appropriately intended to protect “innocent” retailers and end users from patent litigation suits, would have the unintended consequence of immunizing from liability culpable infringers throughout the supply chain, including large companies who rely on offshore subcontractors to build or assemble their products, and leave patent holders without recourse to enforce their patent rights. Federal judges already have authority to manage their cases and routinely grant stays in individual cases as justice requires. Congress should appropriately target this provision to ensure that a U.S. patent owner does not have to seek relief for indirect infringement of valid U.S. patent rights against upstream manufacturers of non-infringing components while the real case of direct infringement against the infringing product is stayed.

Heightened pleading standards (sec. 3(a)). The PATENT Act would impose stringent and specific pleading standards on patent plaintiffs that would require a patent owner to identify with particularity the model number or description of “each accused instrumentality” of “each claim” infringed on “each patent” at issue. This would pose an extreme threshold barrier to the enforcement of U.S. patent rights by requiring patent plaintiffs to prove much of their case before even filing a complaint. This is not possible in most patent cases, where substantial information about the full extent of infringement may not be available in the public domain or even knowable without discovery. In addition, this provision will create substantial additional expense and delay at the outset of virtually all patent cases as plaintiffs will need to file complaints dozens or hundreds of pages in length to get into court, and defendants will routinely file motions to dismiss complaints (and any later-amended complaints) as insufficiently pleaded. This provision is unnecessary, as the Judicial Conference already voted to abolish Form 18 of the Federal Rules of Civil Procedure, which does not require patent owners to plead infringement with any level of specificity. By eliminating Form 18, courts will require patent plaintiffs to plead sufficient facts to state a plausible claim of infringement under heightened pleading standards established by the Supreme Court.

Discovery Stay (sec. 5). The PATENT Act contains provisions that would stay all discovery pending the resolution of pre-trial motions to dismiss, transfer venue, or sever accused infringers. When coupled with the heightened pleading requirements, the discovery stay in the PATENT Act creates significant potential for abuse. Linking the discovery stay to a motion to dismiss would allow a defendant to repeatedly move to dismiss a plaintiff’s complaint and any subsequent amended complaints due to alleged failure to meet the heightened pleading requirements. A defendant could also invoke a stay of discovery by moving to transfer venue or to sever, even though the merits of a venue or severance motion have no bearing whatsoever on whether or not the plaintiff will ultimately be allowed discovery. Moreover, even under normal circumstances, the discovery stay would go on indefinitely as there are no time limits for courts to decide these types of pretrial motions, and some districts, such as the District of Delaware, take significant periods of time—sometimes months or even more than a year— to resolve them. Such delay would unfairly prejudice the patent owner and allow ongoing infringement to continue unabated without any recourse. Judges already have discretion to limit discovery in individual cases as necessary; rather than impose rigid statutory rules, Congress should structure discovery to allow litigants to receive basic information necessary to prosecute or defend a patent case, and to require judges to make timely rulings on pretrial motions within reasonable deadlines.

Inter Partes Review Reform at USPTO. While it is overbroad in these areas, the PATENT Act does not go far enough in others. The PATENT Act fails to correct the well-documented unfairness and imbalance in the inter partes review procedure (IPR) at the USPTO that is an unintended consequence of the America Invents Act. Since the IPR program was implemented in September 2012, more than 2,700 requests for IPRs have been made at USPTO, and 78 percent have been decided against the patent holder.
The PATENT Act should include provisions that would end abuse and ensure basic fairness to patent owners by imposing a standing requirement for filing IPR petitions, ensuring that patent owners have the right to amend their patent claims to preserve patentability, and ensuring that patent claims are construed consistently and under the same standards in both IPR and district court proceedings. Model language for these reforms can be found in the STRONG Patent Act, introduced by Senators Durbin, Coons and Hirono.