Patent Troll Bill Resurfaces in the Congress

Last year Congress tried to pass a bill aimed at curbing abusive patent litigation initiated by so-called “patent trolls,” or non-practicing entities (NPEs), but the bill died in the Senate when it was dropped from the Senate’s agenda as it was nearing a vote, even though the bill had passed in the House and President Obama had indicated he would sign it. This year, the push for legislation has been revived and bills have been introduced in both the House of Representative and the Senate.

The re-introduced bills include the House’s bill, called “The Innovation Act,” H.R. 9, introduced in February, 2015, and the Senate’s bill, the “Protecting American Talent and Entrepreneurship Act,” or PATENT Act, S. 1137, introduced in mid-May 2015.

While both bills have similar approaches on many provisions, there are four areas where they differ significantly: 1) fee shifting; 2) fee recovery; 3) demand letters and 4) claim construction in AIA reviews.

1. Fee Shifting

In both bills the fee-shifting provision is one of the most controversial provisions. Under a fee-shifting provision an NPE that brings a baseless suit and loses may have to pay its opponents’ legal fees. In the House bill fee-shifting is the default position, unless a court determines that the conduct of the losing party was “reasonably justified” or there are special circumstances that would make such an award unfair. In the Senate’s bill there is no presumption. Instead, a prevailing party must move for award of fees and the court will award them if it determines that the losing party’s conduct was “not objectively reasonable.”

Fees are more likely to be awarded under the House’s bill than the Senate’s. Some worry that these provisions would discourage companies from bringing legitimate patent infringement suits for fear that, if they lose, they would be saddled with paying the legal fees of their opponent.

2. Fee Recovery (Shell Companies)

Both bills have provisions preventing NPEs from setting up shell companies with no assets that are basically judgment-proof. The main difference between the bills is timing. The Senate’s bill wants it disclosed early in the litigation if a party cannot pay, whereas the House’s bill does not require disclosure until the conclusion of trial. In the Senate’s bill a defendant can allege to a court before a scheduling conference that the plaintiff is an NPE and would be unable to pay. In the House’s bill it is only after fees have been awarded and the losing party is not able to pay that a court can grant a motion to join another party to the litigation that can pay and has a direct financial interest in the patent.

3. Demand Letters

Both bills have provisions dealing with vague or misleading demand letters. The House’s bill says it is “the sense of Congress” that such letters are an abuse of the patent system, and unless the letter contains details about the infringement allegation, the sender cannot rely on such a letter in litigation to establish willful infringement and secure enhanced damages but does not give specifics. The Senate’s bill outlines detailed requirements of what actually must be included in a demand letter. It also establishes civil penalties, enforceable by the Federal Trade Commission, for those who engage in widespread sending of misleading demand letters.

4. Claim Construction Used in AIA Reviews

One provision that appears in the House bill, but not in the Senate’s, is a change in claim construction used by the Patent Trial and Appeal Board in America Invents Act (AIA) reviews. Currently the broadest reasonable interpretation is used in claim construction. The House’s bill would change that to adopt the narrower standard used in district courts. In contrast, the Senate’s bill is silent regarding claim construction used in AIA proceedings. Many see this provision in the House’s bill as pro-patent owner since it is believed that fewer patents will be invalidated by AIA proceedings using the narrower claim construction.

We will have to stay tuned as these bills make their way through Congress. Because key members of the House and Senate Judiciary Committees are supporting these bills, there is a strong belief that Congress will pass some version these bills in the next few months.