CONGRESSWOMAN ELISE STEFANIK
On Thursday, December 5, 2013, the House will begin consideration of H.R. 3309, the Innovation Act, under a rule. H.R. 3309 was introduced on October 23, 2013 by Rep. Bob Goodlatte (R-VA), Chairman of the House Judiciary Commtitee, and has sixteen cosponsors. H.R. 3309 was marked up on November 20, 2013 by the House Judiciary Committee and was ordered reported, as amended, by a vote of 33-5.
H.R. 3309 targets abusive patent litigation by increasing transparency within the litigation process and requiring parties to disclose more initial information to explain why a suit is being filed. The bill also provides for education and outreach to small businesses; requires studies on abusive patent litigation; and makes improvements and corrections to the Leahy-Smith America Invents Act (AIA). A section-by-section analysis by the House Judiciary Committee is available here.
Patent Infringement Actions
Heightened initial pleading requirements: H.R. 3309 requires a party alleging patent infringinement to disclose more information than is currently required in its initial pleadings. Speficially, the bill requires a claimaint to identify the patents and claims that are allegedly infringed; and to specify how they are being infringed.
Fee shifting: The bill requires fees and expenses to be paid to the prevailing party if the claims brought against it were not reasonably justified under law. The modification does not impose a strict “loser pays” system, as the nonprevailing party is immune from paying a fee award if its claims were brought in good faith and were reasonably justified in law and fact.
Joinder provision: If a nonprevailing plaintiff is a patent assertion entity and is not able to pay fees and expenses awarded to the prevailing party, H.R. 3309 allows the court to join an interested party (e.g. a parent entity) to satisfy the fee-shifting award.
Discovery in patent cases: If a court determines that it must first rule on the construction of terms used in a patent claim, prior to considering the alleged infringement claim, H.R. 3309 allows the court to limit the information that must be disclosed in discovery until claim construction has occurred.
Transparency of Patent Ownership
H.R. 3309 requires the plaintiff, upon filing an initial complaint for patent infringement, to also provide to the court, other parties, and the Patent and Trademark Office (PTO) basic information on the patent. This information includes the patent assignee, the parent entity of any assignee, any entity with a right to sublicense or enforce the patent, and any entity with a financial interest in the patent. H.R. 3309 requires that the information be updated throughout the life of the patent.
H.R. 3309 allows a manufacturer to intervene in a suit against its customer and allows the action to be stayed as to the customer in the meantime, as long as the manufacturer and the customer agree. To receive a stay, the customer must agree to be bound by any issues it has in common with the manufacturer that ultimately are decided by the court.
Procedures and Practices to Implement and Recommendations to the Judicial Conference
H.R. 3309 requires the Judicial Conference to promulgate rules and procedures on core document discovery.
Case management: The bill provides for procedures to ensure initial disclosure and early case management conference practices in District Courts, to help identify any potentially case-dispositive issues.
Revision of form for filing a patent infringement case: H.R. 3309 eliminates Form 18, the current short-form patent complaint, and allows creation of a new form that requires disclosure of more information to accused infringers.
Protection of IP licenses in bankruptcy: The bill ensures U.S. law—not foreign law—is followed, guaranteeing that intellectual property (IP) licenses are not eliminated in bankruptcy. U.S. law prevents a bankruptcy trustee from terminating licenses to patents and other IP of the debtor. Manufacturers often invest billions of dollars in reliance on their right to practice a technology pursuant to a license. Allowing the elimination of a license in bankruptcy would create commercial uncertainty and would undermine manufacturing investment.
Small Business Education, Outreach, and Information Access
H.R. 3309 establishes a small business education and outreach program. It directs PTO to provide resources for small business concerns arising from patent infringement and abusive patent litigation practices.
The bill also requires PTO to develop a website to include patent transparency information. In part, the website must notify the public when a patent case is brought in Federal court.
Studies on Patent Transactions, Quality, and Examination
H.R. 3309 requires several studies, including 1) a study on secondary market oversight for patent transactions to promote transparency and ethical business practices; 2) a study on patents owned by the U.S. government; 3) a study on patent quality and access to the best information during examination; 4) a study on developing a pilot program for patent small claims courts; 5) a study on the prevalence of demand letters sent in bad faith and their negative impact on the marketplace; and 6) a study on business method patent quality.
Improvements and Technical Corrections to the Leahy-Smith America Invents Act
H.R. 3309 makes several improvements and technical corrections to the Leahy-Smith America Invents Act (AIA), including the following:
Elimination of Section 145: H.R. 3309 eliminates 35 U.S.C. §145, which allows a patent applicant whose claims have been rejected, and who has appealed to the Patent Trial and Appeal Board and lost, to challenge the Board’s decision in a Federal district court rather than appealing to the Federal Circuit. With the AIA in place, entities who previously relied on Sec. 145 to have new evidence considered can accomplish the same administratively through a continuation application.
Post-Grant and Inter Partes claim construction: The bill ensures that claims of issued patents be construed as a matter of law in post-grant and inter partes review, since the proceedings are an adjudication of the validity of issued patent claims and not a reexamination of the claims of an issued patent. H.R. 3309 ensures that the proceedings are implemented in line with Congressional intent, and brings consistency to PTO proceedings, which use judicial claim construction in reexaminations where the claims are no longer permitted to be freely amended.
Prior art in cases of double patenting: The bill codifies the double-patenting doctrine and applies it to first-to-file patents, controlling the effects of exceptions to prior art that permit a patentee to obtain multiple patents for what is basically the same invention and then sell those patents to different parties, requiring others to obtain multiple licenses from multiple parties to practice the invention.
Clarification of limits on patent term adjustment: Current law “provides for a day-for-day adjustment of the term of a patent for delays attributable to the PTO after an application has been pending for more than 3 years. Subparagraph (B) excludes certain events from that adjustment.” H.R. 3309 clarifies that no “B delay” patent-term adjustment (PTA) may be awarded for any of the time accrued after an applicant has restarted prosecution by filing a request for continued examination (RCE).
 H.R. 3309 aligns the fee shifting standard in patent cases with the Equal Access to Justice Act (28 U.S.C. 2412(d)), which was enacted in 1980 and has since developed a well-developed predictable body of case law.
 The manufacturer must be a party to the case or to a separate case involving the same patent or patents related to the same covered product or process.
 Committee Report at 34.
 “The double patenting doctrine was developed by the courts to control the effects of exceptions to prior art that permit a patentee to obtain multiple patents for obvious variations of the same invention.” Committee Report at 35.
 Id. at 41.
The U.S. Patent and Trademark Office (PTO) “is the federal agency for granting U.S. patents and registering trademarks. In doing this, the [PTO] fulfills the mandate of Article I, Section 8, Clause 8, of the Constitution that the legislative branch ‘promote the progress of science and the useful arts by securing for limited times to inventors the exclusive right to their respective discoveries.’” To acquire a patent, an inventor submits an application to PTO, where a team of patent examiners reviews the application to determine whether it meets the statutory requirements.
A proposed patent generally includes two parts: the specification and the claims. “The specification is a written description of the invention that . . . sufficiently discloses the invention and the manner and process of making and using it.” The claims “define the scope of the invention for which protection is granted and must be definite.” Claims are akin to a patent’s “boundaries,” and vague claims can require a court to engage in “claim construction”—a proceeding to define the boundaries of a patent before an alleged infringement can be analyzed. Once issued, a patent provides an inventor “the right to exclude others from making, using, selling, or importing claimed inventions for a limited period of time, generally 20 years.”
Patent holders have traditionally asserted their patents against producers of infringing technologies. Some sell their patents to patent assertion entities (PAEs), which do not produce technology, but instead buy patents and assert them. PAEs can protect small inventors by asserting their patents against larger infringing companies. But in recent years, abusive patent litigation—“patent trolling”—has ballooned, as some PAEs have emerged solely to buy questionable and vaguely-defined patents and assert them against companies in hopes of extracting licensing fees.
The Leahy-Smith America Invents Act (AIA) was enacted in 2011, making fundamental changes to U.S. patent law. Although deliberations surrounding the AIA addressed abusive patent litigation, the AIA ultimately did not contain subtantial reforms targeting the practice. Patent trolls send vaguely-worded complaints, often in the form of “demand letters,” threatening to sue companies that produce or use allegedly infringing technologies. Recent congressional testimony highlighted one challenge for victims of patent trolling: “Without knowing the asserted claims and the accused features of products, it is very difficult for us to begin to defend ourselves. . . . [N]ot providing the necessary information at the beginning of a case in the complaint slows down the litigation and makes it inefficient and expensive for both parties.”
Patent trolls increasingly target not only large manufacturers, but small businesses that use allegedly infringing technology. In congressional testimony in March of 2013, one witness explained, “A patent litigation practice that has been sharply criticized is the institution of suits against large numbers of assemblers, distributors, or retailers rather than the original manufacturer or provider of the component or product alleged to infringe.” One infamous example provides insight:
“The [PAE’s] plan was to assert the patents against users of equipment that provides a form of wireless Internet access commonly known as ‘Wi-Fi.’ By the time the patents were assigned to the PAE, however, the patents had already been broadly cross-licensed to competitors and were nearing the end of their patent terms. Additionally, the prior owners [of the patents] had made binding contractual commitments to license all comers on fair and reasonable terms.
“Its targets—it has sent over 13,000 letters threatening litigation—often are nonprofits, local and state governments, and small and medium-sized businesses including retirement homes, children’s health clinics, coffee shops, cafes, restaurants, and convenience stores. These entities are targets because they . . . provide Wi-Fi on their premises . . . . Some of this equipment is already licensed under the patents-in-suit because of broad licenses previously granted by the previous owners. But the PAE doesn’t tell their targets this . . . . Instead, the PAE tells these targets, who may have spent as little as $40 on their wireless equipment, that, unless they pay at least $2,000 or $3,000 per location within 2 weeks, they will be sued and have to engage counsel to review thousands of pages of documents.”
H.R. 3309 addresses this pattern by allowing manufacturers to join cases against customers, and requires courts to stay cases against customers while the manufacturer’s case proceeds.
An industry witness also testified in April of 2013 on the need for enhanced initial disclosure procedures and early case management, noting “that plaintiffs who do not practice the claimed invention often lack reciprocal discovery burdens, and therefore feel unconstrained in their imposition of such burdens on defendants: ‘Exacerbating that burden are frequently vague and overreaching infringement allegations, making it difficult for a defendant to determine the metes and bounds of its obligation to preserve evidence, and highly disruptive to comply with that obligation. Coupled with the growth of electronically stored information that is an easy target for burdensome discovery requests, the costs of litigation can mushroom out of control and force defendants to settle simply to avoid intrusive discovery.” One company reported “The number of electronic documents [it] had to collect exceeded 10 million. The cost to collect those documents, before considering the attorney’s fees to review and make production determinations, was about $1.5 million. . . . Of those documents, only . . . .000183% . . . appeared on an evidence list as possibly being introduced at trial.”
“Patent litigation is very expensive; the average suit in which $1 million to $25 million is at stake costs $1.6 million through discovery and $2.8 million through trial.” Most unique defendants in these cases are companies with $10 million or less in revenue—and “startups are particularly vulnerable.” Some “have noted that . . . ‘Although startups are a crucial source of new jobs, [patent-troll] demands have impacted their ability to hire and meet other milestones, caused them to change their products, and shut down lines of business.’” Because patent litigation is so complex and costly, businesses often choose to pay licensing fees to patent trolls—even if the claims are baseless—rather than going to court.
Abusive patent litigation is altering the way small businesses conduct their affairs. “‘In response to the wave of patent troll cases, we have changed our business practices. [F]or example, in the past, . . . we might have considered licensing technology from a small inventor, . . . [a] few guys in a garage who are putting together a very exciting idea about technology. . . . [But now,] we are taking a second look at that. . . . [W]e [often] do not license that technology because we are concerned that that young inventor, that startup, may not have the wherewithal to defend and indemnify us in a patent troll case. And I think that is a very unfortunate thing for innovation in general.’”
 The U.S. Patent and Trademark Office: Who We Are.
 The statutory requirements for patents are 1) novelty; 2) nonobviousness; 3) utility; and 4) patentable subject matter . GAO: Intellectual Property: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality (Aug. 2013) at 7 (hereinafter “GAO Report”).
 Id. at 8. “The specification must be written in full, clear, concise, and exact terms so as to enable any person skilled in the art to make and use the invention.” Id.
 Brian T. Yeh, An Overview of the “Patent Trolls” Debate, Congressional Research Service (Apr. 16, 2013) at 3 (hereinafter “CRS Report”). Inventors may enforce this right by filing infringement suits, “regardless of whether it was copied or developed independently.” Id. On average, the process of issuing a patent takes 30 months. GAO Report at 7.
 CRS Report at 4.
 Committee Report at 17. “The AIA addressed scores of matters both large and small, updating or abrogating statutory provisions and judicial constructions from as recently as the last few years to as far back as the first half of the 19th century.” Id. “Perhaps most significantly, the AIA replaced the existing inter partes reexamination system with inter partes review proceedings and introduced a new proceeding titled ‘post-grant review.’ Both inter partes and post-grant reviews are patent revocation proceedings administered by the USPTO. They would operate similarly to the so-called ‘reexamination’ system which has been part of U.S. law since 1981. Prior to the September 16, 2012, effective date established by the AIA, the USPTO had administered two types of reexamination proceedings, termed ex parte and inter partes.” CRS: The Leahy-Smith America Invents Act (Jan. 15, 2012) at 12.
 Committee Report at 23.
 Id. at 26.
 Id. at 26-27.
 Id. at 31-32.
 Id. at 32.
 CRS Report at 3.
 Committee Report at 20.
 Id. at 20.
 Committee Report at 20.
According to CBO cost estimates, implementing H.R. 3309 would cost $3 million from 2014-2018. The bill would not affect direct spending or revenues. “CBO also estimates that implementing H.R. 3309 would have a gross cost to PTO of about $30 million per year. However, PTO is authorized to collect fees sufficient to offset its operating expenses; therefore, CBO estimates that the net budgetary effect of PTO’s activities undertaken to implement H.R. 3309 would not be significant.”
1) Rep. Goodlatte (R-VA) Manager’s Amendment #26 – Amendment makes a few technical and clarifying changes. Specifically, under Section 3(d), it clarifies that the exception in paragraph one applies to biosimilars, it also adds an exception for actions seeking relief based on competitive harm, and ensures that the provision is not subject to reverse gamesmanship. Under Section 6(d) it makes clarifying changes that ensure that foreign courts cannot terminate licenses to US IP. Extends time required by the agencies to complete the various studies and reports required in the bill.
2) Rep. Watt (D-NC) Amendment #17 – Amendment brings the fee shifting provision in the underlying bill more closely aligned with the Equal Access to Justice Act. Amendment also allows a judge to consider dilatory or other abusive tactics by the prevailing party in determining whether to reduce or deny a fee award.
3) Rep. Polis (D-CO) Amendment #4 – Amendment requires claimants to provide additional disclosure information in any pre-suit notification to establish a willful infringement claim.
4) Rep. Massie (R-KY) Amendment #1 – Amendment strikes section 5, the "Customer-suit exception" provision. According to the sponsor’s office, the amendment would ensure a patentee’s enforcement rights are not undermined.
5) Rep. Jackson Lee (D-TX) Amendment #7 – Amendment modifies “covered customer” definition to include small businesses whose annual revenue does not exceed $25 million, thereby narrowing the definition of “covered customer,” which currently does not contain an annual revenue cap.
6) Rep. Jackson Lee (D-TX) Amendment #8 – Amendment requires the Director to conduct a study regarding the economic impact of the changes in current law resulting from Sections 3, 4, and 5 of the bill on the ability of individuals and small businesses owned by women, veterans, and minorities to assert, secure, and vindicate their constitutionally guaranteed exclusive right to their inventions and discoveries.
7) Rep. Rohrabacher (R-CA) Amendment #20 – Amendment strikes 9(a) from the bill and reorders the remaining subsections of Section 9. According to the sponsor’s office, the amendment would restore the independent judicial review provisions of current law.
8) Reps. Conyers (D-MI) and Watt (D-NC) Amendment #15 – Amendment promotes transparency in patent ownership; protects customers who are targeted in infringement suits; directs the PTO to develop educational resources for small businesses; and instructs the PTO and others to prepare reports on several issues including the use of deceptive demand letters.
For questions or further information contact the GOP Conference at 5-5107.