Six months ago, when I last wrote in this space, Congress seemed poised to advance several measures designed to stamp out abuse of the patent system.
So-called patent “trolls,” known more politely as non-practicing entities (NPEs) or patent assertion entities (PAEs) found themselves on the receiving end of the legislation, which aimed to elevate pleading standards, restrain the scope of discovery in litigation, increase patent ownership transparency, protect customers from manufacturer suits, and award attorney fees more readily.
But despite passage by both the House and Senate Judiciary Committees, the legislation broke down over the summer as pharmaceutical companies, universities, venture capital funds, and other groups persuaded some members of Congress that the various provisions, separately and in total, would impair the patent rights of many individuals and companies. And now, with an election year upon us, further action on these bills is unlikely.
Into the legislative void has stepped the judiciary, which has issued new litigation guidelines and which will soon consider a bellwether case on how patent claims are interpreted.
First, until last December, patent complaints could follow so-called “form pleadings,” which required only very general and broad allegations, such as ownership of the patent, infringement by the defendant, and an entitlement to damages.
But under the new rules, which federal courts implemented in December 2015, all complaints, including patent filings, now have to recite enough detailed, plausible facts to survive a motion to dismiss. This change will presumably deter frivolous suits, including those filed by PAEs.
In addition, the rules will reduce the cost of discovery, a major driver of litigation expense. The previous rules dictated that discovery requests had to be “reasonably calculated to lead to the discovery of admissible evidence,” a fairly broad standard that some observers peg as one of the reasons discovery costs have escalated so sharply. In fact, two legal scholars, in work cited by the White House, found that litigation defendants and licensees paid PAE’s a total of $29 billion in 2011.
But under the new rules, discovery requests must now be “proportional to the needs of the case,” a measure that should deter “trolls” from driving up the cost of litigation by serving never-ending discovery pleadings. Since many PAEs exist on paper only, and therefore have virtually no documents of their own, they used to be able to exert asymmetric pressure on operating companies by requiring them to produce millions of pages of documents or lines of source code.
As one practitioner told IPLaw 360, the old rules sometimes “allowed nonpracticing entities to be aggressive in discovery requests as the incentives were skewed,” while the new “proportionality concept should help cut back on that phenomenon.”
In addition to the new rules, the Supreme Court announced in January that it would consider the proper standard for interpreting patent claims in proceedings at the Patent Office—a decision that could impact a different kind of PAE.
Through these proceedings, created by Congress in 2011, a party can challenge the validity of a patent more quickly, cheaply, and reliably than in district court. And unlike courts, where patent claims are given their “customary and ordinary meaning,” in the Patent Office, they are given their “broadest reasonable construction.” This broader interpretation makes it easier to invalidate a patent.
The Supreme Court will now consider the appropriateness of this dichotomy in what practitioners call the “claim construction” standard. If the Supremes elevate the Patent Office standard to the district court one, they will make it more difficult to challenge patents, including for a growing number of entities such as hedge funds that have filed such petitions.
Thus, in the absence of congressional action, the courts have worked to recalibrate the patent system.
