Monthly Archives: July 2013

Congress Considering Stronger Trade Secret Laws

by: Robert Wagner, intellectual property attorney at Picadio Sneath Miller & Norton, P.C. ()

shutterstock_65907358Congress is not limiting its intellectual property legislation to just patents. Senators Whitehorse and Graham announced yesterday that they are proposing new legislation to aid US companies in protecting their trade secrets via expanded criminal penalties. While just in a “discussion draft” stage, the proposed legislation  includes provisions that “cover[] foreign-sponsored trade secret theft, that victim companies can weigh in on how to protect trade secrets during criminal prosecutions, and to ensure that foreign hackers that victimize American companies can be held accountable.”

Among its provisions, the proposed legislation would:

  • expand coverage to prohibit government sponsored hacking
  • allow owners of the trade secrets more input in cases
  • clarify that the statute covers trade secret theft that is facilitated by means located in the US
  • clarify that “foreign instrumentalities” include companies that are substantially subsidized by foreign government entities
  • expand trade secrets to include negotiating strategies and positions
  • clarify that liability exists for any knowing conveyance of stolen trade secrets to foreign governments
  • make trade secret theft a RICO predicate act

The text of the discussion draft can be found here, along with a summary of the key provisions.

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Survey of Proposed Patent Lawsuit Reform Bills in Congress (Part 3)

by: Robert Wagner, intellectual property attorney at Picadio Sneath Miller & Norton, P.C. ()

US Capitol BuildingIn a growing response to concerns about patent “trolls” and the tactics they use in litigation, the President and Congress are calling for changes in the patent laws to assist the targets of these patent assertion entities (PAEs). Currently, there are six bills pending in Congress that address, in some respect, these concerns. In the final part of this series, we are looking at the four remaining pieces of legislation, which are all more narrow in focus, and what changes are being proposed in them. (Parts one and two of our series are here and here.)

Pending Legislation:

  • Patent Abuse Reduction Act of 2013 (S. 1013)
  • Patent Litigation and Innovation Act of 2013 (H.R. 2639)
  • Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013 (H.R. 845—SHIELD Act)
  • End Anonymous Patents Act (H.R. 2024)
  • Patent Quality Improvement Act of 2013 (S. 866)
  • Stopping the Offensive Use of Patents Act (H.R. 2766—STOP Act)

Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013 (H.R. 845)

The SHIELD Act is designed to shift the costs of litigation to certain kinds of patentees that lose patent infringement lawsuits. Specifically, patentees that (1) are not the original inventor or assignee of the patent, (2) have not made a “substantial investment” to exploit the patent through production or sale of item covered by the patent, or (3) are not a university or a university’s technology transfer organization will be required to pay the full costs and attorneys’ fees of the prevailing party that asserted invalidity or non-infringement, unless the court finds that exceptional circumstances exist.

A party asserting invalidity or non-infringement may move the court for a judgment that the patentee does not fall within one of these three classifications. If the motion is made before initial disclosures are due, the court must stay discovery, except for that necessary to resolve this motion. If the motion is made after the initial disclosures, the court may wait until after entry of final judgment to decide the motion.

There are a couple of interesting points about this proposed litigation. First, there is no good faith or reasonable basis exception explicitly contained in the determination of whether to award fees. Thus, unless courts consider a good-faith basis for filing the suit to be an “exceptional circumstance,” entities that do not fall within one of the three categories must pay a defendant’s costs and fees regardless of the reasonableness of the lawsuit.

Second, the bill does not indicate what happens with mixed verdicts. If a patentee prevails on all but one claim, is a defendant entitled to collect all of its costs and fees, or only some pro-rated amount?

Third, how would this bill affect declaratory judgment actions? The language is not written in terms of plaintiff or defendant, but in terms of the “party asserting invalidity or noninfringement.” If a company receives a cease-and-desist letter from an entity that does not fall within one of the three categories and files a declaratory judgment action, is the patentee subject to this rule? Presumably, it would be, which means that these kinds of patentees would have to be extremely careful when sending licensing or cease-and-desist letters.

End Anonymous Patents Act (H.R. 2024)

This act is fairly straightforward. It simply requires that a patent owner file a disclosure with the USPTO of the real party in interest of any patent when (1) the patent issues, (2) a maintenance fee is paid, and (3) within 90 days of any transfer of ownership. If a patent owner does not, it cannot collect any damages in a patent infringement lawsuit until it cures its failure to do so.

Patent Quality Improvement Act of 2013 (S. 866) and Stopping the Offensive Use of Patents Act (H.R. 2766)

These two acts are basically mirror images of one another, except one was introduced in the Senate and one in the House. Both remove the sunset provision in 35 U.S.C. § 321 note, subsection (a)(3), which provides for a streamlined post-grant review of financial business method patents, and makes the program permanent. The acts would also expand the scope of review from financial business method patents to all types of business method patents.

The STOP Act also requires the USPTO to work with and support intellectual property law associations with pro bono programs “to assist financially under-resourced re-sellers, users, implementers, distributors, or customers of an allegedly infringing product or process.”

Conclusions and Final Thoughts

All six pieces of legislation target the patent “troll” problem, but do so in different ways. None of these approaches seem to be the silver bullet to solve this problem, however. In fact, some of them are likely to cause significant issues in the traditional patent litigation context. Also, there are many questions and ambiguities about how these laws would be applied. It will be interesting to see if any of these proposal garner  enough support to become law (and whether any changes are made to do so).

Survey of Proposed Patent Lawsuit Reform Bills in Congress (Part 2)

by: Robert Wagner, intellectual property attorney at Picadio Sneath Miller & Norton, P.C. ()

US Capitol BuildingIn a growing response to concerns about patent “trolls” and the tactics they use in litigation, the President and Congress are calling for changes in the patent laws to assist the targets of these patent assertion entities (PAEs). Currently, there are six bills pending in Congress that address, in some respect, these concerns. In this series, we are looking at the pending legislation and what changes are being proposed. (Parts one and three of our series are here and here.)

PENDING LEGISLATION:

  • Patent Abuse Reduction Act of 2013 (S. 1013)
  • Patent Litigation and Innovation Act of 2013 (H.R. 2639)
  • Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013 (H.R. 845—SHIELD Act)
  • End Anonymous Patents Act (H.R. 2024)
  • Patent Quality Improvement Act of 2013 (S. 866)
  • Stopping the Offensive Use of Patents Act (H.R. 2766—STOP Act)

Patent Litigation and Innovation Act of 2013 (H.R. 2639)

Sponsors: Representatives Jeffries and Farenthold

The Patent Litigation and Innovation Act of 2013 (“PLIA”) is in many ways very similar to the Patent Abuse Reduction Act of 2013 (“PARA”) we discussed in the first part of this series, although there are some notable differences. These two bills are the most comprehensive and far-reaching of the currently proposed legislation. The bill would make five major changes to the patent laws that will affect all patent lawsuits, not just the “troll” variety.

First, like the PARA, the PLIA would require a patentee to plead substantially more information than is currently required in a complaint, including (1) identifying the patents that are allegedly infringed; (2) identifying the claims that are allegedly infringed; (3) identifying each allegedly infringing product, method, process, etc., including the specific name and model numbers; (4) identifying how each element of each claim is infringed; (5) identifying whether the infringement is literal or under the doctrine of equivalents; (6) for indirect infringement, identifying the acts and parties who directly infringed and the indirect infringer’s acts that give rise to liability; (7) identifying the basis of the patentee’s right to sue; (8) describing the principal business of the patentee; (9) identifying the owners, assignees, and exclusive licensees of the patents; and (10) identifying anyone who has a legal right to enforce the patents.

Unlike the PARA, the PLIA does not require that the patentee identify any previously-filed complaints involving the patents, whether the patent is subject to any licensing or pricing commitments, or the identity of anyone who has a financial interest in the patent (and the basis for that interest).

Given that the bare-bones nature of the current model Form 18 for patent lawsuits, the bill would also require that Form 18 be updated to include this information.

Second, like the PARA, the PLIA would require courts to join any interested parties on a defendant’s motion if the defendant shows that the plaintiff’s interest in the patent is limited “primarily to asserting any such patent claim in litigation.” The court may deny the motion if the interested party is not subject to service or would deprive the court of subject matter jurisdiction.

Third, the PLIA provides a mechanism for staying any actions against “secondary parties,” who are defined to be those whose alleged infringement is based on the use, distribution, resale, or consumption of a product or process by a primary party. Primary parties are those who manufacture or supply the product or process that allegedly infringes. If the primary and secondary parties agree, they can move the court, which then must stay the action against the secondary parties. The secondary party will then be treated as a non-party for purposes of discovery, hearings, and trials. However, the secondary party will be bound by any judgment against the primary party relating to common issues between the two.

Fourth, the PLIA creates a number of automatic stays of discovery. The court must stay discovery while ruling on any motion to dismiss, motion to transfer, or claim construction, although there are provisions for lifting the stay in extraordinary circumstances. The court can also allow whatever discovery is necessary to decide these issues.

Finally, the PLIA provides that the court must include specific findings in its final adjudication regarding the parties’ and attorneys’ compliance with Rule 11(b) and may impose sanctions for any violations.

The Consequences of This Proposed Legislation

While this bill is clearly directed at curbing abusive patent litigation, its effects will be felt in all patent lawsuits. Given that, all patent litigators should be aware of how patent litigation may change. In particular, there are many unanswered questions about this bill that could have some interesting consequences.

First, as with the PARA, the amount of information required in a complaint is extraordinary, especially in comparison to what is required now under the notice pleading standard of the federal rules. The same concerns discussed in the article on the PARA apply equally to the PLIA. As a practical matter, it is difficult to see what the purpose behind these changes is, especially in jurisdictions that have local patent rules that require this type of disclosure early in the process. Most plaintiffs, whether of the “troll” variety or not, have put together detailed infringement charts as part of their due diligence. While pleading this information will be time consuming, it should not be particularly difficult. In addition, what is the recourse if a plaintiff is “wrong”? A court should not be resolving questions of fact on a motion to dismiss. On the other hand, requiring this kind of information, whether in the pleadings or early in the litigation, is extremely helpful for defendants to understand the scope of the lawsuit and what products and claims are actually at issue and should help streamline the litigation. Whether it should be required in the complaint or as part of early disclosures is another matter.

Second, the provisions regarding staying the action against secondary parties are potentially very helpful in reducing the distractions caused by this kind of litigation tactic. It will be interesting to see how secondary parties react and whether they are willing to be bound to whatever judgments are entered against the primary party. In theory, a primary party should have a far greater interest in defending the lawsuit and the greater knowledge to do so.

Third, the stay of discovery while the court is construing claims could be helpful, but it also could prove problematic. For instance, sometimes it is difficult to know exactly what claims could be at issue until a defendant provides the details of how its product works or what the steps in its process are. Certain elements or steps may be unknowable without access to source code or knowledge of the precise process used. And, this cuts both ways. Sometimes, a patentee may believe that additional claims are infringed after learning more about the defendant’s products, but it could also be the reverse, where discovery reveals that certain claims that it believed were infringed are not infringed. In addition, a patentee may not appreciate that a particular claim term needs to be construed until it sees how the accused products work and the positions that the defendant is taking. Courts are unlikely to be thrilled at the prospect of having to engage in the claim construction process multiple times or having to construe claim terms that later turn out to be irrelevant once additional discovery is done.

Finally, it is unclear how useful the requirement that courts make specific findings regarding Rule 11(b) compliance will actually be. Presumably, if one of the parties or the court felt that another party’s behavior was inappropriate, they would have raised that issue anyway. Further, it is unlikely that a court will have sufficient evidence to make any findings of inappropriate behavior in those cases that settle early, even if the case actually had little merit.

Summary

There are clearly issues with patent litigation now, especially with respect to suits brought by “trolls.” While not as drastic as the PARA, it is not clear how helpful the PLIA will actually be in addressing some of the abuses that currently exist. It will also be interesting to see the discussions surrounding this piece of legislation and whether it ever becomes law.

Survey of Proposed Patent Lawsuit Reform Bills in Congress (Part 1)

by: Robert Wagner, intellectual property attorney at Picadio Sneath Miller & Norton, P.C. ()

US Capitol BuildingIn a growing response to concerns about patent “trolls” and the tactics they use in litigation, the President and Congress are calling for changes in the patent laws to assist the targets of these patent assertion entities (PAEs). Currently, there are six bills pending in Congress that address, in some respect, these concerns. In this three-part series, we will look at the pending legislation and what changes are being proposed. (Parts two and three of our series are here and here.)

Pending Legislation:

  • Patent Abuse Reduction Act of 2013 (S. 1013)
  • Patent Litigation and Innovation Act of 2013 (H.R. 2639)
  • Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013 (H.R. 845—SHIELD Act)
  • End Anonymous Patents Act (H.R. 2024)
  • Patent Quality Improvement Act of 2013 (S. 866)
  • Stopping the Offensive Use of Patents Act (H.R. 2766—STOP Act)

Patent Abuse Reduction Act of 2013 (S. 1013)

Sponsor: Senator Cornyn

Along with the Patent Litigation and Innovation Act of 2013 that will be discussed in the next installment, the Patent Abuse Reduction Act of 2013 is the most comprehensive and far-reaching of the currently proposed legislation. The bill would make four major changes to the patent laws that will affect all patent lawsuits, not just the “troll” variety.

First, the bill would require a patentee to plead substantially more information than is currently required in a complaint, including (1) identifying the patents that are allegedly infringed; (2) identifying the claims that are allegedly infringed; (3) identifying each allegedly infringing product, method, process, etc., including the specific name and model numbers; (4) identifying how each element of each claim is infringed; (5) identifying whether the infringement is literal or under the doctrine of equivalents; (6) for indirect infringement, identifying the acts and parties who directly infringed and the indirect infringer’s acts that give rise to liability; (7) identifying the basis of the patentee’s right to sue; (8) describing the principal business of the patentee; (9) listing each previously filed complaint relating to the asserted patents; (10) identifying whether the patent is subject to any licensing terms or pricing commitments; (11) identifying the owners, assignees, and exclusive licensees of the patents; (12) identifying anyone who has a legal right to enforce the patents; (13) identifying anyone with a direct financial interest in the lawsuit or its proceeds; and (14) describing the basis for that direct financial interest.

Given that the bare-bones nature of the current model Form 18 for patent lawsuits, the bill would also require that Form 18 be updated to include this information.

Second, the bill would require courts to join any interested parties on a defendant’s motion if the defendant shows that the plaintiff’s interest in the patent is limited “primarily to asserting any such patent claim in litigation.” The court may deny the motion if the interested party is not subject to service or would deprive the court of subject matter jurisdiction.

Third, the bill would substantially change the timing and scope of discovery, including shifting the costs for non-core discovery materials. If a court determines that claim construction is required, discovery is limited to only that necessary for construction until after the court issues its ruling. After that ruling, discovery is divided into two groups—core documentary evidence and additional discovery. Core documentary evidence is limited to documents that (1) relate to conception, reduction to practice, and application for the patent; (2) are sufficient to show the technical operation of the accused products or services; (3) relate to invalidating prior art; (4) relate to prior licensing of the patent; (5) are sufficient to show the revenues attributed to the invention; (6) are sufficient to show the organizational structure of each party; (7) relate to the defendant’s awareness of the patent or infringement before the lawsuit was filed; and (8) are sufficient to show any marking, lack of marking, or notice of infringement.

Notably, computer code and electronic communications (e-mail, text messages, etc.) are not core discovery, unless the court finds good cause to classify them as such. Additional discovery is the discovery of every other kind of evidence. Each party bears the burden of producing its own core discovery, as is currently the case. However, the burdens shift with respect to additional discovery. There, a requesting party is not entitled to the additional discovery unless it pays for it (including both actual costs and reasonable attorneys’ fees) or posts a bond in that amount.

Finally, the court is to award costs, expenses, and attorneys’ fees to the prevailing party, unless the non-prevailing party’s positions and conduct were objectively reasonable and substantially justified or exceptional circumstances make such an award unjust. If the non-prevailing party cannot pay these costs, the court can make them recoverable against any interested party.

The Consequences of This Proposed Legislation

While this bill is clearly directed at curbing abusive patent litigation, its effects will be felt in all patent lawsuits. Given the far-reaching impact of these proposed changes, all patent litigators should be aware of how patent litigation may change. In particular, there are many unanswered questions about this bill that could have significant consequences.

First, the amount of information required in a complaint is extraordinary, especially in comparison to what is required now. Some of this information may be very difficult for a plaintiff to know at the filing stage, even with substantial pre-filing due diligence. For instance, it may be difficult to determine all of defendant’s allegedly infringing products beforehand. Indeed, discovery often reveals additional products that infringe. What are the consequences if a plaintiff later discovers infringing products? How can they be added to the lawsuit? Interestingly, there is no equivalent requirement for defendants to plead this level of detail with respect to their non-infringement or invalidity positions.

Second, how will these pleading changes affect declaratory judgment lawsuits? Normally, an infringement counterclaim must be raised in an answer as a mandatory counterclaim. These pleading requirements apply for counterclaims, as well as the initial complaint. What happens if a patentee is sued based on a licensing demand and does not have this information? Or does not have this information for all of the accused infringer’s products? Patentees would have to be extremely careful before sending out cease-and-desist or licensing letters.

Third, given that core discovery specifically excludes e-mails, how will the parties obtain some of the core discovery that may only be in e-mail format? For instance, a defendant’s awareness of the patent or infringement may only be found internal e-mail communications. Core discovery also excludes computer code. Presumably, a court will find this code to be core discovery for computer software patents or inventions that use a computer, but that is not clear.

Fourth, the bill states that a party is not entitled to additional discovery until it first pays for it. How will those issues be addressed? What happens if there is a dispute over the reasonableness of the costs? Will courts have to micromanage litigation budgets and fees? What happens if a party cannot afford the discovery? Is it completely barred from obtaining it? Is this a due process concern?

Fifth, core discovery is defined as “core documentary evidence” and only includes documents relating to the topics described above. How are depositions and expert discovery treated? What about interrogatories? Are they “additional discovery” that must be paid for by the requesting party? If so, this is especially problematic with experts. Unlike document requests and interrogatories, a party has no control over what experts (or how many) the other side hires. The bill is silent on how to address these issues.

Sixth, this bill turns patent litigation into a loser pays proposition. In other words, it is the equivalent of a default finding of exceptional circumstances in our current system. The bill is silent as to what happens if a position that was reasonable becomes unreasonable in the middle of the litigation. For instance, an infringement or non-infringement position may become unreasonable after the court issues its claim construction. What happens then? If a plaintiff does not withdraw its suit or a defendant does not immediately settle, are they liable for all of the fees? Only those fees after the ruling? A defendant may not be able to extricate itself on reasonable terms at that point, especially if the plaintiff now knows it will be able to collect its attorneys’ fees.

Finally, while this payment requirement can be challenged, this change will create even more pressure on a defendant to settle a case, especially if it is likely to be costly. Plaintiffs can presumably take more precautions to make sure that their positions are reasonable and substantially justified before they choose to file suit. A defendant may not have that luxury.

Summary

There are clearly issues with patent litigation now, especially with respect to suits brought by “trolls.” It is not clear whether the Patent Abuse Reduction Act of 2013 will help or hurt more, however. It will be interesting to see the discussions surrounding this piece of legislation and whether it ever becomes law.

Ninth Circuit Holds Royalty Agreement Unenforceable

by: Robert Wagner, intellectual property attorney at Picadio Sneath Miller & Norton, P.C. ()

Web BlasterA recent decision from the Ninth Circuit in Kimble v. Marvel Enterprises Inc., No. 11-15605, highlights the problems parties can have when they enter into license agreements involving patents where the royalty payments extend beyond the life of the patents. In general, hybrid licensing agreements (those having inseparable patent and non-patent fights) are unenforceable beyond the expiration date of the patent unless either (a) there is a discounted royalty rate after the expiration date or (b) there is some clear indication that the royalty rate was not driven by leverage created by the patent rights. See Brulotte v. Thys Co., 379 U.S. 29 (1964). The rationale is that to hold otherwise would improperly extend the lifetime of the patent.

In Kimble, the inventor met with Marvel about his patented idea for a toy that children could use to mimic Spider-Man’s ability to shoot webs from his hands by shooting foam string from a glove. Kimble claimed the parties reached an oral agreement that Marvel would compensate Kimble if it used his ideas. Marvel then created a toy called the “Web Blaster” that was similar to what Kimble suggested. Marvel did not compensate Kimble, however.

Kimble sued for both patent infringement and breach of contract. The parties ultimately settled the case, with Marvel paying a lump sum to Kimble along with a perpetual 3% royalty on Marvel’s sales of these products. Eventually, the parties had a falling out regarding what products were covered by the agreement and the amounts due to Kimble.

The Court found that the agreement was a hybrid licensing agreement encompassing both patent and non-patent rights. Because there was no discount in the royalty rate post-expiration and there was no clear indication that the royalty rate was not subject to the leverage created by the patent, the post-expiration royalties were per se unenforceable.

The Ninth Circuit was not pleased to reach this result, however. It believed that the Supreme Court’s rule in Brulotte is “counterintuitive and its rationale is arguably unconvincing.” Nonetheless, it recognized that it was bound by this decision and that national uniformity on these issues is important.

The Kimble and Brulotte decisions highlight the importance of carefully considering the terms and duration of any licensing agreement that encompasses patent rights. Care must be taken to determine when any patent rights expire, what a royalty rate is based on, and how the two interact. With proper care ahead of time, problems like these can be avoided.