Another patent reform bill is quickly working its way through Congress as we speak. The Innovation Act (HR 3309) passed the House by a vote of 325–91 and is pending in the Senate, which has said that it will fast track passage of it. Many of the provisions are similar to those found in the other proposed pieces of legislation that we discussed earlier (see parts 1, 2, and 3), and address some of the concerns I raised in these prior discussions. One of the more significant provisions of the Innovation Act is the fee-shifting provision, which proposes to amend 35 U.S.C. § 285.
Under current law, patent lawsuits follow the American system in which each side pays its own legal fees. The current § 285 modifies the American rule somewhat, providing that in exceptional cases the court may award attorney fees to the prevailing party. The Innovation Act scraps the American rule altogether and flips current § 285 by providing that the court must award reasonable attorney fees and expenses to the prevailing in patent cases, “unless the court finds that the position of the non prevailing party or parties was substantially justified or that special circumstances make an award unjust.” (Proposed § 285(a)).
As an initial matter, this provision is supposed to deter parties from filing frivolous lawsuits, but it is not clear that it will accomplish this purpose. To be a prevailing party requires a judgment by the court, likely either on a motion for summary judgment or a trial verdict. Neither of these happen towards the beginning of litigation, so a defendant will have to still incur significant costs to get to the point at which it has a chance to recover its fees. Many defendants will likely not want to incur those costs, especially if the plaintiff appears to lack significant assets or has a plausible basis for its claims (even with the interest party expansion of proposed § 285(b)).
This provision may, in fact, create an incentive for patent trolls, especially in cases where they have a strong patent but the damages are not significant. By defaulting to a loser pays system, there is a greater likelihood that patent trolls will file additional lawsuits and defendants in these kinds of cases will be required to pay the troll’s litigation costs, even when a troll would have been unlikely to prove willful infringement.
Finally, there are real questions about what it means to be prevailing party and what the “substantially justified” standard means. For instance, what happens if a plaintiff prevails on one claim, but the jury find non-infringement on another? Are both parties prevailing parties? Or, if the plaintiff prevails on one patent, but the defendant invalidates the other asserted patent? What happens if a target of a demand letter files a declaratory judgment action and forces a patentee into a lawsuit that it never intended to file?
Also, when, exactly, does a non-prevailing party have to be substantially justified in its position? At that time it first asserts the position? At the end of the litigation? At any time? These are not trivial concerns. A defendant at the initial stages of a lawsuit often will assert non-infringement and invalidity defenses and counterclaims before having much time to analyze the claims or having the benefit of the court’s claim constructions. Those positions may be only in their initial stages with modest support, but later blossom into very strong positions. Similarly, what appear to be strong positions can turn into weak ones once the court issues its claim construction. In which of these situations are the positions substantially justified?
Courts will undoubtedly struggle with interpreting these standards and deciding who, exactly, “deserves” to pay and who does not. Moreover, while these new rules are clearly targeted towards fighting patent trolls, they apply equally in all patent cases, including the traditional competitor vs. competitor lawsuits. By changing the rules, it will create additional pressures that are more likely to be borne by defendants, who have no control over whether they are sued, than by plaintiffs, who can have significant control over when they sue and which patents/claims they sue on.
The Innovation Act looks likely to pass the Senate and be signed into law by the President. It will be interesting to see if it accomplishes what it purports to set out to do.