Legislation to Rein in Patent Trolls Passes the House of Representatives

By Brad Meyer

On December 5, 2013, the U.S. House passed the Innovation Act by a vote of 325 to 91.  The bill is aimed at reining in the most egregious practices of so-called patent trolls (also known as Non-Practicing Entities (NPEs) and Patent Assertion Entities (PAEs)).

Although trolls do not physically produce any goods or services, they use patent rights they own or control to sue others alleging infringement. These trolls rarely take an accused infringer to trial, but rather rely on parties who would rather settle and pay a small portion of the cost of patent litigation. Small businesses and start-ups are particularly vulnerable to these types of practices because they do not have deep pockets and are easily scared into paying a settlement to avoid confrontation. Trolls are also known to target larger companies who would rather pay a settlement that has little to no impact on their bottom line and pales in comparison to the cost of full-blown litigation. Most people feel that these practices stifle both the economy and technological innovation.

The Innovation Act attempts to reduce the abusive tactics of trolls without stifling legitimate lawsuits. The bill has several features aimed to address these concerns; some of the more interesting ideas are summarized below:

• The bill requires the losing party of the litigation to pay the opposing party’s legal fees if the lawsuit was “unreasonable.”  Additionally, real parties in interest can be brought into the lawsuit to pay expenses if the plaintiff is unable. This is helpful because many trolls are structured as shell companies that funnel profits to outside entities or the troll’s parent(s).
• The bill has heightened pleading requirements. A lawsuit is instituted by filing a complaint alleging infringement. Current practices allow for vague complaints, which allow trolls to bring broad claims without much foundation. The proposed pleading requirements force the plaintiff to identify the specific claims of the patent(s) that are being infringed, and how the accused infringer is infringing the patent. Since the majority of lawsuits instigated by trolls are frivolous, heightened pleading requirements will prevent many complaints from being filed.
• The bill delays the discovery process, which is often extremely expensive. Under the bill, discovery does not occur until after claim construction is complete, at which point the parties have a much better understanding as to whether infringement has, in fact, occurred. Further, discovery will be limited to core documents. Costs associated with the request of any documents desired beyond those directly related to how an accused product works will be paid for by the requesting party.

Although many of these features will help prevent patent troll practices, there is the potential that aspects of this bill will negatively impact small businesses and start-ups with limited budgets that have invested their resources in research and development but have not yet introduced a product.

The next stop for the Innovation Act is the Senate. We will keep you informed on the progress of the bill in the coming months. In the event that you have any specific concerns about how the Innovation Act might affect your intellectual property rights, do not hesitate to contact your Boyle Fredrickson attorney.