Today we talk with Matt Cutler, a principal at Harness Dickey, about the Protecting American Talent and Entrepreneurship Act (PATENT Act) of 2015. The 55-page PATENT Act is an attempt to make reforms to stop abusive patent litigation practices. It is the first patent reform bill to have bipartisan support. (See the contents of S. 1137 here.)
Patent Baristas: You are currently with Harness Dickey specializing in intellectual property litigation and Inter Partes Review and Post-Grant Review proceedings before the Patent Trial and Appeal Board at the USPTO. Can you tell me a little about yourself and how you got involved with these proceedings?
Baristas: First off, I have to ask the question: do you think that we really need any further reforms of the U.S. patent system?
Cutler: I do believe that there is room for improvement in several of the provisions of the AIA. That was such a sweeping law, so there were bound to be areas that missed the mark, even if only slightly. The pending bills contain many more sweeping reforms, but I am of the belief that these are just starting points in a negotiation and more incremental change will ultimately be enacted. With tech companies on one side of the debate and bio/pharma companies on the other, I believe it is likely that any changes will be part of a compromise deal that will hopefully address the important issues facing each industry.
Baristas: The Senate Judiciary Committee has moved on the Protecting American Talent and Entrepreneurship Act of 2015 (PATENT) Act. The Act appears to be in better condition after the last revision and seems to have a good chance of being enacted. Is that a good thing? Who will be the losers?
Cutler: The PATENT Act is a multi-faceted effort to reign in the improper litigation behavior engaged in by some non-practicing entities. The concern, of course, is making litigation so difficult that legitimate claims cannot be pursued. Many of the provisions of the Act, however, are aimed at increasing transparency earlier in litigation. Positions such as identifying the claims at issue, accused products, etc. are all concepts that emerge fairly early on in the litigation process anyway. By having that disclosure up front, it increases the odds that only the truly grounded infringement claims will be pursued, not frivolous claims whereby an entity is trying to leverage the litigation process to obtain nuisance payments.
Baristas: The PATENT Act has heightened pleading and transparency requirements, including specific information about which patents and claims are being infringed, what product is infringing, and how. That all sounds reasonable. But, the Act also includes additional requirements about what parties have a financial interest in the outcome of the case, as well as every complaint from the three-year period beforehand. How does this make anything better? Doesn’t this just serve to act to harass the plaintiff?
Cutler: There are many intersecting factors that impact the issue of whether so-called “transparency” is necessary at the outset of litigation. On the one hand, by constructing a web of shell companies, the true entity that is driving what ultimately is determined to be frivolous litigation can avoid accountability. In essence, this is the check necessary to ensure that existing and any increased penalties for frivolous litigation actually can be recovered. Also, transparency will help to ensure that standing and real-parties-in-interest are identified.
On the other hand, such disclosures are often best handled in a discovery context where protective orders can protect sensitive information. In the end, these requirements will increase the transactional costs of filing complaints. Maybe that is the point, but it would seem that companies bringing legitimate litigation, non-practicing entity or not, would be able to fairly quickly make these disclosures. For bio/pharma companies, for example, there is typically going to be a fairly straightforward patent ownership path and easily-identifiable patent complaints over a three-year period. This seems like one of the provisions on which the bio/pharma industry could concede (recognizing that transactional costs will rise) in exchange for something else that is important to the industry.
Baristas: The bill precludes a plaintiff from relying on pre-suit demand letters to establish willful infringement if the letters do not specify the asserted patent, the accused product, the plaintiff’s ultimate parent entity, and the grounds for the alleged infringement. How does that differ from the requirements already in place?
Cutler: Under the current state of the law regarding willful infringement, a patent holder must prove that the defendant knew or should have known the risk of infringement. Demand letters have often been used to establish notice of the patent and can later be used to prove that the defendant acted with subjective recklessness. There have been, to date, no requirements regarding what, specifically, those letters must contain. The provisions of the PATENT Act that relate to the information that must be contained in a pre-suit demand letter would be the new cost to enable a patent owner to use such letters to serve as notice regarding willfulness.
Baristas: Does knowing the “parent entity” change whether or not there’s been notice of infringement? Couldn’t a court decide if the notice is enough “notice”?
Cutler: Under the current law, the courts do decide whether adequate notice has been provided as part of the inquiry into the subjective reasonableness of the infringer’s actions. Of course, whether the “parent entity” is known or not does not impact true “notice.” The proposed law contains a trade-off – use of the notice letter is forbidden as evidence of knowledge of the potential infringement unless an unrelated goal of “transparency” is furthered by requiring the listing of the “parent entity.”
Baristas: The PATENT Act requires an award of attorneys’ fees to the prevailing party if the court finds that the losing party’s position was “not objectively reasonable in law or fact” or the losing party’s conduct was “not objectively reasonable.” The bill also allows recovery of fees from third parties with a “substantial financial interest” in the patent. Why special treatment for a lawsuit that happens to involve a patent versus a suit involving any other Why should third parties with a “substantial financial interest” be on the hook for anything when our system doesn’t provide this type of special recovery for other matters?
Cutler: You have put your finger on the reason why there has been such opposition to fee-shifting in patent cases. That is, the trial bar is uninterested in letting the camel get his nose under the tent, so to speak, by heading down a slippery slope where introduction of fee-shifting in patent cases leads to fee-shifting in other areas of the law. Proponents of tort reform, on the other hand, are getting behind this aspect of patent reform for the opposite reason – gaining a foothold in the patent arena will be a launching point for more broad-based fee-shifting efforts. Answering your question more directly, proponents of this provision are of the opinion that more liberal shifting of attorney fees against losing parties would reduce nuisance lawsuits and make it more economically feasible for defendants to challenge patents because they will have a greater opportunity to recoup their attorney fees. Reiterating a point we discussed earlier, however, maybe enough has already been done in this area with the Supreme Court’s recent fee-shifting decisions, including in Octane Fitness. I served as lead counsel on behalf of Octane Fitness in the district court portion of that case. I have, of course, been watching this issue very closely and perhaps we should let the post-Octane case law continue to develop before we make additional significant legislative changes.
Baristas: The Act would allow suits against customers to be stayed if a manufacturer is also involved in federal court litigation. Again, what makes patent litigation so different that there needs to be this additional element?
Cutler: There probably is not a single patent owner who has not considered the impact litigation may have on the customer of its litigation rival. Simply, pulling a customer into litigation is a high-leverage move that makes it more likely that a defendant will pay more to get out of the litigation sooner. In fact, in most cases, the customer really has nothing to do with the accused product, except as a retailer or end user. And, of course, the patent owner can only recover damages one time. On the flip side, in legitimate cases, it sometimes makes sense to bring a customer into the litigation because the damage base might be larger, among other considerations. As such, the concept of a customer stay makes sense for many situations where the party involved is just a bystander to the main act. As that provision stands, however, it may be overly broad because this is not a one size fits all type of provision. For example, as written, the customer stay provision will exempt all parties downstream from the maker of the first component part, including large manufacturers that are combining numerous components into a completed device. In these cases, the downstream customer is not merely a retailer or end user. More work likely needs to be done to make this provision acceptable to all stakeholders involved.
Baristas: Are any of these provisions going to come back to bite the very companies pushing for these changes?
Cutler: The pendulum always seems to swing too far, doesn’t it? Ever since this new wave of patent reform has gained momentum, I have been predicting that the very companies that are pushing so hard to ensure sweeping enactment will find that it has gone too far. Either they will find their own patent portfolios devalued or unenforceable or, given how our economy is increasingly knowledge-based, there will be less demand for their products due to an erosion of the fundamentals of that economy. Changes may be necessary, but without surgical precision, the pendulum might turn into a wrecking ball.
Baristas: I have to ask, what are your feelings about the Cincinnati Reds?
Cutler: The National League Central Division has the best, most knowledgeable fans in baseball. As a fan of a team that has suffered through mediocrity for well-over 100 years, that’s about the most trash-talking I am allowed.
Baristas: Thank you for your time today.
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Matt Cutler’s specialties include intellectual property litigation and Inter Partes Review and Post-Grant Review proceedings before the Patent Trial and Appeal Board at the U.S. Patent and Trademark Office. Matt has a website www.IPR-PGR.com dedicated to issues surrounding these Patent Office procedures.
