Article: Patent Reform in the United States

Patent Reform in the United States

Author: Austin Hansley (August 17, 2017)

Introduction

The intent of this article is to describe the current state of the U.S. patent system in the United States and abroad, and to give an analysis and prognosis for the said U.S. patent system if these trends continue. Additionally, the argument will be made that the reforms that have thus far been instituted have had unintended negative consequences while doing little to fight the perceived problems with the United States patent system. This article is not meant to provide legal analysis, but to analyze and give a prognosis for the United States patent system.

Overview

Over the last 5 years the United States patent system has been negatively affected by the United States Supreme Court, Congress, and the change in the rules that govern procedure in patent cases. All of these “reforms” were instituted to fix the patent system in the United States for its alleged problems. One of the goals, obviously, is to curb the filing of patent infringement cases by, what is known as, Non-Practicing Entity, Patent Assertion Entities, otherwise known as Trolls. In the narrowly focused battle against these entities, unintended consequences have occurred and will continue to occur unnecessarily weakening the United States patent system in relation to foreign countries. This has and will result in a shift of the technological superiority of the United States to those foreign jurisdictions giving them more power over the United States.

The Facts

The patent system in the United States is in disarray. I suspect that this is due in part to a general call to action by various entities for reform, and the different bodies responsible for this reform taking action without a moratorium among practitioners with experience in such matters. This is made clear when you look at the facts.

Currently, we have a patent system that grants patents at the USPTO, then upon petition, invalidates the same patent that they just granted. This process is known as the post-grant review and inter partes review otherwise known as an IPR. The IPR came in to being through The Leahy–Smith America Invents Act (AIA), a United States federal statute that was passed by Congress and was signed into law by President Barack Obama on September 16, 2011.

An IPR, is an adjudicative proceeding conducted by a panel of three Administrative Patent Judges. The standard of review during the IPR proceeding is to ask the question is there a reasonable likelihood of prevailing in showing anticipation or obviousness based on patents or printed publications with respect to at least one claim. This must be shown by a preponderance of the evidence, while reading the claims with the broadest reasonable claims construction.

A post-grant review is the mechanism for challenging the validity of a patent during the nine-month window immediately following patent issuance while inter partes review is the mechanism for challenging the validity after the nine-month window.

The post-grant review standard is met by showing that at least one challenged claim is more likely than not to be deemed unpatentable. At this time, there is no direction as to the difference between these two standards.

A post-grant review can be based on any grounds that are available for an invalidity defense, while an inter partes review is limited to prior art grounds based on patents and printed publications.

While this back and forth is going on at the USPTO, meanwhile our court system just experienced what amounts to a cluster bomb shattering a huge piece of mass and scattering said mass into pieces, yet oddly preserving most if not all of the mass collectively.

On May 22, 2017 the United States Supreme Court (“SCOTUS”) handed down the TC Heartland decision which found that, in patent cases, venue is proper where the defendant: (1) resides, which now means where defendant is incorporated, and, (2) where the defendant has committed acts of infringement and has a regular established place of business. See TC Heartland LLC v. Kraft Foods Group Brands LLC, 581 U.S. ____ (2017).

The result of this decision basically amounted to a cluster bomb going off on a huge mass, breaking it up into little pieces and scattering it all over the country, yet preserving most if not all of the mass itself. This is evidenced by the recent filings of patent cases listed on RPX’s daily patent docket report.

As you can see, the filings are in fact scattered all over the country. Before the TC Heartland decision, patent litigation filings were concentrated in the Eastern District of Texas. Some may think that this is a step in the right direction. But take in to account the fact that most states do not have local patent rules yet. Local patent rules are rules that govern the prosecution of a patent litigation case, which dictate the how, when, why, where, and what for the case.

The following states have some form of local patent rules in place:

California, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Maryland, Massachusetts, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Utah, Washington. Source: http://www.localpatentrules.com.

The following states DO NOT local patent rules:

Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Hawaii, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Vermont, Virginia, West Virginia, Wisconsin, Wyoming. Source: http://www.localpatentrules.com.

Imagine a scenario where a corporation has their principal place of business in Arizona and is also incorporated in Arizona. If a patent plaintiff wanted to file suit against this company, then the only place they could file would be in Arizona because under TC Heartland, the case may only be filed in the state of incorporation or where the business committed acts of infringement AND where it has a regular and established place of business. If that same patent plaintiff wanted to file against another company that had their principal place of business in Colorado and was incorporated in Colorado, then that patent plaintiff would have to file the patent suit in Colorado and so on and so forth.

According to the Delaware Division of Corporations 2015 Annual Report, well over 1 million entities are incorporated there, including more than 50 percent of publically traded companies in the U.S. and more than 60 percent of Fortune 500 companies. This means that Delaware will be the new Eastern District of Texas as seen by the recent docket reports. But for some companies, as in the example above, Delaware is not an option even if the company sells their products online to consumers all over the nation. What this effectively has done, is incentivize companies to set up their brick and mortar office in a favorable jurisdiction and sell from that location online, or just forgo the brick and mortar and just sell online. This effectively causes companies to have to weigh the cost and benefits of having brick and mortar stores in other jurisdictions with only selling online. In this internet economy in which we now live, companies may realize that selling online will improve their bottom line.

This scattering effect is not necessarily a good thing for patent law. Patent cases are complex and the procedure necessary for these patent cases are very important. Jurisdictions that do not have patent rules in place, may initially struggle to manage these cases effectively. When analyzing human nature, it is fair to say that patent plaintiff’s filing in jurisdictions with no local patent rules, may see a lower success rate, and lower quality claims construction. Judges have interests in moving their dockets, and may play loose with cases that they aren’t used to handling. Additionally, in those jurisdictions with little to no patent jurisprudence, comity and persuasive authority will be the arguments that practitioners have to make as they will be using non-precedential case law from other jurisdictions to make their arguments.

Patent cases rarely make it to U.S. Court of Appeals for the Federal Circuit. That is why many in the IP community have argued in the past that the Eastern District of Texas was effectively governing patent law due to the large number of cases that were typically filed in that jurisdiction. When cases are scattered all over the country, you are left with judges that are inexperienced in handling patent cases, which will create inconsistent opinions on various issues, which will further throw the patent system in to disarray. Additionally, in those jurisdictions with little to no patent jurisprudence, judges will be left with possibly conflicting persuasive authority to make their decisions.

On December 1, 2015, as part of a sweeping set of amendments to the Federal Rules of Civil Procedure, Form 18 was stricken from the rules. This has caused conflicting opinions among the district courts regarding the pleading standard to apply to suits for direct patent infringement. This reform basically reinstated Twombly and Iqbal, as the appropriate authority on the issue. These cases opined that a complaint must be dismissed unless it alleges facts that state a claim to relief that is “plausible on its face.” Mere conclusory statements supporting “threadbare recitals” of the elements of a claim do not suffice; the facts as alleged must be able to support a reasonable inference of the defendant’s alleged liability.

First, In Thermolife Int’l, LLC v. Vitamin Shoppe, Inc., the Southern District of Florida required that the plaintiff allege facts showing infringement for each asserted claim, dismissing the complaint as to two claims where the plaintiff asserted three claims, but only charted the accused device against one.

The second group of cases are not so strict. These cases require that a court must be able to reasonably infer that the accused product infringes each element of at least one asserted claim. Courts in the Northern District of California, Georgia, Illinois, Massachusetts, and Nebraska have applied this element-by-element approach in determining plausibility. However, compliance with this line of cases does not require a plaintiff to outline specific infringement contentions in their complaint. See Vigil Systems Pty. Ltd. v. Trackit, LLC, 16-cv-198, 2016 WL 4595538 (S.D. Cal. Aug. 22, 2016).

The third group of cases only require that the plaintiff allege that the accused devices possess some unique feature as the patented system. For example, in Incom Corp. v. The Walt Disney Company, the Central District of California stated that a plaintiff would satisfy the pleading standards under Twombly by “specifically identifying Defendants’ products and alleging that they perform the same unique function as [the plaintiff’s] patented system.” The Southern District of New York in Iron Gate Security, Inc. v. Lowe’s Companies, Inc. applied a similar standard, stating that a complaint that alleges that a specific product infringes the patent by virtue of “certain specific characteristics” meets the plausibility standard.

What we do know is that a complaint which includes allegations of fact tying the accused devices to each element of each asserted claim will be sufficient in any district.

Other reform has affected patent law some of which also affects litigation generally, for instance on December 1, 2015 the discovery rules for the Federal Rules of Civil Procedure were amended. Below, the rules that have most effect on patent law are described.

The Federal Rules of Civil Procedure were amended to add proportionality to the scope of what can be sought in discovery.

“Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable.” Rule 26(b)(1).

Rule 34 requests for documents 21 days after service of the summons and complaint. Rule 34(b)(2) was amended to sharpen the requirements for responding and objecting in several ways. First, the amendment adds that objections must be stated “with specificity”. This amendment was intended to stop the use of boilerplate objections that provide no real reason for the objection.

Second, the amendment addresses the common practice of producing copies of documents instead of making documents available for inspection. A party may indicate that it will produce copies of documents, but the party must complete the production no later than the time specified in the request, or by some other reasonable time specified by the party in the response. This change is intended to abate the problem of a party indicating that documents will be produced in due course, without actually committing to a specific date. However, because the amendment allows a party to specify “another reasonable time,” the impact of the change may be blunted. The Notes are silent on what amount of time is “reasonable.” At a minimum the amendments require a party to provide a date for production of documents and indicate whether they are withholding documents based on an objection.

Finally, the rule was amended to require that if a party objects, it must also state whether the objection serves as a basis for withholding documents. This change is intended to short-circuit the practice of simultaneously objecting to a request and producing responsive documents, which leaves the requesting party wondering whether some documents have been withheld on the basis of the objection.

On June 19, 2014, the SCOTUS handed down the Alice Corporation PTY. LTD. V. CLS Bank International et. al. 573 U.S. __, 134 S. Ct. 2347 (2014), opinion, otherwise known as an “Alice” or “101” challenge. The aftermath was historic, with patents being invalidated left and right both at the district court level, the CAFC and the USPTO.

See http://allendyer.com/wp-content/uploads/2017/03/CLE.3.1.17.mwt-03.01.17-MWT-.pptx

The issue in Alice was whether certain claims about a computer-implemented, electronic escrow service for facilitating financial transactions covered abstract ideas ineligible for patent protection. The patents were held to be invalid because the claims were drawn to an abstract idea, and implementing those claims on a computer was not enough to transform that idea into patentable subject matter. It and the 2010 Supreme Court decision in Bilski v. Kappos, 561 U.S. 593 (2010), another case involving software for a business method basically made every software patent subject to dismissal under these cases as seen in the graph above.

Patent Law Abroad.

Given this trend towards delegitimizing the patentability of inventions in the U.S., China, the United States’ top economic competitor, has been trending in the opposite direction. In October of 2016, China’s State Intellectual Property Office (SIPO) released revised guidelines for its patent examiners making them friendlier to both software and business method patents.

For software patents, patent applicants will be able to claim a medium plus computer program process instead of claiming means plus function, a term which has typically been narrowly construed by SIPO examiners. Previously ineligible claims directed at “a computer program product” or “a machine-readable medium” will now be eligible for patent protection in China.

For business methods, claims relating to business models which include a technical feature in addition to business rules or methods will be patent-eligible under the new guidelines, with some exceptions.

The Future of Patent Law in America

Based on the available data mentioned herein, and if something is not done about it, then the aforementioned technological shift to foreign jurisdictions will continue to occur. This shift is obviously not a good thing. China already owns roughly 5% of the U.S. debt and Japan owns another 5% of said debt with a combined 34% of debt owned by foreign jurisdictions. Just to give a perspective, the U.S. GDP is around $19 Trillion. While income taxes earned by the U.S. in 1 year amount to around $1.1 Trillion. With that said, China or other foreign jurisdictions could call in their debt at any time putting a significant burden on the U.S. financial system. We have allowed this to happen over the years, giving China and other foreign jurisdictions substantial power over the U.S. financially.

The recent negative changes in the United States patent system when compared to the almost opposite changes being made in the Chinese patent system illuminate the fact that we may be unintentionally giving the Chinese more power in yet another sector, technology.

If this shift in power continues to happen, then the Chinese will be the parties suing American companies for patent infringement in their courts under their laws. There are a few reasons why this is of concern. For one, money paid from American companies to foreign jurisdictions is money that will probably never return to our shores. Basically, this is an additional way for foreign jurisdictions to extract value from the United States. Secondly, the Chinese could use their newly relaxed patent law jurisprudence to step into the shoes of NPEs, PAEs otherwise known as Trolls and basically copy the play book that has played out here in America for so long. If you think outside the box, instituting laws that affect NPEs, and PAEs in light of the shift in Chinese patent law is un-American. When NPEs, and PAEs are allowed to operate, most of the time, these companies are owned by American citizens. This money is transferred from corporations involved in law suits with these entities, into the pockets of their owners. This same money, is then reinjected into the American economy. That same money is then used by consumers to purchase more of the products made by the same companies who were sued for patent infringement in the first place. Money is recirculated as long as it stays within the same financial ecosystem.

NPEs, and PAEs serve a purpose in the marketplace, by providing for the liquidity of patents, which are considered under the law as property. If there is limited liquidity in a marketplace, then this brings down the price of the goods subject to that marketplace as one cannot easily liquidate their property e.g. patent. We have all experienced this in our life, for example, when you try and sell your car, and you spend months courting buyers who only offer you substantially less than your asking price. Eventually you cave in and lower your price to the highest bidder. If there was high liquidity, i.e. high demand for your car, then you could pick your price. This was seen recently in the housing market in parts of the U.S. when people could list their house for sale, and the next day have a buyer willing to buy the property for more than the ask on the house.

When you attack one part of the patent system, the entire system hurts. For example, if inventors don’t believe it is beneficial to secure their invention with a patent, then many of them have and will choose to give up inventing. Many large corporations rely on the inventions of persons employed by small businesses or start-ups as evidenced by Apple’s purchase of a slew of small/start-up companies before they came out with their smart watch e.g. sensor start-ups. If invention is stifled in the United States, Fortune 500 companies will need to obtain this additional intellectual capital via other means.

It is very short sighted and naïve to think that invention only happens within the confines of a brick and mortar building of the likes of Apple, Google, or any other Fortune 500. There are currently roughly 26 million people employed by the Fortune 500. The United States has a population of roughly 323 million people. This means that less than 10% of people in the United States are employed by the Fortune 500.

When the patent system is hurt, the first people that hurt are the NPE/PAE owners, and their attorneys. If cases are not being filed against corporations for patent infringement, then the next to be hurt are the defense lawyers. After the defense lawyers are hurt, then eventually the America citizens hurt, both by inventors leaving the profession, and the Fortune 500 having less innovation to choose from for their products. These same Fortune 500 companies will then go into the worldwide marketplace, and possibly purchase patent rights in foreign jurisdictions or purchase companies located and operating in foreign jurisdictions which amount to a transfer of wealth overseas. This again hurts the American citizens by taking away important jobs and capital out of our economy.

Analysis/Proposal

Our legal system here in the United States has grown up organically through the years from a few basic underlying principles and rules outlined in our U.S. Constitution. This has resulted in our legal system being set up with venue, personal jurisdiction, and federal/state statutes, regulations and a body of judge made law.

One thing is clear, patents and patent litigation will never go away. The United States Constitution gave the power to Congress to create laws pertaining to patents. Under Article I, section 8, it reads, “Congress shall have power… to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

The disarray in the U.S. patent system could be mended with a bit of standardization. For instance, a model local patent rules could be implemented. Model local patent rules could be distributed among the district courts in all 50 states to standardize the way that patents are litigated. Eventually, judges in the less active jurisdictions will get used to having patents show up on their dockets. At that point we would have judge made law coming from 50 different states offering a wide smattering of opinions. This is great for attorneys as our calling is to operate in the gray, and disarray of our legal system. Appellate activity may heat up, and the need for appellate lawyers may increase.

Another option is to have a compelled Multi-District Litigation docket for cases with the same patent in suit but filed concurrently in different states/jurisdictions. I propose that the MDL be set up in Delaware given the current venue rubric. The fallout from TC Heartland puts most cases in Delaware as seen on the docket reports. More likely than not when a group of cases are filed at least one of them will be in Delaware. Compelling the others into an MDL in Delaware would join all of the cases together creating efficiency, judicial economy and take away the risk of inconsistent opinions, necessary stays in litigation etc. The counter argument to this approach is that such an approach would bring patent litigation back to where it was before the reforms. In other words, that many of these cases would be decided by one court.

Another approach is to reform the patent office itself. If money is poured into the patent office so that they could issue only quality patents, then this would renew confidence in the patent system. Once the quality patents trickle down into the system, maybe the USPTO will stop granting patents and then invalidating them a few years later in an IPR. But alas, this solution is still an imperfect one as there are too many moving parts in our patent system. The USPTO examiners examine patents under the current state of the law. If the law changes, then all of the patents that they have granted up to that point are subject to scrutiny.

This brings us to the final proposal. We should take back dating out of patent law altogether. If a patent was granted under a set of laws, then for the life of that patent, if that patent was to ever be scrutinized, then that patent should only be scrutinized under the law that existed at the time that patent was granted. Inventors seek patent protection and believe that the USPTO is granting them a property right. By taking away back dating in patent law it would renew confidence in the minds of the inventors in this country to do what they do best. Under the current system inventors seek patent protections from the USPTO, later the law changes via Congress, the SCOTUS or an amendment to the Federal Rules of Civil Procedure. Subsequently, that same patent is challenged under this new stricter body of laws and POOF! No more patent. What if you bought a car, and the law changed in some fashion which effectively took away your right to own that car. You would be mad as well.

Conclusion

The patent system in the United States is in disarray, which is not necessarily a bad thing for lawyers. Every time someone tinkers with the patent ecosystem, there are unintended consequences. We have seen this in the past when reform is made to try and stop NPE, PAE filings. We need to start thinking about these consequences so as to make sure we do not lose our technological prowess and important capital to other foreign jurisdictions. NPEs and PAEs are not necessarily a bad thing as such entities provide liquidity in the marketplace for patents benefiting everybody that owns a patent including the same companies lobbying against NPEs and PAEs. The concern should be how robust the infringement read is in each case, not whether the case is filed by a NPE or PAE. Proposals were made including model local patent rules governing the prosecution of patent litigation cases. A compelled MDL in Delaware may make sense given the current venue rubric. Better scrutiny at the USPTO could result in increased confidence in the patent system and less successful IPRs which would give the USPTO a better image. Finally, for a confidence blockbuster, a proposal was made to stop the practice of invalidating patents based on law handed down after the date that the patent was issued. While these solutions or variations thereof are not likely to create a perfect patent system in the United States, these reforms would go a long way to create confidence in the patent system so that our inventors will invent, keep capital stateside and promote innovation in our beloved country.

Austin Hansley – Attorney

Welcome to my blog. I am a patent litigation attorney in Dallas, Texas. I have worn many hats during my time on this planet. These include, working as a bag boy at Kroger, a breakfast cook at Braum’s, a department store representative at JCPenny, a call center representative for Cingular Wireless, a credit card collections agent with Associates Credit Card, a pizza delivery driver at Papa Johns, a supplemental instructor at a college, a private high school teacher, an electrical engineer, and now an attorney. During law school I clerked for an attorney who showed me how to litigate and run a practice. After graduating, I opened my own law practice and built the firm, employing new law school graduates and offering internship positions for those still in law school.

If you have a legal issue and need an intelligent, hard working attorney look me up and give me a call.

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