Patent Litigation Reform Legislation in the
114th Congress
Brian T. Yeh
Legislative Attorney
Emily M. Lanza
Legislative Attorney
April 10, 2015
Congressional Research Service
7-5700
www.crs.gov
R43979
Patent Litigation Reform Legislation in the 114th Congress
Summary
This report describes how current patent litigation reform legislation (H.R. 9, S. 632) would
change existing patent law to address the perceived problems caused by entities that engage in
patent litigation tactics that have been criticized as abusive or deceptive. The key legislative
proposals in the Innovation Act (H.R. 9) and the Support Technology and Research for Our
Nation’s Growth (STRONG) Patents Act of 2015 (S. 632) include the following:
Heightened Pleading Requirements: H.R. 9 would require parties alleging patent infringement
in a civil action to include in the court pleadings specified details concerning each claim of each
patent infringed, acts of the alleged infringer, the principal business of the party alleging
infringement, and the authority of the party alleging infringement to assert each patent.
Joinder of Interested Parties: H.R. 9 would establish mandatory joinder rules when the
nonprevailing party alleging infringement is unable to pay the fee award and other expenses.
Limits on Discovery: During hearings relating to patent claim construction, the Innovation Act
proposes to limit discovery “to information necessary for the court to determine the meaning of
the terms used in the patent claim.”
Transparency of Patent Ownership: H.R. 9 would require plaintiffs in patent cases to disclose
to the United States Patent and Trademark Office (USPTO), the court, and all adverse parties
information relating to entities that own or have a financial interest in the patent. The duty to
disclose this information to the USPTO would be an ongoing obligation throughout the term of
the patent.
Customer-Suit Exception: H.R. 9 would allow a court to stay litigation against a customer of a
product that contains allegedly infringing technologies, if the manufacturer of the product is a
party to the same or other action on the same patent and other requirements are satisfied.
Shifting of Attorney’s Fees: H.R. 9 would require a district court to award attorney’s fees to a
prevailing party in patent cases, unless the court finds that the losing party’s position and conduct
“were reasonably justified in law and fact or that special circumstances ... make an award unjust.”
Demand Letters: S. 632 would impose specific enforcement and content requirements for
demand letters. H.R. 9 expresses the sense of Congress that purposely evasive demand letters are
abusing the patent system in a manner contrary to public policy.
Post-Grant Review Reforms: Both bills would mandate that the Patent Trial and Appeal Board,
in inter partes review (IPR) and post-grant review (PGR) proceedings, follow the same claim
construction standard used by district courts. In addition, H.R. 9 would narrow the estoppel effect
arising from a PGR. S. 632 would heighten the standing requirements for persons wanting to
initiate a PGR or IPR. S. 632 would also require the IPR/PGR petitioner to prove unpatentability
of a patent claim by “clear and convincing evidence.”
Elimination of USPTO Fee Diversion: S. 632 would permit the USPTO to spend all fee revenue
that it collects without further appropriation action or fiscal year limitation.
Assistance for Small Businesses: Both bills contain provisions designed to help small businesses
that participate in the patent system either as patent owners or as defendants.
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Patent Litigation Reform Legislation in the 114th Congress
Congressional Research Service
Patent Litigation Reform Legislation in the 114th Congress
Contents
Introduction ...................................................................................................................................... 1
Background ...................................................................................................................................... 1
Patent Law Fundamentals .......................................................................................................... 1
Patent Assertion Entities ............................................................................................................ 5
Legislation in the 114th Congress ..................................................................................................... 6
Heightened Pleading Requirements ........................................................................................... 6
Joinder of Interested Parties ...................................................................................................... 7
Limits on Discovery and Cost-Shifting ..................................................................................... 9
Transparency of Patent Ownership .......................................................................................... 10
Stays of Litigation Brought Against Infringing Customers ..................................................... 12
Shifting of Attorney’s Fees ...................................................................................................... 14
Demand Letters ....................................................................................................................... 17
Post-Grant Review Reforms .................................................................................................... 19
Ending Diversion of USPTO Fees ........................................................................................... 22
Provisions Concerning Small Businesses ................................................................................ 23
Contacts
Author Contact Information........................................................................................................... 24
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Patent Litigation Reform Legislation in the 114th Congress
Introduction1
Congress has shown significant interest in altering the current patent system in response to
concerns about entities that engage in patent litigation tactics that have been criticized as abusive
or deceptive. Many congressional hearings on the topic of patent litigation abuse have been held
in the 114th and 113th Congresses,2 and several legislative proposals have been introduced;3 one
bill in the 113th Congress, H.R. 3309, the Innovation Act, was passed by the House in December
2013. This report describes how the major provisions of current patent litigation reform
legislation would change existing patent law to address the perceived problems in the patent
litigation system.
Background
Patent Law Fundamentals
According to Section 101 of the Patent Act, one who “invents or discovers any new and useful
process, machine, manufacture, or any composition of matter, or any new and useful
improvement thereof, may obtain a patent therefore, subject to the conditions and requirements of
this title.”4 Thus, in order for an invention to qualify for patent protection, it must fall within one
1 Portions of this report have been borrowed and adapted from CRS Report R42668, An Overview of the “Patent
Trolls” Debate, by Brian T. Yeh and CRS Report R43321, Patent Infringement Pleadings: An Analysis of Recent
Proposals for Patent Reform, by Emily M. Lanza.
2 Patent Reform: Protecting American Innovators and Job Creators from Abusive Patent Litigation: Hearing Before
the House Judiciary Comm., Subcomm. on Courts, Intellectual Property and Internet, 114th Cong. 1st Sess. (2015); The
Impact of Abusive Patent Litigation Practices on the American Economy: Hearing Before the Senate Judiciary Comm.,
114th Cong. 1st Sess. (2015); Patent Reform: Protecting Innovation and Entrepreneurship: Hearing Before the Senate
Comm. on Small Business & Entrepreneurship, 114th Cong. 1st Sess. (2015); Trolling for a Solution: Ending Abusive
Patent Demand Letters: Hearing Before the House Energy & Commerce Comm., Subcomm. on Commerce,
Manufacturing, and Trade, 113th Cong. 2d Sess. (2014); H.R. 3309, the “Innovation Act:” Hearing Before the House
Judiciary Comm., 113th Cong., 1st Sess. (2013); Protecting Small Businesses and Promoting Innovation by Limiting
Patent Troll Abuse: Hearing Before the Senate Judiciary Comm., 113th Cong., 1st Sess.(2013); The Impact of Patent
Assertion Entities on Innovation and the Economy: Hearing Before the House Energy and Commerce Comm.,
Subcomm. on Oversight and Investigations, 113th Cong., 1st Sess. (2013); Demand Letters and Consumer Protection:
Examining Deceptive Practices by Patent Assertion Entities: Hearing Before the Senate Commerce, Science, &
Transportation Comm., Subcomm. on Consumer Protection, Product Safety, and Insurance, 113th Cong., 1st Sess.
(2013); Abusive Patent Litigation: The Issues Impacting American Competitiveness and Job Creation at the
International Trade Commission and Beyond: Hearing Before the House Judiciary Comm., Subcomm. on Courts,
Intellectual Property, and the Internet, 113th Cong., 1st Sess. (2013); Abusive Patent Litigation: The Impact on
American Innovation & Jobs, and Potential Solutions: Hearing Before the House Judiciary Comm., Subcomm. on
Courts, Intellectual Property, and the Internet, 113th Cong., 1st Sess. (2013).
3 In the 114th Congress, introduced legislation includes the Innovation Act (H.R. 9) and the Support Technology and
Research for Our Nation’s Growth (STRONG) Patents Act of 2015 (S. 632). In the 113th Congress, legislation that was
introduced but not enacted included the following: the Innovation Act (H.R. 3309), Transparency in Assertion of
Patents Act (S. 2049), the Patent Transparency and Improvements Act of 2013 (S. 1720), the Patent Abuse Reduction
Act of 2013 (S. 1013), the Patent Litigation Integrity Act of 2013 (S. 1612), the Demand Letter Transparency Act of
2013 (H.R. 3540), Patent Litigation and Innovation Act of 2013 (H.R. 2639), End of Anonymous Patents Act (H.R.
2024), and the Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act of 2013 (H.R. 845).
4 35 U.S.C. § 101.
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of the four statutory categories of patent-eligible subject matter: processes, machines,
manufactures, and compositions of matter. However, the U.S. Supreme Court has articulated
certain limits to Section 101 of the Patent Act, stating that “laws of nature, natural phenomena,
and abstract ideas” may not be patented.5
The U.S. Patent and Trademark Office (USPTO) issues a patent to an inventor after USPTO
examiners approve the submitted patent application for an allegedly new invention.6 An
application for a patent consists of two primary parts: (1) a “specification,” which is a written
description of the invention enabling those skilled in the art to practice the invention, and (2) one
or more claims that define the scope of the subject matter which the applicant regards as his
invention.7 Therefore, these claims define the scope of the patentee’s rights under the patent.8
Before a patent may be granted, the USPTO examiners must find that the new invention satisfies
several substantive requirements that are set forth in the Patent Act.9 For example, one of the
statutory requirements for patentability of an invention is “novelty.”10 For an invention to be
considered “novel,” the subject matter must be different than, and not be wholly “anticipated” by,
the so-called “prior art,” or public domain materials such as publications and other patents.
Another statutory requirement is that the subject matter of an alleged invention must be
“nonobvious” at the time of its creation. A patent claim is invalid if “the differences between the
subject matter sought to be patented and the prior art11 are such that the subject matter as a whole
would have been obvious at the time the invention was made to a person having ordinary skill in
the art to which said subject matter pertains.”12 Finally, the invention must also be “useful,”
which means that the invention provides a “significant and presently available,” “well-defined
and particular benefit to the public.”13
The Patent Act grants patent holders the exclusive right to exclude others from making, using,
offering for sale, or selling their patented invention throughout the United States, or importing the
invention into the United States.14 Whoever performs any one of these five acts during the term of
the invention’s patent, without the patent holder’s authorization, is liable for infringement.15 A
patent holder may file a civil action against an alleged infringer in order to enjoin him from
further infringing acts (by securing an injunction, also referred to as injunctive relief).16 The
patent statute also provides federal courts with discretion to award damages to the patent holder
that are “adequate to compensate for the infringement, but in no event less than a reasonable
5 Diamond v. Diehr, 450 U.S. 175, 185 (1981).
6 35 U.S.C. § 131.
7 35 U.S.C. § 112.
8 3-8 DONALD S. CHISUM, CHISUM ON PATENTS § 8.01 (2006).
9 35 U.S.C. §§ 102, 103(a).
10 35 U.S.C. § 102.
11 “Prior art” is a legal term of art that refers to the materials (usually called “references” in patent law) that comprise
the available knowledge regarding the subject matter of the invention sought to be patented, such as other issued
patents, publications, and evidence of actual uses or sales of the technology. ROGER SCHECHTER & JOHN THOMAS,
PRINCIPLES OF PATENT LAW 4-1 (2d ed. 2004).
12 35 U.S.C. § 103(a).
13 In re Fischer, 421 F.3d 1365, 1371 (Fed. Cir. 2005).
14 35 U.S.C. §§ 154(a)(1), 271(a).
15 35 U.S.C. § 271(a).
16 35 U.S.C. § 283.
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royalty for the use made of the invention by the infringer.”17 The usual term of patent protection
is 20 years from the date the patent application is filed.18 At the end of that period, others may use
the invention without regard to the expired patent.
Because the Patent Act expressly provides that “patents shall have the attributes of personal
property,”19 patent holders may sell their patent rights in a legal transfer called an “assignment.”20
Alternatively, patent holders may grant others a “license” to exercise one of the five statutory
patent rights.21 A license is not a transfer of ownership of the patent, but rather is the patent
holder’s permission to another entity to use the invention in a limited way, typically in exchange
for periodic royalty payments during the term of the patent.22 A patent holder may grant to a
licensee the right to practice the invention through a contract (typically known as a patent
licensing agreement). The terms of the licensing agreement, however, may include conditions
upon the grant of rights—for example, restricting the licensee from making the invention but
allowing that party to sell it.23 A licensee that performs an act that exceeds the scope of the license
(through a violation of the limitations and conditions of the grant of rights) or refuses to comply
with the terms of the license agreement (such as by refusing to pay the required royalties) is
potentially liable to the patent holder for breach of contract as well as for patent infringement.24
The U.S. Court of Appeals for the Federal Circuit (Federal Circuit) is a specialized tribunal
established by Congress that has exclusive appellate jurisdiction in patent cases.25 Parties
dissatisfied with the Federal Circuit’s rulings may petition the U.S. Supreme Court to review the
appellate court’s decision. However, the Supreme Court is not required to entertain the appeal; it
has discretion to decide whether to grant certiorari to review the case.26
Besides seeking legal relief for infringement in the federal courts, U.S. patent holders may also
obtain an order from the U.S. International Trade Commission (ITC or Commission) preventing
the importation of foreign goods that infringe their rights. The ITC is an independent,
nonpartisan, quasi-judicial federal government agency responsible for investigating and
arbitrating complaints of violations of Section 337 of the Tariff Act of 1930 (19 U.S.C. § 1337),
which prohibits unfair methods of competition or other unfair acts in the importation of products
into the United States. Section 337 also prohibits the importation of articles that infringe valid
U.S. patents, copyrights, processes, trademarks, or protected design rights. (The majority of
unfair competition acts asserted under Section 337 involve allegations of patent infringement.)27
17 35 U.S.C. § 284.
18 35 U.S.C. §154(a)(2).
19 35 U.S.C. § 261.
20 ROGER SCHECHTER & JOHN THOMAS, PRINCIPLES OF PATENT LAW § 11-1 (2d ed. 2004).
21 A patent holder has the right to exclude others from making, using, offering for sale, or selling the invention
throughout the United States, or importing the protected invention into the United States. 35 U.S.C. § 154(a)(1).
22 SCHECHTER & THOMAS, supra footnote 200, § 11-1.
23 United States v. General Electric Co., 272 U.S. 476, 490 (1926).
24 JOHN R. THOMAS, PHARMACEUTICAL PATENT LAW 427 (BNA Books 2005).
25 28 U.S.C. § 1295(a)(1).
26 28 U.S.C. § 1254(1).
27 Colleen V. Chien, Patently Protectionist, 50 WILLIAM & MARY L. REV. 63, 70 (2008) (patent cases comprise 85% of
the ITC’s Section 337 docket). For more information about Section 337 proceedings, see CRS Report RS22880,
Intellectual Property Rights Protection and Enforcement: Section 337 of the Tariff Act of 1930, by Shayerah Ilias
Akhtar.
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The ITC has the power to order several forms of prospective injunctive relief, including ordering
the U.S. Customs and Border Protection (CBP) to stop imports from entering U.S. borders (an
exclusion order), or issuing cease and desist orders that prohibit parties from distributing or
selling infringing articles from existing U.S. inventory. However, unlike the federal courts, the
ITC lacks the statutory authority to award monetary damages for patent infringement (past or
future).
Although issued patents are presumed to be valid, accused infringers may assert in court that a
patent is invalid or unenforceable on a number of grounds.28 The accused infringer could raise
this argument as an affirmative defense or counterclaim when sued for patent infringement. A
party could also preemptively file a “declaratory judgment action”29 against a patent owner to
challenge a patent’s validity, if there is a case or controversy between them.30
However, the constitutionally based “case or controversy” requirement for federal judicial
proceedings significantly limits the ability of members of the public to challenge the USPTO’s
decision to grant a patent. Unless the patent holder becomes involved in an actual, continuing
controversy with another person, that person cannot successfully request that a court determine
whether the patent is valid or not. To address this perceived deficiency, Congress established
several administrative procedures that are conducted by the USPTO’s Patent Trial and Appeal
Board, or PTAB,31 through which any interested person may challenge the validity of an issued
patent. Three trial proceedings comprise the current system of administrative patent challenges:
inter partes review (IPR), post-grant review (PGR), and the transitional post-grant review for
covered business method patents (CBM). The three proceedings have different rules, timing, and
eligibility requirements.32 The proceedings may result in the confirmation of patentability of the
original claims, an amended patent with narrower claims, or a declaration of patent invalidity.33 A
party dissatisfied with the PTAB’s final written decision in an IPR, PGR, or CBM review may
appeal directly to the Federal Circuit.
28 35 U.S.C. § 282.
29 For more on declaratory judgment actions in patent cases, see CRS Report RL34156, A Nonrepudiating Patent
Licensee’s Right To Seek Declaratory Judgment of Invalidity or Noninfringement of the Licensed Patent: MedImmune
v. Genentech, by Brian T. Yeh.
30 The requirement that an immediate, concrete dispute between the patent owner and another individual arises because
the U.S. Constitution vests the federal courts with jurisdiction only where a “case or controversy” exists. U.S. CONST.,
Art. III, sec. 2, cl. 1. A charge of patent infringement typically satisfies the “case or controversy” requirement. See
Prasco, LLC v. Medicis Pharm. Corp., 537 F.3d 1329 (Fed. Cir. 2008).
31 The PTAB’s membership consists of the USPTO director, deputy director, the Commissioner for Patents, the
Commissioner for Trademarks, and the administrative patent judges. 35 U.S.C. § 6(a).
32 The USPTO provides a helpful chart that compares the major differences between the three administrative trials, in
terms of (1) who may file a petition with the USPTO to institute the review; (2) when such a petition is allowed; (3) the
estoppel provisions applicable to the review (to prevent individuals from making repetitive arguments during later
proceedings—either in federal court, the ITC, or in a USPTO administrative proceeding); (4) standards to trigger the
review; (5) the standard to prove invalidity; (6) time limits for completing the review; and (7) the basis for challenging
validity of the patent, available at http://beta.uspto.gov/sites/default/files/ip/boards/bpai/
aia_trial_comparison_chart.pptx.
33 35 U.S.C. §§ 318(b); 328(b).
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Patent Assertion Entities34
“Patent assertion entities” are people or companies that do not develop, manufacture, or sell any
product covered by the patents they own. The business model of a patent assertion entity (PAE)
instead focuses on buying and asserting patents against companies that have already begun using
and developing the patent, often without knowledge of the PAE’s ownership of the patent.35 PAEs
emerged alongside the burgeoning tech industry around the turn of the 21st century and gained
notoriety with lawsuits claiming exclusive ownership of such ubiquitous technologies as wireless
email, digital video streaming, and the interactive web.36 The vast majority of lawsuits brought by
PAEs end in settlements because litigation is risky, costly, and disruptive for defendants, and
PAEs often offer to settle for amounts well below litigation costs to make the business decision to
settle an obvious one.37 PAEs are frequently referred to as “patent trolls,” after the villains of
folklore known to lie in wait under bridges they did not build, then emerge from the smog to
demand tolls from unsuspecting travelers.38 The term “troll” is controversial because it is both
pejorative and ambiguous, often used imprecisely for any opportunistic or unpopular patent
holder.39
Critics of PAEs argue that they extort the patent system through litigation by extracting licensing
fees or damage awards from companies that cannot afford the cost of litigation. Critics also argue
that “patent trolling” deters innovation and discourages companies from seeking patents, and thus
delivering new products to the market.40 However, defenders of PAEs argue that they actually
promote invention by increasing the liquidity and managing the risk of investments in applied
research and invention, as well as by compensating small inventors.41 PAEs’ strongest allies
include universities and other nonpracticing entities that benefit from having PAEs as buyers for
their patents and are not as vulnerable to lawsuits because they ordinarily do not make or sell
anything that could be infringing.42
34 For comprehensive background information on these entities, see CRS Report R42668, An Overview of the “Patent
Trolls” Debate, by Brian T. Yeh.
35 FEDERAL TRADE COMMISSION, THE EVOLVING IP MARKETPLACE: ALIGNING PATENT NOTICE AND REMEDIES WITH
COMPETITION 67-68 (2011).
36 See Gerard N. Magliocca, Blackberries and Barnyards: Patent Trolls and the Perils of Innovation, 82 NOTRE DAME
L. REV. 1809 (2007).
37 John R. Allison, Mark A. Lemley & Joshua Walker, Patent Quality and Settlement Among Repeat Patent Litigants,
99 GEO. L.J. 677, 694 (2011).
38 The term was coined at Intel in 2001 as a pithy label for litigants asserting patents that they owned but did not
practice and which they typically acquired. An Intel Corporation vice president had been sued after referring to such
litigants as “patent extortionists.” See Joff Wild, The Real Inventors of the Term “Patent Troll” Revealed, IAM
MAGAZINE, August 22, 2008, http://iam-magazine.com/blog/detail.aspx?g=cff2afd3-c24e-42e5-aa68-a4b4e7524177.
39 See, e.g., Ronald S. Katz et al., Patent Trolls: A Selective Etymology, IP LAW 360, March 20, 2008,
http://manatt.com/uploadedFiles/News_and_Events/Articles_By_Us/patentroll.pdf; see also Jenna Greene, Trolls?
Patent Director Says the Term Isn’t Helpful, NAT’L LAW JOURNAL, Jan. 22, 2015 (quoting USPTO Director Michelle
Lee: “I don’t find the term [patent troll] helpful. It means different things to different people. We need to focus on
behavior.”).
40 See, e.g., James Bessen et al., The Private and Social Costs of Patent Trolls, REGULATION 26, 31-35 (2006).
41 See, e.g., Ron Epstein, Debunking the ‘Patent Troll’ Myth, BLOOMBERG BUSINESSWEEK, August 15, 2011, available
at http://www.businessweek.com/stories/2010-02-01/debunking-the-patent-troll-mythbusinessweek-business-news-
stock-market-and-financial-advice.
42 See Mark A. Lemley, Are Universities Patent Trolls?, 18 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 611, 618
(2008).
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Legislation in the 114th Congress
The remainder of this report discusses and analyzes the key provisions of legislative proposals
that have been introduced in the 114th Congress related to patent litigation abuse. The subject
matter of the patent law reforms is presented below in no particular order.
Heightened Pleading Requirements
According to the Federal Rules of Civil Procedure, a complaint for patent infringement43 must
include four statements that assert jurisdiction, patent ownership, patent infringement by the
defendant, and a demand for relief.44 Plaintiffs typically rely upon the Federal Rules of Civil
Procedure’s Form 18 to structure their patent infringement complaint. Generally, the Federal
Circuit has applied the “notice pleading standard” to patent infringement pleadings for the
purpose of a motion to dismiss for failure to state a claim (a typical method by which a defendant
may attempt to have a case dismissed at the beginning of the case). Under this standard, a court
finds that the patent pleading statements contain sufficient particularity to survive a motion to
dismiss for failure to state a claim if they notify parties of the general issues of the case. In K-
Tech Telecommunications v. Time Warner Cable, the Federal Circuit held that the information
required by the Federal Rules of Civil Procedure’s Form 18 is sufficient for pleading a patent
infringement claim as the form states a plausible claim and places the alleged infringer on
notice.45 Additionally, the Federal Circuit in McZeal v. Sprint Nextel Corporation found that a
party does not need to describe the relationship between each element of the claim and the
infringing device in a patent infringement complaint.46 According to the court, specific
information such as this “is something to be determined through discovery.”47
The Innovation Act, H.R. 9, proposes additional heightened initial pleading requirements for an
infringement claim, as compared to the current requirements under the Federal Rules of Civil
Procedure’s Form 18. Under these new requirements, a party alleging infringement in a complaint
must include specific details regarding the following:
• each claim of each patent allegedly infringed;
• for each claim of indirect infringement, the acts of the alleged indirect infringer
that contribute to, or are inducing, a direct infringement;
• the principal business of the party alleging infringement;
• the authority of the party alleging infringement to assert each patent and the
grounds for the court’s jurisdiction;
• each complaint filed that asserts any of the same patents; and
43 As previously discussed, patent infringement is the unauthorized making, using, offering for sale, selling, and
importing of a patented invention. 35 U.S.C. § 271.
44 Fed. R. Civ. P. Form 18.
45 K-Tech Telecommunications v. Time Warner Cable, 714 F.3d 1278 (Fed. Cir. 2013).
46 McZeal v. Sprint Nextel Corp., 501 F.3d 1354, 1358 (Fed. Cir. 2007).
47 Id.
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• whether the patent is essential or has potential to become essential to a standard-
setting body, as well as whether the United States or a foreign government has
imposed any specific licensing requirements.48
The bill states that if the information is not readily accessible, then the party may generally
describe the information with an explanation of why such undisclosed information was not
readily accessible.49 Similarly, a civil action that includes a claim for relief arising under Section
271(e)(2) relating to certain drug claims is not subject to the heightened pleading requirements
described above.50
Commentators have linked “patent trolls” together with the current patent pleading requirements
for a patent infringement claim.51 They have argued that the minimal information required in a
patent infringement complaint encourages PAEs to initiate “frivolous” lawsuits that otherwise
would not survive the initial pleading state under a more stringent standard. Proponents of these
pleadings changes state that such heightened pleading requirements would force a plaintiff to
consider the alleged infringement instrumentality more carefully and decide whether infringement
has occurred before filing the suit.52 Supporters of heightened pleading requirements also argue
that “not providing the necessary information at the beginning of a case in the complaint slows
down the litigation and makes it inefficient and expensive for both parties.”53 Additionally, these
proponents assert that heightened pleadings standards would not impose a greater burden on the
plaintiff, who would develop a good-faith case, and providing such information at the early stages
of litigation would improve efficiency and costs.54 However, some commentators believe that the
heightened pleading requirements would render patent enforcement impractical. According to
these opponents, the plaintiff may not have the information available at this stage of litigation, as
the discovery process typically reveals the information necessary to build a successful
infringement claim.55
Joinder of Interested Parties
The Federal Rules of Civil Procedure outline when a person must and may join as a party in
litigation. Under Rule 19, a person must join as a party if, in the person’s absence, the court
would be unable to accord complete relief among existing parties, the person is unable to protect
an interest, or a present party would be subject to a substantial risk of incurring multiple
48 H.R. 9, § 3, adding new 35 U.S.C. § 281A.
49 Id.
50 The Innovation Act provides an exception to this disclosure requirement for civil actions that include a specific cause
of action for patent infringement involving pharmaceutical drugs. The particular cause of action, established by the
Hatch-Waxman Act and codified in 35 U.S.C. § 271(e)(2), allows a brand-name drug company to enforce its patents
against a potential generic competitor at such time that the generic firm files an application (a so-called Abbreviated
New Drug Application (ANDA)) with the Food and Drug Administration, seeking marketing approval. For more
information on this provision, see CRS Report R42354, Patent Infringement and Experimental Use Under the Hatch-
Waxman Act: Current Issues, by John R. Thomas.
51 See, e.g., Patent Progress, Common Sense Solutions to the Patent Control Problem, at http://www.patentprogress.org/
patent-troll-reform/common-sense-solutions-to-the-patent-troll-problem/.
52 H.Rept. 113-279, p. 23.
53 Id.
54 Id.
55 See Edward R. Ergenzinger and Andrew R. Shores, “Here We Go Again: The Next Round of Legislative Patent Law
Reform,” at http://www.wardandsmith.com/articles/the-next-round-of-legislative-patent-law-reform.
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obligations.56 Under Rule 20, a person may join as a plaintiff if all the plaintiffs could claim a
right to relief for injuries arising from the same occurrence or transaction.57 Likewise, a person
may join as a defendant if assertions made against all of the defendants could claim a right to
relief for damages emerging from the same transaction or occurrence.58 The Patent Act outlines
mores specific joinder requirements for a patent civil action. Under the Patent Act, a party may
join a patent civil action as a defendant (accused infringer) only if any right to relief is asserted
against the parties jointly and severally,59 or arising out of the same transaction relating to the
making, using, importing into the United States, offering for sale, or selling of the same accused
product/process.60 All defendants in the action must share the same questions of fact for joinder to
occur.61 Joinder cannot occur if “based solely on allegations that they each have infringed the
patent or patents in suit.”62
Section 3(c) of H.R. 9 would establish mandatory joinder rules when the nonprevailing party
alleging infringement is unable to pay the fee award ordered by the court and other expenses.
Thus, this provision would require a court presiding over a patent case to grant a defendant’s
motion to join an “interested party,” “if such defending party shows that the party alleging
infringement has no substantial interest in the patent or patents at issue other than asserting such
patent claim in litigation.”63 An “interested party” subject to this joinder provision would include
a party that is a patent assignee, has a right to enforce or sublicense the patent, or has a direct
financial interest in the patent, such as the right to any part of a damage award or licensing
revenue. The bill would exclude as an “interested party” legal counsel retained on a contingency
fee basis or an individual “whose sole financial interest in the patent or patents at issue is
ownership of an equity interest in the party alleging infringement, unless such person has the right
or ability to influence, direct or control the civil action.”64 H.R. 9 would also grant the court with
the discretion to deny a motion to join if the interested party is not subject to service of process,
or if the joinder would deprive the court of subject matter jurisdiction or render the venue
improper.
Mandatory joinder provisions, including that proposed by H.R. 9, respond to the alleged lack of
transparency regarding PAEs or the absence of financial resources held by some PAEs and their
corresponding inability to pay fees to a prevailing defendant. Proponents of this proposed
provision state that mandatory joinder would encourage greater transparency by granting patent
defendants with further knowledge regarding all the parties who may have an interest in the
litigation beyond the PAE “shell company.”65 Proponents of the joinder provision also argue that
56 Fed. R. Civ. P. 19.
57 Fed. R. Civ. P. 20.
58 Id.
59 Joint and several liability occurs when two or more people are found liable, and the plaintiff may collect the entire
judgment from any one of the parties or from any and all of the parties in various amounts until the judgment is paid in
full. See Black’s Law Dictionary, 2d. ed.
60 35 U.S.C. § 299(a).
61 Id.
62 35 U.S.C. § 299(b).
63 H.R. 9 § 3 amending 35 U.S.C. § 299.
64 H.R. 9 § 3.
65 Hearing on H.R. 3309 Innovation Act Before the House Committee on the Judiciary, Subcommittee on Courts,
Intellectual Property, and the Internet, 113th Cong., 1st Sess., (2013) (Statement of Kevin T. Kramer, Vice President
and Deputy General Counsel for Intellectual Property, on behalf of Yahoo! Inc.).
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such a change would allow prevailing defendants to seek a greater financial award against PAEs,
who may not have extensive financial resources, by permitting the defendants to seek financial
recovery against additional parties.66 Opponents of this provision argue that the mandatory
joinder of third parties is “one-sided” and may restrict the ability of patent owners to enforce their
patents.67 Some have stated that joinder provisions such as the one proposed by H.R. 9 may harm
business relationships that arise through licensing by forcing parties to join in order to pay
damages and other fees.68 Opponents also contend that joinder in this context for the purposes of
fee-shifting raises constitutional concerns as the provision would create standing for parties that
would otherwise not have standing.69 Specifically, the opponents point to the scenario where “a
defendant may join [as] a third-party at the end of the case for the purposes of fee shifting, but the
third-party had no standing to assert or defend themselves during the course of the legal
proceedings.”70
Limits on Discovery and Cost-Shifting
The Federal Rules of Civil Procedure permit discovery71 into any unprivileged matter that is
relevant to the claim or defense of any party.72 This broad definition leads to costly discovery in
patent litigation.73 During the discovery process, the court may decide to hold a “Markman
hearing,”74 during which a judge examines evidence concerning the parties’ disputes over the
meaning and language of a patent claim that defines the boundaries of the invention. (Also
referred to as “claim construction,” or the interpretation of a patent’s claims, this process largely
determines the scope of the patent owner’s proprietary rights.) For these hearings, courts must
consider volumes of evidence produced during discovery relating to many different aspects of
claim construction including evidence regarding the definition, meaning, scope, and pertinent art
of the claim.75
During hearings relating to patent claim construction, the Innovation Act proposes to limit
discovery “to information necessary for the court to determine the meaning of the terms used in
the patent claim.”76 The bill would grant the courts with the discretion to permit discovery “in
special circumstances” to prevent manifest injustice. Under H.R. 9, parties would also have the
ability to consent to voluntary exclusion from these proposed limitations on discovery.
66 Protecting Small Businesses and Promoting Innovation by Limiting Patent Troll Abuse: Hearing Before the Senate
Judiciary Comm., 113th Cong., 1st Sess. (2013) (Statement of Philip S. Johnson, Chief Intellectual Property Counsel,
Johnson & Johnson).
67 The Impact of Abusive Patent Litigation Practices on the American Economy: Hearing Before the Senate Judiciary
Comm., 114th Cong. 1st Sess. (2015) (Statement of Hans Sauer, Ph.D., Deputy General Counsel for Intellectual
Property, on behalf of Biotechnology Industry Organization).
68 Id.
69 H.Rept. 113-279, p. 109.
70 Id.
71 Discovery is the process to gather information in preparation for trial.
72 See Fed. R. Civ. P. 26.
73 See Chief Judge Randall R. Rader, The State of Patent Litigation, Eastern District of Texas Bar Association Judicial
Conference, Sept. 27, 2011.
74 This type of hearing developed as the result of the U.S. Supreme Court decision in Markman v. Westview
Instruments, Inc., 517 U.S. 370 (1996).
75 See Phillips v. AWH Corp., 415 F.3d 1303 (Fed. Cir. 2005).
76 H.R. 9, § 3, adding new 35 U.S.C. §299A.
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Supporters of these limitations on discovery note that the technical nature and complexity of
patent litigation inherently leads to the extensive document discovery, and correspondingly
encourages frequent settlements to avoid this high cost.77 These supporters have stated that the
propensity towards settlements in patent litigation encourages PAEs to file infringement suits.
Thus, supporters have also emphasized that specific limits on claim construction discovery, such
as those proposed by the Innovation Act, would help the parties to focus “on truly relevant
discovery” and to reduce “wasted efforts” during litigation over claim construction.78 Critics of
these discovery limitations argue that this approach may create further discovery by encouraging
courts to separate claim construction analysis from its summary judgment decision-making.79
Others have also raised concerns that the discovery limitation provision may cause “patent
litigation in the overwhelming majority of patent cases [to] incur significant across-the-board
delays and increased expense for all parties.”80
Transparency of Patent Ownership81
Under current law, within a month after the filing of a civil action involving a patent, the clerks of
the federal courts must provide written notice of the action to the USPTO director that describes
the names and addresses of the parties, the name of the inventor, and the number of the patent
upon which the action is based.82 The USPTO director is then required to enter this information in
the file of that patent.
Section 4 of the Innovation Act would amend this section of the Patent Act to impose specific
disclosure requirements upon plaintiffs upon the filing of an initial complaint for patent
infringement. (Similar to the exemption for the new pleading requirements, the Innovation Act’s
patent ownership disclosure requirement would not apply to any civil action that includes a cause
of action for patent infringement under 35 U.S.C. § 271(e)(2).) 83 Plaintiffs would be required to
disclose to the USPTO, the court, and all adverse parties the following information relating to
entities that own or have a financial interest in the patent:
1. the assignee(s) of the patent(s) involved in the case;
2. any entity with a right to sublicense or enforce the patent(s) at issue;
3. any entity, other than the plaintiff, that the plaintiff knows to have a financial
interest84 in the patent(s) at issue or in the plaintiff; and
77 H.Rept. 113-279, p. 9.
78 H.Rept. 113-279, p. 24.
79 Dennis Crouch, “Patent Reform: Innovation Act of 2015,” Feb. 5, 2015, available at http://patentlyo.com/patent/
2015/02/patent-reform-innovation.html.
80 The Impact of Abusive Patent Litigation Practices on the American Economy: Hearing Before the Senate Judiciary
Comm., 114th Cong., 1st Sess. (2015) (Statement of Hans Sauer, Deputy General Counsel for Intellectual Property,
Biotechnology Industry Organization).
81 This topic is often referred to as the disclosure of the “real party-in-interest.”
82 35 U.S.C. § 290.
83 H.R. 9, § 4(a)(3), adding new 35 U.S.C. § 290(b)(2).
84 The Innovation Act defines “financial interest” to mean (1) with regard to a patent, the right of a person to receive
proceeds related to the assertion of the patent(s), and (2) with regard to the plaintiff, direct or indirect ownership or
control by a person of more than 5% of such plaintiff. H.R. 9, § 4(a)(3), adding new 35 U.S.C. § 290(e)(1). However,
the definition expressly excludes anyone who owns shares or other interests in a mutual or common investment fund
(continued...)
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4. the ultimate parent entity85 of any assignee, or the entities identified in #2 and #3
above.
Section 4 of the Innovation Act would require the plaintiff to notify the USPTO of any changes in
the identity of the assignee of the patent or the entities described above, within 90 days of such
change.86 Failure to comply with this ongoing duty of disclosure would result in the plaintiff
being barred from recovering either enhanced damages or reasonable fees and other expenses
incurred in connection with the infringement lawsuit (with respect to infringing activities
occurring during the period of noncompliance), “unless the denial of such damages or fees would
be manifestly unjust.”87 In addition, the Innovation Act directs a court to award to a prevailing
party accused of infringement any reasonable fees and other expenses that the party incurred to
uncover the updated information about the assignee or entities, “unless such sanctions would be
unjust.”88
Section 4 of the Innovation Act grants the USPTO director the power to issue regulations to
establish a registration fee in order to recover the cost of administering the “disclosure of
interests” requirement, which includes the costs to facilitate collection and maintenance of the
information submitted by plaintiffs and “to ensure the timely disclosure of such information to the
public.”89
According to the sponsors of the Innovation Act, the amendments made by Section 4 “will ensure
that patent trolls cannot hide behind a web of shell companies to avoid accountability for bringing
frivolous litigation.”90 However, a critic of this provision argued that it would be “needlessly
burdensome” and that the required disclosure “could lead to the revelation of confidential
financial and licensing agreements”;91 furthermore, he noted that if such information is relevant to
the litigation, “it is readily discoverable under current rules, with appropriate protective orders to
maintain needed confidentiality.”92
(...continued)
(unless the person participates in the management of such fund) and also excludes the proprietary interest of a
policyholder in a mutual insurance company or of a depositor in a mutual savings association, unless the outcome of
the civil action could substantially affect the value of that proprietary interest.
85 The Innovation Act defines “ultimate parent entity” by reference to 16 C.F.R. § 801.1(a)(3), which provides that the
term “means an entity which is not controlled by any other entity.” H.R. 9, § 4(a)(3), adding new 35 U.S.C. § 290(e)(3).
86 Id., adding new 35 U.S.C. § 290(d)(1).
87 Id., adding new 35 U.S.C. § 290(d)(2)(A).
88 Id., adding new 35 U.S.C. § 290(d)(2)(B).
89 H.R. 9, § 4(c).
90 Press Release: Goodlatte, Defazio, Issa, Nadler, Smith, Lofgren, Eshoo Introduce Patent Litigation Reform Bill, Feb.
5, 2015, available at http://judiciary.house.gov/index.cfm/2015/2/goodlatte-defazio-issa-nadler-smith-lofgren-eshoo-
introduce-patent-litigation-reform-bill.
91 Howard Klein, Patent Law Reform—Proceed with Caution, Law360, Mar. 9, 2015, at http://www.law360.com/
articles/626618/patent-law-reform-proceed-with-caution.
92 Id.
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Stays of Litigation Brought Against Infringing Customers
Under the Patent Act, anyone who “makes, uses, offers to sell, or sells any patented invention”93
is potentially liable for patent infringement if such actions occur without the authority of the
patent holder. Thus, the patent holder has the right to bring a lawsuit against not only the
manufacturer or seller of products that incorporate allegedly infringing components, but also the
customers who purchase and use those products.94 Over the past few years, businesses (including
restaurants, retailers, and grocery stores) and individuals increasingly have faced charges of
patent infringement for their use of certain equipment that contain technologies such as Wi-Fi,
PDF scanning, email, and vehicle tracking.95 A witness at a congressional hearing in 2013
described the situation as follows:
Another patent litigation practice that has been sharply criticized is the institution of suits
against large numbers of assemblers, distributors or retailers rather than the original
manufacturer or provider of the component or product alleged to infringe. This tactic takes
advantage of the fact that such suits threaten defendants with the disruption of aspects of
their businesses that are at best tangentially related to the invention which is the subject of
the patent, and that each individual defendant has less motivation to litigate the issue to final
conclusion that the manufacturer of the product at issue. The result can be to collect
enormous sums as the result of a very large number of small settlements whose cumulative
value far exceeds the amount that could have been recovered from the original
manufacturer.96
The judicially created response to such customer lawsuits is the so-called “customer suit
exception” doctrine, which allows courts to prioritize litigation against or brought by the
manufacturer of infringing goods over a lawsuit by the patent owner against customers of the
manufacturer in the interest of efficiency and judicial economy.97 The doctrine permits a court to
stay an earlier-filed action against a customer involving an infringement product pending the
outcome of a later-filed declaratory judgment action brought by the manufacturer of the accused
product. As explained by the First Circuit Court of Appeals (prior to the creation of the Federal
Circuit), “At the root of the preference for a manufacturer’s declaratory judgment action is the
recognition that, in reality, the manufacturer is the true defendant in the customer suit.... [I]t is a
simple fact of life that a manufacturer must protect its customers, either as a matter of contract, or
good business, or in order to avoid the damaging impact of an adverse ruling against its
93 35 U.S.C. § 271(a) (emphasis added).
94 See Aro Mfg. Co., Inc. v. Convertible Top Replacement Co., Inc., 377 U.S. 476, 484 (1964) (explaining that “it has
often and clearly been held that unauthorized use, without more, constitutes infringement.”).
95 See Colleen V. Chien & Edward Reines, Why Technology Customers Are Being Sued en Masse for Patent
Infringement & What Can Be Done (Santa Clara Univ. Sch. of L. Legal Studies Research Papers Series, Working Paper
No. 20-13, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2318666.
96 Abusive Patent Litigation: The Impact on American Innovation & Jobs, and Potential Solutions: Hearing Before the
House Judiciary Comm., Subcomm. on Courts, Intellectual Property, and the Internet, 113th Cong., 1st Sess. (2013)
(Statement of Philip S. Johnson, Chief Intellectual Property Counsel, Johnson & Johnson, on behalf of the 21st Century
Coalition for Patent Reform), at 7, available at http://judiciary.house.gov/_files/hearings/113th/03142013_2/
Johnson%2003142013.pdf.
97 Spread Spectrum Screening LLC v. Eastman Kodak Co., 657 F.3d 1349, 1357 (Fed. Cir. 2011).
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products.”98 However, the doctrine “has long existed in a state of relative disuse” and the Federal
Circuit has affirmed its application in only one case in the last three decades.99
Section 5 of the Innovation Act would codify a modified version of the customer suit exception
by amending the Patent Act100 to require a court to suspend or postpone litigation against a
customer of a product or process that contains allegedly infringing technologies, if several
requirements are satisfied:101
1. the manufacturer of the product and the customer consent to the stay of the action
in writing;
2. the manufacturer is a party to the civil action or a separate action involving the
same patent(s);
3. the customer agrees to be bound by the decisions of the court in the action
involving the manufacturer, with respect to any issues that the customer and
manufacturer have in common; and
4. the customer requests the court to stay the action no later than the later of (a) 120
days after the date on which the first pleading in the action is served (if such
pleading specifically identifies the product or process that is the source of the
customer’s alleged infringement of the patent, and the pleading specifically
explains how the product or process is alleged to infringe the patent), or (b) the
date on which the first scheduling order in the case is entered.
The Innovation Act provides two limited exceptions to the manufacturer and customer’s
entitlement to a stay: (1) if the action involving the manufacturer will not resolve a major issue in
the suit against the customer; or (2) if the stay unreasonably prejudices and would be manifestly
unjust to the party seeking to lift the stay.102 In addition, like the exemption for the new pleading
and patent ownership disclosure requirements, the Innovation Act exempts from the customer suit
stay provision any action that includes a cause of action for patent infringement under 35 U.S.C.
§ 271(e)(2).103
Though the stay provision would only postpone, and not terminate, a cause of action against the
customer, supporters of the stay provision assert that “in the vast majority of cases, a suit
involving the manufacturer will eliminate all potential infringement liability of the customer.”104
98 Codex Corp. v. Milgo Electronic Corp., 553 F.2d 735 (1st Cir.), cert. denied, 434 U.S. 860 (1977).
99 Brian J. Love and James C. Yoon, Expanding Patent Law’s Customer Suit Exception, 93 B.U. L. REV. 1605, 1614
(Oct. 2013), citing Katz v. Lear Siegler, Inc., 909 F.2d 1459 (Fed. Cir. 1990).
100 H.R. 9, § 5(a), replacing existing 35 U.S.C. § 296 that contains an unrelated provision that attempted to make state
governments and state institutions liable for monetary damages in a patent infringement lawsuit. This provision that
sought to abrogate a state’s Eleventh Amendment sovereign immunity has been invalidated by the Supreme Court in a
1999 decision, Florida Prepaid v. College Savings Bank, 527 U.S. 627 (1999). For more information on this issue, see
CRS Report RL34593, Infringement of Intellectual Property Rights and State Sovereign Immunity, by Brian T. Yeh.
101 H.R. 9, § 5(a), adding revised 35 U.S.C. § 296(a)(1)-(4).
102 Id., adding revised 35 U.S.C. § 296(c).
103 Id., adding revised 35 U.S.C. § 296(d).
104 H.Rept. 113-279, p. 30.
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In testimony offered before the House Judiciary Committee in October 2013, former USPTO
Director David Kappos argued that the Innovation Act’s stay provision’s definition of a “covered
customer” is overbroad and may also have the potential for unintended consequences:
[A]s currently written the stay provision permits all parties in the product channel
downstream of the first component part maker to escape infringement liability, including
large commercial actors such as manufacturers combining procured components into value-
added completed devices, as well as assemblers, and others not operating in the roles of
“mere retailers” or “mere end users,” and certainly not operating in the roles of “mom and
pop shops.” This unnecessarily devalues intellectual property and thus innovation by
artificially limiting or even eliminating legitimate patentees’ ability to protect their
innovations. It also may leave an American innovator with no infringer at all to pursue where
infringing manufacturers are located outside the reach of the US courts, such as overseas, or
lack adequate assets to answer for infringement.105
Others have raised similar concerns about stay provisions in patent litigation reform legislation
that are “overly inclusive” by providing the benefit of a stay of a suit to “any and all downstream
parties.”106 One critic of the Innovation Act’s stay provision suggests that any bill providing for a
stay of infringement suits against customers “limit eligibility of customer stays to retailers and
end users who have not materially altered the product or process, or incorporated it into another
product or process.”107
Shifting of Attorney’s Fees
For many years, patent cases were subject to the “American Rule,” under which “[e]ach litigant
pays his own attorney’s fees, win or lose.”108 Then in 1947, Congress enacted a fee-shifting
provision that gave district courts the power to award attorney’s fees to the prevailing party in
patent suits. The 1952 revision of the patent laws codified this provision at 35 U.S.C. § 285. This
section of the Patent Act provides a court with the discretion to award “reasonable” attorney’s
fees to the prevailing party (plaintiff or defendant) only “in exceptional cases.”
However, the Federal Circuit in its 2005 opinion, Brooks Furniture Manufacturing, Inc. v.
Dutailier International, Inc.,109 established that courts may find an “exceptional case” under
Section 285 in only two limited circumstances: (A) “when there has been some material
inappropriate conduct” (during the litigation or in obtaining the patent from the USPTO) or (B)
when the litigation is both (1) brought in subjective bad faith and (2) objectively baseless. In
105 H.R. 3309, the “Innovation Act:” Hearing Before the House Judiciary Comm., 113th Cong., 1st Sess. (2013)
(Statement of David J. Kappos, Former Under Secretary of Commerce for Intellectual Property and Director of the
United States Patent and Trademark Office), at 7, available at http://judiciary.house.gov/_files/hearings/113th/
10292013/Kappos%20Testimony.pdf.
106 Thomas M. Susman and Robert O. Lindefield, Re: S. 1720, the “Patent Transparency and Improvements Act of
2013,” and Related Bills, Letter to Senate Judiciary Chairman Leahy and Ranking Member Grassley, Feb. 4, 2014, at
8, available at http://www.americanbar.org/content/dam/aba/uncategorized/GAO/
2014feb4_patentreformletters.authcheckdam.pdf.
107 Id. at 9.
108 Marx v. General Revenue Corp., 133 S. Ct. 1166, 1175 (2013); see also Alyeska Pipeline Service Co. v. Wilderness
Society, 421 U.S. 240, 247-53 (1975) (explaining that “[i]n the United States, the prevailing litigant is ordinarily not
entitled to collect a reasonable attorneys’ fee from the loser.”).
109 Brooks Furniture Mfg., Inc. v. Dutailier Intern., Inc., 393 F.3d 1378 (Fed. Cir. 2005) (overruled by Octane Fitness,
LLC v. ICON Health & Fitness, Inc., No. 12-1184, slip op. (2014)).
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addition, Brooks Furniture held that the prevailing party must prove its entitlement to attorney’s
fees by “clear and convincing evidence.”110 In part due to this strict standard, federal judges have
rarely award these fees.111
In April 2014, the Supreme Court in Octane Fitness v. Icon Health & Fitness unanimously
overruled the Federal Circuit’s Brooks Furniture standard because the two-prong test “is unduly
rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.”112
Instead, the Court adopted a more lenient standard, holding “that an ‘exceptional’ case is simply
one that stands out from others with respect to the substantive strength of a party’s litigating
position (considering both the governing law and the facts of the case) or the unreasonable
manner in which the case was litigated.”113 The Court explained that district courts must make the
Section 285 determination by considering the “totality of the circumstances.”114 The Court also
rejected the Federal Circuit’s requirement that prevailing parties establish their entitlement to
legal fees by “clear and convincing evidence” and instead embraced a “preponderance of the
evidence” standard.115 In a companion case decided the same day as Octane Fitness, the Supreme
Court in Highmark v. Allcare Health Management116 rejected the Federal Circuit’s position that a
district court’s “exceptional case” determination is to be reviewed on appeal “de novo” and
“without deference.” Instead, the Court held that the district court’s Section 285 determination
must be reviewed on appeal under an abuse-of-discretion standard.117
By overruling the Federal Circuit’s restrictive interpretation of Section 285, Octane Fitness and
Highmark provide district courts with greater discretion in deciding whether to award fees, thus
likely increasing the number of patent cases in which attorney’s fees are shifted. Thus, in
evaluating whether to award attorney’s fees, a court must first assess whether the case is
“exceptional” in accordance with the standard announced in Octane Fitness, and if so, the court
may (or may not) choose to award the fees. It is unclear the extent to which these recent Supreme
Court decisions will impact the filing of patent infringement lawsuits by patent assertion entities,
yet supporters of patent litigation reform express hope that the increased prospect of paying the
other party’s litigation expenses could be a significant financial disincentive to PAEs’ litigation
tactics.118 However, some observers predict that Octane Fitness and Highmark will not have a
significant impact on PAEs because fee-shifting will remain limited:
[R]ecent Supreme Court cases ... make clear that a case is exceptional only if it is unusually
weak. Moreover, because district courts now have substantial discretion to decide whether to
award fees, district courts that signal a reluctance to shift fees will invariably attract greater
proportions of future patent lawsuits from plaintiffs eager to avoid any risk of fee-shifting.
110 Id. at 1382.
111 See Randall R. Rader et al., Make Patent Trolls Pay in Court, N.Y. TIMES, June 4, 2013, available at
http://www.nytimes.com/2013/06/05/opinion/make-patent-trolls-pay-in-court.html?_r=0 (noting that “fees were shifted
under Section 285 in only 20 out of nearly 3,000 patent cases filed in 2011.”).
112 Octane Fitness, LLC v. ICON Health & Fitness, Inc., No. 12-1184, slip op. at 1 (2014).
113 Id. at 7.
114 Id. at 8.
115 Id. at 11.
116 Highmark Inc. v. Allcare Health Mgmt.Sys., No. 12-1163, slip. op. (2014).
117 Id. at 5.
118 Daniel Fisher, Patent Trolls Face Higher Risks As Supreme Court Loosens Fee-Shifting Rule, Forbes, April 29,
2014, at http://www.forbes.com/sites/danielfisher/2014/04/29/patent-trolls-face-higher-risks-as-supreme-court-loosens-
fee-shifting-rule/.
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Finally, even when a court does shift fees to a plaintiff, the shell-corporation structure of
many abusive litigants precludes any meaningful recovery for the defendant. So long as the
entity that owns the patent rights holds no other assets, patent plaintiffs can effectively
render themselves judgment proof.119
Section 3(b) of the Innovation Act would amend Section 285 to require a court, in any patent
case, to award attorney’s fees to a prevailing party, unless the court finds that either
1. the losing party’s position and conduct are “reasonably justified in law and
fact”120 or
2. there are “special circumstances (such as severe economic hardship to a named
inventor) [that] make an award unjust.”121
To help enforce the fee shifting provision against so-called “judgment-proof” parties, the
Innovation Act would provide a court with discretionary authority to make an “interested party”
who was joined under Section 3(c) of the act (as described in the “Joinder of Interested Parties”
section of this report) liable for any part of the award of attorney’s fees that the nonprevailing
party is unable to pay.122
Supporters of the Innovation Act’s fee shifting provision believe that “allowing more liberal
shifting of attorney’s fees against losing parties would reduce the frequency of such nuisance
settlements, and would allow more defendants to challenge patents that are invalid or that have
been asserted beyond what their claims reasonably allow.”123 On the other hand, those wary of fee
shifting provisions are concerned that they may benefit wealthy corporate parties to the
disadvantage of individual inventors. They assert that “[a] ‘loser pays’ provision will deter patent
holders from pursuing meritorious patent infringement claims and protects institutional
defendants with enormous resources who can use the risk of fee shifting to force inventors into
accepting unfair settlements or dismissing their legitimate claims.”124
The Support Technology and Research for Our Nation’s Growth (STRONG) Patents Act of 2015
(S. 632) does not include a fee-shifting provision; instead, Section 101 of S. 632 (the “findings”
section) asserts that the Supreme Court’s Octane Fitness and Highmark rulings “significantly
reduced the burden on an alleged infringer to recover attorney fees from the patent owner, and
increased the incidence of fees shifted to the losing party.”125
119 Examining Recent Supreme Court Cases in the Patent Area: Hearing Before the House Judiciary Comm., Subcomm.
on Courts, Intellectual Property, and the Internet, 114th Cong., 1st Sess. (2015) (Statement of Andrew J. Pincus,
Partner, Mayer Brown LLP), at 3, available at http://judiciary.house.gov/_cache/files/43c13fd8-8287-4a3f-b172-
67a0b37d236f/02.12.15-pincus-testimony.pdf.
120 H.R. 9, § 3(b), adding revised 35 U.S.C. § 285(a).
121 Id.
122 H.R. 9, § 3(b), adding revised 35 U.S.C. § 285(b).
123 H.Rept. 113-279, p. 21.
124 H.Rept. 113-279, p. 107 (quoting a letter from the American Association for Justice).
125 S. 632, § 101(12).
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Demand Letters
A patent demand letter is a letter sent by a patent-holder to a company or an individual accusing
the recipient of patent infringement. The letters tend to demand that the alleged infringer take a
specific action such as ceasing the infringing action or agreeing to a licensing arrangement. A
patentee may use demand letters to prove willfulness in a patent infringement lawsuit, a high bar
after recent court decisions. In the 2007 case, In re Seagate Technology, the Federal Circuit
established a two-pronged test for willful infringement in a patent case. First, the patentee must
show, by clear and convincing evidence, “that the infringer acted despite an objectively high
likelihood that its actions constituted infringement of a valid patent.”126 Then the patentee must
prove “subjective recklessness,” which means that the accused infringer knew or should have
known the risk of infringement.127 A detailed demand letter, including a summary of the alleged
patent infringement, helps to establish that the recipient/alleged infringer has the high degree of
knowledge to meet this standard. Current law, however, does not dictate any specific content
requirements or level of detail for demand letters.
The Innovation Act states that it is the “sense of Congress” that “it is an abuse of the patent
system and against public policy for a party to send out purposely evasive demand letters to end
users alleging patent infringement.”128 H.R. 9 also states that any claimant asserting willful
infringement may not rely on demand letters as notification of infringement unless the letter
identifies with particularity the asserted patent, the product or process accused, and the ultimate
parent entity of the claimant, and explains how the product or process infringes to the extent
possible.129
S. 632 expands upon this consideration of patent letters and articulates specific enforcement
requirements. Under the STRONG Patents Act, a demand letter would qualify as an “unfair or
deceptive act or practice” under the Federal Trade Commission Act130 if the sender states or
represents wrongly and in bad faith that
• the sender is a person with the right to license and enforce the patent;
• a civil action asserting a claim of infringement has been filed against the
recipient;
• a civil action asserting a claim of infringement has been filed against other
persons;
• legal action for infringement of the patent will be taken against the recipient;
• the sender is the exclusive licensee of the patent;
• persons other than the recipient purchased a license for the patent asserted in the
letter;
126 In re Seagate Technology, 497 F.3d 1360, 1371 (Fed. Cir. 2007).
127 Id. at 1371-72.
128 H.R. 9, § 3.
129 Id.
130 15 U.S.C. § 45(a)(1).
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• persons other than the recipient purchased an unrelated license and it is not
identified as such;
• an investigation of the recipient’s infringement occurred.131
S. 632 also would consider demand letters as unfair practices if the sender in bad faith seeks
compensation for
• a patent that is held to be unenforceable or invalid in a final determination;
• activities taken by the recipient after expiration of the asserted patent;
• activity of the recipient that the sender knew was authorized by a person with the
right to license the patent.132
Demand letters would also qualify as unfair practices under the STRONG Patents Act if the
sender fails to include
• the identity of the person including the name of the parent entity unless such
person is a public company and the name of the public company is identified;
• an identification of at least one patent allegedly infringed;
• an identification of at least one product or service of the recipient infringing the
identified patent;
• a name and contact information of a person the recipient may contact about the
assertions or claims.133
Under S. 632, the Federal Trade Commission would enforce any violations of the provisions
above.134 This provision would also preempt any state law “expressly relating to the transmission
or contents of communications relating to the assertion of patent rights.”135
Commentators often associate vague demand letters with PAEs using these letters for the sole
purpose of extracting financial concessions.136 Supporters of more stringent requirements for
demand letters point to vague demand letters as impediments of innovation due to the financial
costs relating to litigation or settlement that ultimately arise from receiving these types of
communications and the resulting impact on small businesses who cannot afford such costs.137
Supporters also claim that placing more content-based requirements on demand letters would
encourage patent owners to target specific infringers more carefully and likewise, would allow
alleged infringers to have a clearer understanding of the infringement claims.138 Critics of patent
131 S. 632, § 202.
132 Id.
133 Id.
134 Id. § 203.
135 Id. § 204.
136 See, e.g., Brian Fung, “Patent reform advocates are launching a ‘super-coalition’ to whack patent trolls,”
Washington Post, Jan.14, 2015.
137 Trolling for a Solution: Ending Abusive Patent Demand Letters: Hearing Before the House Energy & Commerce
Comm., Subcomm. on Commerce, Manufacturing, and Trade, 113th Cong. 2d Sess. (2014) (Statement of Mark
Chandler, Senior Vice President and Chief Compliance Officer, on behalf of Cisco Systems Incorporated).
138 Id.
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legislation have argued, however, that the legislation itself is not sufficiently tailored towards
letters sent by PAEs, and additional requirements for patent letters may make “it more difficult for
patent owners to communicate with potential licensees and alleged infringers even when those
communications are in good faith.”139
Post-Grant Review Reforms
The Leahy-Smith America Invents Act (AIA)140 established a new administrative proceeding
conducted by the USPTO’s Patent Trial and Appeal Board (PTAB) called a “post grant review”
(PGR). In this proceeding, petitioners may challenge the validity of an issued patent based on any
ground of patentability.141 A petition to initiate a PGR must be filed within nine months of the
date of patent grant.142 To initiate a PGR, the petitioner must present information that, if not
rebutted, would demonstrate that it is “more likely than not that at least one of the claims” is
unpatentable.143 A PGR must be completed within a year of its commencement, with an extension
of six months possible for good cause shown.144
Claim Construction Standard
The AIA is silent on what claim construction standard is appropriate in post-grant proceedings
conducted by the PTAB. Pursuant to authority granted by the AIA, the USPTO promulgated a
regulation in August 2012145 that provided the following standard for instituting post-grant review
as well as regulating proceedings after such institution: “[a] claim in an unexpired patent shall be
given its broadest reasonable construction in light of the specification of the patent in which it
appears.”146 In a case issued in February 2015 involving a challenge to the USPTO’s rulemaking
authority to promulgate this regulation, a divided panel of the Federal Circuit upheld the PTAB’s
use of the “broadest reasonable interpretation” (BRI) standard in claim construction.147 The
appellate court noted that the USPTO has long applied the BRI standard in a variety of
proceedings, including initial examinations, interferences, and reissue and reexamination
proceedings.148 The Federal Circuit explained that by applying the BRI standard, the USPTO
“reduce[s] the possibility that, after the patent is granted, the claims may be interpreted as giving
broader coverage than is justified.”149 The appellate court stated that “Congress is presumed to
legislate against the background of existing law where Congress in enacting legislation is aware
139 Gene Quinn & Steve Brachmann, “Demand Letter Legislation Must be Narrowly Tailored,” March 4, 2015,
available at http://www.ipwatchdog.com/2015/03/04/demand-letter-legislation-must-be-narrowly-tailored/id=55365/.
140 P.L. 112-29. For more information on this law, see CRS Report R42014, The Leahy-Smith America Invents Act:
Innovation Issues, by John R. Thomas.
141 35 U.S.C. § 321(b).
142 Id. § 321(c).
143 Id. § 324(a).
144 Id. § 326(a)(11).
145 USPTO, Changes to Implement Inter Partes Review Proceedings, Post-Grant Review Proceedings, and Transitional
Program for Covered Business Method, 77 Fed. Reg. 48680 (Aug. 14, 2012) (final rule).
146 37 C.F.R. § 42.100(b).
147 In re Cuozzo Speed Technologies LLC, 778 F.3d 1271 (Fed. Cir. 2015).
148 Id. at *16.
149 Id. at *17 (quoting In re Prater, 415 F.2d 1393, 1396 (CCPA 1981).
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of the prevailing rule,”150 and concluded that “Congress implicitly adopted the broadest
reasonable interpretation standard in enacting the AIA.”151
Section 9 of the Innovation Act would legislatively overrule the Federal Circuit’s recent decision
regarding the use of the BRI standard in post-grant proceedings. Instead, the Innovation Act
would require that the PTAB, in inter partes review (IPR) and PGR proceedings, use the same
claim construction standard that is applied by federal courts; that is, the PTAB would need to
construe a patent claim “in accordance with the ordinary and customary meaning of such claim as
understood by one of ordinary skill in the art and the prosecution history pertaining to the
patent.”152 The Innovation Act would also require the PTAB to consider prior claim construction
by a court in a civil action in which the patent owner was a party.153
Sections 102 and 103 of the STRONG Patents Act contain similar amendments regarding the
claim construction standard to be used in IPR and PGR proceedings.
Former USPTO Director David Kappos has observed that currently, “the speed mandated for
post-grant procedures is leading to greater interaction between court interpretations and USPTO
interpretations of the same patent claims, and having the USPTO apply a different standard than
the courts [for claim construction] is leading, and will continue to lead, to conflicting
decisions.”154 However, he notes that there are valid arguments for retaining the broader standard
for post-grant proceedings, such as that the BRI standard “requires patentees to define their
claims clearly over the prior art during proceedings” before the USPTO.155
Others have asserted that changing the claim construction standard in IPR and PGR from BRI to
“ordinary and customary meaning” would be a positive benefit to patent owners who feel that the
BRI standard makes it easier to invalidate their patents in the AIA-established post-grant reviews
than in federal courts.156
Estoppel Effect of Unsuccessful Challenges in PGR and IPR Proceedings
An individual who commences a PGR proceeding, along with anyone who has a legal interest in
the patent, are barred from raising in a later civil action issues that they raised in the
administrative review of the validity of a patent claim—as well as any issue that “reasonably
could have been raised” during the PGR.157 Section 9 of the Innovation Act would narrow the
estoppel effect arising from a PGR by removing the phrase “or reasonably could have raised” in
150 Id. at *17.
151 Id. at *21.
152 H.R. 9, § 9, adding new 35 U.S.C. § 316(a)(14)(A).
153 Id., adding new 35 U.S.C. § 316(a)(14)(B).
154 H.R. 3309, the “Innovation Act:” Hearing Before the House Judiciary Comm., 113th Cong., 1st Sess. (2013)
(Statement of David J. Kappos, Former Under Secretary of Commerce for Intellectual Property and Director of the
United States Patent and Trademark Office), at 8.
155 Id.
156 Ryan Davis, Innovation Act Would Revamp AIA Reviews to Shield Patents, Law360, Feb. 10, 2015 (explaining that
“[c]onstruing the claims of a patent in an AIA review broadly means that significantly more prior art can be used to
invalidate the patent than would be available in district court. A majority of AIA final decisions to date have
invalidated at least some claims of the patent.”).
157 35 U.S.C. § 325(e).
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the statute.158 Thus, this provision would effectively permit parties to later assert in a civil action
that a patent claim is invalid on any ground that the party “reasonably could have raised” during
the PGR. The purpose of this change is apparently to correct an “inadvertent scrivener’s error”
made in drafting the AIA.159
Presumption of Validity and Burdens of Proof
The AIA provided that in an IPR or PGR proceeding, “the petitioner shall have the burden of
proving a proposition of unpatentability by a preponderance of the evidence.”160 Sections 102(c)
and 103(c) of the STRONG Patents Act would amend existing law to provide a presumption of
validity to a previously issued claim that is challenged during an IPR or PGR proceeding.161
These sections of the legislation would also heighten the evidentiary standard for proving
unpatentability of a previously issued claim, requiring that the IPR or PGR petitioner prove such
unpatentability “by clear and convincing evidence.”162
Standing
Sections 102(d) and 103(d) of the STRONG Patents Act would provide more stringent standing
requirements for persons wanting to initiate a PGR or IPR. The legislation provides that in order
to have standing to file a petition with the USPTO to institute an IPR,163 a person, or a real party
in interest or privy of the person, must show a reasonable possibility of being sued for, or charged
with,164 infringement of the patent. The STRONG Patents Act adjusts the standing requirement
slightly for instituting a PGR:165 a person, or a real party in interest or privy of the person, must
demonstrate
1. a reasonable possibility of being sued for, or charged with, infringement of the
patent; or
2. a competitive harm related to the validity of the patent.
158 H.R. 9, § 9(a), amending 35 U.S.C. § 325(e)(2).
159 See Colleen Chien and Eric Goldman, In its Rush to Fix Patent Reform, Congress Didn’t Fix Its Biggest Error,
Forbes.com, Jan. 2, 2013; see also 158 Cong.Rec. S8517 (daily ed. Dec. 28, 2012) (statement of Senator Leahy)
(“Regrettably, the legislation passed today does not include one technical correction that would improve the law by
restoring Congress’s intent for the post-grant estoppel provision of the America Invents Act. Chairman Smith recently
described certain language contained in that provision as an ‘inadvertent scrivener’s error.’ As written, it
unintentionally creates a higher threshold of estoppel than was in the legislation that passed the Senate 95-5, or that was
intended by the House, according to Chairman Smith’s statement. I hope we will soon address this issue so that the law
accurately reflects Congress’s intent.”).
160 35 U.S.C. §§ 316(e), 326(e).
161 S. 632, § 102(c), adding revised 35 U.S.C. § 316(e)(1); S. 632, § 103(c), adding revised 35 U.S.C. § 326(e)(1).
162 S. 632, § 102(c), adding revised 35 U.S.C. § 316(e)(2); S. 632, § 103(c), adding revised 35 U.S.C. § 326(e)(2).
163 S. 632, §102(d), adding new 35 U.S.C. § 311(d)(2).
164 The STRONG Patents Act defines the term “charged with infringement,” for purposes of this standing provision, to
mean “a real and substantial controversy regarding infringement of a patent exists such that the petitioner would have
standing to bring a declaratory judgment action in Federal court.” S. 632, § 102(d), adding new 35 U.S.C. § 311(d)(1).
165 S. 632, §103(d), adding new 35 U.S.C. § 321(d)(2).
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Ending Diversion of USPTO Fees
The USPTO is funded entirely by fees it charges to patent and trademark applicants, as well as
other entities that interact with the agency.166 However, the amounts received as fees by the
USPTO must still be appropriated by Congress in order for the funds to be available to the agency
for obligation or expenditure.167 Yet over the past 25 years, Congress has often not allocated all of
the fees that the USPTO has collected towards the operation of that agency. It has been estimated
that, since 1999, over $1 billion in USPTO fee revenue has been withheld from the USPTO and
directed towards unrelated government programs and operations.168
The America Invents Act (AIA) that was enacted in 2011 made several changes to the handling of
fees collected by the USPTO. Under the AIA, the use of fees generated is still subject to the
appropriations process, whereby Congress provides the budget authority for the USPTO to spend
these fees. To address the issue of fees withheld from the office in the past, the AIA created within
the Treasury a “Patent and Trademark Fee Reserve Fund” into which fee collections above that
“appropriated by the Office for that fiscal year” are to be placed.169 These funds are to be
available to the USPTO “to the extent and in the amounts provided in appropriations Acts” and
may only be used for the work of the USPTO.170 However, the USPTO must still obtain
congressional authority to use these “excess” funds.
Some argue that USPTO fee diversion is the “single most important problem facing our patent
system today” because “continuing fee diversion constitute[s] a tax on innovation and
undermine[s] efforts of the USPTO to reduce its backlog [of pending patent applications].”171
The STRONG Patents Act would put an end to USPTO fee diversion. Section 107(a) of S. 632
would establish within the U.S. Treasury a revolving fund172 called the “United States Patent and
Trademark Office Innovation Promotion Fund” (Fund). Any fees collected by the USPTO would
be deposited into this Fund and would be available to the USPTO Director until they are
expended.173 The amounts in the Fund would be available, without fiscal year limitation, to pay
for all expenses of the USPTO, including all administrative and operating expenses that the office
incurs.174
166 See Figueroa v. United States, 466 F.3d 1023, 1027-28 (Fed. Cir. 2006). The USPTO became fully user-fee funded
as a result of P.L. 101-508, the Omnibus Budget Reconciliation Act (OBRA) of 1990. For more information about
USPTO’s funding structure, see CRS Report RS20906, U.S. Patent and Trademark Office Appropriations Process: A
Brief Explanation, by Glenn J. McLoughlin.
167 In the absence of an appropriation making fees collected by an agency available to that agency, the collected fees
are placed in the general fund of the Treasury as miscellaneous receipts, unless otherwise directed. See Government
Accountability Office (GAO), Office of the General Counsel, 3 Principles of Federal Appropriations Law 1-12 (2004)
(citing 31 U.S.C. § 3302(b)).
168 See Intellectual Property Owners, USPTO Funding, at http://www.ipo.org/index.php/advocacy/hot-topics/uspto-
funding/.
169 35 U.S.C. § 42(c)(2).
170 Id.
171 H.Rept. 113-279, p. 104.
172 S. 632, § 107(a)(4), adding revised 35 U.S.C. § 42(d)(2).
173 S. 632, § 107(a)(2), adding revised 35 U.S.C. § 42(c)(1).
174 S. 632, § 107(a)(4), adding revised 35 U.S.C. § 42(d)(4).
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Provisions Concerning Small Businesses
The patent reform litigation legislation introduced in the 114th Congress contains several
provisions designed to help small businesses that are involved in the patent system either as
patent owners or as defendants in infringement lawsuits.
Innovation Act
Section 7(a) of the Innovation Act would require the USPTO director to develop educational
resources for small businesses with respect to their “concerns arising from patent
infringement.”175 Furthermore, the Innovation Act would require that the USPTO’s existing small
business patent outreach programs, as well as relevant offices at the Small Business
Administration and the Minority Business Development Agency, provide education and
awareness on abusive patent litigation practices.176 Section 7(b) of H.R. 9 would require the
USPTO to create and maintain a “user-friendly” section of its official website, in which the public
can find information about patent cases that have been filed in federal court and information
about the patent at issue (including the disclosures regarding patent ownership that are mandated
by Section 4(a) of the Innovation Act). H.R. 9 does not authorize or provide additional
appropriations to pay for these initiatives; rather, they are to be implemented using existing
agency resources.
Section 8(g) of the Innovation Act would require the USPTO director, in consultation with several
heads of relevant agencies and interested parties, to conduct a study that examines the economic
impact of the Innovation Act on the ability of individuals and small businesses owned by women,
veterans, and minorities to enforce their patent rights.
STRONG Patents Act
Section 111 of the STRONG Patents Act would require the Small Business Administration to
produce a report that analyzes the impact of patent ownership by small businesses (those that are
independently owned and operated and which are not dominant in their field of operation) and
patent infringement actions against small businesses. In addition, S. 632 would require the
Director of the Administrative Office of the United States to designate at least six U.S. district
courts (that are already participating in the patent cases pilot program) “for the purpose of that
program to address special issues raised in patent infringement suits against individuals or small
business concerns.”177 These specially designated courts would be required to expedite cases in
which an individual or small business concern is accused of patent infringement.178
175 H.R. 9, § 7(a)(1).
176 Id., § 7(a)(2).
177 S. 632, § 111(c)(1).
178 Id., § 111(c)(2).
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Author Contact Information
Brian T. Yeh
Emily M. Lanza
Legislative Attorney
Legislative Attorney
byeh@crs.loc.gov, 7-5182
elanza@crs.loc.gov, 7-6508
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