Non-Practicing Entities

Recently the House Judiciary Committee voted  24-8 to approve a revised version of the Innovation Act.  As we previously discussed, the Innovation Act was re-introduced in the House earlier this year in the same form approved by the entire House at the end of 2013.  The Judiciary Committee recently met to mark-up and vote on the bill.  A summary of the Act’s provisions as well as the approved amendments is provided below.

Demand letters and willful infringement.  The Innovation Act (Sec. 3, beginning at page 18) would prohibit a patent plaintiff from relying on a pre-suit demand letter as evidence of willful infringement if the demand letter did not identify “with particularity the asserted patent,” the “product or process accused,” and “the ultimate parent entity of the claimant” nor explain “with particularity, to the extent possible following a reasonable investigation or inquiry, how the product or process infringes one or more claims of the” asserted patent(s).  The PATENT Act, which was recently recently approved by the Senate Judiciary Committee, contains a similar provision but also goes farther.  Specifically, as we previously discussed, the PATENT Act would expressly regulate demand letters sent in bad faith by patent owners by granting the Federal Trade Commission the express authority to bring enforcement actions against individuals and entities that send such bad faith demand letters.  The Innovation Act simply requires the PTO to conduct a study of bad faith demand letters and their potential impact on the marketplace, with a report to Congress on the findings of the study due within a year.

Heightened infringement pleading standardsSimilar to the PATENT Act, the Innovation Act (§ 281A(a), beginning at page 2) would increase the specificity and information required to plead patent infringement.  Specifically, “unless the information is not reasonably accessible,” a patent plaintiff would be required to identify, in its initial complaint, the patents, the asserted patent claims, the accused infringing products or services, and an element-by-element description of how each accused product or service infringes the asserted patent claims.  As we previously discussed, the Judicial Conference has already taken steps to increase the specificity of patent infringement complaints by amending the Federal Rules of Civil Procedure to eliminate Form 18 “Complaint for Patent Infringement,” which only requires a patent plaintiff to provide a bare recitation for pleading direct patent infringement.  Form 18 will be eliminated in December of this year.  The Federal Circuit also held that, while Form 18 kept it from requiring more specificity in pleading direct infringement, it did not prevent it from requiring more specificity with respect to pleading indirect infringement.  The elimination of Form 18 may allow courts to require more detailed pleadings than the current Rules require.  Given this, the full House might consider whether and to what extent there remains support for the heightened pleading provisions of the reintroduced Innovation Act.

Patent ownership and financial information.  Like Section 3 of the Senate Judiciary Committee’s PATENT Act (§ 281B(b), beginning at page 7), the Innovation Act (Sec. 4(b), beginning at page 22) would require a patent plaintiff to disclose at the outset of an infringement case certain patent ownership and financial interest information to the court, other parties, and the U.S. Patent and Trademark Office (PTO), including the patent assignee, the assignee’s parent entity, any entity with a right to sublicense or enforce the patent, and any entity with a financial interest in the patent.

Disclosure of Standard Setting Obligations.  Simliar to the PATENT Act (§ 281B(b), beginning at page 8), the Innovation Act (Sec. 4, at page 23) would require a patent plaintiff to disclose to the court, other parties and the PTO certain information regarding obligations to Standard Setting Organizations (SSOs).  The Innovation Act would require a patent plaintiff to state “whether a standard-setting body has specifically declared” any of the asserted patents “to be essential, potentially essential, or having potential to become essential to that standard-setting body, and whether the United States Government or a foreign government has imposed specific licesning requirements with respect to such patent.”  As we explained previously, this language is a misnomer, as SSOs generally do not declare patents essential or potentially essential.  Instead, the patent owner declares whether its patent may be essential to an industry standard, usually by way of a a letter of assurance or similar assurance to the SSO.  These assurances often only state that the identified patents might cover a standard and what the patent owner would do as far as licensing the patent if the patent actually is essential to the standard.   And often patent owners submit blanket letters of assurance that do not identify any particular patent. The Senate’s PATENT Act more accurately reflects this practice, requiring a patent plaintiff to state “whether the patent is subject to an assurance made by the [patentee] to a standards development organization to license others under such patent[(s)]”  if “the assurance specifically identified such patent or claims therein” and “the allegation of infringement relates to such standard.”  The PATENT Act would also require a patent plaintiff to state “whether the Federal Government has imposed specific license requirements with respect to” the asserted patents, but not whether a foreign government has imposed specific licensing requirements.

Discovery cost shifting.  The Innovation Act (Sec. 6, beginning at page 34) would require six district courts participating in the patent pilot program to develop rules and procedures governing discovery of core documentary evidence, including rules addressing whether cost should be shifted for such discovery, potential phasing of discovery of electronic communications, and other limits on discovery in patent cases.  The PATENT Act (Sec. 6, beginning at page 19), would authorize the Judicial Conference to develop such rules and procedures.

Customer stay.  Like Section 4 of the PATENT Act (§ 299A(b), beginning at page 13), the Innovation Act (Sec. 5, § 296(b), beginning at page 30) would require district courts to stay patent infringement suits against customers of allegedly infringing products if certain conditions are met.  Specifically, courts would be required to stay a case against a customer if (1) the manufacturer of the accused product or process is a party to the action against the customer or a separate action involving the same patent(s) “related to the same covered product or covered process”; (2) the customer agrees to be bound by the court’s ruling on any issues in common between the customer and manufacturer; and (3) the stay is sought within 120 days after the first complaint for infringement is served or before the first order, whichever is later.   In cases where the customer impleads the manufacturer as a party to the infringement action against the customer, a district court would be required to stay the portion of the case against the customer if the manufacturer and the customer consent in writing to the stay.  “In any other case in which the covered manufacturer did not consent in writing to the stay, the court may not grant the motion to stay if the stay would be inconsistent with an indemnity or other agreement between the covered customer and the covered manufacturer,” or “if the covered manufacturer shows that the covered customer is in a better position to understand and defend against the claims of infringement.”

As we previously discussed, the Federal Circuit’s decision in In re Nintendo may impact this provision.  In Nintendo, the Federal Circuit ordered a district court to stay claims against defendant retailers accused of selling an infringing product in favor of letting the manufacturer of the accused product and the patentee litigate the merits of the infringement claims.  The district court was ordered to sever the claims against the retailers from those against the manufacturer, and to transfer the case against the manufacturer to the Western District of Washington, where the manufacturer’s U.S. operations are based.

Prevailing party fee/cost shifting.  Similar to Section 7 of the PATENT Act (§ 285(a), beginning at page 24) the Innovation Act (§ 285(a), beginning at page 5) also includes fee and cost shifting provisions, although the competing bills take a different approach.  Under the PATENT Act, a district court would first be required to determine “whether the position of the non-prevailing party was objectively reasonable in law and fact” as well as “whether the conduct of the non-prevailing party was objectively reasonable.”  Only if the court finds that the position of the non-prevailing party was “not objectively reasonable in law or fact or that the conduct of the non-prevailing party was not objectively reasonable” is the court required to “award reasonable attorney fees to the prevailing party unless special circumstances would make an award unjust.”

The Innovation Act, however, would set a default rule that would require fees and costs to be awarded to the prevailing party unless the positions of the non-prevailing party are shown to be objectively reasonable:

The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a name inventor) make an award unjust.

As we previously discussed, recent Supreme Court decisions have relaxed the standard for showing a case to be “exceptional,” thereby permitting the prevailing party to collect their reasonable attorney fees, from “clear and convincing evidence” to the lower preponderance of the evidence standard.  The high Court also changed the standard of review of fee awards in patent cases from de novo to the more relaxed “abuse of discretion” standard which grants much more deference to the district court’s decision.  The House and the Senate may consider whether statutory fee shifting provisions are necessary given this recent Supreme Court jurisprudence.

The venue amendment.  One of the amendments that was approved during mark-up of the Innovation Act would change the rules governing where a patent infringement action or an action seeking a declaratory judgment of non-infringement or invalidity may be brought.  Under the Act’s provision, such cases may only be filed where: (1) the defendant has its principal place of business or is incorporated; (2) the defendant has committed an act of infringement and has a regular and established physical facility; (3) the defendant has agreed or consented to be sued; (4) the invention claimed in a patent-in-suit was conceived or actually reduced to practice; (5) significant research and development of an invention claimed in a patent-in-suit occurred at a regular and established physical facility; (6) a party has a regular and established physical facility that such party controls and operates and has (a) engaged in management of significant research and development of an invention claimed in a patent-in-suit, (b) manufactured a product that embodies an invention claimed in the patent-in-suit, or (c) implemented a manufacturing process that embodies an invention claimed in a paten-in-suit; or (7) for foreign defendants that do not meet (1) or (2) above, wherever personal jurisdiction may lie over them.

Supporters of this amendment indicated that it was designed to restore limits on venue in patent cases and make it more difficult for patentees to file infringement suits in district courts that they perceive as more favorable to patent owners but which are inconvenient for accused infringers who often do not have any real, substantial contacts with such fora.  The House Judiciary Committee’s website specifically states as follows:

Restores Congress’s intent that patent infringement suits only be brought in judicial districts that have some reasonable connection to the dispute.  Since 1987, Congress has regulated the venue in which patent actions may be brought.  These limits protect parties against the burden and inconvenience of litigating patent lawsuits in districts that are remote from any of the underlying events in the case.  In 1990, the U.S. Court of Appeals for the Federal Circuit ‘re-interpreted’ that statute in a way that robbed it of all effect.  The Innovation Act corrects the Federal Circuit’s error, and restores the congressional purpose of placing some reasonable limits on the venue where a patent action may be brought.

At this time, the House has not scheduled a full vote on the Innovation Act.

We previously discussed the Vermont attorney general’s enforcement action against MPHJ Technology Investments, LLC, a non-practicing entity that has recently been the subject of regulatory scrutiny.  The attorney general’s complaint, filed in Vermont state court in early May of 2013, alleges that MPHJ’s patent assertion conduct directed toward Vermonters violates the state’s Consumer Protection Act.  The state seeks permanent injunctive relief, an award of restitution to Vermont businesses that were damaged by MPHJ’s alleged conduct, civil penalties of up to $10,000 for each violation of the Consumer Protection Act, and costs.

A few weeks after the suit was filed, Vermont’s governor signed into law the Bad Faith Assertions of Patent Infringement Act (Bad Faith Demand Act) which, as its title suggests, attempts to regulate patent demand letters sent in bad faith.

After several unsuccessful attempts by MPHJ to remove the attorney general’s action to federal court (see our August 11, 2014 post), MPHJ filed a separate action against the attorney general in federal district court seeking a declaration that the Bad Faith Demand Act is constitutionally invalid or federally preempted as well as a declaration that the Vermont Consumer Protection Act — as it is being applied by the attorney general in the state court action against MPHJ — is constiutionally invalid or federally preempted.  MPHJ also sought an injunction prohibiting the attorney general from prosecuting the state court action against it.

Recently, the federal judge presiding over MPHJ’s case granted in part and denied in part the attorney general’s motion to dismiss MPHJ’s amended complaint.  A summary of the Bad Faith Demand Act, MPHJ’s claims, the motion to dismiss briefing and the court’s decision is provided below.

The Bad Faith Demand Act.  The Bad Faith Demand Act provides that “[a] person shall not make a bad faith assertion of patent infringement.”  The statute permits a court to consider several factors “as evidence that a person has made a bad faith assertion of patent infringement,” including, but not limited to:

  • The demand letter does not contain the patent number, the name and address of the patent owner(s) and assignee(s), or “factual allegations concerning the specific areas in which the” recipient’s “products, services, and technology infringe”;
  • The demand letter fails to include the above-listed information, the recipient of the letter requests it, and the patentee fails to provide it within a reasonable period of time;
  • The patent owner fails to compare the claims to the recipient’s products, services and technology prior to sending the demand letter, or such analysis was “done but does not identify the specific areas in which the” recipient’s products, services and technology are covered;
  • The demand letter demands payment of a license fee or response within an “unreasonably short period of time”;
  • The patentee “offers to license the patent for an amount that is not based on a reasonable estimate of the value of the license”;
  • The claim “of patent infringement is meritless, and  the person knew, or should have known, that the claim or assertion is meritless”‘; and
  • The patentee, its subsidiaries or affiliates “have previously filed or threatened to file” a lawsuit “based on the same or similar claim of patent infringement” and those threats lacked the information listed above (e.g., the patent number, name and address of the patent owner and assignee(s), etc.) and a court found the claims to be meritless.

In analyzing whether patent assertion conduct was done in bad faith, the Bad Faith Demand Act also permits a court to consider whether such conduct was “deceptive.”  The court may also consider “[a]ny other factor [it] finds relevant.”  The facial breadth of this language may give a court discretion to consider whether a standard essential patent owner has informed the recipient that the asserted patents have been declared essential by the patent owner to a standard setting organization (SSO) and/or whether the patent owner has promised to license the patents on reasonable and non-discriminatory (RAND) terms.

Conversely, the Bad Faith Demand Act also lists several factors that may show that patent assertion conduct was not committed in bad faith.  Among the factors that a court may consider are:

  • The demand letter contains the patent number, the name and address of the patent owner(s) and assignee(s), and “factual allegations concerning the specific areas in which the” recipient’s “products, services, and technology infringe”;
  • Where the demand letter lacks such information and the recipient requests it, the patent owner provides it within a reasonable time;
  • The patent owner “engages in a good faith effort to establish that the target has infringed the patent and to negotiate an appropriate remedy”;
  • The patent owner “makes a substantial investment in the use of the patent or in the production or sale of a product or item covered by the patent”;
  • The patent owner is the inventor or joint inventor of the asserted patent, the original assignee, an institution of higher education or a technology transfer organization owned or affiliated with an institution of higher education;
  • The patent owner has engaged in “good faith business practices in previous efforts to enforce the patent” or a “substantially similar patent” or successfully enforced the patent, or a substantially similar patent, through litigation”; and
  • Any other factor the court deems relevant.

The Vermont attorney general is empowered to bring enforcement actions for restitution, civil penalties and injunctive relief against violators of the statute.

Additionally, a recipient of a bad faith demand letter or target of other bad patent assertion conduct may bring an action and, if they prevail, may be awarded equitable relief, damages, costs and attorneys fees, exemplary damages in an amount equal to $50,000 or three times the total damages, costs, and fees, whichever is greater.

As an interim remedy, the Bad Faith Demand Act also provides that if a recipient of a demand letter or target of other patent assertion conduct establishes “a reasonable likelihood that a person has made a bad faith assertion of patent infringement” in violation of the statute, “the court shall require the person [making the demand] to post a bond in an amount equal to a good faith estimate of the target’s costs to litigate the claim and the amounts reasonably likely to be recovered” under the civil remedies provisions of the statute discussed above, “conditioned upon payment of any amounts finally determined to be due to the target” of the patent assertion conduct.  The bond may not exceed $250,000 and the court may waive it “if it finds [that] the person [making the demand] has available assets equal to the amount of the proposed bond or for other good cause shown.”

MPHJ’s Complaint.  In September of 2014, MPHJ filed a complaint against the attorney general challenging the constitutionality of the Bad Faith Demand Act as well as the attorney general’s application of Vermont’s Consumer Protection Act in the state court action against MPHJ.  In response to the attorney general’s motion to dismiss, MPHJ filed an amended complaint.

Count I-A seeks a declaration that the Bad Faith Demand Act is invalid under, or preempted by, the First and Fourteenth Amendments to the United States Constitution.  MPHJ also alleges that the Bad Faith Demand Act is preempted by Title 35 of the United States Code and the Federal Circuit’s decisions thereunder, in that it “permits liability to attach to patent owners, including injunctive and monetary liability, without a requirement that the plaintiff prove that the conduct at issue was both objectively baseless and subjectively baseless pursuant to the standard outlined in” the Federal Circuit’s 2004 decision in Globetrotter Software, Inc. v. Elan Computer Group, Inc.

Count I-B seeks a declaration that the Vermont Consumer Protection Act, as it is being applied by the attorney general in the state action against MPHJ, is also invalid under, or preempted by, the First and Fourteenth Amendments to the United States Constitution.  Specifically, MPHJ alleges that the attorney general “has [asserted] and currently asserts that the Vermont Consumer Protection Act may be applied against correspondence related to patent enforcement without pleading or proof that such conduct is objectively baseless and subjectively baseless.”  “As a result, as applied, the Vermont Consumer Protection Act is invalid or preempted under the First, Fifth and Fourteenth Amendments, and the Supremacy and Patent Clauses of the U.S. Constitution, and Title 35 of the U.S. Code.”

The other counts in MPHJ’s amended complaint assert causes of action for, inter alia, a declaration that the Bad Faith Demand Act and the Vermont Consumer Protection Act, as applied, are invalid under or preempted by the Dormant Commerce Clause as well as a count for attorneys fees under Section 1988 of Title 42 of the United States Code for the attorney general’s allegedly unconstitutional conduct.

Motion to dismiss to briefing.

The Vermont attorney general moved to dismiss MPHJ’s First Amended Complaint, arguing that the court should abstain from hearing any of MPHJ’s challenges to the constiutionality of the Vermont Consumer Protection Act because those claims could be litigated in the state court action as affirmative defenses or counterclaims.

The attorney general also argued that MPHJ lacked standing to challenge the constitutionality of the Bad Faith Demand Act because those claims were based on MPHJ’s intention to send demand letters in the future and, according to the attorney general, such potential future conduct was too speculative to support standing.  Even if MPHJ could establish standing, its claims were not ripe because the allegations of MPHJ’s potential future conduct were too “cursory.”

MPHJ opposed the motion.  MPHJ argued that, because the state court action did not involve claims under the Bad Faith Demand Act, abstention was not proper and MPHJ is entitled to pursue its federal challenges to the Bad Faith Demand Act.  MPHJ argued further that its challenges to the Bad Faith Demand Act were both ripe and that it has standing to pursue them because MPHJ has “alleged that Defendant’s conduct represents a credible threat of suit that chills the exercise of MPHJ’s First Amendment rights” to enforce its patents by sending demand letters.

With respect to its challenges to the attorney general’s application of the Consumer Protection Act in the state court action, MPHJ argued that abstention was not proper because, inter alia, the state does not have an important interest in deciding MPHJ’s claims.  Specifically, MPHJ argued that “it is clear that dominion over patents, and their enforcement, is not an attribute of sovereignty retained by the American states.”

The attorney general filed a reply, arguing, inter alia, that even substantial claims of federal preemption do not warrant federal court action, and that MPHJ should be required to litigate those claims in the state court action.  The attorney general also argued that MPHJ had not alleged that its asserted patent claim was valid and infringed and, therefore, MPHJ lacked standing to challenge the Bad Faith Demand Act based on potential future demand letters involving the patent claim at issue.

MPHJ filed a supplemental opposition identifying new authority regarding the attorney general’s abstention arguments that MPHJ contended required the denial of the attorney general’s motion.

The Court’s decision.  The court granted the attorney general’s motion to the extent it related to MPHJ’s challenges to the AG’s application of the Consumer Protection Act in the state action, deciding to abstain in favor of having those challenges resolved by the state court.  “The constiutionality of the [Consumer Protection Act] being enforced can be determined by the state courts…”

The court, however, denied the attorney general’s motion to dismiss MPHJ’s challenges to the Bad Faith Demand  Act.  “As there has been no civil enforcement action under the [Bad Faith Demand Act], abstention with respect to that statute is unwarranted.”

The court also rejected the attorney general’s argument that MPHJ lacked standing to challenge the Bad Faith Demand Act because the attorney general has not brought any enforcement action under that statute.  According to the court, the lack of any enforcement action was not dispositive to the standing issue.  Rather, because MPHJ “has made plain its intention to send enforcement letters in the future” and that the attorney general, in an interview, discussed the Bad Faith Demand Act’s intentions “to deter patent trolling in Vermont” and also mentioned MPHJ specifically in that same interview, “future enforcement under the [Bad Faith Demand Act] seems neither conjectural nor hypothetical.”  MPHJ, according to the court, had established “a credible threat of enforcement” sufficient to give it standing to challenge the constitutionality of the Bad Faith Demand Act and that such claims were ripe for review.

As we previously discussed, the Senate Judiciary Committee recently approved the PATENT Act, and that bill will soon go to the full Senate floor.  The House Judiciary Committee has also approved competing patent reform legislation that will be voted on by the full House.  Both of these bills contain provisions that would regulate patent demand letters and other patent assertion conduct.  Should either bill or revised versions of them be enacted into law, Vermont’s Bad Faith Demand Act as well as other states’ laws that attempt to regulate patent assertion conduct may be expressly pre-empted, likely mooting MPHJ’s constitutional challenges.  MPHJ’s claims for monetary damages, however, might not be mooted.

Yesterday, we reported on the manager’s amendments to the Protecting American Talent and Entrepreneurship Act, or “PATENT Act,” a bi-partisan patent reform bill introduced by Senator Leahy and several other Senators.  After two additional amendments by members of the Senate Judiciary Committee during yesterday’s mark-up session, the committee approved the bill by a vote of sixteen (16) to four (4).  The two amendments are discussed below.

Senators Feinstein and Tillis’ amendment made changes to the Act’s provisions governing pre-suit notification of infringement by patentees to accused infringers.  The amendment prohibits such pre-suit notification from containing, absent “consent of the intended recipient,” a “request for, demand for, or offer to accept a specific monetary amount in exchange for a license, settlement, or similar agreement to resolve allegations of patent infringement” or “a specific monetary amount demanded based on the cost of legal defense in a lawsuit concerning any asserted claim or claims.”

Senator Cornyn’s amendment permits certain “institution[s] of higher education” and employees thereof to qualify for micro entity status when applying for patents and, therefore, pay lower patent application fees.

Senator Coons, who has also introduced proposed patent reform legislation known as the STRONG Act, proposed several amendments to the PATENT Act, but none were approved.  One of his proposed amendments would have required petitioners in inter partes and post-grant reviews to prove that a previously issued patent claim is invalid “by clear and convincing evidence” and a proposed amended claim invalid by a preponderance of the evidence.  This same language is in Senator Coons’ proposed STRONG Act.  Senator Coons’ other proposed amendments would have exempted certain claims and parties from the Act’s provisions.  For example, one proposed amendment would have rendered inapplicable the heightened patent infringement pleading standards in the Act to patent plaintiffs that have “never previously brought a civil action alleging infringement of any patent” and who also allege “infringement of a patent that has never been the subject of litigation in any previous civil action.”

Senator Durbin proposed an amendment that would have exempted inventors, joint inventors, “or in the case of a patent filed by and awarded to an assignee of the original inventor or joint inventor, the original assignee of the patent” from the heightened patent infringement pleading standards in the PATENT Act.  This amendment was also not approved by the committee.

Prior to the PATENT Act going to the full Senate for a vote, it is expected that members of the committee will make revisions to Section 11’s provisions governing the amendment of patent claims in inter partes and post grant review proceedings.

On Tuesday, a proposed Manager’s Amendment was released for the Senate’s pending PATENT Act bill.  Following is a recap of the recent wave of patent legislation proposals this year.

Innovation Act.  Since 2013, the House and the Senate have considered various forms of patent reform legislation that attempt to address perceived patent litigation abuse.  See our Dec. 9, 2013 post.  In February, the House Judiciary Committee Chairman Bob Goodlatte (R-Va.) reintroduced the Innovation Act, which is identical to the bill the House passed in December of 2013 by a vote of 325-91.  A summary of the Innovation Act’s provision is in our Feb. 11, 2015 post.

TROL Act.  In April, the House Subcommittee on Commerce, Manufacturing and Trade — a subcommittee of the House’s Energy and Commerce Committee — voted to send a separate proposed patent legislation bill to the full committee for a vote.  This bill, known as the Targeting Rogue and Opaque Letters Act, or “TROL Act,” would expressly render misleading demand letters sent by patent holders to accused infringers a violation of Section 5 of the Federal Trade Commission Act.  Under the bill’s provisions, a demand letter that states or represents “that the recipients are or may be infringing” would be deemed unfair and deceptive under Section 5 if, among other things, the sender, “in bad faith,” misrepresents that

  • it has the right to enforce the patent (when it does not);
  • a patent infringement action has been filed against the recipient and/or other persons;
  • legal action for infringement will be taken against the recipient; or
  • other persons have purchased a license to the asserted patents.

The bill also prohibits sending a demand letter in bad faith seeking compensation for infringing a patent that has been held, in a final determination, to be invalid or unenforceable due to inequitable conduct.  The FTC and states attorneys general would be granted authority to bring civil actions for penalties and other relief against persons that violate the Act, with the FTC retaining the right to intervene in any civil action brought by a state attorney general.  A previous version of the TROL Act was introduced last year.  After mark up by the House’s Subcommittee on Commerce, Manufacturing and Trade, the bill was forwarded, as amended, to the full Energy and Commerce Committee for consideration, but did not advance further.

STRONG Act.  In May of this year, Senators Coons (D-DE), Durbin (D-IL) and Hirono (D-HI) introduced a proposed bill known as the Support Technology & Research for Our Nation’s Growth Act, or “STRONG Act.”  If enacted into law, this bill would, inter alia:

  • harmonize the claim-construction standard used in post-grant proceedings at the Patent Trial and Appeal Board (PTAB) with the standard used in District Court litigation;
  • clarify that during post-grant proceedings, the patent-holder may propose amended, narrower claims for the patent(s) under consideration;
  • maintain the presumption of validity for patent rights in post-grant proceedings, and clarifies that unpatentability may be proved for existing claims by the “clear and convincing evidence” standard used in District Court litigation;
  • attempt to minimize abuse of post-grant proceedings by ensuring that a petitioner has a business or financial reason to bring a case before the PTAB, to reduce incentives for privateering or extortion of nuisance settlements; and
  • permit evidence in post-grant discovery to determine the petition’s real party in interest.

PATENT Act.  At the end of 2013, Senators Leahy (D-VT) and Lee (R-UT) introduced the Patent Transparency and Improvements Act of 2013 (see our Nov. 19, 2013 post), but the bill was pulled from debate apparently due to lack of bi-partisan support (May 23, 2014 post).  In April of this year, Senator Leahy, along with several other Senators from both sides of the aisle, introduced a separate patent reform bill known as the Protecting American Talent and Entrepreneurship Act, or “PATENT Act.”  Here is an overview of some of that version of the PATENT Act’s provisions.

  • Pleading Requirements for Patent Infringement Complaint.  The PATENT Act would expressly direct the Supreme Court to eliminate Form 18, “Complaint for Patent Infringement,” in the Appendix to the Federal Rules of Civil Procedure (as we previously reported, the Judicial Conference has already recommended the elimination of Form 18, and this rule change is expected to take effect later this year).  Similar to the re-introduced Innovation Act by the House, the PATENT Act contains provisions that would increase the specificity and information required to plead patent infringement, requiring a patentee to identify the patents, the asserted patent claims, the accused infringing products or services, and an element-by-element description of how each accused product or service infringes the asserted patent claims.  District courts would be directed to dismiss any complaint that does not include such factual information unless the plaintiff alleges that such information is inaccessible, the reason(s) why the information is inaccessible, and also generally pleads the factual information that is available.
  • Patent Ownership and Financial Interest.  The PATENT Act would require a patent plaintiff to disclose at the outset of an infringement case certain patent ownership and financial interest information to the court, other parties and the Patent Office, including the identity of the patent assignee, the assignee’s parent entity, any entity with a right to sublicense or enforce the patent, and any entity with a financial interest in the patent.
  • Other Complaints Involving the Asserted Patents.  The PATENT Act would also require a patent plaintiff to disclose at the outset of an infringement case all other complaints involving the asserted patents filed by the patentee or any of its affiliates within the preceding three (3) years.
  • Standard Setting Obligations.  The proposed PATENT Act would also require a patent plaintiff to disclose at the outset of an infringement case whether any of the asserted patents are subject to an assurance made “to a standards development organization to license others under such patent” if “the assurance specifically identifies such patent[s] or claims therein” and “the allegation of infringement relates to such standard.”
  • Customer Stay.  The PATENT Act also includes a customer stay provision, under which a District Court would be obligated to stay an infringement action against a “covered customer” (defined as a retailer or end user accused of infringement as a result of the sale, offer for sale or use of a patented product or process) where the manufacturer of the accused product or process is also a party to the action against the customer or a separate infringement action involving the same patent or patents, the covered customer agrees to be bound by the patent determinations that are made in the case against the manufacturer, and the motion to stay is filed no later than 120 days after service of the first pleading against the covered customer or the date on which the first scheduling order is entered.  If the covered customer impleads the manufacturer of the accused product or process into the case, then a stay may only be granted if the covered customer and manufacturer agree in writing to a stay.  If the manufacturer obtains or consents to entry of a consent judgment or fails to prosecute the patent issues to a final decision, the District Court may, upon motion, determine that the consent judgment or unappealed final decision is not binding on the customer if the customer shows that “such an outcome would unreasonably prejudice or be manifestly unjust to the covered customer in light of the circumstances of the case.”
  • Stay of Discovery Pending Decision on Certain Initial Motions.  The proposed PATENT Act would stay discovery in patent infringement actions during the pendency of a motion to dismiss, a motion to transfer venue and a motion to sever accused infringers if the motion or motions were filed prior to the first responsive pleading.  The District Court would retain discretion to allow limited discovery that is “necessary to resolve” such motions.
  • Discovery limitations.  The Act would also require the Judicial Conference to develop rules that address the extent to which each party in an infringement action is “entitled to receive core documentary evidence and should be responsible for the costs of producing core documentary evidence within the possession or control of each such party, and to what extent each party to the action may seek noncore documentary evidence.”
  • Fee Shifting.  Under the proposed PATENT Act, a District Court would be required to award reasonable attorney fees to a prevailing party if the court determines that “the position of the non-prevailing party was not objectively reasonable in law or fact or that the conduct of the non-prevailing party was not objectively reasonable” unless “special circumstances would make an award unjust.”
  • Pre-suit written notice.  In an action alleging infringement “in which the plaintiff has provided written notice of the accusation of infringement to the party accused of infringement prior to filing the action,” the PATENT Act would require the “initial written notice” to: (1) identify each patent believed to be infringed and at least one claim of each patent that is believed to be infringed, (2) contain a “clear and detailed description of the reasons why the plaintiff believes each patent identified . . . is infringed,” (3) notify the recipient that they may have the right to a customer-suit stay, (4) identify any person that has the right to enforce the patent, and (5) if compensation is proposed, “a short and plain statement as to how the proposed compensation was determined.”  If the initial written notice does not contain such information, the defendant’s time to respond to a complaint alleging patent infringement is extended by thirty (30) days.  Additionally, a patent plaintiff seeking to establish willful infringement may not rely on evidence of pre-suit notification unless the notification includes such information.
  • Regulation of “Abusive” Demand Letters.  Similar to the proposed TROL Act, the PATENT Act would render the “widespread” sending of unfair and deceptive demand letters a violation of Section 5 of the FTC Act and expressly grant the FTC the authority to bring enforcement actions against alleged violators.  A demand letter would be deemed to be unlawful if, among other things:
    • it falsely represents that administrative or judicial relief has been sought against the recipient or others or threatens litigation if compensation is not paid, the infringement issue is not otherwise resolved, or the communication is not responded to and there is a pattern of false statements regarding administrative or judicial relief against the recipients or others having been made without litigation or other relief then having been pursued;
    • the assertions contained in the communications lack a reasonable basis in fact or law (e.g., the sender does not have the right to enforce the patent, the sender seeks compensation for acts occurring after the patent has expired, the patent has been finally held to be invalid or unenforceable); or
    • the content of the written communication is likely to materially mislead a reasonable recipient because the content fails to include facts reasonably necessary to inform the recipient (1) of the identity of the person asserting a right to license the patent to, or enforce the patent against, the intended recipient or any affiliated person, (2) of the patent allegedly infringed by the recipient, and (3) if infringement or the need to pay compensation for a license is alleged, of an identification of at least one product, service, or other activity of the recipient that is alleged to infringe the identified patent or patents and, unless the information is not readily accessible, an explanation of the basis for such allegation.

On Tuesday, the co-sponsors released the Committee Manager’s proposed amendments to the PATENT Act.  Among other things, the amendments would add language that changes the procedures for inter partes review (IPR) and post grant review (PGR) at the Patent Office.  Specifically, the amendments would:

  • require IPR and PGR proceedings to apply the same claim construction standard used in District Court and consider District Court claim constructions;
  • estop parties from eschewing in later court or Patent Office proceedings arguments made on claim construction to the Patent Office;
  • presume that patents are valid in IPR and PGR proceedings, though retaining the current preponderance of the evidence burden to invalidate a patent in such proceedings;
  • clarify that the Patent Office Director has discretion not to institute an IPR or PGR if doing so would not serve the interests of justice considering factors such as whether the same prior art or arguments were decided in a prior proceeding or the patent is the subject of a current Patent Office proceeding;
  • allow patent owners to submit evidence in response to a petition to institute an IPR or PGR, and permit petitioners to file a reply to respond to new issues;
  • direct the Patent Office to modify the IPR and PGR process so that institution and merits decisions are not made by the same panels;
  • direct the Patent Office to hold a rulemaking on instituting a Fed. R. Civ. P. 11-type obligation in IPR and PGR proceedings;
  • require PTAB decisions to be publicly available and searchable on the web; and
  • remove the ability to join additional claims to a timely-filed IPR after the time for filing has elapsed, except for claims that are newly-served against the petitioner in an amended complaint (which get 1 year from amendment).

The Judiciary Committee is scheduled to mark-up the PATENT Act today.

As we previously reported, Cisco and Ruckus Wireless filed complaints against Innovative Wireless Solutions (IWS) in the Western District of Texas for declarations of non-infringement and invalidity of three of IWS’ patents allegedly covering WiFi technology.  In their claim construction briefing, the parties disputed the meaning of the term “CSMA/CD”, which stands for “Carrier Sense Multiple Access with Collision Detection.”  The court issued a Markman claim construction opinion holding that IWS acted as its own lexicographer in the patents-in-suit by expressly referencing the Institute of Electrical and Electronics Engineers (IEEE) 802.3 Ethernet standard’s definition of the term CSMA/CD.  This term, therefore, was construed to incorporate the IEEE standard’s definition of it.

On Tuesday, the parties stipulated to a final judgment of non-infringement of IWS’ patent claims in light of the court’s claim construction ruling.  The parties stipulated that the accused “communications path” associated with each accused product “complies with the IEEE 802.11 (g), (n) and/or (ac) amendments, (ii) is not wired, and (iii) does not ‘utiliz[e] twisted-pair wiring.’” “In particular, each Accused Product contains one or more radio transceivers (in connection with other circuitry) for communicating wirelessly with devices that are compliant with the IEEE 802.11 (g), (n) and/or (ac) protocols.”  “IWS’s infringement contentions identify those wireless communications as satisfying the ‘bidirectional communications path’ and ‘communications path’ limitations.”

While the parties stipulated that the accused products practiced certain portions of the IEEE 802.11 standards, the parties nonetheless agreed that, in light of the Court’s claim construction ruling, the accused products

have not infringed and currently do not infringe the Asserted Claims of the Patents-in-Suit for at least the reason that the accused communications path associated with each Accused Product is not a ‘bidirectional communications path’ or ‘communications path’ ‘utilizing twisted-pair wiring that is too long to permit conventional 10BASE-T or similar LAN (Local Area Network) interconnections’.

Cisco, Ruckus and IWS, “therefore, stipulate[d] to entry of a final judgment that the Accused Products have not infringed and currently do not infringe the Asserted Claims of the Patents-in-Suit.”

IWS reserved the right to appeal the claim construction ruling.  If IWS chooses to do so and it successfully challenges that ruling, the Federal Circuit may remand the case to the district court for further proceedings on claim construction or to determine whether Cisco or Ruckus’ products infringe IWS’ patents.

On Wednesday, the Court entered the final judgment pursuant to the parties’ stipulation.

This case hihglights a few points that may arise when litigating standard essential patents.  First, court’s may look to see whether disputed claim terms incorporate definitions from standards adopted by standard setting organizations (SSOs).  Second, even in cases where the court finds that a disputed claim term incroporates a standard’s definition, and the alleged infringer agrees that its products practice that standard, there is still a possibility that the accused product does not infringe the patent.

Last week, House Judiciary Committee Chariman Bob Goodlatte (R-Va.) reintroduced the Innovation Act, a bill that attempts to address perceived patent litigation abuse.  This current bill as introduced is identical to the bill that was passed by the House in December of 2013 by a vote of 325-91.  Discussed below are some of the Act’s provisions as well as judicial developments since the 2013 House vote that may impact those provisions.

Heightened Pleading Requirements

The proposed Innovation Act requires a patent owner to disclose a lot more information in its initial pleadings–e.g., Complaint–in order to first start a patent infringement lawsuit, rather than awaiting that information in initial disclosures or discovery.

Pleading Infringement.  The proposed Act (§ 281A(a), beginning at page 2) contains provisions to increase the specificity and information required to plead patent infringement, requiring a patentee to identify the patents, the asserted patent claims, the accused infringing products or services, and an element-by-element description of how each accused product or service infringes the asserted patent claims.

But there has been some development along these lines in the judiciary since this identical legislation was proposed in December 2013.  The Judicial Conference recently recommended amending the Federal Rules of Civil Procedure to eliminate example pleading forms, including Form 18 “Complaint for Patent Infringement” that provided a bare recitation for pleading direct patent infringement.  The Committee concluded that the “sample complaint” forms, like Form 18, “illustrate a simplicity of pleading that has not been used in many years.”  Further, “[t]he increased use of Rule 12(b)(6) motions to dismiss, the enhanced pleading requirements of Rule 9 and some federal statutes, the proliferation of statutory and other causes of action, and the increased complexity of most modern cases have resulted in a detailed level of pleading that is far beyond that illustrated in the forms.”  This rule change is expected to take effect in December 2015.

Importantly, the Federal Rule’s current presumption that use of the existing Form 18 is sufficient pleading to survive a motion to dismiss had hindered courts from requiring more specificity in pleading patent infringement.  The Federal Circuit indicated that Form 18 kept it from requiring more specificity in pleading direct infringement, but the court was able to require more specificity with respect to pleading induced or contributory infringement (see our June 7, 2012 post on In re Bill of Lading).  The  Judicial Conference’s elimination of Form 18 may allow courts to require more detailed pleadings than the current Rules require.  Congress may consider this when deciding whether and to what extent there remains support for the heightened pleading provisions of the reintroduced patent reform bill.

Patent Ownership and Financial Interest.  The proposed Act (Sec. 4(b), beginning at page 16) would require a patent plaintiff to disclose at the outset of an infringement case certain patent ownership and financial interest information to the court, other parties, and the U.S. Patent and Trademark Office (PTO), including the patent assignee, the assignee’s parent entity, any entity with a right to sublicense or enforce the patent, and any entity with a financial interest in the patent.

Standard Setting Obligations.  A patentee would be required, under proposed § 281A.(a)(10), beginning at page 4, to identify in the initial pleadings any standard setting organizations (SSOs) to which the patent has been declared essential, stating:

 [W]hether a standard-setting body has specifically declared such patent to be essential, potentially essential, or having potential to become essential to that standard-setting body, and whether the United States Government or a foreign government has imposed specific licensing requirements with respect to such patent.

As we explained previously, the language “whether a standard setting body has specifically declared such patent to be essential …” is a misnomer, as SSOs generally do not declare patents essential or potentially essential.  Instead, the patent owner declares whether its patent may be essential to an industry standard, usually by way of a a letter of assurance or similar assurance to the SSO.  These assurances often do not state definitively whether the patent covers the standard, only that it might cover the standard and what the patent owner would do as far as licensing the patent if the patent actually is essential to the standard.  Perhaps Congress will clarify or remove this language to align with real world practices.

Prevailing Party Fee/Cost Shifting

The proposed Act (§ 285A, beginning at page 6) would depart from the “American Rule” generally applied in all civil cases that each party bears its own attorneys fees; ratther, the proposed Act would presumptively award costs and attorneys fees to a prevailing party unless the position and conduct of the nonprevailing party was reasonably justified in law and fact.  There has been case law development on this issue after Congress considered this language in 2013.

Specifically, on April 29, 2014, the Supreme Court issued two opinions (Octane Fitness and Highmarkthat relaxes the standard for fee-shifting in patent cases, lowers the burden of proof from clear and convincing evidence to a preponderance of the evidence, and also changes the standard of appellate review of district court fee awards in patent cases from de novo to the more deferential abuse of discretion standard (i.e., the district court’s decision is more likley to withstand appellate review).

35 U.S.C. Section 285 governs fee-shifting in patent cases and provides that a “court in exceptional cases may award reasonable attorney fees to the prevailing party.”  Prior to Octane Fitness and Highmark, courts applied the Federal Circuit’s stringent test in Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc. to analyze whether a case was “exceptional.”  Under Brooks, a case was “exceptional” if (1) the case involved “material inappropriate conduct” in the litigation or prosecuting the patent or (2) the case was both “objectively baseless” and “brought in subjective bad faith.”  Brooks also required a prevailing litigant to establish the “exceptional” nature of a case by “clear and convincing evidence.”

As we previously reportedOctane Fitness overruled Brooks and adopted a more flexible test that gives district courts more discretion to determine, on a case-by-case basis, whether a case is “exceptional” given the totality of the circumstances.  Octane Fitness also held that a prevailing party need only show that a case is exceptional by a preponderance of the evidence, rather than the higher clear and convincing burden of proof.  Highmark overruled Brooks’ holding that a de novo standard of review applies to a district court’s determination that a case is exceptional.  Under Highmark, such determinations are now reviewed for an abuse of discretion, which is much more deferential to the district court’s decision and renders it less likely to be reversed on appeal.

In considering the reintroduced bill, Congress may consider how the new, flexible and discretionary fee-shifting standards set forth in Octane Fitness and Highmark, warrants revising–if not tabling altogether–the proposed fee-shifting provisions in favor of awaiting further judicial development under the new and more flexible Octane Fitness/Highmark standard.

Discovery

Mandatory Disclosures of SSO Obligations.  With respect to discovery obligations, the Act (Sec. 6(a)(2), beginning at page 27) also proposes that the Judicial Conference consider “documents relating to any licensing term or pricing commitment to which the patent or patents may be subject through any agency or standard-setting body” to be part of the “core documentary evidence” that must be produced by a patent-plaintiff to defendants in every litigation.

Discovery Cost Shifting.  The proposed Act (Sec. 6(a)(2), beginning at page 27) also would impose fee-shifting for discovery of core documentary evidence and other discovery requests , limit the scope of discovery that would be permitted prior to claim construction, and also require the Judicial Conference to develop rules and proposals limiting discovery in patent cases and to study the efficacy of the rules enacted.

Here again, there has been judicial development on this issue since 2013 that may impact the proposed bill.  The Judicial Conference has revised Federal Rule of Civil Procedure 26 — which governs, inter alia, the scope and timing of discovery — to expressly incorporate a requirement that any discovery sought in a civil case be “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.”  The Judicial Conference has also revised Rule 26 to expressly permit a district court to “allocat[e]” the expenses for the costs of the discovery that is sought.  While the Judicial Conference noted that this change “does not mean that cost-shifting should become a common practice” and that “[t]he assumption remains that the responding party ordinarily bears the costs of responding” to a discovery request, the House should nonetheless consider what impact these revisions to Rule 26 may have on the Act’s proposed discovery limitation and cost-shifting provisions.

Customer Stay

Some supporters of the proposed Act expressed concerns about certain non-practicing entities (what some refer to as “patent trolls”) suing customers of allegedly-infringing products, rather than suing the manufacturer of those products, to leverage a quick settlement against an end user that is not familiar with the technology or patents in general (e.g., a coffee shop providing WiFi access).  The proposed Act (§ 286, beginning at page 22) would allow a manufacturer to intervene in a patent suit brought against its customer.  Under the Act, a patent suit against the customer may be stayed as to the customer while the manufacturer and patent plaintiff litigate the merits of the infringement action, so long as (1) the manufacturer and the customer consent, (2) the stay is sought within 120 days after the first complaint for infringement, and (3) the customer agrees to be bound by the court’s ruling on any issues in common between the customer and manufacturer.  Some have expressed concern that this provision may be abused and used beyond unsophisticated end customers.

The Federal Circuit’s decision in In re Nintendo may impact this provision.  As we previously reported, in Nintendo, the Federal Circuit ordered a district court to stay claims against defendant retailers accused of selling an infringing product in order to let the case proceed against the manufacturer of the accused products.  The Federal Circuit ordered the district court to sever the claims against the retailers from those against the manufacturer, and to transfer the case against the manufacturer to the Western District of Washington, where the manufacturer’s U.S. operations are based.  The House may consider whether and to what extent the customer-suit exception may be in necessary in light of  the Nintendo decision.

*****

As we previously reported, the Innovation Act was pulled from consideration by the Senate in May of 2014, which also was considering its own patent reform bill introduced by Senator Leahy.  As Representative Goodlatte alluded, should the House vote to approve the Innovation Act, it will then be up to the Senate to resume its consideration of the Act or a competing bill and resolve any disagreements through committee.  Prior to approving the Act, however, the House may consider the potential impact of the intervening judicial developments discussed above and revise accordingly.

 

The Western District of Texas recently held that patent holder Innovative Wireless Solutions (IWS) acted as its own lexicographer by expressly referencing the Institute of Electrical and Electronics Engineers (IEEE) 802.3 Ethernet standard’s definition of a disputed claim term in the patents-in-suit.  Therefore, the disputed claim was construed to incorporate the standard’s definition.

Background.  Cisco and Ruckus Wireless both filed complaints against IWS seeking declarations of non-infringement and invalidity of three of IWS’ patents allegedly covering WiFi technology.  Cisco’s complaint alleges that IWS is a “patent assertion entity that, on information and belief, has been set up to monetize patents by filing strike suits against mere end users of 802.11 standard compliant products (also known as Wi-Fi products) for the purpose of obtaining licensing and settlement amounts to which they are not entitled.”  “[R]ather than seek to license its patents to Cisco and other manufactures of Wi-Fi compliant products, IWS instead sent demand letters to end users that have purchased Cisco products that are compliant with the Wi-Fi standards.”  According to Cisco, “[w]ithin one week of sending the letters, IWS filed 41 lawsuits against these end users of Cisco products and other similar parties.”  “In turn, Cisco received indemnity demands from a number of these purchasers.”  “Although the 41 lawsuits were dismissed without prejudice,” Cisco claims that “IWS is intent on re-filing these lawsuits against these retail purchasers after correcting one or more procedural deficiencies.”  Cisco therefore filed suit “to protect the purchasers” of its WiFi compliant products. 

Ruckus’ complaint makes similar allegations and, like Cisco, requests a declaratory judgment of non-infringement and invalidity to protect purchasers of its WiFi compliant products.

IWS filed answers generally denying the substantive allegations of both complaints but admitting that a case or controversy existed for purposes of Cisco and Ruckus’ request for declaratory relief.  IWS also counterclaimed for infringement of the three patents against both Cisco and Ruckus.

The disputed claim term.  The term “CSMA/CD” appears in claims in all three of the IWS patents at issue.  This stands for “Carrier Sense Multiple Access with Collision Detection.”  The parties disputed whether the term needed to be construed at all.  In their claim construction brief, Cisco and Ruckus argued that CSMA/CD is a well-known protocol defined by the IEEE 802.3 Working Group and that IWS’ patents defer to the published IEEE standard.  Therefore, a skilled artisan at the time of the patent would understand the use of the term CSMA/CD and no construction was necessary.

IWS, on the other hand, argued that “CSMA/CD is a term the jury cannot readily understand” and requested that the court construe it to mean:    

Techniques compatible with connecting to networks such as Ethernet networks, where a device that wishes to transmit on the network listens and checks to see if the channel is free for sending data.  If the channel is not free, or if a collision is detected during transmission, the device waits for a small amount of time and tries again.

IWS contended that its proposed construction was “supported by the specification and the IEEE 802.3 standard.” Specifically, IWS cited to one sentence in the specification that states: “The term CSMA/CD is used herein to refer generically to this technology.”  IWS argued that “this sentence indicates that CSMA/CD is used throughout the patents-in-suit to describe any network technology that employs a contention scheme similar to the 802.3 scheme.”  IWS asserted further that “the contention scheme contained in its proposed construction is consistent with the contention scheme overview in the 802.3 standard.”  Finally, IWS contended that the “MA” in CSMA/CD “shows that CSMA/CD is a technology that relates to connecting to a network” and that “multiple access” shows “that the technology relates to connecting to networks in addition to facilitating communications.”

The court’s ruling.  The court rejected IWS’ proposed construction as well as Cisco and Ruckus’ position that the term required no construction.  “In light of the clear language contained in the patents’ specification, the court concludes that the patentee acted as his own lexicographer and specifically defined the term’s use in the context of the patents.”  The court relied on the specification, which defines CSMA/CD as follows:

Different technologies can be used to facilitate communications on any LAN [Local Area Network] and throughout the Network, the most common being . . . (CSMA/CD) technology.  This is documented in IEEE Standard 802.3 . . .   The 802.3 Standard is based on the 1985 Version 2 Standard for Ethernet and, although there are some differences  . . . the two Standards are largely interchangeable and can be considered equivalent as far as this invention is concerned.  The term ‘CSMA/CD’ is used herein to refer generically to this technology.  Using CSMA/CD, packets of data are communicated in frames that are generally referred to as Ethernet frames.  This term is also used herein, regardless of whether the frames comply with the 802.3 Standard or Ethernet Standard . . .

In other words, “CSMA/CD is a technology, documented in the IEEE 802.3 standard, used to facilitate network communications” and “[t]he 802.3 standard is based on the 1985 Version 2 Standard for Ethernet (‘Ethernet 2 Standard’).”  The court held that “[a]s far as this invention is concerned, the two standards are equivalent.”  “In the patents-in-suit, CSMA/CD is used to generically refer to the technology as defined in either standard.”  “Moreover, the specification references the documented IEEE standard when describing a network technology that uses CSMA/CD.”  “The specification further references the IEEE standard when describing the contention scheme employed in CSMA/CD.”

According to the court, “Cisco’s argument that the term should be given its ordinary and customary meaning fails.”  While there “is a heavy presumption that the term carries its ordinary and customary meaning,” the “presumption is overcome when the patentee acted as his own lexicographer and clearly set forth a definition of the disputed claim term.”  

The court also rejected IWS’ proposed construction.  IWS’ “relies on the use of ‘generically’ in the specification to argue for a particularly broad interpretation.”  “However, within the context of the paragraph, the word generically refers to CSMA/CD as defined in either the 802.3 Standard or the Ethernet 2 Standard.”  “As the patents-in-suit explain, the two standards are interchangeable and equivalent as far as this invention is concerned.”

The court therefore construed the term CSMA/CD to incorporate the definition in the standard:  “CSMA/CD (Carrier Sense Multiple Access with Collision Detection) as defined in either the IEEE 802.3 Standard or the 1985 Version 2 Standard for Ethernet.”

Thus, litigants should also be mindful that the definition of patent claim terms may be impacted by a patent’s reference to definitions of claim terms in industry standards.

The Eight Circuit Court of Appeals recently granted MPHJ’s motion to transfer the ongoing appeal involving the cease and desist letters sent by the Nebraska Attorney General to the Farney Daniels firm, directing the appeal to the Federal Circuit, which has exclusive jurisdiction over patent appeals. In the context of the ongoing debate as to whether courts should treat allegedly abusive patent-demand-letter practices as a consumer-protection issue or as a patent issue, the Eighth Circuit’s decision provides an interesting contrast to the Vermont Attorney General’s suit against MPHJ, in which a Vermont District Court Judge held — and was not disrupted on appeal to the Federal Circuit — that the Vermont AG’s unfair competition claims against MPHJ belong in state court (see our April 18, 2014 post).

The present decision arises from Activision TV’s July 2013 patent suit against Pinnacle Bancorp, Inc., a bank with charters in Nebraska, accusing Pinnacle of infringing Activision’s patents for digital signage systems (see our January 22, 2014 post for more background). Several days after the suit was filed, the Nebraska AG sent a cease and desist letter to Activision’s counsel, the Farney Daniels firm, demanding that it refrain from initiating any new patent infringement enforcement efforts within the State of Nebraska, pending investigation into whether the enforcement efforts run afoul of Nebraska’s consumer protection or deceptive trade practice law. In response, Activision added the Nebraska AG to the action and sought a preliminary injunction protecting it from the Nebraska AG’s letter. In January 2014, District of Nebraska Judge Bataillon granted the injunction, enjoining the Nebraska AG from enforcing the cease and desist order and concluding that the AG could not prevent Farney Daniels from representing Activision in connection with its Nebraska-based patent enforcement efforts. The Nebraska AG appealed the Activision preliminary injunction to the Eighth Circuit on the basis that the matter deals with consumer protection issues.

Third-party patent holder MPHJ — also a client of Farney Daniels, whose patent enforcement efforts would be affected by the Nebraska AG’s cease and desist order —  moved to intervene in the district court litigation. Like Activision, MPHJ sought and was awarded a preliminary injunction against the Nebraska AG.

MPHJ also intervened in the Nebraska AG’s Eight Circuit appeal and moved to transfer the case to the Federal Circuit, arguing the appeal arises under federal patent laws and, as such, should be heard by the Federal Circuit. In a two-sentence Judgment, the Eight Circuit granted MPHJ’s motion, citing 28 U.S.C. Section 1631, which provides that an appeal filed with a court that lacks jurisdiction over the matter shall be transferred “to any other such court in which the action or appeal could have been brought at the time it was filed or noticed.”

Back in April, we reported on the Vermont Attorney General’s suit against non-practicing-entity MPHJ being remanded to state court. Dissatisfied with the district court’s decision, MPHJ appealed the remand and filed a petition for a writ of mandamus with the Federal Circuit, arguing that the decision was an abuse of the district court’s discretion. Today, the Federal Circuit issued an order dismissing MPHJ’s writ of mandamus and appeal, holding that it lacked appellate jurisdiction over the district court’s remand order. The order is particularly interesting in view of the ongoing debates over patent reform, providing one example of how problematic behaviors of certain non-practicing, non-innovating, patent monetization entities are being addressed via existing consumer protection laws that on their face are unrelated to patent-specific practices.

As discussed in our April 18, 2014 post, Vermont’s Attorney General previously challenged MPHJ’s practice of sending patent infringement demand letters to Vermont entities as constituting unfair and deceptive trade practices under the Vermont Consumer Protection Act. The AG filed the case in Vermont state court. MPHJ removed the case to the U.S. District Court for the District of Vermont in June 2013, asserting federal question and diversity jurisdiction. Vermont’s AG moved to remand back to state court for lack of subject matter jurisdiction, arguing that the complaint was directed to state-consumer-protection violations and not questions of federal patent law. The district court agreed and remanded the case to state court.

On appeal, the Federal Circuit noted that “in the district court’s view the complaint did not raise a claim or question of federal law to give rise to federal jurisdiction.” The Federal Circuit ruled that it lacked jurisdiction over MPHJ’s writ and appeal as “the District Court relied upon a ground that is colorably characterized as subject-matter jurisdiction” and “an order remanding a case to the State court from which it was removed is not reviewable on appeal.” For the time being, it appears that Vermont’s battle against MPHJ will be confined to state court.

Last week, following a bench trial in CSIRO v. Cisco,  Judge Davis in E.D. Texas determined a reasonable royalty damages award for a CSIRO patent stipulated to be valid, infringed and essential to several versions of the IEEE 802.11 WiFi standard where a RAND-obligation applied to one version of the standard, but not others.  The patent owner CSIRO sought a per-end product reasonable royalty of about $30 million.  Cisco argued a per WiFi chip reasonable royalty of about $1.1 million.  Judge Davis rejected both damages models, found the patent to play a “significant role” in the success of 802.11 products, and derived his own per-end-product reasonable royalty damages award of about $16 million.

This is the third bench trial decision to determine a royalty rate for a standard essential patent (the other two were Judge Robart’s Microsoft v. Motorola decision and Judge Holderman’s Innovatio decision).  This case differs, because this royalty rate was determined in the context of past infringement damages, rather than setting a RAND-royalty rate per se.  Further, although the patent was essential to the standard, no RAND-obligation applied to almost all of the accused infringement because the patent owner gave the IEEE a letter of assurance RAND-commitment as to only revision “a” of the standard and refused IEEE request to give such a commitment for later versions of the standard.

Background

Patent owner Commonwealth Scientific and Industrial Research Orginasation (“CSIRO”) is the principal scientific research organization for the Austrialian Federal Government.  The patent-in-suit addresses multipath problems in a wireless local area network.  That technology was incorporated into certain versions of the IEEE 802.11 WiFi standard, including revision “a” adopted in 1999 and revision “g” adopted in 2003.  In December 1998, before IEEE adopted revision “a”, CSIRO provided the IEEE with a letter of assurance that it would license the specific patent-in-suit on RAND-terms if the patent were essential to the 802.11a standard.  IEEE sought additional letters of assurance from CSIRO for later revisions of the standard, but CSIRO declined to provide them.

In 2003, CSIRO offered industry participants a license on RAND terms on all versions of the standard (at first indicating that it had agreed with IEEE to do so, but later clarifying there was no RAND obligation).  By June 2004, CSIRO developed a Voluntary Licensing Program offering licenses to the ‘069 Patent under “a flat-fee royalty, charged per end product unit sold.”

A company called Radiata Communications (“Radiata”)  was formed by the named inventor, CSIRO and others to commercialize the patented technology.  Radiata employed various CSIRO employees as well as another named inventor.  CSIRO entered a Technology License Agreement (TLA) with Radiata in February 1998 that, among other things, had a per-WiFi chip royalty payment.  In 2001, Cisco acquired Radiata and started paying Radiata’s license fees under the TLA license agreement for Radiata products.  This agreement was renogotiated several times, always keeping the general concept of a per-chip royalty base.

In July 2011, CSIRO sued Cisco for infringing the patent-in-suit.  Both parties stipulated to a bench trial solely on damages and that Cisco would not challenge the patent’s infringement or validity.

Judge Davis’s Ruling

Cisco’s Estoppel Affirmative Defense (Denied).  The court denied Cisco’s affirmative defense that legal and equitable estoppel should limit damages.  The elements of these defenses were summarized as follows:

To establish a defense of equitable estoppel, Cisco must demonstrate that: (1) CSIRO communicated something in a misleading way by words, conduct, or silence; (2) Cisco relied upon that communication; and (3) Cisco would be materially harmed if CSIRO is allowed to assert any claim inconsistent with its earlier communication.  Legal estoppel requires that CSIRO granted Cisco certain rights, received consideration for those rights, and then sought to derogate from the righs granted.

Cisco argued that CSIRO’s RAND commitment precluded CSIRO from seeking damages from Cisco higher than the LTA royalty rate that CSIRO gave to Radiata on the same patent.  The parties agreed that RAND commitment applied to the 802.11a version of the standard.  But CSIRO argued that the revision “a” RAND-commitment does not extend to Cisco because Cisco never made a written request for a license.  Judge Davis agreed with Cisco that this  written requirement was met based on the course of dealings between Cisco and CSIRO.  Thus. a RAND obligation applied to 802.11a products.

But that was not the case for later revisions of 802.11 (g, n and ac).  IEEE asked CSIRO to provide letters of assurance for these later versions, but CSIRO declined to do so.  Judge Davis found that CSIRO actually made no RAND commitment to IEEE or its members for “g” or later revisions of the standard: “Therefore, while CSIRO was free to offer licenses on RAND terms as to products practicing these revisions, it was not contractually obligated to do so.”  He found no RAND-license was consummated and, “[r]egardless … the parties would have sought a royalty that each believed accurately valued the ‘069 Patent”, stating:

Because CSIRO provided no letter of assurance creating a binding RAND obligation, and because any voluntary offer by CSIRO to license the ‘069 Patent technology on RAND terms was rejected, was withdrawn, or lapsed, CSIRO has no RAND obligation to Cisco as to 802.11g, 802.11n, or 802.11ac products.  Regardless of CSIRO’s RAND commitment, at the hypothetical negotiations the parties would have sought a royalty that each believed accurately valued the ‘069 Patent.

Thus, Cisco’s legal and equitable estoppel defense did not apply except for products practicing revision “a” of the 802.11 standard, which would require RAND licensing terms.

CSIRO’s Damages Model (Rejected).  CSIRO argued that the end product devices (network interface cards, routers, access points) were the smallets saleable patent practicing unit.  CSIRO also argued that its patent provides the only “improved benefits” between revisions of the standard covered by the patent and other revisions; therefore, the difference in profit margins between covered and not-covered products “largely represents the value attributable to the ‘069 Patent.”  But, among other things, Judge Davis found a “fundamental problem” in the large disperity in profit margins between covered and non-covered products– over $84 difference for consumer products and over $200 difference for enterprise  products; that disparity made it “impossible to reliably determine where the value of the patented technology lies.”  The expert also had problems in apportioning value to the patented technology distinct from unpatented features.  For example, “802.11g is backwards compatible with 802.11b, a feature not specfically attributable to the ‘069 Patent, but which adds value to the consumer” not accounted for in CSIRO’s damages model.  Further, the expert’s resultant oyalty was higher than the royalty CSIRO offered in its Voluntary Licensing Program.  Thus, the court “attributes little weight” to CSIRO’s damages model.

Cisco’s Damages Model (Rejected).  Cisco argued that the royalty should be based on WiFi chip prices capped at the royalty rate that CSIRO gave Radiata under the TLA agreement between them, where the inventive concept resides in the chip.  Judge Davis rejected Cisco’s licensing model because it relied primarily on the TLA agreement, which was a unique agreement given the relationship between CSIRO and its business partner Radiato that was not comparable to the hypothetical negotiation for CSIRO-Cisco license.  Rather, “[t]he connection between CSIRO and Radiata created a special relationship that belies the view that the negotiations leading to the TLA were purely disinterested business negotiations.”  For example, in addition to royalty payments, Radiata agreed to disclose business plans, make best efforts to exploit the technology and grant CSIRO a royalty-free license and assignment of rights to Radiata’s improvements to the technology.  Further, there were rapid improvements between the 1998 date of the TLA and the 2002/2003 hypothetical negotiation date : “Commercial viability of the technology escalated sharply as the 802.11a revision was adopted in September 1999 … and received a greater boost when the 802.11g revision was ratified in June 2003.”  Perhaps concerned that this would improperly capture the value of the standard beyond the patent’s value, Judge Davis states in a footnote:

This is not an indication that the value of the ‘069 Patent increased soelely because it was included in the standard.  Rather, the wireless marketplace as a whole benefited from the adoption of the standard.

Judge Davis found Cisco’s “primary problem” is using chip prices as the royalty base, because (1) the patent was not directed solely to a chip and (2) widespread infringement depressed chip prices:

CSIRO did not invent a wireless chip.  Although it is largely undisputed that the inventive aspect of the ‘069 Patent is carried out in the PHY layer of the wireless chip, the chip itself is not the invention.  The ‘069 Patent is a combination of techniques that largely solved the multipath problem for indoor wireless data communication.  The benefit of the patent lies in the idea, not in the small amount of silicon that happens to be where that idea is physically implemented.  Compounding this problem is the depression of chip prices in the damages period resulting from rampant infringement which occured in the wireless industry.  Prior to 2008, outside of the Radiata TLA, no company in the industry sought a license from CSIRO to the ‘069 Patent and CSIRO received no royalties whatsoever for that technology.  It is simply illogical to attempt to value the contributions of the ‘069 Patent based on wireless chip prices that were artificially deflated because of pervasive infringement.  Basing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product.  While such a calculation captures the cost of the physical product, it provides no indication of its actual value.

Other CSIRO Licenses.  Judge Davis dismissed other license agreements that CSIRO entered in or after 2008, which both experts agreed were not relevant to a hypothetical negotiation in 2002.  The license came at a later time than the hypothetical negotiation, involved litigation settlements, involved worldwide licenses and varied widely in sales volumes at issue.

Court’s Hypothetical Negotiation Analysis.  Judge Davis assumed a hypothetical negotiation in 2002/2003 with no “discount” for uncertainty as to liability given the assumption that the patents were valid and infringed.  Judge Davis found a base starting royalty rate based on the Voluntary Licensing Program licensing rate and a 90-cents per end-product licensing offer Cisco made during negotiations, the latter being “the best evidence available of how Cisco valued the contribution of the ‘069 Patent … and is the best indicator of Cisco’s possible bid price at the time of the hypothetical negotiation.”

Judge Davis then considered various Georgia-Pacific factors for adjusting this starting royalty rate.  Although CSIRO had a RAND-obligation for 802.11 revision “a” products, Judge Davis did not consider a modified Georgia-Pacific analysis for them given the small volume of revision “a” product sales, stating “a modified analysis as to only those products would have a de minimus impact on the overall royalty.”  Judge Davis Davis then considered the several Georgia-Pacific factors, as follows:

  • Factors 1-2, 6-7, 12-13.  Judge Davis agreed with both experts that Georgia-Pacific factors 1, 2, 6, 7, 12, and 13 “are neutral and no adjustment to the base line royalty rate needs to be made in light of these factors.”
  • Factor 3 (nature and scope of license).  Judge Davis gave a downward adjustment because the hypothetical license would be limited to U.S. sales, but Cisco’s negotiation offer and CSIRO’s Voluntary Licensing Program implicitly used to set the hypothetical base royalty rate were for a worldwide license.
  • Factor 4 (licensor’s established program).  This factor warrants a downward adjustment because (1) “CSIRO was very willing to license the patented technology” and (2) CSIRO had a binding RAND obligation for the 802.11a products.
  • Factor 5 (commercial relationship).  This factor warrants a downward adjustment because CSIRO was a government R&D organization that “needed to license the ‘069 Patent in order to commercialize and monetize it.”
  • Factor 8 (product profitability/success).  This factor warrants an upward adjustment because the patented technology, “[a]lthough … not the only factor contributing to the growth of 802.11g products, it was an important one.”  Further, IEEE continued to rely on the patented technology even though “CSIRO declined to issue letters of assurance and in the face of ongoing litigation involving the patent.”  Accordingly, the patent “played a significant role in the commercial success of 802.11 products.”
  • Factors 9 and 10 (utility over older modes, benefits, etc.).  These two factors warrant an upward adjustment.  The patented technology’s multipath solution provided significant improvements, including higher speeds, increased capacity, etc., and alternative technology did not have commercial success.  Further, this remained core technology to the standard despite several revisions to the standard spanning over a decade.
  • Factor 11 (extent defendant uses invention).  This factor is neutral here because it already was accounted for in the starting baseline.
  • Factor 13 (profit attributable to invention).  This factor is neutral because, although the patent “played a significant role in the profitability of wireless products, … Cisco’s role in that profitability should not be diminished” such as Cisco “assum[ing] the business risk” in developing and marketing the products as well as many other non-patented features in the products.
  • Factor 14 (expert opinion).  This factor is neutral because the court rejected both experts’ damages models.
  • Factor 15 (outcome of hypothetical negotiation).  The court weighed all the factors and found they gave each party equal bargaining position and, thus, no adjustment was needed to the baseline rate of $0.90 to $1.90 per end-product with tiered values based on volume of sales.

In sum, all factors were neutral except factors 3 and 4 (downward adjustment) that were offset by factors 8-10 (upward adjustment).  Judge Davis, however, did give a downward adjustment to consumer products based on the proportional profit difference between them and the enterprise products.  The court then multiplied these tiered royalty rates by volumes of sales, discarded sales after the patent expired, discarded sales more than six years before the lawsuit was filed and assessed a total royalty damage of about $16.2 million.