PATENT Act: What Is It?

The PATENT Act is an act passed by the U.S. Senate Judiciary Committee on June 4, 2015, to help regulate the abusive behavior of patent trolls and improve patent litigation.

The PATENT Act or Protecting American Talent and Entrepreneurship Act of 2015 brought about a lot of necessary reforms to U.S. patent law. The PATENT Act was sponsored by Senators Grassley, Leahy, Cornyn, Schumer, Lee, Hatch, and Klobuchar.

The PATENT Act was supported by members of both parties, making it easy to pass. Section 1 of the PATENT Act is the title and table of contents. Section 2 has the definitions of key terms. Sections 3-12 include the changes that the PATENT Act makes to the patent laws. Those changes include:

  • New regulation of cease-and-desist letters. The letters now require that the allegedly infringed upon patent be identified by at least one claim.

  • Sending lots of "bad faith" demand letters is now a violation of Section 5 of the Federal Trade Commission Act.

  • New pleading standards are now higher. This requires that a patent holder explain how the accused product infringes upon the patent by each element.

  • The patent holder must now disclose to the court and opposing party the identity of parent entities, assignees, and sub-licensing entities.

  • A court must stay the discovery until all pending motions to dismiss, transfer venue, or sever accused infringers are resolved.

Section 11 is on IP licenses in bankruptcy. This section states that U.S. courts will not recognize the action of a foreign court cancelling a U.S. patent or trademark if the holder goes bankrupt. This section extends the current protection to trademark holders who go bankrupt.

Section 12 is on small business provisions. This section advises the United States Patent and Trademark Office or USPTO to provide resources for small businesses that have been targeted by patent suits and to support companies that are named in infringement cases. This section also instructs the USPTO to create a webpage that lists the pending patent cases. This will allow those who receive demand letter to more easily identify ongoing litigation that might relate to their case.

Section 13 lists the studies. These studies are on:

  1. The secondary patent market

  2. A potential pilot program to help small businesses in patent claims

  3. Business method patent quality

Section 14 is for technical corrections and improvements to AIA.

Section 15 lists the date of enactment of the new provisions.

Section 16 is about severability meaning that if one part of the law is invalid the rest can remain valid.

The PATENT Act was proposed by the U.S. Senate. The PATENT Act was proposed in response to a proposed act from the U.S. House of Representatives that was called the Innovation Act.

The major difference between the PATENT Act and the Innovation Act is that the PATENT Act doesn't force the attorney's fees of the prevailing party onto the losing party. Those opposed to the Innovation Act believed that if attorney's fees were automatically awarded to the prevailing party, it would discourage small businesses and less wealthy parties from seeking litigation in a legitimate patent infringement case.

Because of this opposition to the Innovation Act and thought that it might favor wealthy parties, the U.S. Senate proposed the PATENT Act which tempered this clause. The PATENT Act allows the judge to decide if the losing party will pay the attorney's fees of the winning party. Instead of being automatic, it is now up to the individual court.

Why the PATENT Act Is Important

The PATENT Act is intended to reduce the time and money that patent trolls are costing small businesses and patent holders.

The cost of litigating patent cases is so high for most companies that they are still settling out of court with patent trolls. It's estimated that these cases cost legitimate businesses $30 billion each year and $80 billion indirectly. On average, a case takes 18 months and costs $2 million for a company. If you do the math, this passes on $943 to the consumer each year.

Patent trolls have most frequently targeted retailers. This is likely because retailers are using cutting edge technology that hasn't been challenged in court for patentability yet. This is especially true for the online and mobile retailing.

For example, a California company sued 40 retailers for patent infringement because those retailers smartphone apps included a link to the privacy policy posted on their website.

Another example, a company challenged for patent infringement for the process of adding an item to an online shopping cart and checking out.

One company asked companies who scanned a document and attached it to an email to pay a fee for using patented technology.

Whether these cases were settled in or out of court, they took up time and money that could have been better spent building a business and making great products.

Improvements of the PATENT Act

The PATENT Act brought about many changes and improvements to patent law. Those changes included the following points. You can also read the official summary if you're interested in the exact language.

Transparency and Heightened Pleading

Before the PATENT Act of 2015, almost no information was necessary to file a patent lawsuit for infringement. This means that someone could sue someone else for patent infringement without naming which patent had been infringed upon or how the patent had been infringed upon.

These tactics cost the person being sued time and money trying to discover what patent has been infringed upon, and often it turns out that there's been no infringement.

The PATENT Act of 2015 was designed to stop such behavior and to discourage patent trolls from using patent lawsuits as a way to make money. The PATENT Act requires that the person filing the lawsuit includes the following information:

  • Which patents are being infringed upon

  • Which specific claims of those patents have been infringed upon

  • What competing product is infringing upon the listed patent

  • How the competing product is infringing upon the patent holder's product

If the above information is unavailable, the patent owner must state why it is unavailable.

The PATENT Act also requires that the person who filed the lawsuit report to the court and defendant if any other parties have a financial interest in the outcome of the case. It must also be revealed to the court whether or not the patent in question has been litigated in the previous three years.

The financial and litigation disclosures help the court to identify if there are licensing deals or other stakes involved in the infringement case. This information must also be released to the USPTO.

As long as the party filing the suit has made a "reasonable inquiry" to discover the required information, they can still file a lawsuit even without some of the required details.

Customer Stay

The PATENT Act allows customers who are sued for patent infringement while a manufacturing company is being sued for the same infringement to put their cases on hold.

A common tactic of patent trolls is to sue small businesses, customers, and end users of a product. For example, a patent troll would sue a small business who bought a Wi-Fi router from the store and was using it at their business. If the manufacturer is being sued for patent infringement, the trolls sue their customers.

By suing the customers of a manufacturer, the patent trolls were motivating the manufacturers to settle the cases more quickly and often with a larger payout.

The PATENT Act adds protection from these tactics. Customers can now stay their patent lawsuit, meaning they put it on hold until the case with the manufacturer is settled.

Discovery Reform

One of the most expensive aspects of a patent litigation case is the discovery or finding, reviewing, and producing the electronic documents that prove there has been patent infringement.

The PATENT Act delays the requirements of discovery until initial trial procedures have taken place and are resolved. These procedures might include: motions to dismiss, change venue, or sever accused infringers.

The amendments made in the PATENT Act for discovery make it easier for defendants to not be called to distant or inconvenient federal districts. This was another tactic used by patent trolls to increase the pressure on defendants to settle the case instead of going to the trouble of traveling to another district.

This reform discourages patent trolls by leaving time to get the case dismissed before it has cost defendants so much money. This will make it easier for small companies and start-ups to participate in litigation without going bankrupt.

Fee Shifting

One of the other aspects of the previous law that patent trolls were using to their advantage was that even if they lost the patent infringement case, their only cost was their own attorney's fees. Patent litigation for the patent trolls or plaintiffs wasn't expensive while the attorney's fees and discovery fees were a major burden for the defendant, those being sued.

This issue made it more likely that those being sued for patent infringement would settle out of court to save time and money, even if there had been no actual patent infringement.

The fee shifting that was introduced in the PATENT Act allows the court to make the non-prevailing or losing party pay the attorney's fees of the prevailing or winning party. The court makes this decision depending upon their determination if the losing party's behavior in bringing the lawsuit was objectively reasonable.

Another important provision that is added in the PATENT Act is the disclosure of other interested parties forces patent trolls to not use shell companies. When a patent troll sued and used a shell company, they wouldn't have to pay charges because the shell company had no assets other than the patent. With this change, more start-ups and small businesses will be able to take on trolls.

Demand Letter Reform

The PATENT Act has added new requirements that demand letters be clear. This also looks at if a company has sent widespread demand letters. If the plaintiff has participated in widespread sending of demand letters, it could indicate abuse of the patent laws. This is also now subject to civil penalties under Section 5 of the FTC Act.

This reform also allows for civil penalties to be filed for deceptive trade practices under Section 5 of the FTC Act. The PATENT Act doesn't pre-empt state laws.

With no records kept of how many demand letters are sent, it's difficult to even track how widespread this practice is.

PATENT Act Problems

There are many critics of the PATENT Act that think it didn't go far enough. Some who were opposed to the PATENT Act were opposed because it didn't go as far as the Innovation Act.

Discovery Reform Problem

The discovery reform clause didn't go far enough for many people, and the guidelines aren't as strong as those that were proposed in the Innovation Act. Instead of demanding that discovery procedures are changed, it's up to the Judicial Conference for consideration.

Another complaint about the discovery portion of the PATENT Act was that the discovery should be limited to those documents that are directly related to the litigation. A nice addition might have been to require the party requesting the documents to pay for the discovery of the documents to deter unwarranted discovery searches.

There's also a loophole in the customer stay provision. The stay provision can allow discovery to be done through questions and long-form answers through interrogatories.

The customer stay provision also only allows for a stay if the manufacturer is already in litigation. A provision that made it easier for the manufacturer to step in on behalf of its customers would have improved the PATENT Act.

There are many problems and many potential concerns with the PATENT Act, but it's still considered by most to be a vast improvement upon the previous patent laws.

What Opposers of the PATENT Act Think

As with any piece of legislation, there are those who were opposed to the PATENT Act of 2015 and not because it wasn't strong enough.

Those who oppose the PATENT Act of 2015 have stated that it will erode the freedom and innovation that is spurred by the privilege and protection that patents grant to inventors. These opposers also state that the PATENT Act has been spurred by a misleading PR campaign to persuade the public that patent trolls are the problem when they actually aren't.

The belief for those who were opposed to the PATENT Act is that patent protection is what make venture capitalists and investors want to risk investing in innovative companies that hold patents for their inventions.

As well, it has been proposed that the PATENT Act will affect the income of universities that are patent holders and sell the licensing rights to cover costs.

To support their argument, those opposed use data to show that patent litigation is declining, meaning that patent trolls aren't waging a war on the courts and unsuspecting people. From PricewaterhouseCoopers: Patent litigation has gone from 13 percent between 2013 and 2014, after it doubled between 2009 and 2013.

Those opposed believe that it might also be possible that the PATENT Act will limit the patent rights of start-ups, single inventors, and universities. This they believe will be costly to innovation and growth.

Each party who was opposed to the PATENT Act had their own reasoning, but the act was passed in 2015.

Removal of Section 101 From Current PATENT Act

In 2016, after the passage of the PATENT Act, another problem became apparent to many people.

The director of the USPTO from 2009 to 2013, David Kappos, came forward to ask Congress to repeal Section 101 of the PATENT Act.

Kappos's reasoning for the repeal:

  • Protection of American industries is being threatened by the Supreme Court decisions in Mayo, Alica, and Myriad and the lower court interpretations of those cases have made a mess of patent law.

  • There is no similar law in Europe or Asia and they don't have problems constraining patent eligible subject matter.

  • The section adds nothing of benefit to patent law that couldn't be incorporated into the provisions for novelty, obviousness, or written description standards.

Section 101 of the Patent Act is a test that describes "I know it when I see it" for patent infringement. It is Kappos's belief that this test cannot be accurately and consistently applied by different USPTO examiners and judges.

To Kappos, Section 101 and the misapplication of the test mean that American inventors are better off seeking patent protection in Europe and Asia and not in the U.S. Kappos believes that American inventors aren't supported by the current patent law.

A Little History

To discuss Section 101 of the Patent Act, it's important to understand it. Section 101 was added to the Patent Act in 1870 and amended in 1952. Section 101, reads:

"Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor subject to the conditions and requirements of this title."

The most important aspect of this for what we're examining is "invents or discovers." The fact that both words are included implies that:

  • Invention and discovery are two different and separate things.

  • The result of both invention and discovery are patentable.

Though this is what may be implied by Section 101, it isn't how it has been interpreted by the Supreme Court. From many years of precedent, it has been set that a discovery cannot be patented. Through famous cases, this includes that steam power, electricity, and phenomena of nature cannot be patented.

According to Section 101, discoveries are patentable but according to U.S. patent law and precedent, this isn't the case.

God, Nature, and Abstract Ideas

Under Section 101, things created by "God" and "Nature" are not eligible for patent protection. This includes new elements created by Nobel Prize winners. In addition to that, abstract ideas are not patent-eligible in the U.S.

The Supreme Court has set precedent to restrict patenting abstract ideas but hasn't been able to place a reasonable definition on what constitutes an abstract idea.

Summation

The major complaint against Section 101 is that it's limiting what can be patented and therefore innovation. Patents provide protection and the possibility of financial gain for inventors. Without those abilities, innovators and inventors may move to other markets in Asia and Europe to receive patent protection reducing the innovation in the U.S.

Aftereffects of the PATENT Act of 2015

Though the PATENT Act was passed in 2015 and was intended to curb the negative behavior of patent trolls, courts that hear patent litigation are still faced with many problems.

2017 Change to Length of Time to File Lawsuit

The U.S. Supreme Court heard a new case and made a decision that affects one of the provisions of the PATENT Act in March 2017.

This decision affects the defense that charges against patent infringement weren't brought quickly enough after the discovery of the patent infringement.

The Supreme Court decision eliminates the defense that a plaintiff unreasonably delayed filing the lawsuit against infringement. It also allows the plaintiff to recover damages over the previous six-year period. This is true no matter when the plaintiff became aware of the infringement or the length of time that the infringement occurred.

This ruling is considered to set a precedent that protects and benefits patent holders. Patent holders now don't have to be concerned about bringing a patent lawsuit to court even if they waited a period of time to do so.

This means that a plaintiff can wait until the cost of the patent infringement has grown substantial enough for it to be worthwhile financially to fight in court.

2017 Change Requiring More Than One U.S.-made Component

There's another change to the PATENT Act that took place in 2017. The decision in this case made clear that one U.S.-made component in an invention that was made overseas is not enough to trigger patent infringement when the invention is imported.

The court defended that liability under Section 271(f)(1) of the Patent Act, 35 U.S.C.A. § 271(f)(1 can only be decided upon the quantity of U.S.-made components in a foreign-made product, not the quality of the component or importance of the component to the invention.

In other words, to trigger patent infringement on a foreign product that's important to the U.S., it must have multiple U.S.-made components, not just one single, very important component.

The opinion was unanimous, 7-0.

The effects of this case could be immediate. It's likely the intellectual property attorneys who are drafting patent claims will change how they describe the inventions. For example, instead of something being a lightbulb, it can be described as its parts, a filament, glass casing, and conductive base. So instead of one part, there are now three parts. This would make it easier for it to appear that an invention has numerous U.S.-made components.

It is not clear how courts will view this change in the drafting and description techniques.

Frequently Asked Questions

  • Did the PATENT Act of 2015 pass?

Yes. The PATENT Act of 2015 passed and has changed the way that patent litigation is heard in the U.S. court system.

  • What is a patent troll?

A patent troll is someone who may file numerous, erroneous patent infringement lawsuits against patent holders who have not actually committed patent infringement.

  • How do patent trolls make money?

One of the major gains and why patent trolls exist is that patent litigation is extremely costly. Because of these costs, it's generally less expensive for companies to settle out of court. So even if a company has not actually infringed upon a patent, they will settle out of court and pay money to patent trolls to avoid the cost of a patent case.

  • Why is the PATENT Act so important?

Because the PATENT Act was designed to stop the abusive behavior of patent trolls, it works to protect small businesses and start-ups that hold patents from being drawn into expensive and time-consuming court litigation for patent infringement that is essentially made up.

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