Davis Polk


Patent Assertion Entities Win, For Now

June 17, 2014

The Senate Judiciary Committee removed legislation from its agenda that would have made it more difficult for patent assertion entities (“PAEs”) to pursue infringement claims, likely guaranteeing that Congress will not pass broad patent reform this year.  Consequently, companies that had sought new tools to deter and defend against patent lawsuits will have to wait.

The House, with strong bipartisan support, passed a reform bill last December that would have required patent holders to provide more disclosure about their patents when bringing a claim, and would have enabled judges to shut down frivolous patent litigation earlier in the process—postponing most discovery until after a “Markman hearing,” which is a preliminary hearing on what the patents actually do.  The Senate appeared on track to follow suit with the “Schumer-Cornyn Compromise,” a draft bill that would have heightened pleading standards, limited discovery, made it easier for judges to impose costs on non-prevailing parties (so-called “loser pays”), and increased transparency of patent demand letters.

A broad coalition supported the reform efforts, including retailers, restaurants, and tech heavyweights, which all frequently find themselves in the crosshairs of PAEs.  However, the legislation faced a powerful coalition of opponents.  While PAEs are not especially popular with either Republicans or Democrats, trial lawyers played a strong and perhaps decisive role in killing the bill, according to sources including tech news website Ars Technica.  But innovators including universities, the pharmaceutical and biotech sectors, and some telecom companies also opposed the measures, fearing they would make it more costly and difficult to defend their extensive patent portfolios.

The Senate’s move is a significant victory for the PAEs and their mainstream allies, but reports of the death of patent reform may be somewhat exaggerated.  There is already a new—if narrower—draft bill in the House that would make it more difficult for PAEs to send demand letters, and would give the Federal Trade Commission (“FTC”) greater power to impose fines for fraudulent claims made in those demand letters.  While there is an outside chance that legislation could pass during the lame duck session of Congress, more meaningful reform almost certainly will have to wait until next year.  If Republicans win control of the Senate, it would revive the prospects for a robust measure in the next Congress.

In the interim, patent reform advocates likely will shift their attention to the FTC, which is investigating PAEs for unfair and deceptive practices related to the demand letters they send accusing businesses of violating their patents.  The FTC is also using its Section 6(b) subpoena power to obtain documents from multiple PAEs for the purpose of preparing a report on their operations and role in the economy.  Similar 6(b) reports have made legislative recommendations and spurred agency enforcement actions.  A strong 6(b) report on PAEs could become a key driver for patent reform in Congress and the courts.

Stay tuned.


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