Patent reform is more likely, but less needed

With the Republicans seizing control of the Senate in the midterm elections this week, the GOP now controls both house of Congress. With that, hopes for passing patent reform will have been raised.

The Republican-controlled House of Representatives had no problem passing a patent reform bill last December. But efforts in the Senate foundered when Senate Judiciary Committee chairman Patrick Leahy (right) pulled his bill after majority leader Harry Reid indicated he would not bring the bill to the floor.

Now that the Republicans control both the Senate and the House the path to patent reform appears to be clearer. Unusually, this is an issue the Republicans and President Obama can agree on. Obama has made numerous calls for patent reform.

There is much support from elsewhere, including within the USPTO. Michelle Lee, who has been nominated as director of the USPTO, took the chance during her speech at AIPLA’s annual meeting two weeks ago to call for “balanced and meaningful legislative reforms”.

“We hope to see patent reform move forward on the congressional agenda next year,” Lee said. “All of us, as stewards of our IP system, have an obligation to engage in that process responsibly, thoughtfully, and with the goal of ensuring balance—regardless of your monetary self-interest on an issue.”

So the stage now seems set for getting patent reform done. Yet just as the ability to get legislation passed increases, the need for it appears to be diminishing.

Those advocating for reform point to out-of-control patent troll litigation making action a necessity. The problem with this argument is that the situation may be improving in the absence of legislation – and may continue to do so.

Patent litigation is falling fast. Unified Patents last week revealed that patent litigation was down 23% in the third quarter, compared with the second quarter (see chart). This reinforced the impression from an earlier report from Lex Machina that revealed that patent litigation in September this year was down 40% on September 2013.

Reform advocates argue that litigation is still at historic highs. Unified Patents noted that in the second-quarter litigation was up 16% on the first quarter, and that 2014 was on track to be the second most litigious year ever (although its projection includes an assumption that the decline in litigation will not be as steep in the fourth quarter). Unified Patents added that NPE activity appeared “surprisingly consistent”, making up 85% of high tech patent litigation in the third quarter of this year, 88% in the second quarter and 82% in the first quarter.

“Although patent litigation is down from its levels in 2013, we are still observing historically high numbers for overall patent litigation,” said Shawn Ambwani, chief operating officer of Unified Patents. “It’s too early to tell what has led the decline since 2013 but it is clear that high tech is still experiencing significant NPE activity.”

While it is true that NPE activity remains high historically, it is also true that during the time the issue has been debated in Congress the NPEs’ business model taken some hefty dents.

Mark Lemley, law professor at Stanford, noted in a Lex Machina blog post that patentees appear to be deciding not to sue in light of the Supreme Court’s June 19 Alice v CLS Bank decision. This decision made clear that merely implementing an abstract idea on a computer is not patentable. Since then courts have been aggressive in invalidating software patents on Section 101 grounds.

It is not just Alice having an effect, however. NPEs have also had to adjust to the rise of Patent Trial and Appeal Board proceedings. These have caused a shift in the balance of power in litigation. Inter partes reviews have handed defendants in lawsuits brought by NPEs a potent way of striking back by seeking to invalidate the patents at issue.

These two developments mean that NPEs asserting weak-looking patents face a much higher chance of having them invalidated.

Alice is not the only Supreme Court decision weakening the argument for reform. One element included in patent reform was provisions for fee shifting.

However, in April the Supreme Court handed down its Highmark and Octane decisions. Octane brought in a new, more relaxed test for determining when a case is exceptional enough to warrant the award of attorneys’ fees, while Highmark said a district court is better placed to make the determination of an exceptional case, making it harder for the Federal Circuit to overturn.

"As of October 28 approximately 75 district court decisions had involved motions for fee awards since the Octane decision, with about 18% of the motions granted."

With half a year gone since the decision, some are assessing the effect of these decisions. An analysis from Glaser Weil noted that as of October 28 approximately 75 district court decisions had involved motions for fee awards since the Octane decision, with about 18% of the motions granted.

“But 18% does not seem to indicate an overwhelming trend to awarding fees,” it said. “Interestingly, where the motion was granted or granted in part, the patent plaintiffs were the slight majority of successful movants. So, these numbers also do not seem to indicate an overwhelming shift within the grant rate towards defendants.”

While not overwhelming, 18% seems quite a high number for success for fee shifting. A case would hardly be exceptional if everyone who asked for it got it.

Glaser Weil said it is possible that some NPEs may have shelved “dubious” cases that they might have filed otherwise, noting the recent drop in litigation.

“But the numbers do not overtly indicate a particular statistical disadvantage to patent plaintiffs, such as NPEs,” it said. “In fact, not surprisingly, the superficial indications are that the lowered standard can affect both sides of litigation. As much as Octane would make it easier for successful defendants, it also lowered the standard for successful plaintiffs, including NPEs, to get their fees awarded.”

Others say the Supreme Court decisions do not go far enough. Fenwick & West noted that Highmark and Octane helped but said legislation on fee shifting is still needed.

“However, just ‘fixing’ the rules associated with attorneys’ fees is not enough,” it said. “Action should also be taken to prevent PAEs from being able to simply walk away from cases where there is about to be an assessment of litigation costs or attorneys’ fees, either by dissipating all of their assets so they are effectively judgment proof or by filing for bankruptcy.”

Renewed calls for patent reform, then, come at an uncertain time for patent litigation and the effects of some Supreme Court rulings still working their way through. What is clear is that the statistics for fourth-quarter litigation will be closely watched by all parties involved in the debate.