Supreme Court Narrows Patent Venue Law in TC Heartland, Likely Limiting Future Suits in the Eastern District of Texas

Maier & Maier

In TC Heartland LLC v. Kraft Foods Group Brands, LLC., 581 U. S. ____ (2017), the Supreme Court substantially narrowed the law of patent venue, preventing a patent owner from filing an infringement suit against a defendant in any district court where the defendant is subject to personal jurisdiction. Instead, patent owners will only be able to bring suit in districts in states where a defendant is incorporated, or in districts where there has been an act of infringement and the defendant has a regular and established place of business.

The ruling required the Supreme Court to reconcile two venue statutes: 28 U.S.C. § 1391, which sets forth the requirements for venue generally, and 28 U.S.C. § 1400(b), which sets forth venue requirements specific to patent infringement. The patent venue statute, 28 U.S.C. § 1400(b), stipulates that “Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.” However, the general venue statute, 28 U.S.C. § 1391, allows a patent owner to file suit in any judicial district where the defendant “resides;” under 28 U.S.C. § 1391(c)(2), a corporate defendant is deemed to “reside” in any district in which the corporation would be subject to personal jurisdiction.

Past Supreme Court precedent, Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957), had established that §1400(b) is not supplemented by §1391. However, in 1988, Congress amended §1391, to state that  “[f]or purposes of venue under this chapter, a defendant that is a corporation shall be deemed to reside in any judicial district in which it is subject to personal jurisdiction at the time the action is commenced.” The Federal Circuit found, in VE Holding Corp. v. Johnson Gas Appliance Co., 917 F. 2d 1574 (1990), that this amendment had made §1391 applicable to patent infringement actions. Congress again amended §1391 in 2011, to state that “[e]xcept as otherwise provided by law… this section shall govern the venue of all civil actions brought in district courts of the United States.”

In this case, Kraft sued TC Heartland in the District of Delaware, where TC has no meaningful presence but does have the minimum contacts necessary for personal jurisdiction.  TC moved to dismiss or transfer the case based on improper venue, citing §1400(b). The District Court rejected these arguments based on Federal Circuit precedent and the Federal Circuit denied a writ of mandamus.

The Supreme Court decided, in a unanimous opinion, that Fourco was still good law and that §1400(b) is not supplemented or replaced by §1391. The Supreme Court based this decision on the fact that Congress never indicated that it had intended to overrule Fourco when it amended §1391 to apply to “all venue purposes” in 1988. Further, if Congress had overruled Fourco by amending §1391 to apply to “all venue purposes,” then, by essentially the same reasoning, Congress had reestablished Fourco by clarifying that §1391 applied “except as otherwise provided by law.”

The most significant effect of this case is expected to be a substantial reduction in the number of patent lawsuits filed in the Eastern District of Texas, which is often chosen for patent litigation because it is perceived to be friendlier to patent owners. Approximately 35% of all patent litigations currently pending have been filed in the Eastern District of Texas, and this case is likely to create a flood of motions to dismiss for improper venue or motions to transfer to a new district.

However, the District of Delaware, also a patent-owner-friendly district, is expected to take up the mantle of the Eastern District of Texas as the patent forum of choice. The District of Delaware is already a very popular patent forum (often the second most active for patent litigation), and as many corporations are incorporated in Delaware there are likely to be few questions of improper venue even under §1400(b).

Supreme Court Grants Certiorari in Oil States to Review Constitutionality of IPRs

Maier & Maier

On June 12, the Supreme Court granted certiorari in Oil States vs. Greene’s Energy Group, et al., a case dealing with the constitutionality of the post-grant challenge procedures established by the America Invents Act (AIA). The Federal Circuit, below, had upheld the constitutionality of these procedures.

The petition for writ of certiorari submitted by Oil States presented three questions:

  1. Whether inter partes review – an adversarial process used by the Patent and Trademark Office (PTO) to analyze the validity of existing patents – violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.
  2. Whether the amendment process implemented by the PTO in inter partes review conflicts with Court’s decision in Cuozzo Speed Technologies, LLC v. Lee, 136 S.Ct. 2131 (2016), and congressional direction.
  3. Whether the “broadest reasonable interpretation” of patent claims – upheld in Cuozzo for use in inter partes review – requires the application of traditional claim construction principles, including disclaimer by disparagement of prior art and reading claims in light of the patent’s specification.

The Supreme Court granted certiorari only as to the first question.

The petitioner, Oil States, has based much of their argument on an 1898 decision from the Supreme Court, McCormick Harvesting Mach. Co. v. Aultman & Co., 169 U.S. 606 (1898). This decision held that “the Patent Office had no power to revoke, cancel, or annul” an issued patent, because once the patent has issued, “[i]t has become the property of the patentee, and as such is entitled to the same legal protection as other property.” Oil States charges that the USPTO has acted contrary to McCormick and has unconstitutionally revoked patents through the post-grant challenges made available under the AIA, such as inter partes review.

It is unclear how the Supreme Court will rule on this case. Several commentators have noted that the Supreme Court has, in the recent past, typically granted certiorari to Federal Circuit patent cases in order to overrule them; as the Federal Circuit upheld the constitutionality of these procedures, the Supreme Court may intend to strike them down. It is also noted that a majority of the Justices of the Supreme Court have adopted “private property” interpretations of patents in other cases, and as such they may find McCormick to be persuasive.

However, the constitutionality of post-grant procedures has been challenged in a number of cases, and the Supreme Court may have wished to take this case just to settle the issue. It is also noted that the facts of McCormick could be limited to the narrow facts of the case. When McCormick was decided, the USPTO did not have a revocation power expressly granted to them by Congress, and the USPTO now has such a power. The Supreme Court may decide that Congress can grant the USPTO jurisdiction over an issued patent and has properly done so.

USPTO Director Michelle Lee Resigns

Maier & Maier

The Director of the United States Patent and Trademark Office (USPTO), Michelle Lee, announced her resignation from that office on June 6th. Lee announced this action by an e-mail to the employees of the USPTO, sent with the subject “Farewell,” and reading as follows:

Dearest Colleagues:

This afternoon, I submitted my letter of resignation from my position as the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office.

It has been a tremendous honor to serve our country for the past several years, first as Director of the Silicon Valley office, then as Deputy Director of the USPTO, and finally as Director of the USPTO. I am tremendously proud of all that we have accomplished together, and appreciate all of your support and dedication during my tenure.

It is no exaggeration to say that the employees of the USPTO rival the best employees of any government agency or private company. The USPTO truly is a “best place to work”– because of you.

I am confident that the leadership team in place will serve you well during this transition.  In the meantime, I wish you all the best in your future endeavors at the USPTO.

With affection and deep gratitude,

    —Michelle

The transition between the Obama and Trump administrations had raised some questions about the employment status of former Director Lee. Lee had previously submitted a letter of resignation to President Obama, but in the days just prior to Trump’s inauguration, apparently attempted to revoke this letter of resignation. The USPTO and Department of Commerce declined to provide official comment as to Director Lee’s status until March 10th, at which point it was finally confirmed that she would remain on as Director. However, in late March, Commerce Secretary Wilbur Ross began interviewing candidates to replace Lee as USPTO Director.

Lee had long been considered to be a favorite of Silicon Valley tech companies, which had encouraged the federal government to retain Lee as Director. A number of tech companies, such as Google and Facebook, as well as a number of lobbying firms, such as Engine and the Internet Association, submitted a letter dated April 25th to President Trump and Secretary Ross encouraging them to retain Lee.

Associate Solicitor Joe Matal has been named Acting Director of the USPTO, and will serve in this capacity during the nomination and confirmation process for a new Director. Matal recently served as acting Chief of Staff for the agency, and previously served as General Counsel of the Senate Judiciary Committee and as a Judiciary Committee Counsel to former Senator Jon Kyl (R-AZ). Matal was also the principal staff drafter and negotiator of the Leahy-Smith America Invents Act (AIA), a recent comprehensive patent reform bill.

Updates in U.S. Patent Law, April 2017

Daniel Ehrlich

Federal Circuit Rules that Patent Holder Cannot Evade Patent Marking Statute with Retroactive Statutory Disclaimer

In Rembrandt Wireless Technologies, LP v. Samsung Electronics Co., Ltd., No. 16-1729 (Fed. Cir. 2017), the Federal Circuit determined that a patent holder could not use a retroactive statutory disclaimer to avoid having to fully comply with the patent marking statute.
The relevant statute, 35 U.S.C. § 287, states that “[p]atentees, and persons making, offering for sale, or selling within the United States any patented article for or under them, or importing any patented article into the United States, may give notice to the public that the same is patented” by appropriately marking the patented article. The statute further provides that, “[i]n the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice.”
Rembrandt had sued Samsung for infringement of a number of claims of two of its patents, US Patent Nos. 8,023,580 and 8,457,228. During the time period in which Samsung was allegedly infringing, Rembrandt had licensed the ‘580 patent to Zhone Technologies, which manufactured products embodying claim 40 of the patent, which was one of the claims Rembrandt had asserted in litigation. Zhone did not mark these products with the patent number.
Before trial, Samsung moved to limit Rembrandt’s damages on the grounds that Rembrandt did not comply with the marking statute (because the product manufactured by Zhone was not marked) and that Rembrandt was therefore not entitled to damages for infringement of any of the claims of the ‘580 patent for any time period before Samsung was notified of the infringement by the filing of the complaint. In response, Rembrandt withdrew claim 40 from its infringement allegations and filed a statutory disclaimer in the US Patent and Trademark Office to disclaim claim 40.
The District Court accepted Rembrandt’s argument that this statutory disclaimer removed its obligation to mark claim 40, for the reason that “a disclaimed patent claim is treated as if it never existed.” The Federal Circuit disagreed, stating that such an interpretation defeated the purpose of the patent marking statute, because allowing Rembrandt to use a disclaimer to avoid the consequences of its failure undermined the public notice function of the marking statute.
However, the Federal Circuit noted that it has not been resolved whether the marking statute applies on a patent-by-patent basis or on a claim-by-claim basis, and the failure to mark claim 40 may limit only the award of damages based on claim 40. The Federal Circuit elected to remand the case for determination of this issue.

USPTO Design Day 2017

On April 25, 2017, the USPTO held its annual Design Day, a seminar featuring Examiners, Practitioners, and Industrial Designers, to discuss the latest developments in design patents.
Design Day 2017 opened with an introduction of Karen Young, the newly named Director of the Tech Center 2900, which is responsible for all design examination. Director Young shared several key statistics showing increasing interest in design patents. In fiscal year 2016, 40,406 design applications were filed, up from 36,889 in FY 2015. 20,361 applications have already been filed in FY 2017. The current backlog of unexamined applications is 44,578, resulting in a 12.9 month average pendency to first action and a 19.1 month average overall pendency for design applications. To keep up with the increased filings and work toward lowering the current backlog, 29 new design examiners were hired in June 2016, increasing the total number of design examiners to 187. However, over 100 of these examiners are still junior examiners without signatory power.  As a result, clear and consistent communication is critical for effect prosecution.
The day also included updates from speakers on international treaties, best prosecution practices, perspectives from in-house counsel and an industrial designer, case law updates, a discussion of design patents in the fashion industry, and a mock argument demonstrating the implications of prosecution history on the enforceability of design patents after issuance.
Please contact us if you are interested in additional information on particular topics covered at Design Day 2017 or if you have general inquiries regarding design filings in the U.S.

Updates from the Federal Circuit, March 2017

Daniel Ehrlich

Federal Circuit Applies Panduit Factors to Specific Feature

In Mentor Graphics Corp. v. EVE-USA, Inc., No. 15-1470 (Fed. Cir. March 16, 2017), the Federal Circuit determined that the Panduit factors could apply to a patented feature that represented only one part of a multi-component product, as well as to a patented product.
Under the Panduit test, a patentee is entitled to damages based on lost profits if it can establish (1) demand for the patented product, (2) an absence of acceptable non-infringing alternatives, (3) that it has the manufacturing and marketing capability to exploit the demand, and (4) the amount of profit it would have made.
In this case, Mentor Graphics asserted several patents against Synopsis, the parent company of EVE. A jury found that EVE’s “ZeBu” hardware emulator infringed one of Mentor’s patents, U.S. Patent No. 6,240,376 (the ‘376 patent), which covered a method for debugging source code. When arguing damages, Mentor had argued that it was entitled to lost profit damages for lost sales of its “Veloce” hardware emulators due to infringing sales of “ZeBu” emulators, because it would have made additional sales of the “Veloce” emulators if not for the infringing “ZeBu” sales. A jury found that Mentor satisfied all four Panduit factors, despite the fact that the feature was only one aspect of the “ZeBu” hardware emulator, and awarded lost profits.
Synopsis argued that the District Court erred in failing to apportion lost profits based on Mentor’s inventive contribution to the emulator, rather than based on the entire cost of the emulator. However, the Federal Circuit affirmed the decision of the District Court, finding that in the relevant market (suppliers of emulators to Intel, which consisted of Mentor Graphics and Synopsis), for each sale that EVE made, Mentor lost that exact sale. There were no non-infringing alternatives, and Intel would not have purchased the emulators if they lacked the claimed features. Therefore, it was appropriate for the District Court not to apportion the award of lost profits.

Federal Circuit Upholds Inertial Tracking System Claims In Thales Visionix v. United States

In Thales Visionix Inc. v. United States, No. 15-5150 (Fed. Cir. Mar. 8, 2017), the Federal Circuit reversed a decision of the Court of Federal Claims which had found the claims of a patent on an inertial tracking system invalid under 35 U.S.C. §101.
In particular, the patent at issue, U.S. Patent No. 6,474,159 (the ‘159 patent) had claimed an inertial tracking system having a first sensor on an object being tracked, a second sensor on a moving reference frame, and an element that determines the tracked object’s orientation relative to the moving reference frame using the signals of both sensors. Prior art systems had tracked the positions of the object and the moving reference frame relative to the earth and fused the data, which caused some error to build up over time which had to be periodically corrected.
Thales had alleged that the helmet-mounted display of the F-35 Joint Strike Fighter infringed the claims of the ‘159 patent. However, the Court of Federal Claims found that the claims were directed to an abstract idea, in particular the abstract idea of “using laws of nature governing motion to track two objects,” and as such were not patent-eligible under 35 U.S.C. §101.
The Federal Circuit reversed this decision, finding that the claims were nearly indistinguishable from the claims of Diamond v. Diehr in terms of patentability, and were patent-eligible under the Alice standard. In particular, the Federal Circuit characterized the claims as using mathematical equations in conjunction with inertial sensors “in a non-conventional manner to reduce errors in measuring the relative position and orientation of a moving object on a moving reference frame,” just as the claims in Diehr had been directed to using mathematical equations to reduce the likelihood of problems in rubber molding. The Federal Circuit stressed that the mere use of a mathematical equation does not “doom the claims to abstraction.” Since the claims did not seek to cover the general use of the mathematical equations, but merely sought to cover the application of the equations to the unconventional configuration of sensors, the claims were not directed to an abstract idea and were thus patent-eligible.

Supreme Court Limits Laches Defense

Maier & Maier

In SCA Hygiene Products Aktiebolag et al. v. Quality Baby Products, LLC, et al., No. 15-927, 580 U.S. ___ (2017), the Supreme Court held that the defense of laches is not appropriate when suit is brought within the six year limitations period for patent infringement.
Laches is an equitable doctrine used to limit the recoverability of damages when a suit is filed after unreasonable delay.  In patent law, damages are already limited by a “statute of limitations” set forth in 35 U.S.C. § 286, which limits damages to only cover infringement that occurred within the six year period prior to the filing of the complaint. Contrary to typical limitations periods, the limitations period of 35 U.S.C. § 286 is counted backward from the filing of a complaint, not forward from the time of infringement.  However, this existing limitation on damages weighed heavily in the Court’s ruling.  The Court found that a laches defense would override the statutory damages period set forth by Congress.
The highly-anticipated ruling mirrored that of Petrella v. Metro-Goldwyn-Mayer, Inc., 572 U.S. ___ (2014), which addressed the defense of laches in copyright law.  On its face, the ruling looks to be favorable for patent owners by eliminating a defense in infringement proceedings and allowing plaintiffs to bring suit at a time of their choosing, which will likely be after a favorable six years of damages have accrued.

February 2017 Case Highlights

Maier & Maier

Supreme Court Overrules Life Techs v. Promega

In Life Technologies Corp. v. Promega Corp., No. 14–1538 (February 22, 2017), the Supreme Court overruled the Federal Circuit’s finding of induced infringement. Writing for a majority of the court, Justice Sotomayor determined that supplying a single component of a multi-component invention from the United States cannot be an infringing act under 35 U.S.C. §271(f)(1).

Promega’s patent had claimed a process for examining polymorphism in DNA samples. A subsidiary of Life Techs manufactured, overseas, genetic testing kits that included one component (Taq polymerase) that was manufactured by Life Technologies (“Life Techs”) in the US. The statute in question, 35 U.S.C. §271(f)(1), establishes infringement liability if a “substantial portion” of a claimed invention’s components are manufactured within the US and provided elsewhere. The Federal Circuit ascribed a qualitative meaning to the term, establishing that one single component could be a “substantial portion” if it was vital enough to the invention.

The Supreme Court found that, in the context of the statute, the term “substantial portion” is intended to be quantitative, rather than qualitative. The “qualitative” interpretation is intended to be covered by other law. As such, a single component, no matter how vital, can never be a “substantial portion” and thus cannot give rise to infringement liability under 35 U.S.C. §271(f)(1).

Federal Circuit Narrows CBM Eligibility

In Secure Axcess, LLC v. PNC Bank Nat’l Assoc., No. 16-1353 (Fed. Cir. February 21, 2017), the Federal Circuit overturned a covered business method patent review decision of the USPTO Patent Trial and Appeal Board (PTAB), on the basis that the patent fell outside of the statutory definition for a CBM patent.

Secure Axcess (“Secure”) had a patent for a computer security system and for a method for authenticating a web page. The PTAB found that the patent was directed to solving problems that might arise from customers of a financial institution attempting to access the web site of the financial institution, and determined that the patent therefore qualified as a CBM patent, because it was “incidental” to a financial activity.

The Federal Circuit found that, under section 18 of the America Invents Act, CBM review is only available for patents that claim “a method… for performing data processing or other operations used in the practice, administration, or management of a financial product or service [emphasis added].” It is not sufficient that a claim be “incidental” to financial activity; instead, it must actually have some financial activity element.

Judge Lourie wrote a dissenting opinion, arguing that while the term “financial” was not found within the claims, the exemplary embodiments described in the patent deal exclusively with online banking, and the patent has been asserted exclusively against financial institutions. Therefore, although the claims do not recite the intended use of the invention, she contended that they should not have to do so for the PTAB to find that the claims recite an invention “used in the practice of a financial product.”

Federal Circuit Declines to Interpret Claims In Light of Limiting Terms in Provisional

In MPHJ Techn. Invs., LLC v. Ricoh Ams. Corp., No. 16-1243 (Fed. Cir., February 3, 2017), the Federal Circuit upheld an inter partes review decision of the PTAB invalidating the claims of a patent. The patent in question, owned by MPHJ, claimed a computer data management system and method for enabling virtual copying by scanning a document and emailing the scanned copy.

The USPTO construed the claims of the patent as requiring that scanning and emailing of a document be done either in separate steps or in one step. MPHJ argued that several statements included in the provisional application had “expressly limited the scope of the invention” to a one-step copying and sending process. However, these statements had been deleted from the non-provisional patent application.

The Federal Circuit determined that the deletion of the limiting statements in the provisional application was significant. Without them, the patent contained no suggestion of an intent to limit the claims expressly to a one-step operation. The court found that a skilled artisan would find the deletion significant, and would conclude that the inventor considered the one-step operation to be optional rather than obligatory.

Judge O’Malley wrote a dissenting opinion, arguing that, because the patent made repeated references to a one-step operation, and incorporated the entire provisional application by reference in the specification, the patentee did the opposite of deleting the limiting statements, and the claims should be interpreted accordingly.

Supreme Court Says Components Can Be “Articles of Manufacture” For Calculating Total Profits

Timothy Maier

In Samsung Electronics Co., Ltd. v. Apple Inc., 580 U. S. ____ (2016), the Supreme Court reversed a damages award of approximately $399 million that had been granted to Apple by the trial court based on a “Total Profits” theory, and remanded the case to the Federal Circuit for reconsideration under its new standard.

In this case, Apple Inc. (“Apple”) had sued Samsung Electronics Co. (“Samsung”) for infringement of various utility and design patents covering its mobile phone technology. A jury found that Samsung infringed Apple’s design and utility patents and diluted Apple’s trade dresses. With regard to the design patent issues, the jury in the lower court case had based their award on a “total profits” calculation as called for by the statute, and awarded Apple approximately $399 million, representing Samsung’s entire profit from the sales of the smartphones that were found to be infringing.

With regard to the design patent issue, the relevant statute governing design patent damages (35 U.S.C. §289) provides that:

Whoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250, recoverable in any United States district court having jurisdiction of the parties.

Nothing in this section shall prevent, lessen, or impeach any other remedy which an owner of an infringed patent has under the provisions of this title, but he shall not twice recover the profit made from the infringement.

Samsung appealed the verdict, including the findings of design patent infringement, utility patent infringement, and trade dress dilution, to the Federal Circuit. The Federal Circuit affirmed the award. In relevant part, it concluded that §289 was applicable to the “total profit” of any infringing product incorporating the design feature, because the infringing product (and not just the infringing component) was what would be considered the “article of manufacture.”

However, today, the Supreme Court reversed this decision. Writing for a unanimous Court, Justice Sotomayor stated that “the relevant ‘article of manufacture’ for arriving at a §289 damages award need not be the end product sold to the consumer but may be only a component of that product.” An “article of manufacture,” said the Court, was simply something that was made by hand or by machine, which encompassed both products sold to consumers and components of products sold to consumers.

The Supreme Court justified this decision as consistent with section 171(a) of the Patent Act, which permits “design[s] for an article of manufacture,” and which has long been interpreted by the US Patent and Trademark Office to be applicable to designs for features or components of products as well as complete products. Similarly, section 101 of the Patent Act authorizes patent protection for “any new and useful . . . manufacture,” and has likewise been interpreted to be applicable to features or components of products.

The Supreme Court did not elect to determine whether the “articles of manufacture” at issue in this case were the infringing smartphones or the infringing components or features of the smartphones. Instead, the Supreme Court left it for the Federal Circuit to craft a test for determining whether an “article of manufacture” in a particular case refers to a product sold to a consumer or to a particular component of that product, and to apply that test to determine whether the smartphones or smartphone components were the “article of manufacture.”

While a full analysis of the case’s effects on design patent law will depend on what test the Federal Circuit crafts to determine what is or is not an “article of manufacture,” the Court did strike down the broadest definition of an article of manufacture as necessarily being “the entire infringing product.” This means that, in a design patent litigation, a litigant can no longer automatically expect an award of “total profits” for the end product sold to consumers, and will have to prove entitlement to such an award. Meanwhile, defendants will have more ammunition that they can use in order to reduce the size of a design patent award.

USPTO Announces First Ever Fee Increases Under the AIA

Timothy Maier

On October 3, 2016, the United States Patent and Trademark Office (USPTO) issued a notice of proposed rulemaking (NPRM) to set or increase certain patent fees. The goal of this directive is to cover funding shortfalls, or specifically to “recover the estimated costs of the patent operation and USPTO administrative fees that support patent operations.” A full disclosure of the NPRM, as well as several summaries, can be found here. Public comments on the notice are due by December 2, 2016.

It appears that a major reason for these fee increases is to cover the costs of Patent Trial and Appeal Board (PTAB) operations. The USPTO reports that the current ex parte appeals fees cover only around 58% of the cost per appeal, and that the PTAB is insufficiently staffed to deal with both the appeals backlog and the AIA review proceedings that come before it. The USPTO expects that increasing the fees that it takes in will allow the PTAB to hire more judges and reduce the appeals backlog.

The proposal includes the following fee increases:

  • The current large entity fee rates for utility applications will be increased by approximately 6%. This extends to utility filing fees, search fees, examination fees, and issue fees for large entities. Maintenance fees are proposed to remain unchanged.
  • Excess claim fees will be increased, with the fee for claims in excess of 20 being increased by the most significant amount (25%, to $100 per claim). However, the USPTO is considering offering refunds for claims canceled in response to a restriction requirement, if the initial number of claims was over 20.
  • The large entity fee for filing an information disclosure statement is increased by 33%.
  • RCE and appeal fees are each increased, with RCE fees being increased by approximately 10% and appeal fees being increased by approximately 25%.
  • The current large entity fee rates for design applications will be increased by approximately 33%. This extends to design filing fees, search fees, examination fees, and issue fees for large entities.
  • Inter partes review fees will be increased significantly, going from $23,000 to $30,500 (the combined total for petition and institution). Likewise, the fees associated with other post-grant proceedings (post-grant review and covered business method patent review) will also be increased, from $30,000 to $38,000.

The USPTO has also proposed imposing fees on the following:

  • Very large genetic sequence submissions. The USPTO is proposing to impose fees aimed at dissuading applicants from submitting unnecessary large sequence listings that put undue burden on the Office’s information systems. Sequences of over 300MB will be subject to a $1000 fee, and sequences of over 800MB will be subject to a $10000 fee.
  • A late fee will be imposed for sequence listings in international applications.
  • A number of OED fees will be created for practitioners seeking reinstatement.
  • A number of service fees will be created for various services performed by the USPTO. For example, a fee will be created for bulk weekly downloading of patent grants and applications.

Finally, the USPTO has proposed reducing or eliminating fees on the following:

  • The transmittal fee for international design applications under the Hague Agreement will be reset for small and micro entities. The fee rate for large entities will remain the same ($120).
  • A new “streamlined reexamination” process, having a fee of half the existing rate for a request for reexamination (that is, $6000 instead of $12000) will be created.
  • Several disused service fees have been eliminated.

Federal Trade Commission Releases New Report on PAEs

Timothy Maier

The Federal Trade Commission has released a long-awaited report on “patent assertion entities” (PAEs). As defined by the FTC, a “patent assertion entity” is a company that, as a primary business function, acquires patents from third parties and seeks to generate revenue by asserting them against accused infringers. These firms typically generate revenue by licensing these patents or, more rarely, through successful patent litigation. Such firms also typically open patent license negotiations by immediately demanding payment or filing a patent infringement suit.

The FTC made use of its subpoena power to obtain data on more than 2000 patent holding companies that it determined fit the PAE mold. It found that only a small minority of these PAEs had ever asserted their patent rights in court. The FTC found that, generally, these companies could be separated into two different categories: “portfolio PAEs” and “litigation PAEs.”

“Portfolio PAEs” assembled large portfolios, often containing hundreds or thousands of patents, and received most of their money through licensing. Typically, they were able to do this without first suing the alleged infringers. While “portfolio PAEs” accounted for only a small portion of the licenses in the study (around 9%), these licenses accounted for an overwhelming majority of the total revenue of all licenses looked at in the study (around 80%, or approximately $3.2 billion in licensing revenue). These entities typically received most of their initial startup capital from investors, which included institutional investors and manufacturing firms.

“Litigation PAEs” typically operated by suing potential licensees and using the threat of prolonged litigation to induce defendants to settle and take licenses. These companies typically operated using small portfolios, usually containing fewer than ten patents. The typical charge for these licenses was just under the lower bound of early-stage costs for defending against a patent suit; as a result, the FTC has concluded that such lawsuits are “consistent with nuisance litigation.” However, while these litigation PAEs represented most of the litigation activity within the FTC’s study (around 96%), and were responsible for most of the licenses examined by the study (around 91%), these PAEs only received around 20% of the total licensing revenue.

Several interesting results came out of the FTC study. First, it did not appear that many (if any) patent defendants negotiated patent licenses when faced with a demand letter from a litigation PAE, and that in essentially all cases, the PAE had to file suit against the defendant to bring them to the negotiating table.

Second, while a large number of the patents that were asserted by PAEs had to do with either information and communications technology (ICT) or computer software, most of the litigation PAE targets were not in the software industry; instead, it appeared that the largest plurality of PAE targets were in the consumer retail industry. These targets included, for example, store retailers that operated fixed point-of-sale operations and non-store retailers (such as Internet sites) that directly sold products.

The FTC’s findings also suggest that many of the solutions put in place with the stated goal of curbing the abuses of litigation PAEs, such as legal fee shifting, may not be as effective as hoped. Most litigation PAEs are small companies with few assets, and most PAE litigation appears to settle early, before an award of fees is considered. The FTC has prepared some of its own ideas, such as discovery reform, which may help to curb the abuses of litigation PAEs where past reform efforts have failed.

Specifically, the FTC noted that the discovery process is structured so as to be incredibly expensive for patent defendants early on in a litigation. In PAE litigation, the reverse is not true; because PAEs, as defined, do not invent, develop, or manufacture products that incorporate the patented technology and typically are not at any real risk of being countersued, they generally have much less discoverable information than the accused infringer. This is used by many litigation PAEs to grab the upper hand in a settlement; since discovery is so expensive and so one-sided, it is usually cheaper for a patent defendant to settle for a relatively small amount rather than pay even more money to continue through the discovery process.

As such, the FTC has proposed developing rules and case management practices directed at addressing this discovery burden and other cost asymmetries in PAE litigation. Specifically, the FTC has urged courts to develop, under Rule 26 of the Federal Rules of Civil Procedure (FRCP Rule 26), plans for discovery that specifically take into account the disparity in discovery requirements in PAE litigation. For example, The FTC recommends crafting discovery plans so as to limit the scope of discovery before certain preliminary motions have been resolved, and so as to require early disclosure of claim, infringement, and invalidity contentions in PAE litigation. The FTC also proposes amending Rule 26 to codify its suggestions into the Federal Rules.

The FTC has also proposed greater initial disclosure requirements for patent plaintiffs. For example, the FTC recommends requiring patent plaintiffs to provide early disclosure of what damages theories they intend to be using in the remainder of the case. The FTC also notes that patent pleading requirements have recently changed, such that patent infringement pleadings now require that a patent plaintiff allege with greater specificity how a defendant infringes their patent; the FTC notes that this maps with the general thrust of its recommendations for patent litigation reform.

The FTC has also proposed streamlining the process for determining the ownership and control of a litigation PAE. Specifically, it proposes amending FRCP Rule 7.1, which requires all nongovernmental corporate parties to identify “any parent corporation and any publicly held corporation owning 10% or more of its stock” in its “first appearance, pleading, petition, motion, response, or other request addressed to the court,” to be broader. The FTC proposes, among other examples, adopting language similar to that used in the Civil Local Rules of the Northern District of California, which requires parties appearing before the court to disclose any known financial interest of a third party in the litigation.

One final proposal from the FTC is intended to halt or reduce the practice of patent plaintiffs suing the customers of a manufacturer for infringement, based on the customers’ use of an infringing product made by the manufacturer. It appears that some litigation PAEs have allegedly used this as a tactic to gain leverage over manufacturing companies against which they have brought patent litigation. Others have done it to take advantage of the fact that a manufacturer’s customers are far less well-equipped to defend against a patent suit than the manufacturer would be, as the manufacturer is likely to have a much better understanding of the disputed technology. Therefore, in cases involving simultaneous infringement lawsuits directed against manufacturers and customers, the FTC proposes allowing, and encouraging, district courts to stay actions against the customers until the manufacturer suit has been resolved.

The FTC’s comments are likely to influence future patent reform. The FTC has been known to carry a great deal of influence in Congress with regard to legislation in which it has an interest, and has devoted a significant amount of effort and expense to preparing this report and is not expected to let it go easily. As such, while a number of patent reform bills introduced into Congress in the past, such as the Innovation Act and the PATENT Act, have stalled because of an apparent lack of interest, the same will likely not be true for any bills that may be introduced that implement some or all of the FTC’s proposals, which will most likely be supported by aggressive lobbying from the FTC. Because of this, the findings of this report should be given ample consideration.