Yesterday the U.S. House Judiciary Committee held a hearing on Chairman BOB GOODLATTE’s (R-Va.) “Innovation Act,” H.R. 9. USPTO Director MICHELLE LEE testified and took questions about the agency’s positions on the bill for about two hours. Lee said the USPTO believed that legislation to curtail abusive patent litigation was necessary but must balance preventing abuse with ensuring that patent owners are able to enforce their valid, infringed patents.

Lee said the USPTO supported shifting attorney fees to prevailing parties in patent litigation cases. She supported a rewrite of the provision in the bill to provide that fees should be available only upon a motion by a prevailing party and that the prevailing party should bear the burden of demonstrating that it was entitled to such a fee award. Lee suggested that the committee clarify which entities would be subject to joinder, including an exemption for “passive investors” who lacked the ability to direct or control litigation.

She said the USPTO generally supported a heightened pleading requirement for patent infringement. However, the agency supported setting the standard lower than H.R. 9, to require an identification of allegedly infringing product and an explanation of how it infringed at least one claim of each asserted patent. Lee said a more stringent requirement would place undue burdens on patent owners, create the potential for procedural motions that did not advance the case, and create incentives to “overplead” marginally relevant claims.

Discovery, Venue –The USPTO supported a provision in H.R. 9 that directed the Judicial Conference of the United States to develop rules and procedures to address asymmetries in discovery burdens and costs in patent cases. However, Lee urged reconsideration of a provision to stay discovery pending a ruling on claim construction, except for discovery necessary for construing the claims. Lee said that developing an understanding through discovery of validity and infringement issues often clarified which terms should be construed and that claim construction was sometimes not dispositive. She suggested a provision to stay discovery until the judge ruled on motions to transfer venue, coupled with more restrictive venue rules to limit forum shopping.

Customer Stays, Transparency — Lee said the agency generally supported the so-called “customer stay” provision, which would allow consumers and retailers of off-the-shelf products to agree to have the manufacturer of the product litigate a patent infringement suit concerning the product. Likewise, the agency supported a “transparency” provision that would require disclosure of patent ownership information provided that it did not require the gathering of more extensive information that may provide little benefit to the parties.

Demand Letters, PTAB — The USPTO believed there was a need for a “national approach” to demand letter regulation. The agency also supported provisions to protect patent licenses in foreign bankruptcy proceedings and to clarify the estoppel effect of post-grant review proceedings. Finally, Lee said that if legislation were to direct the PTAB to employ the district court approach to claim construction in AIA trials, consideration should also be given to repealing the right to amend claims in those proceedings consistent with the historical use of these two standards.

Outlook — In his opening statement, Goodlatte said he recognized that some more work may be needed on some of the provisions and called out specifically the customer stay provision and demand letter abuse provision. Several publications have reported that H.R. 9 could be reported out of committee and taken to the House floor within weeks.

Kramer said Yahoo! supported H.R. 9 because it would focus patent infringement litigation by requiring genuine notice pleading, prioritizing claim construction, and ensuring that only reasonable cases were brought. Yahoo! also supported a provision in the bill to create a presumption that would allow prevailing parties to recover attorney fees.

Armitage said the attorney fee shifting provision could provide a significant check on abusive litigation. He believed a provision to stay discovery until the court ruled on claim construction could be improved by and instead requiring stays of discovery until the resolution of any motions to transfer venue. He suggested that rather than creating a heightened pleading standard, the committee could look to district courts’ local rules for best practices regarding initial disclosure requirements. Any new requirements should be imposed only in district courts where local patent rules impose lower requirements. He said the bill should address abusive patent demand letters and that the USPTO’s Inter Partes Review proceedings should be rebalanced to treat patent owners fairly.

Simon said H.R. 9 took a balanced approach in addressing abusive patent litigation. With regard to the provision that would stay discovery until claim construction, Simon said litigants should understand what rights the government has granted before undertaking expensive discovery. He said heightened pleading is important to provide a defendant adequate notice about the product at issue, including whose product it is, and what patent claim is allegedly infringed. Finally, Simon said the bill should force shell companies to reveal their investors so defendants would know who is financing the litigation. He said requiring those responsible for financing unjustified litigation to be held personally accountable for the attorney fees would make patent litigation fairer.

Sauer said Congress should not overlook abuses of the system that target patent owners. Specifically he referred to “reverse trolling” of biotech companies by entities threatening to challenge patents in Inter Partes Review proceedings unless settlements are paid. Further, BIO was concerned that some provisions in H.R. 9 lacked balance and would cause investors to be scared of investing in biotech innovations. Provisions he characterized as too onerous for patent owners included the heightened pleading requirement, mandatory stays of discovery until a claim construction ruling, and joinder of all third parties with a financial interest in the patent owner or the patents for the purpose of recovering attorney fee awards.

Sauer also urged the committee to consider recent developments in patent law that have favored patent infringers and ensure that the pendulum does not swing too far in favor of infringers. He some provisions in H.R. 9 could be rewritten to be more targeted, such as the heightened pleading standard, which could be improved by requiring identification of “at least” one infringed claim each patent asserted and a description of infringement or explanation of why the information is not available. He agreed with Armitage that some issues, such as sequencing discovery, could be resolved by identifying best practices in sophisticated district courts’ local patent rules.

Goodlatte said he recognized that some more work may be needed on some of the provisions and called out specifically the customer stay and demand letter provisions. Several publications have reported that H.R. 9 could be reported out of committee and taken to the House floor within weeks.

Witnesses’ written statements and a video recording of the hearing are posted on the committee’s website.