Innovation Act Would Significantly Alter Patent Litigation

WASHINGTON — The Innovation Act, written to keep the effective structure of the patent system in place but reducing the incentives to file frivolous complaints, is gaining momentum.

The U.S. House of Representatives approved the bill, 325 to 91, on Dec. 5, meaning the bill will now go to the Senate for consideration.

The bill's intentions are simple: Stop abuse — abuse that has plagued all types of industries, including adult entertainment.

Through the past decade, scores of adult entertainment companies have been hit with patent infringement lawsuits that have cost operators millions in legal fees.

The Innovation Act aims to curb the influence of some of those plaintiffs that act as "patent assertion entities," or PAEs, also known as "patent trolls."

These types of companies often amass large patent portfolios of patents that they then enforce against companies through infringement lawsuits or the threat of such actions.

Patent holding companies like Acacia, which took on adult operators over the use of so-called digital media transmission patents, and Patent Harbor, which sued 10 adult studios over patents that allow DVDs and Blu-ray discs to organize and skip to chapters and scenes in a menu, are prime examples of PAEs.

Facing on average $3 million to $10 million in legal fees to fight a patent infringement case to the finish, many defendants opt to accept a high-five or six-figure settlement offer, even if they don't think the allegations are credible.

The settlements get made because patent litigation is one of the most expensive forms of legal action.

Patent counsel must have both engineering and legal expertise, making the going rate for an experienced attorney at $1,000 per hour.

Because of a recent spike in patent litigation, it now takes about two-and-a-half years for a suit filed by a PAE to reach trial, according to a recent PricewaterhouseCoopers study.

During that time, the PAEs force defendants to rack up huge legal bills by demanding hundreds of source records and design documents, making claims unaffordable to defend.

And the PAEs typically exploit the legal system by setting up limited liability corporations solely for litigating patents. Recorded LLCs trolls have that leg up on defendants because they are unable to go after the records of the true operators of the PAE during discovery, the information-disclosure phase that precedes court action.

Because of that advantage, discovery costs PAEs virtually nothing since they're forced to turn over so few records during that phase.

As the Innovation Act moves forward to the Senate, it has been joined by another piece of legislation — the Patent Transparency and Improvements Act, introduced by Sen. Patrick Leahy in November. That piece of legislation is still in committee, but with significant momentum around the issue it's likely to do well.

Background on the Innovation Act: 

• Requires plaintiffs to disclose who the owner of a patent is before litigation, so that it is clear who the real parties behind the litigation are. This will ensure that patent trolls cannot hide behind a web of shell companies to avoid accountability for bringing frivolous litigation.

• Requires plaintiffs to actually explain why they are suing a company in their court pleadings.

• Requires courts to make decisions about whether a patent is valid or invalid early in the litigation process so that patent trolls cannot drag patent cases on for years based on invalid claims. This prevents invalid patents from being used to extort money from retailers and end users.

• When parties bring lawsuits or claims that have no reasonable basis in law and fact, the Innovation Act requires judges to award attorneys fees to the victims of the frivolous lawsuit. The bill allows judges to waive the award of attorneys' fees in special circumstances. This provision applies to both plaintiffs and defendants who file frivolous claims.

• Requires the Judicial Conference to make rules to reduce the costs of discovery in patent litigation, so that patent trolls cannot use the high costs of discovery to extort money from small businesses and entrepreneurs.

• Creates a voluntary process for small businesses to postpone expensive patent lawsuits while their larger sellers complete similar patent lawsuits against the same plaintiffs, to protect customers who simply bought the product off the shelf.

In a recent XBIZ World column, attorney Gregory A. Piccionelli discusses patent trolls and pending legislation in detail here.