The Protecting American Talent and Entrepreneurship Act expected to be marked up by the Senate in early June is seen as a mostly fair compromise by the patent monetization industry though changes during the expected mark up could create a disaster.

The Patent Act, which is sponsored by Sen. Charles Grassley, Republican of Iowa and chairman of the Judiciary Committee, would clarify pleading standards, require early disclosures about the patents in suit, prevent patent assertion companies from suing customers of infringers until they prevail in those cases and set reasonable limits on discovery.

The legislation also creates risks for bad actors including both plaintiffs and defendants who engage in abusive and dilatory litigation practices.

The bill provides that reasonable attorney fees will be awarded if the winner — plaintiff or defendant — proves and a court rules that the losing party was not “objectively reasonable.”

The legislation also provides a process to recover fees where the abusive litigant is hiding behind a shell company.

Unlike the House bill, the Senate bill does not establish a presumptive fee shifting rule. Fee shifting will however extend to cases where a party attempts to unilaterally withdraw from a case on the eve of a trial.

The bill requires a plaintiff to identify interested parties such as investor or litigation financiers in the litigation, and provides a process for a court to recover fees where the abusive litigant is judgement-proof.

If a plaintiff cannot certify it has sufficient funds to satisfy a fee award, it must notify interested parties, who can opt out of their interest.

The bill permits a court to exempt institutions of higher education and qualifying parties in the interest of justice.

So called demand letters would be required to contain meaningful information so they cannot be used merely to scare recipients into early settlements. Misleading or abusive demand letters would face penalties for violations of the FTC Act.

The U.S. Patent and Trademark Office would be tasked with maintaining a database of information about patent ownership in order to provide a resource about patents being asserted in a demand letter or lawsuit.

In addition, patent holders would be required to disclose assignments of interests in patents to the PTO. If a patent holder fails to disclose such an assignment, increased damages of attorney fees will not be recoverable.

“I think that we struck the right balance on the reform measures currently in the bill,” Grassley said in a Judiciary Committee executive business meeting on Wednesday.

The jury is still out on that balance because many patent market observers are still living with the unintended consequences of the last round of patent reform: the America Invents Act of 2011.

Moreover, a study of patent litigation trends by PricewaterhouseCoopers found that patent lawsuits declined by 13% in 2014 and that non-practicing entities were having less success than practicing entities, suggesting that the need for reform may be overstated.

Chris Barry, an analyst at PricewaterhouseCoopers, declined to comment on whether the findings suggest further reform is unnecessary.

“The deal out there in the Senate bill now feels pretty good. It’s a pretty straight deal,” said a patent market observer who asked not to be identified because he prefers to advise clients rather than make news.

To be sure, he said the bill as it stands is likely to have some unintended consequences like the AIA.

“Who in 2011 thought the IPR process would end up being a cudgel to hit patent owners over the head with? What are the bright people writing this legislation not seeing this time?”

Moreover, he said some powerful Senators such as Charles Schumer of New York, who is in the Minority Democratic Leadership, may end up inserting language in the bill to do the bidding of “the infringement lobby,” which includes big technology, the big banks and big retail.

The infringement lobby still thinks the Senate bill “is too weak” and favors the House version of the bill, he said.

Susan Davies, a partner with Kirkland & Ellis in Washington, D.C. and a member of the interest group Unified 4 Patent Reform, didn’t return several calls seeking comment.

“I don’t necessarily think the Senate bill is a good idea because of the unintended consequences of the AIA,” said Robert Fletcher, president of Intellectual Property Insurance Services in Louisville, Kentucky.

Even so, “the Senate version is much better than the House version because presumptive loser pays is a disaster,” he said. “It erodes the fundamental constitutional right to pursue your patent rights.”

While an objectively reasonable determination is better than the exceptional case determination test created by the Supreme Court in Octane Fitness LLC v. ICON Health & Fitness Inc., “lawyers will still have a field day with that.”

Patent monetization companies are hoping for the best and bracing for the worst.

Marvin Key, an executive vice president of Acacia Research Corp. (ACTG), agreed that the bill as it stands seems fair and reasonable though some aspects are a concern.

“We have stated publicly that we are in favor of legislation that means to limit abusive litigation tactics while making no effort to target or single out particular business models,” Key said.

Acacia also agrees that this bill’s effort to treat plaintiffs and defendants equally, particularly from the fee shifting perspective, is a step in the right direction.  

“The customer stay provision, as written, is  potentially of concern as it appears to give large corporate defendants the ability to indefinitely stay patent litigation in the event they are themselves consumers.”

“Overall, Acacia is cautiously optimistic on the direction of the Patent Act.”

Not everyone is as optimistic.

“If the fee shifting is truly symmetrical — loser pays then I am a fan,” said Erich Spangenberg, founder and owner of IP Navigation Group in an email.

The ultimate law “will have unintended consequences but so be it if they want action now,” he said.

Spangenberg said one of his biggest concerns on the fee shifting provisions is that defendants will be held to a lower standard.

“If an infringer gets a $10,000 opinion from some law firm saying they do not infringe, is this enough to satisfy” the “objectively reasonable” language of the bill?

Others raised concerns or hopes about provisions that still may be added to the bill during mark up.

Ashley Keller, managing director at Gerchen Keller Capital, a Chicago-based investment advisory firm that has some $100 million committed to patent investments, said one area of concern with the Senate and House bills centers on IPRs and the different ways the PTAB and the district courts construe patent claims.

Under the AIA, the PTAB applies the broadest reasonable interpretation of the claims. The PTO has historically adopted a similar test, though it has also typically allowed applicants to amend (and thereby narrow) the claims during prosecution. In contrast, the PTAB has allowed such amendments in only four of hundreds or thousands of IPRs.

“A reasonable solution to this problem is to require the PTAB to follow the claim-construction standard that the district courts apply at a Markman hearing. An alternative would be to require the PTAB to allow patentees to offer narrowing amendments as a right.”

Asked whether such a provision was likely to be included in the final Senate bill, Keller said no.

With regard to fee shifting, Keller said the Senate bill’s version of fee shifting is more acceptable to the pro-patent community than the House version, which makes it presumptive.

“The language of the bill says fee shifting will be allowed and a hearing will be held,” he said. “Fees will be shifted if the losing party has been objectively unreasonable. I have no problem with that standard.

“My problem is twofold. It allows for veil piercing only for non practicing entities. They must certify they can pay legal fees and if they can’t their backers are on the hook. 

Alternatively, the bill allows investors the right to opt out and give up their equity investment. 

“It’s a pretty painful outcome. Either lose money by paying legal fees or giving up your equity investment.”

While the issue of thinly capitalized patent trolls abusing the system is a legitimate one, Keller said veil piercing unfairly singles out NPEs for special treatment as if they are the only problem. 

“Plenty of undercapitalized companies are in the business of infringing on patents without any ability to pay.”

It would be much fairer to write a neutral proposal and if the effect falls more heavily on NPEs so be it, he said. 

“There’s nothing inherently wrong with someone purchasing patents to monetize them via licensing and enforcement activity,” he said.

Keller also objects to a special fee shifting carveout in the bill for the pharmaceutical industry again on fairness grounds. 

“There’s no good policy reason for a special carveout,” he said.

While Keller said the Senate version off the bill comes up with the right standard on fee shifting, he has some concerns about its version of pleading standards.

“They’re one-side and only apply to the plaintiff side” in requiring more information to be revealed up front, Keller said.

Providing more information can be useful in terms of allowing the parties to focus on the claims that matter, he said. But the flip side ought to be that the defendants also have to provide specific details in their answers.

“Requiring only one side to open the kimono gives a tactical advantage to defendants that's not fair.”

Finally, Keller also has concerns about how both the Senate and House bills come crashing down on so-called abusive demand letters.

The concern is letters that are vague with the veiled threat of litigation hanging over recipients, which can be intimidating to smaller companies who can ill-afford such litigation. 

“It’s scary and a legitimate concern for these smaller companies.”

The problem with the demand letter provisions is that they involve an onerous penalty,i.e. scrutiny from the FTC, even though most letters are vague for a specific reason.

“Demand letters are not vague for any nefarious purpose,” he said. “They’re vague because patentees—NPEs and operating companies alike—don’t want to subject themselves to declaratory judgment jurisdiction.”

Patent monetizers “don’t want the mere sending of a letter to trigger a defendant’s right to beat them to the courthouse for litigation over the patent. 

“The unintended consequence of this is that defendants will sue first and ask questions later. It will do everybody a disservice by raising the costs of negotiated settlements.

“The easy fix is to require more information in demand letters but write into law that the mere receipt of a letter is not sufficient to seek a declaratory judgment of noninfringement or invalidity.”

To reach the reporter responsible fro this story please contact Dan Lonkevich at 707 318-7899 or dan@thepatentinvestor.com