Originally published in Baker Bots Insights, January 30, 2020
Inventor Rights Act Proposes Sweeping Changes to Patent Law – Not Just for Inventors
30 January 2020Firm Thought Leadership
Don Debelak offers Affordable Patents. Check Out www.patentsbyDonDebelak.com
The Inventor Rights Act of 2019 (the Act),1 as introduced to the House of Representatives on December 18, 2019, could bring monumental change to the practice of patent law. Mainly, the Act attempts to provide greater protections to inventors who own their own patents while offering none of the proposed benefits to entities that own patents invented by others, including inventors’ employers.2 Due to the number and extent of the benefits the Act provides, companies that practice their patents as well as non-practicing entities (NPEs), such as universities, and patent-assertion entities (PAEs) may attempt to circumvent the requirements in order to take advantage of the Act. As written, there are ambiguities and broad definitions that create potential loopholes in the Act, and Congress will likely need to revise certain provisions to reach its stated goal of limiting the benefits to the inventors themselves. But due to the nature of the business of PAEs, there may not be a complete fix to these potential loopholes that would exclude PAEs.
The New Benefits for Inventors
Some of the most important protections the Act would provide to “inventor-owned patents”3 include: denying Patent and Trademark Appeal Board (PTAB) review without consent of the inventor,4 expanding proper venue,5 shifting the burden of proof for certain injunction factors to the defendant if infringement is found,6 and allowing a patentee to elect a different form of recovery under the Act instead of what is available under 35 U.S.C. § 284.7 Many of these changes in the protections afforded to inventors would directly override decisions handed down by the Supreme Court of the United States.
Post-Grant PTAB Review
Under the Act, the United States Patent and Trademark Office (USPTO) would no longer be able to conduct post-grant proceedings to review the patentability of an inventor-owned patent without consent of the patentee.8 This would mean that companies accused of or anticipating being accused of infringing inventor-owned patents likely would no longer be able to challenge the patents in front of the PTAB by way of Inter Partes Reviews (IPRs), Post-Grant Reviews (PGRs), or Covered Business Method Reviews (CBMRs).9 While some might think this is a cause for concern, challenging the patentability or validity of a patent at the district court is still a viable option. One study has shown that District Courts tend to find patents invalid 42% of the time, 10 while at least one claim has been found invalid in only approximately 39% of petitions ruled upon by the PTAB.11 Therefore, the biggest effect this change would have is making it more expensive to challenge a patent’s validity since the cost of litigation is much higher than a PTAB proceeding.12
The venue provision of the Act would broaden the options for enforcing inventor-owned patents. Since the Supreme Court’s holding in TC Heartland LLC v. Kraft Foods Grp. Brands LLC, venue for patent litigation is proper under 28 U.S.C. § 1400(b) either where (1) the defendant resides or (2) the defendant has committed acts of infringement and has a regular and established place of business.13 This holding in TC Heartland caused a major change in the application of patent venue rules, which, as a result of VE Holding Corp. v. Johnson Gas Appliance Co., previously held venue to be proper wherever the defendant was subject to personal jurisdiction at the time the suit was commenced.14 The Act now proposes a middle ground for proper venue in patent cases by expanding the 28 U.S.C. § 1400(b) options for inventor-owned patents to also include where the inventor designed the patented invention, where the accused infringer designed or manufactured an accused infringing invention, and where the accused infringer implemented an accused infringing process.15 While these expansions seem quite broad, nothing in the Act changes the requirement that the court have personal jurisdiction over the defendant. So, if a court does not have personal jurisdiction over the defendant in one of the new venues available, the case may still be dismissed. Thus, as the proposed expansions to the venue rules broaden the options under 28 U.S.C. § 1400(b) but do not extend past the principals of personal jurisdiction, the impact of these proposed changes may be more limited.
Ease of Injunction
The Act will make it easier for inventors who own their own patents to secure an injunction when a court finds the inventor-owned patent infringed. Since eBay v. MercExchange, a plaintiff must prove that it meets a four-factor test to obtain a permanent injunction.16 These factors include that there would be further harm if the injunction is not issued, that other remedies, such as monetary damages, are inadequate, that the injunction is warranted considering the balance of the parties’ hardships, and that injunction is in the public’s best interest.17 At least one study has shown that since eBay, courts have regularly denied injunctions to inventors and entities that do not practice the patents they are asserting, typically finding that the plaintiff has not suffered irreparable injury and that remedies at law are adequate.18 The Act would counteract this tendency by creating rebuttable presumptions that further infringement of the inventor-owned patent would cause irreparable injury and that remedies available at law are inadequate to compensate for that injury.19 Further, the Act requires clear and convincing evidence for defendants to rebut the presumptions.20 Thus, while the Act will not change the overall requirement that the four-factor test be proven by the plaintiff, it would shift the burden to the defendant to disprove the two elements that previously hindered NPEs and PAEs from receiving permanent injunctions.
One of the most significant changes the Act proposes for inventor-owned patents is to allow the patentee to elect to receive profit disgorgement and guaranteed attorney fees if those fees exceed 10 percent of the total amount awarded.21 Presently, courts are to award damages adequate to compensate for the infringement, but in no event less than a reasonable royalty,22 which is essentially the fair market value of a license for the infringed patent. Even though reasonable royalties are the minimum required damages in patent cases, proving up such damages requires determining the outcome of a hypothetical licensing negotiation involving sometimes extensive economic analyses of fifteen factors, called the Georgia Pacific factors.23
While reasonable royalty is the floor, plaintiffs often seek to recover lost profit damages, which is the money the patentee could have made but for the infringer’s wrongful conduct and is often larger than a reasonable royalty. A lost profits claim requires proof of all four elements of the Panduit test, which includes showing a demand for the patented product, an absence of acceptable non-infringing substitutes, a manufacturing and marketing capability to exploit the demand, and the amount of the profit patentee would have made “but for” the infringement.24 Notably, the Federal Circuit has recognized that “[d]amages under Panduit are not easy to prove.”25 In part, the Panduit test is difficult for patentees to meet because the patentee must prove a causal relation between the infringement and the loss of profits and that there was a reasonable probability that, absent infringement, the patentee would have made those sales.26 Thus, if NPEs and PAEs do not practice or intend to practice the patents they assert, they will be unable to prove they would have made those sales absent infringement, as required to be awarded lost profits.
The Act would allow parties asserting inventor-owned patents to forego reasonable royalties and lost profits in favor of disgorgement of the infringer’s profits.27 The damages from disgorgement of the infringer’s profits are likely to be on par with that of lost profits; however, unlike lost profits, disgorgement will be guaranteed under the Act, and unlike reasonable royalties, disgorgement will not require extensive economic analyses. Therefore, it is highly likely that patentees of inventor-owned patents, as well as NPEs and PAEs that find a way to qualify for the Act’s proposed protections, will elect to recover under the Act considering the evidentiary burdens they face to be awarded lost profits or to determine a reasonable royalty.
Further, the Act would expand the availability of attorney fees under 35 U.S.C. § 285, which currently only allows attorney fees to be awarded in “exceptional cases.”28 Specifically, the Act proposes a guaranteed award of attorney fees for any amount that exceeds 10 percent of the amount of damages awarded for profit disgorgement, interest, and costs, including possible trebling if infringement was willful.29 In addition, it appears that a patentee electing to recover damages under the Act would still have the option to recover attorney fees under existing § 285 instead of under the new provisions of the Act. However, as presently written, the Act is ambiguous as to whether a patentee electing to recover a reasonable royalty under § 284 would still have the option to recover attorney fees under the Act. But ultimately, at least a portion of a successful patentee’s attorney fees would be awarded without having to establish more than the act of infringement.
Barrier to Entry and Possible Loopholes
The only requirement to be eligible for each of the protections provided under the Act is that the asserted patent be an “inventor-owned patent.”30 An “inventor-owned patent” is defined in the Act as “a patent with respect to which the inventor of the invention claimed by the patent or an entity controlled by that inventor: (1) is the patentee; and (2) holds all substantial rights.”31 However, without further definitions of some terms, the Act contains several loopholes that would allow non-inventors to benefit from the proposed protections of the Act.
For example, the definition of “inventor-owned patent” only refers to a singular inventor and lacks detail as to whether a patent with multiple inventors is eligible to receive the Act’s protections, even if none of the co-inventors has assigned away their rights. While the trend in patents today is patents having multiple inventors,32 the Act is ambiguous as to whether patents with multiple inventors would qualify as “inventor-owned.” All patentees enjoy an undivided right in the entire patent,33 so it is likely that a multiple-inventor patent would qualify for the Act’s protections being that each inventor would satisfy the requirement that “the inventor” be “the patentee” who “holds all substantial rights.” However, the Act does not define whether, in the multiple-inventor patent case, the requirement of “the inventor” being the “patentee holding all substantial rights” would be met only if all named inventors have maintained their rights, or whether one single co-inventor maintaining his or her rights would qualify the patent as inventor-owned. If the latter, then non-inventors seeking to enforce a patent, e.g., PAEs, might circumvent the Act’s requirements by taking an assignment of rights from all but one of the inventors in a multiple-inventor patent, leaving at least one inventor as a co-owner of the patent, and thus, still a “patentee holding all substantial rights.”
This same situation may present itself when dealing with single-inventor patents too. A patentee may assign a partial interest in the patent, e.g., a 50% interest in the patent that carries the same undivided right in the entire patent that all patentees are afforded, such that the assignee and assignor become co-patentees of the patent.34 As stated above, all patentees enjoy an undivided right in the entire patent; thus, it appears non-inventors seeking to enforce a patent, e.g., PAEs, could circumvent the Act’s requirements by taking an assignment of just a percentage of a sole inventor’s interest in the patent such that the non-inventor and inventor co-own the patent but the inventor is still a “patentee holding all substantial rights.”
Further, the ability of “an entity controlled by that inventor” to benefit from the Act’s protections, by being “the patentee” that “holds all substantial rights,” opens another loophole for entities, including PAEs or universities, to also benefit from the Act. The Act includes no prohibition against an entity hiring an inventor to control a subsidiary company that holds the rights in that inventor’s patent. This would create a situation where the inventor-controlled subsidiary is the patentee and holds all substantial rights, thus benefiting from the Act, while a parent entity ultimately benefits from the proceeds of any litigation brought by the subsidiary.
An additional loophole might allow a non-inventor to benefit from the Act’s protections even if he is just an exclusive licensee of an inventor-owned patent. The Federal Circuit has held that an exclusive licensee may only have standing to sue in its own name to enforce patent rights, without joining the patent holder, where “all substantial rights” in the patent are transferred to the licensee.35 However, an exclusive licensee with less than all substantial rights may properly bring suit as long as the licensee joins the patentee as plaintiff before initiating suit.36 Thus, by requiring that the inventor or inventor controlled entity “hold all substantial rights,” the Act would only effectively preclude an exclusive licensee that brings suit under its own name from having both standing and the Act’s protections. The Act would not, however, prevent a non-inventor exclusive licensee from benefiting from the Act if the licensee brings suit to enforce an inventor-owned patent after joining the inventor or inventor-controlled entity as long as the inventor-owner “holds all substantial rights.”37
While the Act is in its infant stages and is far from becoming law, it is a signal of potential patent reform to come. Should the Act be written into law, the average costs of litigating patents are likely to rise for accused infringers, who will no longer be able to pursue post-grant proceedings at the PTAB for inventor-owned patents without the consent of the inventor. Further, companies who commercialize their products and services will need to do more diligence when bringing products to market considering the easier access to increased damages the Act intends to bring. All entities should keep an eye on the Act as it continues through Congress as the benefits and consequences of the Act could be far-reaching, particularly if any final legislation fails to address these potential loopholes.