The Landscape: Impact of Recent Supreme Court, Reform Activity on NPE Litigation

With Congress failing to vote on any patent reform bills before the summer recess and the Supreme Court’s term coming to a close, the NPE litigation landscape appears to be set through the rest of 2016 and into the new year. As in 2014 and 2015, legislative efforts to introduce patent reform stalled, with most of the bills currently mired—like so much other legislation—in congressional gridlock.

For its part, the Supreme Court addressed two key patent-related issues in the spring term. In one case (Cuozzo), the Court essentially preserved the status quo of the inter partes review (IPR) process. In the others (Halo and Stryker, a pair of cases), it overturned the Federal Circuit’s rigid test for awarding enhanced damages in infringement cases—a shift deemed unlikely to significantly impact “garden-variety” cases.

Whether these decisions and continuing reform discussions will have any long-term effect on patent litigation or licensing activity remains to be seen. However, we can draw some insight from the details of these developments.

Cuozzo: Bringing Certainty to the IPR Process

The Supreme Court sided with the Patent Trial and Appeal Board (PTAB) in Cuozzo Speed Technologies v. Lee, affirming the Board’s use of the broadest reasonable interpretation (BRI) standard for claim construction in IPR proceedings. The Court further held that appeals of the PTAB’s institution decisions are barred by statute. The decision is notable for its substantial deference to the US Patent and Trademark Office’s (USPTO) rulemaking authority, reflecting the Court’s understanding of the congressional intent behind the IPR regime: to create an expedited, “hybrid” proceeding on patent validity that will not get stuck in endless appeals.

Cuozzo essentially maintains the status quo for inter partes review, validating the standards set by the USPTO and removing much of the previous uncertainty brought by judicial challenges. In the wake of this decision, the PTAB may see an uptick in new IPR filings now that petitioners have confirmation that most institution decisions are not subject to appeal.

However, the Supreme Court’s opinion leaves room for broader statutory and constitutional challenges in the future. The Court may soon address one such challenge in MCM Portfolio LLC v. Hewlett Packard Company, et al., in which the plaintiff argues that IPRs violate the Seventh Amendment and Article III of the US Constitution. A petition for writ of certiorari is pending for that case, and the Court is expected to respond by the end of June.

Halo/Stryker: Letting Trial Courts Decide Enhanced Damages

In a combined ruling on two cases, Halo Electronics v. Pulse Electronics and Stryker v. Zimmer, the Court threw out the Federal Circuit’s rigid, nine-year-old Seagate standard for awarding enhanced damages, replacing it with a more plaintiff-friendly discretionary test. Under this new standard, which parallels the Court’s decision on attorney fee awards in Octane and Highmark, district courts no longer have to confine enhancement to cases in which the alleged infringer is found to have acted with “objective recklessness”, in addition to other requirements. Rather, courts may impose enhanced damages in so-called “egregious” cases of willful misconduct as they deem subjectively appropriate. The Court also lowered the standard of proof for willfulness from “clear and convincing evidence” to “preponderance of the evidence,” discarding the Federal Circuit’s complicated three-part framework for appellate review in favor of the more deferential “abuse of discretion” standard.

The Court’s opinion explicitly acknowledged the problem of so-called patent trolls and the increased possibility that treble damages would compel defendants to spend time and money investigating even frivolous demand letters. Nevertheless, the Court expressed confidence that district courts would show restraint by declining to grant enhanced damages in what it calls “garden-variety cases”.

Notwithstanding the Court’s confidence in the district courts, if the differing applications of Octane and Highmark are any indication, the Federal Circuit may soon have to contend with disparate approaches to enhanced damages as cases applying the new discretionary standard make their way up on appeal.

Reactions to the Halo/Stryker decision have been mixed in Congress. On June 17, Senator Orrin Hatch (R-Utah) filed a “Sense of Congress” amendment to the Commerce, Justice, Science, and Related Agencies Appropriations Act, stating that Congress intended to have the Seagate standard govern rulings on enhanced damages. According to Senator Hatch, the fact that Congress did not amend the statute on enhanced damages as part of the America Invents Act demonstrated Congress’ view that Seagate was the proper approach. In response, Senator Chris Coons (D-Del.) released a statement applauding Halo/Stryker, arguing that the new standard would help protect startups and foster innovation.

Legislative Reform: Stuck in Gridlock

While the Supreme Court has not shied away from tackling patent cases, legislative efforts to combat perceived problems with the patent litigation system have languished in Congress since 2011.

One of the most prominent reform measures to get stuck in gridlock is the VENUE Act (S. 2733), a Senate bill designed to curb “forum shopping” by limiting where patent suits can be brought. Although the VENUE Act was seen as one of the most plausible avenues toward patent reform this session, Senate Judiciary Committee Chairman Chuck Grassley (R-Iowa) has indicated that priority will be given to a more comprehensive patent reform bill, the PATENT Act (S. 1137), which lacks venue reform provisions. However, little progress has been made on moving that bill through Congress, with sponsors disagreeing on certain key provisions.

Incremental progress has been made in other areas, however. For instance, a bill still under consideration by the House Ways and Means Committee, the Trade Protection Not Troll Protection Act (H.R. 4829), represents an effort to curb NPE litigation before the ITC by requiring that a plaintiff actually practice any patents asserted before the Commission.

Appetite for Further Reform: Time Will Tell

As is often the case, it will take a few quarters—or even years—to tell whether the Supreme Court’s recent rulings augur a more dramatic shift than it now appears. We are still awaiting oral argument on design patent damages (Samsung v. Apple), and the Court has already agreed to hear two additional patent-related cases next term dealing with laches (SCA Hygiene Products) and international infringement issues (Life Tech v. Promega). Meanwhile, the developments on the Hill this session hint at a continued, if fitful, inclination toward reform. Even Hillary Clinton has given it a bit of attention. So while the first half of 2016 has delivered seemingly modest changes to the patent landscape, it seems certain that patent issues will remain on the Court’s docket and the legislative agenda for the foreseeable future.