Patent troll legislation: a closer look (pt 4): Real party in interest

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In earlier episodes of this series, we’ve examined different facets of Rep. Bob Goodlatte’s (R-Va.) “Innovation Act,” a bill introduced in the House last October that targets the worst excesses of “patent trolls.”

In December, following easy passage of the bill in the House, Sen. Patrick Leahy’s (D-Vt.) Judiciary Committee began considering it. During the first hearings, various senators sounded notes of caution about the Goodlatte bill.  “I am wary of overkill,” said Sen. Richard Blumenthal (D-CT). “I’m wary of unintended consequences of limiting patent rights without knowing what the end result will be. We have a very important obligation that we first do no harm.”

Sen. Richard Durbin (D-IL), himself a former trial lawyer, was similarly sanguine.  “If the goal is to create a chilling effect on trolls that are abusing the system,” Durbin opined, “it seems to me this goes too far by reaching into meritorious claims.”

Leahy introduced his own, narrower bill, which he labeled “balanced and targeted to preserve the rights of legitimate patent holders.” Leahy also urged his committee to “stay focused on that balance, so that we achieve meaningful but targeted reform”—music to the ears of this patent attorney, who has sung a similar tune about certain provisions of the Goodlatte bill.

But even as the bill encounters some resistance in the upper chamber, it’s worth exploring some of its other aspects. In addition to changes to the pleading requirements, the standards for awarding attorney’s fees, and modifications to discovery procedures, the Innovation Act would impose a new requirement that the patentee identify all “real parties in interest.”

Patentees with innocuous-sounding corporate names, critics charge, are often nothing more than stalking horses for aggressive patent assertion entities who seek to shield their true identities.  This lack of transparency has bred severe frustration among companies defending against patent lawsuits, as they frequently don’t even know whom they’re truly litigating against. It also infects the demand letters that such entities send to would-be defendants before filing suit by preventing the receiving parties from knowing whom they’re actually negotiating with. (Incidentally, Stanford Law School’s Tom Ewing and Robin Feldman have done yeomen’s work in exposing this practice and piercing the veil of some of these entities.)

In his remarks during an address at AEI, Goodlatte noted that “since the enactment of the AIA, the Patent and Trademark Office has worked to ensure that there is greater transparency surrounding patent ownership. They have even developed rules around real party and interest. But much of their work hinges on actually receiving the information.”

Providing that information, Goodlatte contends, would become mandatory in his proposed legislation. “The Innovation Act,” he asserted at AEI, “includes a transparency provision that requires the plaintiff to provide this basic information to the PTO, the court, and the opposing party. It also requires the patent owner to keep these records updated, and if not, they forgo enhanced damages and fee shifting.”

Specifically, the Goodlatte bill provides that:

the court shall grant a motion by a party defending against an  allegation of infringement of a patent claim to join an interested party if such defending party shows that the party alleging infringement has no substantial interest in the patent or patents at issue other than asserting such patent claim in litigation.

The law defines “interested parties” to include assignees of the patents, anyone with a right “to enforce or sublicense” them, and anyone with “a direct financial interest in the patent or patents at issue, including the right to any part of an award of damages or any part of licensing revenue.”

Thus, the defendant can rope in the “real” party in interest to a suit—i.e., any entity enjoying certain substantial rights in enforcing or reaping the benefits of the patent at issue—and render irrelevant the shell company fronting the litigation.

In addition, the Innovation Act would require the patentee to affirmatively identify to the Patent Office any and all interested parties, as well as the “ultimate parent entity” controlling them. This would encompass naming all partners with larger than a 5% stake in a partnership (and all officers in a corporation) falling under the “interested party” rubric.

These provisions of the Goodlatte bill are simple, thoughtful, common-sense proposals that should go a long way toward increasing transparency in patent litigation. And while there may be some dispute over how precisely to define the various terms in the bill (“interested,” “financial interest,” “ultimate parent entity”), they should be fleshed out naturally, rationally over time.

In the next episode, we’ll consider customer lawsuits and how the Innovation Act seeks to thwart them.

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