It is a common insight that no system of civil procedure can be perfect. Make the requirements to maintain a lawsuit too lax and you'll invite too many speculative or abusive law suits. Make the pleading rules too tight and many meritorious claims will find themselves kept out of the courts. In all cases, getting the right balance is equal parts art and science. In dealing with well-established legal practices, the proper approach is generally to enact legal change only incrementally unless there is strong proof of some wholesale breakdown of the system.
The Senate is currently considering a bill (the Transparency in Assertion of Patents Act) that violates that maxim in patent cases. Ostensibly designed to the curb the influence of "patent trolls" — those companies that, according to the bill's sponsor, Senator Claire McCaskill, "buy patents, but then fail to actually produce goods or services, opting instead to intimidate or sue other small businesses" — this piece of legislation defines its ambitious goal as: “To curb unfair and deceptive practices during assertion of patents, and for other purposes.” This is not a novel goal. But the means offered to achieve those end are nothing short of revolutionary—and unwise. In the effort to control those unidentified trolls, her legislations threatens to wreck the current procedural system.
The proposed legislation makes grievous errors in two critical areas. The first is its wholesale alteration of the pleading rules under the Federal Rules of Civil Procedure. The second is the massive overkill that it embraces with respect to public enforcement of the new rules by a combination of actions through the Federal Trade Commission and the Attorney Generals in all 50 states. It is worth explicating both points.
To orient the discussion of civil procedure, it is best to harken back for a moment to the adoption of the Federal Rules of Civil Procedure (FRCP), adopted after much reflection in 1938. The basic assumption of the FRCP was that pleadings were supposed to serve a “notice” function; namely, they were supposed to give the other side some awareness of the nature and source of the claim against them.
Most of the factual disputes were to be resolved through the process of discovery, which followed the pleading. Under the FRCP, there is much opportunity for abuse in the discovery process, but most of that can be handled in ways that reform the discovery rules without undercutting the sensible role of the notice pleading. Thus it is possible to require that parties get leave of the court to pursue discovery, or to limit the amount of material that can be requested at any time, or to require the moving party to pay for the costs of the production of documents when requests become too onerous. Applying these reforms across the board would improve the civil procedure system without singling out patent infringement claims for special treatment.
Unfortunately, the proposed Senate bill takes none of these steps applicable to all civil litigation. Instead, it presumptively introduces a set of detailed pleading requirements for all patent claims that would embarrass the most ardent special pleaders from the era before the FRCP. These rules are not set out in the statute, but are to be formulated by the Federal Trade Commission, which now displaces the various federal rulemaking bodies that normally cover this territory.
To make matters worse, the statute allows the FTC to fashion some exemptions to this rule, allowing them to exclude, for instance, disclosures of "written communications between parties regarding existing licensing agreements." That phrasing carries with it the negative pregnant that all future written licensing arrangements may well be caught by the act. It also allows the FTC to exempt written communications "not necessary for the protection of consumers or within the scope of the purposes of this Act." Which communications meet that standard, however, are not defined in the statute. The details are to be filled in by FTC rule making that grants the agency enormous amounts of discretion, largely insulated from judicial review.
The wooliness of this general grant is matched by the incredible reach of the substantive provisions that fall within the jurisdiction of the FTC. The problem starts with a demand that the parties list, in detail, all patents for which they claim infringement, and all claims of these patents. It then doubles down on this approach by requiring an equally exact description of all the ways in which the defendant’s invention may infringe the patent in question, along with information about manufacturers whom an aggrieved party might sue for indemnity.
The confusion is then compounded by a requirement that the plaintiffs list all of the potential interested parties in the patented technology, whether as “owner, coowner, assignee, exclusive licensee, and entity with the authority to enforce the patent, and the ultimate parent entity of each owner, coowner, assignee, exclusive licensee and entity with the authority to enforce the patent.” That list could involve hundreds of parties. In most cases, this information may well prove irrelevant; in some cases it could require the disclosure of trade secrets; and in cases of multiple patents, it could overwhelm the system with endless amounts of trivia.
The cascade of demands then includes a requirement that the plaintiff make disclosures of its FRAND obligations — that is, those obligations to license the patented technology on reasonable and non-discriminatory terms. It requires a proposal on how to deal with the measure of damages without having knowledge of the extent or scope of the potential violations. And it caps off the list of requirements by forcing the plaintiffs to disclose whether the patent in question is in reexamination before the Patent and Trade Office.
I list all of these onerous demands to show just how far off the rails this Senate bill has gone. To be sure, these requirements many make sense in some simple cases (of which there are precious few in patent law). But they border on the oppressive in cases that involve the application of patent portfolios with multiple overlapping and complementary patents.
In many cases there may appear to be some evidence that some of these patents have been infringed, but it is almost impossible to determine whether that is the case without taking some discovery in the first place. Yet there is no explanation as to why the correct approach is not to allow the trial judge discretion to require a more definite statement of those issues that the defendant thinks relevant to the successful defense of the case. The net effect of these provisions is to overwhelm the entire system. Yet there is no protection for honest and good faith errors, only a provision that prohibits “an assertion that lacks a reasonable basis in fact or law” without excluding the possibility of imposing a system of strict liability.
To round out the discussion of this bill, it is necessary to discuss its multiple systems of enforcement. The one glimmer of sanity in this statute is that it does not appear to authorize private rights of action by individuals who are subject to lawsuits that do not meet these requirements. But that limitation offers scant consolation, because the proposed law offers both the FTC and the state Attorney Generals the option to commence suit. At the federal level, the FTC can unleash the full set of actions for damages, injunctions, and civil penalties. For their part, the state AGs are specifically authorized to sue for damages and restitution, and for statutory fines up to $16,000 for each “separate violation,” — a term that receives no statutory definition. In a sense, this arrangement is worse than ordinary private litigation, because it allows defendants to use state resources to defend themselves in at least some cases, unfortunately, it is all too easy to believe that, at the first sign of trouble, they will call their state AG, who is allowed to intervene in individual cases or initiate enforcement actions.
To be sure, the proposed statute contains one constructive limitation that blocks the state Attorneys General from initiating their proceedings if the FTC has started its own enforcement proceedings. But it does not appear that the law prohibits any concurrent FTC action if the state AGs sue first. Nor does it appear the state AGs must stay their actions when the federal proceedings are going on. There are lots of opportunities for cooperative game-playing between like-minded FTC officials and state AGs. The cumulative enforcement of this law could amount to a barrage of major lawsuits, most of which involve ordinary licensing activity for which there has been no evidence of abuse at all. Bringing out the heavy artillery might be relevant for massive abuse and overreaching. But in these cases, the response is wholly disproportionate to mistakes in pleading under exacting rules that should not be adopted in the first place.
There are, moreover, serious constitutional issues lurking in the wings. The situation massively chills the right to bring any lawsuit, and may well constitute a violation of the due process norm that allows all individuals to have access to courts to protect their own property.
There is also a real possibility, given the aggregate burdens that the law imposes, that it creates First Amendment issues under the complex Noerr-Pennington doctrine that allows parties to petition the government for redress of grievances, which has been read by the Supreme Court to protect the initiation of lawsuits, including patent lawsuits, that are brought in good faith.
This is not the place to examine the immense difficulties that this proposed legislation could raise. My hope is that the Senate regains its senses and decides to start over with a more modest and more sensible piece of legislation that does not revolutionize the entire law of civil procedure in patent cases for the worse in order to address a troll that is of far more modest proportions than its supposed statutory solution.