Regions

Patent Trolls V. Their Corporate Targets: In View of Recent Legislative, Judicial and Market Changes, Companies Have Distinct Advantages Over NPEs

August 5
9:12 PM 2014

In recent years, there has been much discussion in the business and legal communities about Non-Practicing Entities ("NPEs"), a.k.a. patent trolls, and the ills and costs they can often impose on companies large and small. It is said that NPEs sue companies alleging infringement of dubious patents, and then extort nuisance value (or higher) settlements, effectively imposing a tax on companies as they grow and are repeatedly targeted by NPEs. Companies settle even if they determine they don't infringe or that the patent is invalid because the NPEs' "ask" is too small to justify the litigation costs necessary to defeat the claim on the merits.

While the costs of NPE litigation are undoubtedly real, over the past decade changes in the patent law landscape have given defendants significant advantages over NPEs, even if it might not seem that way at times to those facing (yet another) NPE suit. As a result, defendants already have significant leverage to oppose and defeat NPE litigation and even to bend the incentives for bringing such cases further away from NPEs.

To begin, the United States Supreme Court's decisions across a range of patent law issues have made litigation success easier for defendants and harder for plaintiffs, including NPEs. Among other significant rulings, the Court:

  •  struck down long-standing presumptions that enabled successful patentees to permanently enjoin infringers. See eBay, Inc. v. MercExchange, LLC. Now, even patentees who can show infringement of a valid patent are treated like any other litigant, and have to show they would be irreparably harmed if the defendant is not enjoined, and that public and private interests favor injunctive relief. It is understood that most NPEs will have a difficult time making this showing. Without a credible threat of injunction, the settlement value of a patent case is reduced and an NPE's settlement demands must decline accordingly.
  •  provided lower courts with greater flexibility to find patent claims invalid as obvious. See KSR, Int'l Co. v. Teleflex, Inc. While arguably not a change to the basic principles governing obviousness determinations, the Supreme Court rejected a rigid approach, and allowed obviousness to be found where a claimed innovation was obvious to try, contrary to Federal Circuit precedents.
  •  made it easier for courts to find patent claims invalid as indefinite, rejecting the Federal Circuit's standard that a claim must be "insolubly ambiguous" in order to warrant an indefiniteness finding. See Nautilus Inc. v. Biosig Instruments, Inc. Instead, a claim is indefinite if it does not show "with reasonable certainty" those skilled in the art about the scope of the claimed invention.
  •  clarified, to some extent at least, the standard for determining whether a patent claims eligible subject matter, calling into question the validity of some business method patents, among others. See Alice Corp. Pty. Ltd. v. CLS Bank Int'l.
  •  required a finding of direct infringement of a method claim by a single party in order to find inducement of infringement. See Limelight Networks, Inc. v. Akamai Technologies, Inc. The Court reasoned that "[A method] patent is not infringed unless all the steps are carried out," and without a direct infringer carrying out each step, Limelight could not be liable for inducing infringement. Thus, where steps in a method claim are distributed across multiple actors, establishing direct infringement and inducement will be problematic in view of Limelight. Defendants will understandably seek to organize their operations to prevent direct infringement by a single entity in this way, which can insulate them from liability for inducing infringement.
  •  loosened the standard for fee-shifting by holding that district courts should grant fees in a case-by-case exercise of their discretion, "considering the totality of the circumstances," and held that district court's decisions on fees are subject to deference on appellate review. See Octane Fitness, LLC v. Icon Health & Fitness, Inc. and Highmark Inc. v. Allcare Health Mgmt. Sys., Inc.

Taken together, these rulings tilt the playing field in defendants' favor in litigation against NPEs. The decisions reduce defendants' overall exposure to injunctive relief, provide greater flexibility in invalidating questionable patents on a variety of grounds, and potentially foster more fee-shifting (although this change could also result in fees being shifted against defendants given courts' ability to consider the totality of the circumstances). It is likely that these rulings have contributed to lowering the overall value of NPEs' patent portfolios, or at least to reducing the price they can extract from defendants in settlement, compared with their value in the absence of these decisions.

In addition to court-imposed changes, the America Invents Act of 2011 (the "AIA"), while lacking provisions altering the state of play in NPE litigation to the extent some might have hoped when the bill was proceeding through Congress, nonetheless created or revised procedures to foster further scrutiny of patents by the U.S. Patent & Trademark Office. Specifically, under post-grant review, inter partes review, covered business method patent review and/or the traditional ex parte review procedures, requesters can ask the USPTO to take a further pass on the patentability of claims in issued patents. The USPTO's acceptance of a request for review can provide a basis for staying district court litigation concerning the claims at issue, although the decision to stay is within the court's discretion, and results vary. As of this writing, there continues to be discussion in Congress about enacting further curbs on patent assertions by NPEs and others, though likelihood of final passage of particular changes are difficult to gauge.

Particularly in view of the litigation tools discussed above, companies can take further steps to combat NPE litigation - steps that are admittedly more feasible for some than others. Simply stated, companies can refuse to settle cases they do not believe are meritorious. The extortionate aspects of NPE litigation can be mitigated when a company invests its money in vindicating its non-infringement and or invalidity defenses on the merits, via summary judgment or trial. NPEs generally are not profitable if they are forced to try their cases, which of course risks further diminishing or even destroying the value of their core patent assets. Further, if companies do settle, they can consider refusing to agree to keep the settlement terms confidential. NPEs thrive on keeping their settlement terms--especially the consideration paid--under wraps, so that the true value of their licenses is difficult to ascertain. Defendants of course have their own reasons to keep settlements confidential, which of course have to be weighed against the value of allowing open disclosure.

Finally, outside the courts and Congress, private enterprise has also stepped in to try to rein in NPEs. For example, patent aggregators such as RPX Corp. and Unified Patents seek to blunt and deter NPE litigation through patent acquisitions and other means. Subscribers obtain patent licenses to the aggregated patents and potentially additional services such as monitoring, market intelligence, claims analysis and USPTO challenges. Other organizations lobby for legislative changes to the patent laws, and contribute to the public debate about the issue and solutions to meet the challenges raised by the emergence of NPEs as players in patent litigation.

In sum, the legal system is not built to deliver quick, radical change, but it does adapt, and is doing so as patent litigation has evolved. Whether or not Congress enacts further changes to the system, some of the most significant changes are already in place. These changes give defendants powerful tools and leverage to combat NPE litigation.

Daniel T. McCloskey is a Special Counsel with Duane Morris, LLP in its Silicon Valley Office, where he litigates intellectual property and complex business disputes. He practices in state and federal courts and before arbitration panels across the country. He can be reached at dtmccloskey@duanemorris.com and 650-847-4176.

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