June 18, 2015

Fighting Patent Trolls: New Weapons Emerge

Robert W. Payne

Small business or large business: sooner or later your client may be confronted by a demand from a patent “troll,” saying that your client’s company is infringing its patents, then offering to provide a license, for a fee, to continue doing what the company has been doing. Especially over the past year, new weapons have developed to tackle this challenge. 

A patent “troll” is hard to define. Some say a patent troll is any company that purchased a patent only for the purpose of enforcing it against others to generate license fees, without intent to sell products covered by the patent. However, what really makes it a “troll” is overreach: attacking sellers whose goods really aren’t covered by the claims of the patent and asserting patents having questionable validity. 

But assuming that patent infringement is iffy, why is this threat credible? In a typical dispute between two competitors, the accused seller would think, “This will cost them just as much to litigate as it will me. Why would they spend much to press a ‘hopeless’ case?” 

Patent trolls bypass this dynamic. They use law firms working on a contingent fee, who make their money on the sheer volume of early settlements. It is commonplace to see such companies file 15 or more lawsuits at a time in the same court, each involving the same patent. There is little deterrent for a troll to add one more defendant when the troll is already filing 15 actions in court the same day for the same patents. The work will be the same, whether dealing with 15 or 16 defendants. 

How Pervasive are Patent Trolls?

A tidal wave of lawsuits has been filed by and against troll companies in recent years. A July 2014 PricewaterhouseCoopers study concluded that nonpracticing entities accounted for 67 percent of all patent lawsuits filed – up from 28 percent five years earlier. 

On the other hand, another type of troll rarely sues. Some rely on a letter campaign, going after smaller end users to extort money by mere threats alone. One Texas-based venture sent out over 16,000 demand letters to companies that scan documents directly to e-mail. Highly questionable in its assertion to begin with, the company did almost no investigation before making such demands, the claims did not fully support such a broad reading, and no lawsuits followed. Frightened companies often figure it is cheaper to pay the “troll toll” than to spend money fighting or investigating the issue.  

How Can Businesses Fight This?

In just the past year or two, effective weapons have developed. They group into five areas:

  • New patent proceedings before the Patent Trial and Appeals Board (PTAB). New administrative trial proceedings became available to challenge “weak” patents. These challenges are generally cheaper, quicker, and more broadly based (i.e., more favorable to accused infringers) than similar challenges available in court. As a result, many suits by trolls get stayed while the administrative challenge is brought by the alleged infringer to see if the patents claims are valid. This drives the parties to discuss settlement shortly before or after the PTAB decides the matter.
  • Stricter subject matter requirements. In the 2014 decision of Alice Corp. v. CLS Bank, the Supreme Court held that a computer-implemented electronic service was an overly abstract “idea” rather than a patentable “invention.” Patent practitioners are debating the breadth of Alice, but defense litigators are challenging software and other patents more than ever. The challenge is lack of patentable subject matter due to abstractness of “simply” applying a computer, without further indication of inventiveness. According to one observer of such attacks, of the first 15 court decisions following the teachings in Alice, 13 resulted in invalidation of the asserted patent.
  • Procedural attack at the first instance: Motions to dismiss. Until Alice came along, it was an article of faith that patents asserted by plaintiffs could not be challenged at the outset of litigation. It had to await claims construction and summary judgment motions, many months into the case. Even with the administrative attacks now permissible through the PTAB, initial adjudication of patent’s viability is nearly a year away. However, recent cases have ruled that patents may now be challenged at the pleading stage by motions to dismiss, if they lack on their face the sufficient inventiveness dictated by Alice. (See, e.g., Cogent Med. Inc. v. Elsevier Inc., N.D. Cal. 2014.)
  • New attorneys’ fees claims against trolls. In another recent Supreme Court set of decisions in 2014, the standard for claiming recovery of the defendant’s attorneys’ fees in patent infringement claims was loosened. (Octane Fitness v. Icon Health & Fitness; Highmark Inc. v. Allcare.) Defendants are threatening patent trolls with significant attorneys’ fees claims if they should get sued.
  • Declaratory judgment actions. One tactic gaining ground in recent years is for the targeted company to file a declaratory judgment action, preempting the patent troll’s anticipated strike. This is done, of course, to choose a more favorable jurisdiction – away from the notorious patent troll “haven” of the Federal District Court for the Eastern District of Texas. However, taking such action jeopardizes implementation of PTAB review. 

Assuming considerable doubt exists about the patents, companies face some hard choices when accused of infringement. Ignoring demands to see what happens, or contacting the demanding party without benefit of experienced counsel is generally unwise. Given the prospect of making damaging admissions or concessions, overlooking key points, and showing a weak hand, few patent litigators would recommend either course. 

A better strategy is to have a patent litigation attorney investigate or at least write a letter challenging the assertion by the troll. The attorney can demand specifics (which are usually lacking) or can point out noninfringement and prior art, if that workup has been done. The demanding party’s track record in court can be checked – is it filing suits on this patent or not? How is it faring? 

Big Firm or Smaller Firm to Defend?

If sued, should the company retain a large law firm or a smaller, less expensive firm to defend it? Patent trolls affect that equation as well. Being sued nearly simultaneously by the same party on the same patents, defendants generally enter into joint defense agreements to coordinate tactics and responses. While the defendant with the most at stake may need to hire a large, heavily-staffed law firm to take the lead, others need not. The remaining defendants may fare equally well hiring a smaller, experienced law firm with lean staffing and lower billing rates. Since another firm or set of firms is assuming the laboring oar, less expensive law firms can monitor, coordinate, appear at hearings, and assist in resolving the dispute equally effectively. You don’t need to pay top dollar to get the best results; you may fare better not doing so. 

In any case, pushing back in one form or another is a prudent first step in managing patent troll demands.

Robert W. Payne

Robert W. Payne practices patent, trademark, trade secret, and other business litigation at Payne IP Law in San Jose, California.