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Douglas Panzer
April 30, 2014

Supreme Court Sets Stage for Potential Financial Doom of Patent Trolls

Patent litigation has been a hot and growing judicial and legislative topic for several years now.  On April 29, 2014, the Supreme Court delivered two opinions that may prove to define an inflection point leading to a downward trend in that recent growth.

The fervent attention to patent litigation has been due in large part to the growing number of patent infringement suits brought each year by those patent owners known as non-practicing entities (NPE’s) or more derisively as “patent trolls” (depending on your perspective).  These are entities or individuals who own patents and sue to enforce them, but do not actually produce a product or service based on the patent.  Supporters of such litigation point out that while small corporate or individual inventors may not have the resources to commercialize their patents, protecting those patents through litigation is the only way to properly compensate and incentivize inventive “little guys” who would otherwise be trampled by infringing, larger companies.  Critics respond that NPE litigation actually stifles innovation and economic growth by unfairly rewarding patent owners who have taken no financial risk — especially when the patents are of questionable substance.

Tuesday’s Supreme Court decision in Octane Fitness v. Icon Health, No. 12-1184 represents a major lowering of the standard for patent defendants to show the court that the plaintiff should pay the defendant’s attorney’s fees when the defendant wins.  The Patent Act allows for a grant of attorney’s fees in “exceptional cases.”  Prior to this decision, a prevailing defendant had to show that the suit was “objectively baseless” and brought in “subjectively bad faith” to prove exceptional case status.  These factors also had to be proved by “clear and convincing” evidence.  The court’s holding in Octane says that standard is too rigid and that a determination of exceptional case status should be within the court’s reasonable discretion.   Justice Sotomayor wrote:

An “exceptional” case, then, is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated. District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances.

So the test for exceptional case status should now be that the case “stands out from others” based on the totality of the circumstances.  This is a major opening for a potential increase in fee awards.

On the same day, the Court also delivered its opinion in Highmark v. Allcare Health Management System, No. 12-1163.  This opinion states that when a lower court does award attorney’s fees, an appeals court should only overturn that award if it finds that the lower court decision represented an abuse of judicial discretion.  This standard is the standard most deferential to the trial court and means that (as interpreted by the Federal Circuit) appellate courts will only overturn fee awards when they find:

(1) the tribunal’s decision is clearly unreasonable, arbitrary, or fanciful; (2) the decision was based on an erroneous conclusion of law; (3) the tribunal’s findings are clearly erroneous; or (4) the record contains no evidence upon which the tribunal rationally could have based its decision.

(See Abrutyn v. Giovanniello, 15 F.3d 1048,1050-51, 29 U.S.P.Q.2d 1615, 1617 (Fed. Cir. 1994); W. Elec. Co. v. Piezo Tech., Inc., 860 F.2d 428, 430-31, 8 U.S.P.Q.2d 1853, 1855 (Fed. Cir. 1988); Heat & Control, Inc. v. Hester Indus., Inc., 785 F.2d 1017, 1022, 228 U.S.P.Q. 926, 930 (Fed. Cir.1986).)

In combination with the Octane decision, the Highmark case sets the stage for more findings of exceptional case status and a lower likelihood that such findings will be overturned on appeal.  Now we wait to see if this significantly affects the rate of NPE patent litigation.  Will the coffers of the NPE’s be cleaned out by the first loss?  Will investors in the litigation shy away from the increased risk?  Will defendants be emboldened to see cases through trial?  Stay tuned!

December 6, 2013

Overwhelming Support for House Anti-Patent Troll Bill

The US House of Representatives yesterday passed a proposed patent litigation reform bill aimed at making it much more difficult for non-practicing entities or “patent trolls” to bring patent infringement suits.  The bill passed with major bipartisan support in a 325 to 91 vote.  This bill, introduced by Representative Bob Goodlatte, sets new standards for suits by NPE’s, including such highlights:

  • Significant increases in the pleading specificity requirements for patent suits
  • Disclosure of the ultimate beneficiary of any damage award or settlement
  • New double-patenting rules
  • Judicially limited early discovery
  • Early determination of patent validity

The passage of this bill, referred to as The Innovation Act, is sure to be followed quickly by introduction in the Senate of a sister bill sponsored by Representative Patrick Leahy, one of the sponsors of the American Invents Act, which introduced the most sweeping patent legislation reforms in decades last year.

The Innovation Act is sure to continue the dialogue/debate regarding patent infringement suits brought by those not commercializing the patented subject matter.  On one extreme the argument will be raised that shell companies sweeping up dozens or even thousands of patents solely for the purpose of litigating them for profit is stifling of innovation, in contravention to the Constitution and the Patent Act.  On the other extreme we’ll find the argument that in this age of costly, complex and time-intensive litigation, such enforcement represents the only real means for individual or small company inventors to protect their inventions and in turn spur further innovation.  In true Goldilocks fashion, the answer likely lies somewhere in between.  Whether the Innovation Act becomes law and whether it finds the happy medium is one step closer to determination.

New York Times report: http://www.nytimes.com/2013/12/06/business/house-bill-raises-bar-for-suits-over-patents.html?emc=edit_tnt_20131206&tntemail0=y&_r=0

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