Over the past few years, we have been reporting on the full frontal assault against patent assertion entities (PAEs), pejoratively referred to as patent trolls in blog posts in May 2014, July 2014 and December 2014. Actions to curb these perceived pariahs of the US economy have come from nearly every angle of attack including the White House, Congress, the Federal Trade Commission and all the way down to various state houses. Although much has happened on many of the fronts we have previously reported, much has stayed the same. We thought now would be a good time to reflect over the last year’s activities to see if the strategy of patent litigation as a business is truly nearing its demise.
To catch those of you up who are unfamiliar with the term, “patent troll” generally refers to an individual or entity that focuses its efforts solely on enforcing patent rights against purported infringers without itself intending to manufacture the patented product or supply the patented service. Patent trolls are often accused of a sort of “21st century shakedown,” often holding vaguely worded patents and, rather than using the protected technology themselves, demanding “licensing fee” payments from alleged infringers in hopes that their targets will settle rather than defend themselves in court. Patent trolls are most often thought of as asserting computer implemented inventions claimed in so-called business method patents. The bread and butter tactics of a troll usually begin with sending demand letters to accused infringers, inviting a quick settlement before prolonged litigation likely to cost the accused infringer several multiples of what the troll will take to resolve the issue.
To be sure, patent trolling is big business in the U.S. A number of studies conducted on the subject have found that patent trolling cost the U.S. economy close to $30 billion each year, with many small businesses paying significant sums to defend themselves or settle claims raised by patent trolls.
Federal Legislation to Reform the Patent Act
Since our first post on the subject back in May 2014, there have been several attempts at reforming the US Patent Act in order, at least in part, to rope in patent trolls. In July 2015, the Innovations Act (H.R. 9) was reintroduced in Congress and was designed principally to put a legislative lid on patent trolls. A key, and controversial, element of the bill is a revision to the Patent Act to provide a presumption that the winner of any infringement suit will have its attorney’s fees paid by the loser.
Despite its early wide-spread bipartisan support, the Innovations Act has lost its momentum and appears to be dead – at least for the time being. As it turns out, there are several critics to the bill’s concepts, including universities and other research and development-based businesses that do not generally practice the inventions they create. Undaunted, Representative Bob Goodlatte (R-Va) vows to keep up the fight.
State Actions Directed to Curbing Unscrupulous Demand Letters
In our last post, 9 states had enacted or were considering some sort of legislation directed to providing civil rights of action against bad-faith assertions of infringement from patent trolls. At last count, the number has grown to 27 states with anti-demand letter statutes on the books and 8 more in the works. These statues are extremely similar in character, often springing from copy-cat legislation borrowed from another state. In general, these statutes allow the state’s courts to scrutinize whether a demand letter claiming patent infringement is raised in bad faith. In doing so, many provide both objective and subjective criteria for that review. Some states limit enforcement to the state’s attorney general; others allow for civil rights of action to those who receive bad faith demand letters.
New Jersey appears on the brink of joining the ranks, with their own version passing through the Assembly Commerce and Economic Development Committee in mid-February. Supporters of the bill cited statistics showing that 2/3rds of the patent infringement suits filed last year were originated by NPEs.
In January of this year, Virginia’s attorney general announced plans to establish a “Patent Troll Unit” to help protect the state’s businesses from bad faith claims of patent infringement. Virginia’s AG has appointed a registered patent attorney to head the Unit to investigate potential violations and determine if the conduct runs afoul of Virginia’s law. The AG sent letters to the state’s various chambers of commerce to get the word out to Virginia businesses to report any suspected violations directly to the AG’s Patent Troll Unit.
Vermont’s AG is continuing its drawn out battle with the well-known troll MPHJ Technology, asserting that its actions of sending licensing demand letters to Vermont residences violates Vermont’s consumer protection statutes. The current skirmish line is directed to where the case must be heard: Vermont state court or federal court. Recently, the Federal Circuit sided with Vermont, affirming that its lawsuit against MPHJ Technology should proceed in state court.
Supreme Court Actions Impacting the Business of Patent Trolls
As noted in our first post on the subject in early 2014 , the Supreme Court, in its Octane Fitness, LLC v. Icon Health & Fitness, Inc. decision, substantially modified the standard for awarding attorney’s fees under the Patent Act, leaving the determination largely to trial courts to decide whether the case “stands out from others.” Under Octane Fitness, circumstances suggesting that a patent infringement suit was filed in order to obtain a nuisance settlement are to be factored into a court’s assessment of whether a party’s litigation tactics merit a finding that a case is exceptional. As a result, the Supreme Court by and large implemented the fee shifting aspect urged by the Innovations Act (and may perhaps be a reason the bill ultimately lost support in Congress).
At the time of our earlier posts, the real impact of the Court’s Octane Fitness decision on patent trolls was uncertain. In the nearly two years since Octane Fitness, attorney’s fees are awarded nearly 15% more when they are requested, and that is an important statistic considering that fee requests are now requested much more often than before the decision. Recently, Judge Gilstrap of the Eastern District of Texas awarded several defendants their attorneys’ fees against a notorious patent troll, eDekka LLC. In his widely publicized opinion, Judge Gilstrap found that eDekka had litigated the cases in an unreasonable manner by filing similar lawsuits against over 200 defendants using a strategy that avoided testing its patent infringement claims on the merits by aiming for early nuisance settlements – in essence calling it a troll with a weak patent.
Another set of cases impacting NPEs is the trio of Alice, Mayo and Bilski. These cases address whether the subject matter of a patented invention is in fact patentable. Of the three, Alice is most often cited in relation to judging the patentability of computer-implemented or business method patents. The Alice decision is frequently cited as putting into question the validity of literally tens of thousands of patents.
Where is The FTC’s Report on PAEs?
As reported in our first post on this subject back in early 2014 , the FTC initiated a study in late 2013 to determine how big a problem trolls are to the American economy. This past Thursday, Edith Ramirez, Chairwoman of the FTC, appeared before the Senate subcommittee on Antitrust, Competition and Consumer Rights and announced that the FTC’s long awaited report on PAEs should “issue this spring.” In prior comments, Ms Ramirez has stated that patent trolls “are good at monetizing patents” but likened the assertions of “low quality patents” to a “de facto tax on productive economic activity, with little or no benefits for consumers.” Some question the FTC’s methodologies in conducting its study and many do not expect much from the report once it does finally issue. The report could, however, revive Congressional legislative efforts if it provides findings that lawmakers can use to finally gain consensus on patent reforms.
Despite the efforts of Congress, the States, and the Obama administration, 2015 was noted as the second busiest year on record for patent infringement lawsuits with the clear majority of those suits being brought by so-called trolls. As you may expect, statistics may not be a fair representation of whether the various efforts to reel in patent abuses are being effective. For example, the increase in 2015 filings has been partially blamed on heightened pleading standards which took effect on December 1, 2015 requiring patent complaints to include more detailed infringement allegations. Similarly, some believe that the reintroduction of the Innovations Act caused patent trolls to get suits on file before the legislation could pass through Congress. Filings do appear to have decreased in number since late last year.
Regardless, the Eastern District of Texas remains the undisputed champion of patent suit filings, with the number of suits filed in the District up 77 % over 2014. In fact, the Eastern District of Texas now hosts approximately 40% of all patent suits on file in the US, perhaps in part because of its perceived lax treatment of the Supreme Court’s Alice decision, particularly with respect to business method patents. However, on March 11, 2016, the Federal Circuit is scheduled to hear arguments in a case that could change to how courts determine the proper venue for patent suits, which may finally upset Eastern Texas’s status as the go-to-district for patent suits.
Only time can tell whether the various efforts will narrow the noose on patent trolling as a business, and you can rest assured that we will keep you up to date on this continuing hot-button topic.