Some Observations on the Patent Troll Litigation Problem

Intellectual Property& Technology Law Journal Edited by the Technology and Proprietary Rights Group of Weil, Gotshal & Manges LLP VOLUME 26 • NUMBER 8 • AUGUST 2014 Some Observations on the Patent Troll Litigation Problem By Christopher Hu atent infringement cases brought by so-called problem can be addressed. In brief, the problems P patent trolls have received considerable atten- stem from the way nonpracticing entities (NPEs) tion in recent years, enough so that both Congress use or misuse the judicial system, not the US Patent and the White House have chimed in on the sub- Office. Accordingly, the solution primarily involves ject.1 The number of cases filed by patent trolls, the applying existing judicial procedures more vigorously cost of defending or settling these cases, the size with minimal changes to existing substantive law. of some judgments, the perceived frivolousness of some cases, and the use or abuse of litigation as a The Patent Troll “Problem” tool to “extort” settlements have all drawn atten- tion to this issue. Adding to the controversy is the Some Statistics on Patent Troll Litigation sentiment among some that it is inherently unfair NPEs, also known as patent trolls or patent asser- or economically wrong for an entity that does not tion entities (PAEs), are a fact of business life in the practice a patent to profit by asserting it. United States. Definitions of a patent troll vary but Although there is some statistical data concerning the common element of every definition is that a the assertion of patents by trolls, and a considerable patent troll is an entity that does not itself practice a amount of anecdotal evidence, there appear to be patent but instead asserts the patent against entities no rigorous studies on the economic effect of trolls. that are actually engaged in a business of provid- Because the real effect is unknown, drastic remedies ing products or services. However, many entities are neither necessary nor appropriate at this time. operate in a gray area, which makes the problem This article contains some observations on the pat- of defining an NPE even more difficult. These ent troll problem and a few suggestions on how the companies mine their patent portfolios to monetize them and, in the process exhibit some troll-like behavior, including assertion of patents that the Christopher Hu is of counsel in Blank Rome’s New York company is not itself practicing. Many well-known office. He represents clients in patent and trade secret cases and highly respected companies have been accused and disputes involving a wide range of technologies, including of troll-like behavior, including such giants as Apple e-commerce, computers, telecommunications devices, medical Inc. and Microsoft Corp.2 Regardless of how they products, chemicals, pharmaceuticals, consumer products, and mechanical devices. He can be reached at [email protected]. are defined, NPEs exist because the ownership 3 The author gratefully acknowledges Ameya V. Paradkar for his and assertion of patents is a way to make money. contributions to this article. For better or worse, that is free enterprise.4 Until rigorous studies show what economic effect NPEs that clearly define the economic impact of NPE- have, judgment should be reserved as to the effects initiated litigation.16 Attempts to analyze the NPE of their existence. issue are inherently limited by the data set chosen NPEs range in size from extremely small entities and the ad hoc criteria chosen by the author in with a single patent to multimillion dollar ventures defining NPEs within that data. Thus, the numer- with extensive patent portfolios and funded by ous proposed solutions that have been offered are sophisticated investors.5 NPEs acquire their pat- directed to a problem whose real scope and effect ent portfolios through various avenues, including are not fully understood. Radical solutions to a direct purchases, patent auctions, and bankruptcy problem of undetermined scope seem inappropri- proceedings.6 ate under these circumstances. Some NPEs are litigation averse; others have no A flaw in some analyses of the troll problem is the reluctance in bringing, maintaining, and ultimately assumption that patent infringement cases brought trying lawsuits. Some NPEs routinely file dozens by an NPE are presumptively baseless and that of simultaneous cases, sometimes doing this in the patents asserted have little if any value. Patents multiple waves. NPEs are well-known for forum asserted by NPEs have gone through the same shopping, as evidenced by the disproportionate examination process in the US Patent Office as number of patent cases filed in the Eastern District other patents. The suggestion that patents asserted of Texas.7 by trolls are somehow inferior or frivolous is not fair In 2012, by some estimates, almost 60 percent of to the US Patent Office, which applies an identical the almost 5,200 patent lawsuits filed were brought statutory standard for patentability, as interpreted by NPEs.8 In 2012, 4,282 companies were sued by the courts, to all patent applicants, regardless by trolls.9 Of these, 55 percent were companies of who the owner or inventor is. Moreover, many with $10,000,000 or less in annual revenues.10 patents asserted by NPEs originally were obtained The median cost of defending a troll case ranges by mainstream companies as part of their regular from $1.25 million for cases with $10 million or research and development activities.17 If there is an less at stake, to $2.4 million for cases with $10 to issue of the quality of issued patents, it has little if $25 million at stake, to $4 million for cases with anything to do with who the applicant was. $25,000,000 or more at stake.11 Consequently, trying to come up with a one- Only a small percentage of cases go to trial. size-fits-all definition of an NPE is fraught with Recent data shows that 97 percent of patent problems. It follows, then, that solutions relying on infringement cases settle before trial and that this such a definition of an NPE may create a cascade number is about the same for troll cases.12 However, of unanticipated repercussions. there is also data that indicates that the median damages award in cases brought by NPEs is sig- What Is the Real Problem? nificantly greater than in other patent cases.13 This Absent economic studies to the contrary, the statistic is surprising and counter-intuitive because problem is not the existence of investors who seek juries would be expected to be more sympathetic to profit from intellectual property acquired from to plaintiffs who are actual operating companies others. The problem is that, with a frequency that than to PAEs.14 varies depending on one’s viewpoint, NPEs appear Statistics such as these lead commentators to to bring frivolous or weak cases with significantly conclude that NPEs are a parasitic drain on the greater frequency than regular plaintiffs. Accordingly, economy, a threat to start-ups and going concerns the aspect of patent troll litigation many find most alike and generally an example of free market capi- offensive is the apparent impunity with which trolls talism run amok that threatens America’s techno- bring frivolous or weak cases in which patents are logical and economic preeminence.15 asserted with seemingly little or no regard for the actual “invention” described and claimed in the pat- Some Considerations in Fashioning ent and/or with little regard for whether the patent a Remedy is valid. Notwithstanding all that has been written on The most egregious troll cases seem to use some the subject, there appear to be no rigorous studies or all of the same plays from a common game plan. 2 Intellectual Property & Technology Law Journal Volume 26 • Number 8 • August 2014 The complaint is filed in a plaintiff-friendly forum The proliferation of cases that should not have which often has little or no connection to the been brought, should not have been maintained, center of gravity of the case, that is, the location and should have been terminated early is the result of relevant evidence and witnesses. Before the of a combination of factors: America Invents Act (AIA), multiple defendants were often named in the same lawsuit.18 Post-AIA, 1. The law and rules governing jurisdiction, venue, multiple cases with a single defendant often are and convenient forum are too liberal and permit filed at the same time.19 The complaint is typically forum shopping. These statutes encourage pat- a bare-bones pleading alleging infringement by the ent trolls to sue by giving them access to patent defendant in general terms and often not specifi- friendly districts that often have little connection cally identifying any accused product or method. to the real center of gravity of the case. The specific patent claims allegedly infringed are never identified. Frequently, inconsistent causes 2. The pleading standards already required by the of action are pleaded without pleading them in Federal Rules and case law are not enforced the alternative. Necessary elements of actions for strictly enough in patent cases. indirect infringement, that is inducement of, and contributory infringement, are sometimes not 3. Rule 11 sanctions rarely are assessed against plain- alleged at all. Willful infringement and exceptional tiffs and their counsel who do not perform an case are alleged even though no prior notice of adequate pre-suit investigation and who maintain the patent in suit was given. Broad discovery a case despite clear indications that the case lacks requests are then served to maximize the burden merit. Other sanctions, such as those under 28 on the accused infringer with little or no willing- U.S.C. § 1927, are even rarer.

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