United States: How To Deal With 'Patent Trolls' In The Digital Age

Last Updated: October 1 2013
Article by Steven Lieberman

Nonpracticing entities have targeted virtually every media organization in the United States with a significant digital presence for patent infringement lawsuits. A majority of these lawsuits have focused on features or functions of the entities' websites or mobile apps. This article describes the legal issues raised by these lawsuits and provides practical options for successfully (and cost-effectively) defending against them.

Who Are the Nonpracticing Entities?

Some NPEs are funded by private equity investors and others by real operating companies that have decided to "monetize" their portfolios. Others are publicly traded companies that exclusively acquire and license patents. Often these entities have relationships with multiple law firms. Consequently, the number of NPE cases has exploded. NPEs sued companies for patent infringement 1,065 times in 2006 and 5,307 in 2011.1 These patent lawsuits distract media entities that, by and large, had until recently never expected to be embroiled in expensive patent litigation.

How It Begins

An NPE encounter begins in one of two ways:

  • a letter calling your attention to one or more patents and offering you a license; or
  • an infringement complaint, typically followed by an invitation to participate in licensing discussions.

Until recently, NPEs most commonly approached with license offer letters. A well-crafted offer letter would discuss the patents and the inventors' credentials and list the companies that had already agreed to license the patent. Any prior litigation involving the patent would be described. The letter would then typically invite the target to explore the possibility of licensing.

Forum selection is often a critical part of an NPE's strategy. Because a license offer letter typically provides subject matter jurisdiction for a declaratory judgment lawsuit, possibly depriving the NPE of its chosen venue, most NPEs now forego the offer letter and simply file suit.

If you receive a license offer letter, retain counsel quickly to minimize your chance of liability by taking the following steps.

First, send a document retention memorandum to persons most likely to have potentially relevant documents. Crafting the hold memorandum is not easy because patents subject to NPE licensing overtures are typically vague, and document preservation notices tracking the language in the offer letter could call for preserving millions of pages of documents. Take care defining both the scope of the retained material and the identity of the individuals to whom notice should be sent. Just sending the document retention notice is insufficient. Steps should often be taken to ascertain that auto-delete features are disabled, etc.

Second, ascertain the merits of the infringement claim. A determination that the claim has no merit will affect litigation strategy and will play a role in how, if at all, you respond to the license offer letter.

Third, ascertain potential indemnitors — e.g., third parties who created features on your website or mobile app and, if so, how and when to notify them of the potential claim.

Fourth, decide whether to respond to the letter. Some NPEs send thousands of license offer letters. The best strategy may be to not to respond, since responding often seems to increase the likelihood of being sued.

Fifth, after ascertaining that you have a strong defense, you must critically decide whether to file a declaratory judgment action against the NPE in your chosen forum. Filing a declaratory judgment brings two significant advantages. First, you get to choose the forum. If the NPE's assertion is particularly frivolous, you may wish to sue in a jurisdiction that more frequently grants attorneys' fees. Second, Federal Circuit Judge Kimberly Moore, before her appointment to the bench, found a significant benefit in being a declaratory judgment plaintiff rather than a defendant in a patent infringement action.2

I often have recommended to clients that they file declaratory judgment actions after receiving a license offer letter. We often obtained for our clients a covenant not to sue from the patent holder in return for our agreement to dismiss the declaratory judgment action. If the litigation proceeded, the benefit of having chosen an advantageous jurisdiction frequently resulted in a victory that we might not otherwise have obtained.

Before filing for declaratory judgment you should do at least three things:

1. Determine that you have strong case of either non-infringement or invalidity (or both) on the merits;

2. Determine that there is personal jurisdiction over the NPE; and

3. Ascertain that the license offer letter gives rise to subject matter jurisdiction allowing a declaratory judgment action.3 Most license offer letters are sufficient to give rise to subject matter jurisdiction.

Finally, before filing a declaratory judgment complaint, you must decide whether by doing so you are trading the certainty of a patent litigation against a much lower likelihood that the NPE will never pursue your client with a lawsuit.

After receiving a license offer letter, consider whether it is necessary or useful to obtain an opinion of counsel. Such an opinion can be useful in defending against a claim of willful infringement.4 Deciding whether to get an expensive full opinion, a less formal opinion, or no opinion is a fact-intensive analysis with no single right answer.

If you have been sued for patent infringement, you need to complete each of the steps above, except exploring the option of filing a declaratory judgment lawsuit. Additional decisions must also be made quickly.

First, explore the possibility of a transfer motion. One of the most popular venues for NPEs is the Eastern District of Texas. This district is typically viewed as a difficult one for patent defendants, principally because it is challenging to get a case-dispositive motion heard early in the litigation. A number of judges in that district are less inclined that those in other jurisdictions to grant summary judgment.

For years, Eastern District of Texas courts routinely denied transfer motions. However, the Federal Circuit has granted a series of mandamus petitions directed to the district court in the Eastern District of Texas ordering transfer of patent cases to other jurisdictions.5 Such a motion may be appropriate even when the plaintiff purports to have its principal place of business in the Eastern District of Texas, since the principal place of business is often no more than a post office box or an empty office.

The new venue of choice for NPEs appears to be the District of Delaware, principally because of the perception that judges there infrequently entertain summary judgment motions prior to the close of discovery. However, several judges in that district have entertained and granted early summary judgment motions, where appropriate.6

Second, NPEs often carelessly use language in their complaints. Allegations of indirect infringement and willful infringement are many times made without appropriate legal basis. Motions to dismiss such complaints, while rarely dispositive of the entire lawsuit, narrow the issues and should be filed where appropriate. Third, it is critical to evaluate the merits carefully.

Evaluating the Merits

Explore Noninfringement Defenses

If an NPE identifies an exemplary claim in its complaint that it contends is infringed, focus on that claim. Even when faced with a seemingly broad patent claim, there are often non-infringement defenses. Explore this possibility early.

Develop an Invalidity Defense "

Traditional" prior art searches by prior art search firms are largely useless for invalidity defenses in the business method/Internet commerce areas. Most experienced patent litigation firms have developed a better understanding of where the best prior art is.

Consider Post-Grant Review

Post-grant review options and the old ex parte review procedure that is sometimes still available, have both upsides and downsides, a discussion of which is beyond the scope of this article.7 The upsides include having a more streamlined and less expensive process for patent invalidation, while (hopefully) staying the litigation. The downsides including some estoppel provisions in the event that you lose your post-grant review challenge.

Strategies for Defending NPE Litigations

You do not necessarily have to settle if you have been sued. You can win the case and decrease the defense costs.

Work with counsel to maximize your chances of obtaining attorneys' fees. Consider a Rule 11 motion regarding the lack of adequate prefiling investigation by an NPE — particularly if the NPE sued many defendants and did not personalize its complaint.8 In a patent suit, "[a] reasonable pre-suit investigation ... requires counsel to perform an objective evaluation of the claim terms when reading those terms on the accused device."9

The Federal Circuit has held that before filing a complaint for patent infringement the plaintiff should attempt to obtain the accused device or a technical description of it.10 If your website or mobile app is accused, the NPE must have reviewed that site or app with great care and compared it on an element-by-element basis to at least one claim.

Consider diligently preparing for an application that the case be declared exceptional under Section 285 of the patent statute, which can result in a shift of attorneys' fees. Also consider an application under 28 U.S.C. § 1927, relating to vexatiously multiplying litigation.

While district courts reluctantly shift fees, a fee shifting motion sometimes seriously threatens an NPE. Chief Judge Randall Rader of the United States Court of Appeals for the Federal Circuit has written:

[O]ne remaining option to control trolls ... reverse the fees and costs! When the case is over and the court can identify a troll ... I strongly advocate full-scale reversal of attorney fees and costs! ... While I understand that the case must qualify as exceptional, I believe that adequate documentation of "trolls" would qualify.11

Chief Judge Rader echoed this sentiment in a recent op-ed piece in the New York Times.12 President Obama recently issued five executive orders and seven recommendations to lawmakers targeting NPEs, among them a proposal that would facilitate judges' awarding attorney's fees to defendants prevailing in frivolous lawsuits.13 The following strategies can also be useful and effective.

1. Consider joint defense groups. NPEs often count on the cost of defending a lawsuit to induce a settlement. Multiple defendants paying a single firm substantially lowers the "cost of defense." When a defendant pays only one-sixth of the bill, litigating the case vigorously becomes a much more attractive option.

2. Consider re-examination and post-grant review options. Sometimes they are the best choice.

3. Consider early case-dispositive summary judgment motions. In certain cases, a Section 101 motion can dispose of an infringement claim at the beginning of the case, before starting discovery.

Just because you are threatened by an NPE, you need not necessarily settle. Settlement may be the right approach if the offer is low, you have real liability, or the litigation cost is too high. But there are many ways to handle the litigation defense such that settlement is not your only option.

Footnotes

1 All About NPEs: Litigations Over Time, PATENT FREEDOM, https://www.patentfreedom.com/about-npes/litigations/ .

2 See Kimberly A. Moore, Judges, Juries, and Patent Cases: An Empirical Peek Inside the Black Box, 99 MICH. L. REV. 365 (2000).

3 See, e.g., Arkema Inc. v. Honeywell Int'l, Inc. (Fed. Cir. Feb. 5, 2013).

4 See In re Seagate Tech. LLC, 497 F.3d 1360 (Fed. Cir. 2007).

5 See, e.g., In re Verizon Bus. Network Servs., 635 F.3d 559, 562 (Fed. Cir. 2011); In re Microsoft Corp., 630 F.3d 1361, 1365 (Fed. Cir. 2011).

6 See, e.g., Cyberfone Systems LLC v. CNN Interactive Group Inc., 885 F.Supp. 2d 710 (D. Del. 2012). (Robinson, J).

7 See N. Linck, et al., Post-Grant Patent Practice (Bloomberg BNA 2012).

8 See Eon-Net LP v. Flagstar Bancorp, 653 F.3d 1314 (Fed. Cir. 2011).

9 Eon-Net LP, 653 F.3d at 1329.

10 See Judin v. United States, 110 F.3d 780, 782 (Fed. Cir. 1997); Q-Pharma, Inc. v. Andrew Jergens Co., 360 F.3d 1295, 1300-01 (Fed. Cir. 2004).

11 Chief Judge Randall R. Rader, The State of Patent Litigation, Address Before the E.D. Texas Judicial Conference (Sept. 27, 2011), at 18-19.

12 Chief Judge Randall R. Rader, Op-Ed, Make Patent Trolls Pay in Court, N.Y. Times, June 4, 2013, at A25.

13 Editorial Board, Fighting Patent Trolls, N.Y. Times, June 5, 2013, at A22.

Previously published on Law360

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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