Recent Patent Litigation Trends Affecting Non-Practicing Entities

April 26, 2012

By: Michael N. Rader


Executive Counsel

Several recent trends in patent litigation have made lawsuits brought by non-practicing entities (NPEs) somewhat easier and cheaper to defend.  Historically, many NPE cases have settled based not on their merits but as a function of defense costs.  While legal costs will continue to be a factor in settlement of NPE cases, the developments surveyed below may shift the balance somewhat toward merits-based case valuations. 

Implications of E-Discovery Reforms for NPEs

Discovery (in particular e-discovery) is one of the greatest pressure points that NPEs have over their targets.  NPEs typically have only a modest volume of documents to produce in connection with the patents they assert, while their targets must sift through, process, and produce huge volumes of materials.  Leveling the e-discovery playing field can have a profound effect on NPE settlement dynamics.

Courts have increasingly sought to streamline the e-discovery process to control patent litigation expenses.  For example, Federal Circuit Chief Judge Randall Rader and the Advisory Council of the Federal Circuit have responded by developing a Model Order imposing significant limits on email production – e.g., limiting production requests to five custodians and five search terms per custodian.

In several cases, the Eastern District of Texas has adopted a version of Judge Rader’s Model Order.  The District of Delaware recently took similar steps when implementing its own default e-discovery rules.

If routinely implemented in patent cases, such standards are likely to limit the ability of NPEs to use the threat of discovery as a powerful settlement tactic.

Limits on the Number of Claims that Patentees Can Assert

Courts have also taken steps to prevent patent cases from proceeding to summary judgment or trial with unreasonable numbers of asserted claims still pending.

Many judges have adopted case-specific procedures under which patent owners must settle on a limited number of “representative” claims to be tried.  Even Chief Judge Rader himself has imposed such requirements when sitting by designation on district courts.

The Federal Circuit’s February 2011 In re Katz Interactive Call Processing Patent Litigation decision implicitly endorsed such claim selection procedures.  The Katz litigation arose out of efforts by an NPE to leverage a portfolio of interactive voice response patents – including almost 2,000 claims – against a group of 165 defendants.  The presiding judge limited the plaintiff to 100 claims with the option to add more if it could demonstrate that they raised unique issues.  The plaintiff appealed these limits, but the Federal Circuit endorsed the judge’s procedure, opening the door for more district courts to pare down NPE cases.

Innovative Procedures to Deter Strike Suits

Surprising though it may seem, the Eastern District of Texas has emerged as a leader in innovative approaches designed to prevent NPEs from using traditional litigation requirements and schedules to coerce settlements based on legal expense rather than the merits.  Judge Leonard Davis, in particular, has emerged as a leader in evaluating such ideas, including:

  • Holding “mini-Markman” and summary judgment hearings early in a case on key claim terms that may be case-dispositive.
  • Requiring expedited discovery of earlier settlements and/or existing licenses.
  • Encouraging early summary judgment motions on damages theories.
  • Staged trials, starting with validity issues.

Judge Davis has commented that NPE cases can present accused infringers “with a Hobson’s choice: spend more than the settlement range on discovery, or settle for what amounts to cost of defense, regardless of whether a Defendant believes it has a legitimate defense.”   More widespread adoption of procedures like these would have a profound effect on the dynamics of NPE patent litigation across the country.

Misjoinder: Limits on Pursuing Different Accused Infringers in the Same Litigation      

Traditionally, many NPEs have named dozens of defendants in the same case to minimize filing fees and subsequent litigation costs.  The American Invents Act (“AIA”) effectively ended this practice by permitting joinder only when all defendants are making, using, selling, offering to sell, or importing “the same accused product or process.”

The need to pay dozens (or even hundreds) of $350 filing fees instead of just one will inevitably impact the economics of NPE litigation, at least at the margins.  While some NPEs may be tempted to send letters rather than filing suit, doing so would risk inviting declaratory judgment actions.  At some point, certain NPEs will presumably elect to bypass claims against some potential targets altogether.  Gone are the days when NPEs could sue 50 defendants almost as easily as one alone.

It is unclear whether the restrictions on joinder will have more significant effects on NPE litigation.  One critical question is whether courts will be receptive to the routine use of Rule 42 to consolidate cases involving the same patent(s) for pre-trial purposes.  Nothing in the AIA prohibits such an approach.

Transfer Motions

Following a trend that started in 2008 with the In re TS Tech case, the Federal Circuit has continued to scrutinize district court decisions denying defendants’ motions to transfer cases out of districts that have only tenuous connections to the dispute in question.  Most of these cases involve NPEs that brought suit in the Eastern District of Texas, although the December 2011 In re Link_A_Media decision ordered transfer out of Delaware.

Responding to earlier transfer decisions, many NPEs have taken steps to “anchor” themselves in Eastern Texas or other preferred districts.  For example, they sometimes incorporate and/or set up purported offices (including transferring patent-related documents) in the desired forums prior to filing suit.  They may also include one or two Texas-based defendants along with others based elsewhere.  NPEs can also file multiple rounds of litigation, beginning with defendants rooted in the forum and later moving on to those with little or no connection.  When later defendants complain, NPEs stress the judicial economy of handling all of the litigation in the same district.

The Federal Circuit has increasingly rebuffed these tactics, however, even ordering cases transferred when the Texas judges had previous experience with the asserted patents.  In the future, more NPE cases will be defended in the accused infringer’s home court – which is cheaper (and more advantageous) to defendants and more costly to NPEs.

Are NPEs Vulnerable to Attorneys Fee Awards?      

Patent law requires unsuccessful patent owners to pay the attorneys fees of prevailing defendants in “exceptional cases.”  Two recent Federal Circuit decisions have affirmed such awards, while two others have reversed them.  Collectively speaking, these cases suggest that the threat of a fee award is something NPEs need to take seriously, but not something on which defendants should ever count.

In Eon-Net v. Flagstar Bancorp, the Federal Circuit affirmed the district court’s decision to award more than $600,000 in attorneys fees and sanctions against an NPE that had filed suit against a defendant based on a frivolous infringement theory.  The suit was one out of more than a hundred that the plaintiff and related entities had filed.  The patentee had a history of making formulaic offers proposing to drop cases in return for lump sum payments of between $25,000 and $75,000.  The Federal Circuit took this pattern as indicative of extortion.

In another recent case, Marctec, LLC v. Johnson & Johnson, the Federal Circuit affirmed a $4.68 million attorney fee award in favor of a stent manufacturer that had obtained summary judgment of non-infringement as to an NPE’s medical device patent – again where the NPE’s infringement theory was exceptionally weak.

By contrast, in two other recent cases, iLOR, LLC v. Google, Inc. and Old Reliable Wholesale, Inc. v. Cornell Corporation, the Federal Circuit reversed attorneys fee awards.  In iLOR, the court found that the plaintiff’s erroneous claim construction proposal was at least “reasonable” given the facts of the case.  In Old Reliable, the court concluded that a key concession by an important plaintiff’s witness about the prior art was not dispositive of the patent’s validity, such that proceeding with the case did not amount to bad faith.

Reconciling the results in these cases is difficult.  It bears note that the plaintiffs in Eon-Net and Marctec were NPEs, whereas Old Reliable and iLOR had made bona fide efforts to practice their own inventions.  While not specifically acknowledging it, courts may in practice be more inclined to give the benefit of the doubt to patent owners that bring suit in the face of potential business disruptions, crippling discovery costs, and the risk of infringement counterclaims.  By contrast, NPEs generally can file suit without worrying about such issues.  While still an infrequent occurrence, attorneys fee awards against NPEs may have some impact on their willingness to bring particularly weak claims to extract cost-of-litigation settlements.

Conclusion

Collectively, the above trends suggest that the legal environment for NPE patent litigation is shifting in ways that will make it harder for NPEs to extract settlements based on expected legal expense rather than the merits of a case.  How far the pendulum swings will depend on how far district court judges and the Federal Circuit are willing to take the trends discussed above.

Related Practice Areas

Litigation