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What’s the best way to improve the odds in patent troll litigation?

Jason Schwent, CIPP/US April 25, 2014

One can hardly talk about the patent law or patent litigation anymore without addressing the issue of patent assertion entities (PAEs). PAEs develop nothing, make nothing, distribute nothing, and sell nothing. They exist to sue others or to extract license payments under threat of suit.

PAEs have been the source of much consternation from the business and political communities because they constitute a major drain on the bottom lines of technology companies and on the economy as a whole. It is estimated that PAE litigation has cost business billions of dollars in lost capital — capital that could have been invested in more innovation, product development, or jobs.

These economic impacts have gotten the attention of Washington, D.C. And in a political community rife with rancor and partisan dispute, PAEs are the rare issue where everyone — the President, Republicans, and Democrats — agrees that something needs to be done to address the problem. So what can be done? What is being done?

The problem

The first step in solving a problem is defining the problem. As I noted last year in an article for Bloomberg BNA’s patent journal, “Patent Poker: Why Forcing a Plaintiff to Show its Hand Early can Lead to Fairer Play,” patent litigation with PAEs is often a decidedly imbalanced affair.

The imbalance can even be so great that in many cases it can be cheaper for accused infringers to fold and settle a claim of infringement (even where the allegations are meritless) than to ante up and fight. In typical litigation 20 years ago, competing companies sued and countersued each other using thousands of documents and scores of witnesses. Today’s PAE patent litigation is decidedly one-sided. PAEs have no ongoing business to disrupt. They do not have to worry about angering the purchasers of their products with litigation because PAEs sell no products. PAEs also face no possible countersuits for infringement as PAEs have no technology to be targeted. PAEs can bring suit without spending much and usually hire attorneys on a contingency basis — meaning that there aren’t even ongoing legal bills taxing the PAE during litigation.

Possible solutions

So what can be done? Fortunately, there is no shortage of possible solutions to the problem. Unfortunately, because there is so much disagreement amongst the proposals, it is unclear which if any will come to fruition or what effect they may eventually have on the problem.

Congressional solution

There is currently a concerted push from both sides of the aisle to get a patent reform bill passed this session of Congress. Among the issues proposed in the numerous Congressional bills being considered, two issues are of the most concern and likely to have the greatest impact: fee-shifting, and case management measures.

Fee shifting provisions would make it easier for U.S. courts to force losing litigants to pay the legal expenses of winning litigants. The thought behind such measures is to make sure that PAEs face real consequences for bringing and losing suits with dubious claims. The House of Representatives has already passed a patent reform bill that makes the payment of legal fees by the losing party the default, unless certain conditions are met that make such an award unjust.

In the Senate, however, such provisions have met with resistance. Numerous companies who generate substantial revenue from the licensing of patent rights voiced concern with the harshness of some of the patent reforms being contemplated in the Senate. Consequently, strong language forcing losing parties to pay legal expenses was removed in favor of provisions that essentially leave the question up to the courts — who have shown a great hesitancy to award fees in even egregious circumstances. As the Senate struggles through compromise proposals aimed at appeasing increasingly disparate voices, the language favoring fee shifting has continued to soften. And since even the already passed House version of the bill will still need to be rectified with the Senate version, the increased in-fighting and partisan politics of the process portends to doom all significant reform.

The case management reforms cover a wide swath of topics including transparency, stays, heightened pleading requirements, and discovery limits. While some do so better than others, these reforms actively seek to level the playing field between patent plaintiffs and defendants — especially where PAEs are involved. Both House and Senate versions of the bill address transparency requirements that, among other things, force plaintiffs to disclose parent companies with true interests in the litigation. But discovering the true party in interest has never been a matter of much difficulty and does little to stop abusive litigation tactics.

Both the House and Senate versions also allow litigation to be stayed when brought against customers in favor of litigation brought against manufacturers. But this relief is already available in many courts by request. The House bill includes provisions heightening the pleading requirements in patent litigation and compromise language in the Senate has similar requirements. But limits on discovery are more expansive in Senate versions than in the House. But here too, the shifting sands of support for the various provisions and Congress’s inability to work out disputes of any type, make it unclear whether any of these issues will make it to actual law.

Court solution

As noted in an earlier post, the greatest chance for real change in patent litigation may come from the Supreme Court’s slate of cases set for this year. Among them are cases addressing the standards for awarding legal expenses to prevailing parties as well as a case determining under what standard computer software is patentable.

For the former, a substantial change in the standards governing such legal expense awards may make fee shifting legislation unnecessary. Further, because such relief can be doled out by a judge on a per case basis, the relief can be tailored to suit the parties to a particular litigation and the conduct at issue more closely. In contrast, legislation, with its much broader impact, is more likely to unintentionally catch well-meaning patent plaintiffs within its grasp.

With respect to the latter, changes to that standard could greatly impact the validity of many of the patents asserted by PAEs by giving patent defendants strong new ammunition to attack the validity of patents that are asserted. Such ammunition would make PAE patent litigation a riskier proposition and less of a “sure thing.”

Executive branch solutions

The President has not missed his opportunity to weigh in on the PAE problem. On June 14, 2013, the White House Task Force on High-Tech Patent Issues issued several policy changes and legislative recommendations dealing with PAE problems. Among the policy changes enacted was a directive for the U.S. Patent Office to train its examiners to better recognize and reject problematic functional language in software patents — the kind of language which often proves problematic in later PAE litigation. There was also a directive to the ITC to align its standards for granting injunctions with those of the district courts — in an effort to ease the granting of such injunctions. But the effects of these changes are not likely to be felt for years, giving little relief to those facing suits now.

Jason Schwent is a partner in Thompson Coburn’s Intellectual Property group. He is the editorial director of the Patent Billy Goat. You can find Jason on Google+Twitter, and reach him at (314) 552-6291 or jschwent@thompsoncoburn.com.