Phillips Lytle Attorneys Co-Author Column in Buffalo Law Journal

Fighting Back Against Patent Trolls

In recent years, patent trolls have been a hot topic in the intellectual property arena. Sometimes known by the less pejorative terms of patent assertion entities (PAEs) or non-practicing entities (NPEs), a patent troll is an entity that owns a portfolio of patents and generates revenue by collecting licensing fees, cash settlements or monetary damages through litigation or negotiations.

PAEs do not manufacture or sell any products and exist only to enforce intellectual property rights against those that do. PAEs are often viewed as anti-competitive because they drive up costs of doing business without providing any market value.

PAEs are particularly concerning when the patents that they enforce involve software or business methods. Until the mid- to late 1990s, the patentability of software was not completely settled and most software was protected in other ways, such as by copyright, so there is often a shortage of prior patents or technological history (aka “prior art”) documents easily accessible for review while examining the applications. As a result, the U.S. Patent and Trademark Office (PTO) sometimes grants overly broad patents of questionable validity.

When companies, especially smaller companies, receive a cease-and-desist letter from a large PAE, they often believe that their options are limited and they must pay the ransom or stop selling their product. This remains true even though the patent may be invalid or not infringed. Fortunately, recent developments made it easier than ever to fight back against this unfair practice.

Fighting a PAE in court

A company’s first option when confronted by a PAE is always to defend the action on the merits. Historically, this was a high-cost, high-stakes strategy. PAEs often improperly pursued permanent injunctions to leverage a settlement or licensing agreement. This meant that if the company chose to fight the action in court, it risked losing the ability to produce its products altogether.

However, since the U.S. Supreme Court decided eBay Inc. v. MercExchange LLC, 547 U.S. 388 (2006), district courts have been reluctant to grant permanent injunctive relief to PAEs if they cannot establish that they are a “market competitor.” Additionally, district courts have become more willing to award costs and attorneys’ fees to a defendant who is successful against a PAE. As a result, the potential downside to defending an action is much less daunting than it once was.

Moreover, PAEs often chose plaintiff-friendly venues in which to bring their infringement actions – the most popular being the Eastern District of Texas. PAEs were allowed to forum shop based on an incorrect reading of 28 U.S.C. § 1391(c), which permitted PAEs to bring actions in any venue that would have personal jurisdiction over the defendant.

However, last year, in TC Heartland LLC v. Kraft Foods Group Brands LLC, 137 S. Ct. 1514 (2017), the Supreme Court clarified that a domestic corporation may only be sued for patent infringement in the jurisdiction where it is located or incorporated. This severely limited a PAE’s ability to shop for a favorable forum and reduced the cost and inconvenience to a company that otherwise would have been forced to defend a lawsuit in a strange land.

Prior to these changes, many companies were left to defend themselves in jurisdictions where the deck was already stacked against them, where they had to retain local counsel and where they risked a permanent injunction if they were unsuccessful. Not surprisingly, many chose simply to license the invalid patents from the PAE. As a result of these developments, however, it is now easier than ever for a company to defend against actions brought by PAEs.

Fighting a PAE administratively

Alternatively, an accused infringer may go on the offensive and bring an administrative proceeding in the PTO to invalidate a patent. While the administrative costs may sometimes be high, this approach has the benefit of putting the accused infringer in an offensive posture, allowing it to potentially invalidate the patent in its entirety.

The first option is known as “ex parte re-examination,” which permits “[a]ny person at any time” to “file a request for reexamination.” 35 U.S.C. § 302. If the Director then determines that there is a “substantial new question of patentability” for any claim of the patent, the PTO will re-examine the patent using the same procedures that were used in the initial examination. Id. §§ 303(a), 304, 305. Although ex parte re-examination allows the accused infringer to initiate the reexamination process, it does not provide for the accused infringer’s participation after commencement.

The America Invents Act (AIA) enacted in 2011 offers a more hands-on approach through a procedure called “inter partes review.” Under inter partes review, any party may challenge the validity of a patent as non-novel or obvious based on prior art. Once the director determines that there is “a reasonable likelihood that the petitioner would prevail with respect to at least one of the claims challenged,” the Patent Trial and Appeal Board examines the validity of the patent. 35 U.S.C. §§ 314(a), 316(c).

Unlike ex parte re-examination, the petitioner and patent owner take an active role in inter partes review and are entitled to discovery to file written submissions and to receive an oral hearing before the Board. Id. § 316(a)(5), (8), (10). The Supreme Court recently upheld the constitutionality of this procedure in Oil States Energy Services LLC v. Greene’s Energy Group, LLC, 138 S. Ct. 1365 (2018).

Therefore, for a company that prefers to play offense, federal law provides several avenues by which a company may invalidate a patent either before or after the PAE brings an action.

Conclusion

Although patent litigation is a rapidly changing field, the tides have recently shifted in favor of marketplace competition and against PAEs. While it is still imperfect, and some PAEs continue to stifle market forces with vexatious litigation, it has never been a better time for a company faced with an infringement suit to fight back.

David Principe is special counsel at Phillips Lytle LLP, where he concentrates his practice in patent and trademark law: dprincipe@phillipslytle.com; attorney David Rudroff concentrates his practice in the area of commercial litigation, including the infringement of patents and trademarks: drudroff@phillipslytle.com.