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How to Manage the Cost of NPE Patent Lawsuits

Corporate Counsel
October 18, 2013, Philip A. Rovner, Jonathan A. Choa and Alan R. Silverstein

Non-practicing entity (NPE) lawsuits are an increasing expense for companies. While these lawsuits are often not “bet the company,” they can be expensive. Given that the apparent goal of most NPE lawsuits is an early settlement, part of the job of minimizing costs is already done for the company.

But the cost-benefit analysis of early settlement is complicated. On the one hand, patent infringement suits are costly and settling early for less than the cost of litigation may be appealing. On the other hand, early settlement may signal weakness and lead to additional NPE lawsuits, subjecting the company to nearly endless litigation. In lieu of an early settlement, there are several ways defendants can minimize costs and hinder an NPE’s ability to move forward with litigation.

Novel Legal Approaches

IBM and Halliburton have taken perhaps the most interesting approach to NPE lawsuits; they filed patent applications that cover the business method of being an NPE. But a more practical tool that is becoming more common is the Bilski brief. A Bilski brief argues that the asserted patents are invalid because they claim subject matter that is not patentable.

Formally presented as a motion for summary judgment under 35 U.S.C. § 101, the moniker “BilskiBrief” comes from the U.S. Supreme Court decision that held whether a claimed method is tied to a machine or transforms any particular matter is an important test to determine if the claimed method is patentable. Under Bilski, a method of doing business, such as a claim directed to a computerized risk hedging process, is not patentable. Bilski briefs are particularly well suited to NPE lawsuits because many of the patents asserted discuss generalized methods of conducting business with the claims stretched broadly to cover as many defendants as possible. Moreover, whether the subject matter is eligible for patenting is a question of law, allowing a Bilski brief to be filed early in the litigation, if local rules allow, without expensive fact or expert discovery. Given the lenient pleading standards for patent infringement, a Bilski brief is often the best chance a defendant has to get the case dismissed at an early stage.

Rule 11 motions are uncommon in patent litigation, likely due to the lenient pleading standards and the understanding that patent infringement sometimes has to be alleged on supposition. However, Rule 11 motions might become more popular because NPEs often take strained claim construction positions to support their complaints. The Federal Circuit has been unafraid to find that objectively baseless patent lawsuits are subject to an award of fees pursuant to 35 U.S.C. § 285 or sanctions under Rule 11. While many district courts have been reluctant to impose Rule 11 sanctions in patent litigations, the Federal Circuit’s willingness to endorse such sanctions may empower district courts to do the same in an effort to manage dockets clogged by NPE lawsuits.

Even if an NPE’s claim constructions carry enough merit to avoid a Rule 11 motion, early claim construction can serve to narrow the case and may even be dispositive. The timing of claim construction varies among the different district courts. Some courts conduct claim construction early in the case after an initial fact discovery period and before any expert discovery, while other courts conduct claim construction at the end of the case just before trial.

The best chance to secure early claim construction is to convince the court that it will be dispositive as to most, if not all of the defendants. Another argument for early claim construction is that many of the patents asserted by NPEs do not use terms of art and late claim construction will allow a NPE to use discovery of defendants’ accused products to develop its claim constructions.

Inter partes review, recently implemented in the America Invents Act (“AIA”), is another option for defendants. Defendants will use inter partes review, which is conducted by the newly established Patent Trial and Appeal Board (“PTAB”), as a means to try to stay the litigation and narrow or invalidate the patent in suit. Although it is too soon to tell if courts will routinely grant a stay, the statutory requirement that the PTAB must, in most circumstances, reach a final decision within one year, should favor a stay. The danger with an inter partes review is estoppel. Any grounds that were asserted or reasonably could have been asserted in the inter partes review may be subsequently barred in litigation if the patent emerges valid.

Lastly, joint defense groups are perhaps the easiest way to conserve costs. While companies may be loath to cooperate with competitors and concerned with the confidentiality of trade secrets, joint defense groups offer a significant advantage in cost spreading and resource pooling. Due to the AIA, defendants are unlikely be in the same case, however invalidity and claim construction arguments should be similar across multiple defendants and cases and some courts will coordinate all the related cases for pre-trial purposes.

Joint defense groups are also important where cases asserting the same patent are on different schedules because it allows defendants to present complementary arguments and avoid taking contradictory positions. Confidentiality issues can be handled by a protective order and a joint defense agreement, ensuring outside counsel can take advantage of the joint defense group without risking their client’s confidential information.

Potential Legislative Solutions

While companies experiment with different litigation strategies, Congress has also begun to take note of NPE lawsuits. In May 2013, The Patent Quality Improvement Act (“the PQI Act”) was introduced. The PQI Act would amend Section 18 of the America Invents Act to allow post-grant review for almost any business method patent in actual litigation. The original version of Section 18 only allowed post-grant review for financial services patents. Although the intent of the PQI Act is evident, it would affect both NPEs and practicing entities equally.

More directly targeted at NPEs, a bipartisan bill introduced in February 2013 would require them to pay an accused infringer’s full legal costs if the NPE loses in court. The Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013, or SHIELD Act, defines a non-practicing entity as a patent owner who is not the inventor, does not exploit the patent for making a product or is not a university or similar Technology Transfer Organization.

The major shortcoming of the SHIELD Act is that it does nothing to stop the filing of suits by NPEs or allow for early disposition. For the SHIELD Act to provide any redress for the defendant, the case must proceed to a final judgment. For many defendants, the risk and costs involved in completing litigation are more than the small settlement amount many NPEs seek, which the SHIELD Act does not address. Opponents of the SHIELD Act claim that it creates two different types of patent owners with different rights which conflict with the property rights granted by the Constitution.

With the limited protections provided by the legislation proposed thus far and the ever-present concern of Constitutional rights, it seems that legislative relief from NPE lawsuits is far away.

Reprinted with permission from the October 18, 2013 issue of Corporate Counsel. Copyright 2013 ALM Media Properties LLC. Further duplication without permission is prohibited. All rights reserved.