20/04/2016
Trolls, unicorns and giants are terms that you typically do not associate with intellectual property. However, in recent years patent litigation has become an arena for a keenly fought war between these mythical sounding entities, particularly in the United States. In this article, we provide an update on the state of this conflict, and discuss whether the commitment from the US government to make life harder for the trolls has borne any fruit three years on.
The conflict
On one side of the conflict are the ‘patent trolls’, a pejorative term describing non-practising entities (NPEs), patent assertion entities (PAE) and the like. These economic ‘villains’ of intellectual property buy up unused and unexploited patent rights, which generally comprise their only real assets, and make their money by enforcing them against third parties without first seeking royalties via licences. These NPEs do not manufacture or design any useful products of their own and are therefore often accused of stifling innovation and being a drain on the economy.
On the other side of the conflict, the patent assertion entities’ main opponents are the technology firms with sufficiently deep pockets to become targets of the PAEs’ business model. These firms include the ‘tech giants’ such as Apple, Microsoft and Google, and the so called ‘unicorns’- start-ups valued at over $1 Billion – such as Magic Leap, Uber and Snapchat.
This war rages most savagely in the United States, where the patent system and related legislation has allowed the trolls to thrive. Various features of the US legal system, such as low pleading standards and expensive discovery, have resulted in technology firms feeling significant pressure to settle even when facing frivolous infringement claims, rather than risk lengthy and expensive litigation. This results in them paying out a sum disproportionate to the value of the patent held by the troll. In contrast, patent systems in jurisdictions such as the UK and in Europe are less conducive to the NPEs’ business model. Such authorities generally have high pleading standards and are more generous to prevailing parties, often allowing them to recover at least some of their court costs from the other side. Therefore, these jurisdictions have broadly been avoided by the trolls.
This has resulted in many criticising the US patent litigation system as being weighted too heavily in favour of patent owners. The US government responded to this in early 2013 by committing to take steps to swing the balance of power away from the trolls and in favour of the innovators and creators.
The current situation
At first glance, the signs are not encouraging. The legislative reform that was promised by President Obama in 2013 and then again in his 2014 State of the Union Address, has never materialised. Furthermore, according to commentators , such reforms are unlikely to happen in 2016 owing to the fact that both the Presidency and a total of 469 seats in the US Congress are up for election this year. As such, Congress is likely to be focussed on topics more suited to speeches and televised debates.
In addition, according to statistics published by Unified Patents, 2015 saw the highest number of patent disputes filed in the US in history, with 66.9% of lawsuits being filed by patent trolls. This was closely followed by 2013 (in which 62% of lawsuits were filed by patent trolls).
It would not be unreasonable, therefore, to conclude that nothing has changed since the beginning of 2013; the statistics provide a clear indication that the war between the patent trolls and technology firms is as fierce as ever, and the lack of legislative reform seems to suggest that the deck is still stacked against the technology firms.
However, the absence of the promised legislative reform does not mean that the technology firms have been abandoned to fight the good fight alone. In fact, they have found aid from three different sources.
First, the introduction of ‘inter partes review’ (IPR), a US Patent and Trademark Office (USPTO) process introduced towards the end of 2012, has been a boon for the technology firms over the past three years. It allows accused infringers to efficiently challenge the validity of a patent asserted in a lawsuit, providing an alternative way to fight an infringement claim that is often faster, cheaper and more effective than litigation. Indeed, according to a recent article by Law360, a typical IPR takes 17 months from filing to final decision and costs around $300,000. This is compared to a court case which can take anywhere between two and a half to five years to reach a final verdict and can easily cost each party millions of dollars. As such, this has quickly become a favoured strategy among the patent-savvy technology giants when facing NPE lawsuits.
Somewhat surprisingly, the advantages of this system seem yet to be appreciated by the perhaps less patent-savvy unicorns who, according to the same article by Law360, rarely file IPRs. However, if the start-ups do catch on to how effective this process can be in fighting infringement claims, patent trolls may find that they have far fewer victims willing to pay out large sums in the first instance to avoid litigation. Instead, they are likely to have their settlement demands driven below the typical cost of an IPR, which will come as welcome relief to the technology firms.
Second, the US Supreme Court has lent a helping hand by making life harder for patent trolls through a number of recent decisions. Most noticeably, perhaps, are two decisions in 2014, Alice v CLS and Octane Fitness v Icon Health & Fitness.
In Alice v CLS the standard for patent eligibility in relation to software and business method patents was shifted, potentially rendering thousands of patents invalid and therefore unenforceable. The full effects of this decision are still emerging even now, nearly two years on. However, it does appear that it is increasingly common for a court to throw out a ‘bad’ patent early on in proceedings on the grounds that the claimed subject matter is not patent eligible.
Further, thanks to the decision in Octane Fitness v Icon Health & Fitness, the chance of the prevailing party recovering their attorneys’ fees has gone up. This change brings the law in the US closer to that of the UK and Europe.
Both of these decisions may give a patent assertion entity pause for thought before making an infringement claim in the first place. If they do, defendants, emboldened by an increased likelihood of success and a higher chance of recovering some of their court costs, may be more likely to challenge the validity of the troll’s patent rather than consider a quick settlement.
Finally, the Federal Rules of Civil Procedure were amended towards the end of 2015. These amendments have raised the pleading requirements for patent cases, meaning more facts to support infringement claims and more detailed allegations. This may further reduce the likelihood of NPEs filing lawsuits and reduces the pressure on the technology firms to settle.
The battle continues
Thus, many of the issues that the Obama administration committed to solving through legislative reform have, in some way, been addressed by other means. These reforms provide the technology firms with new ammunition with which to fight the NPEs whilst simultaneously blunting many of the trolls’ most fearsome weapons. This may silence some of the critics of the US patent litigation system as these changes do seem to take power away from the patentee.
However, judicial reform and USPTO processes are unlikely to eradicate patent trolls entirely; NPEs are already adjusting to life after Alice and Octane Fitness, and to the prospect of IPRs (the statistics from 2015 alone show this). Although it is too early to know for certain how non-practising entities will handle the amendments to the Federal Rules of Civil Procedure, it is reasonable to assume that they will adapt to this change as well.
2016, therefore, is shaping up to be an interesting year for this conflict; it is unlikely to see the end of the patent troll completely, but it could see the war shift in favour of the giants and the unicorns.
This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice. Please contact Reddie & Grose LLP for advice before taking any action in reliance on it.
