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Returning Trolls to Myth

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June 01, 2014
CIO/CFO Column: What Keeps Me Up at Night
Scott Warner

Activity at All Levels to Stem the Rise of Patent Troll Claims

There was a time not too long ago when the definition of trolls was limited to mythical, cave-dwelling beings in folktales, children’s books, fantasy or science fiction.  No longer.  The most common reference now seems to be in connection with non-practicing entities (NPE) that purchase rights in patents (as well as other forms of IP) and monetize their investments through licensing and litigation.  But if the White House, Congress, courts and others have their way, trolls may once again be relegated to myth.

NPEs are a real problem for large and small businesses alike.  They are also a problem for their customers. According to recent studies, NPEs file the majority of patent litigation; the number of NPE lawsuits increased by 11 percent in 2013, and the total costs of NPE patent suits exceed the societal benefits of patent ownership. This does not represent the entire story, as it does not reflect the vast majority of claims that never ripen into litigation. Moreover, a study by Robin Feldman in October 2013 titled, “Patent Demands and Startup Companies” indicates that such claims have a negative impact on startups and may even discourage venture funding. 

What’s Being Done?
On Feb. 20, 2014, the White House provided a status report on initiatives started in the previous June  and announced a variety of additional steps designed to improve patent quality and put pressure on patent trolls.  These included crowd source prior art, providing a toolkit of information for companies accused of patent infringement (http://www.uspto.gov/patents/litigation/index.jsp). This toolkit answers common questions about patent claims and requirements and establishes a database of demand letter, and rules designed to increase transparency in patent ownership (http://www.gpo.gov/fdsys/pkg/FR-2014-01-24/pdf/2014-01195.pdf).     

There is activity in the U.S. Congress as well. The House and Senate both have bills under consideration that would make it more difficult for NPEs to bring infringement suits. For example, H.R. 3309 and S. 1720 would both make it a deceptive practice to send cease-and-desist letters demanding payment with vague and unspecified claims of infringement. Both would put a stop to claims against consumers who purchase products from manufacturers, and  H.R. 3309 would make NPEs shoulder the costs of litigations if they do not prevail.

On Sept. 27, 2013, the Federal Trade Commission (FTC) announced that it planned to undertake a study of the business practices of what it described as “Patent Assertion Entities,” but which, in substance, are essentially the same NPEs that have caught others’ attentions. The FTC proposes to use its power to get answers from 25 designated companies on how they run crucial aspects of their businesses.  In theory, the FTC has sweeping powers and could take action against specific NPEs if the study concludes that such action is necessary. But therein lies the rub. The agency has much on its plate, and even when the study is completed there is no specific timetable for follow-up enforcement action, if any. 

The United States Supreme Court took up the issue of fee shifting in Octane Fitness, LLC v. Icon Health & Fitness, Inc. this spring. This decision could make it easier for District Courts to award fees to prevailing parties in patent cases. At the same time, courts around the country have increased pressure on NPEs by awarding sanctions, and in at least one case, forced it to go to trial and explain its “sham operations” to a jury.  
Individual states have not been sitting idly by either. Several states, including Kentucky, Oregon, New York, Vermont, Massachusetts, Nebraska, Minnesota and Alabama have taken action to stem the tide of NPE lawsuits, including giving the accused infringer a claim against the NPE for bad faith assertions of patent infringement.

The bottom line is that there is a growing interest and activity addressed to the patent troll problem, but until they bear fruit, what should a restaurant, hotel, tour operator or other company do if it receives a cease-and-desist letter from an NPE? The following are some suggestions which, separately or combined, may improve your chances of success.

The troll problem persists, but as noted, it is not going unnoticed. With luck, some of the changes above will be implemented soon and businesses that have been the subject of these claims can turn their attention back to what they do best: innovation. Until then though, caution and intelligent pushback are the watchwords of the day.

Scott Warner is an attorney with Greg Duff and Company.

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What Can You Do?
Seek counsel.  Studies indicate that the majority of demands do not ripen into litigation.  Still, that does not mean they should be ignored. Upon receipt of a demand, seek legal counsel. Your counsel can suggest a variety of strategies to respond to infringement claims (if appropriate) and establish defenses to them. 

Examine the claims. Often the first contact contains nothing more than a claim that your use of some technology or process may infringe an unspecified right. While there is usually a list of the allegedly infringed patents, there is often no claim chart showing exactly how your use of the technology or process infringes those claims. You need to see this and, more specifically, you need to demand it from the NPE.  If the NPE doesn’t provide it, that may be the end of the interaction. Even if they do, NPE claims charts are often less than helpful. You may want to have them examined by independent patent counsel. Also, you may want that patent lawyer to be different than your litigation lawyer, so as to preserve the possibility of having the patent lawyer give a favorable opinion that you can publically rely upon.

Contact the manufacturer. A common tactic is for an NPE to send cease-and desist letters to end users of technology. In this case, contact the manufacturer. If the manufacturer has been sued or taken action against the NPE, you may be able to stay any proceeding against you pending the outcome of the manufacturer’s action. Also, you may learn that the manufacturer already has a license to the invention in question, which may cover you as well. And, as part of this review, look at your manufacturer purchase agreement.  It may contain an indemnity from the manufacturer. Hint: Always try to include an infringement indemnity in your purchase agreements.

Do your diligence.  Investigate the owner of the patent.  Determine how active they are, the status of other cases they may have filed and how those may have been resolved, and identify other companies that may have received similar letters. With this information in hand, you are in a much better position to plan a defense and, perhaps, enlist the aide of others in defending or negotiating a better resolution of the claim. In this regard, beware that in at least one case (Cascades Computer Innovation LLS v. RPX Corporation et al), the NPE successfully argued that the concerted activity between end users in connection with the negotiation of licensing terms raised anti-trust issues.

In some (relatively rare) instances, you may want to file your own lawsuit against the NPE seeking a declaration that the patent at issue is invalid and/or that you do not infringe it. This is not the rule – litigation is expensive and generally to be avoided if at all possible. However, there are situations where it can make sense. Some examples of these are included at this webpage: (URL). Again, walking into court can be an expensive endeavor. However, it is sometimes the only action that will make an unreasonable NPE wake up and smell the lower license fee, or better yet, stop the next one from banging on your door with its hand out.

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