Strategies to Battle NPEs: Lessons from the Front Lines

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Patent lawsuits brought by non-practicing entities (“NPEs”), sometimes referred to as “patent trolls,” can be expensive for companies defending such lawsuits.  Indeed, according to a 2013 survey by the American Intellectual Property Law Association (AIPLA), the average cost to defend a patent case is nearly $3 million when the amount at risk is between $1-$25 million, and nearly $6 million when the amount at risk is over $25 million.

NPEs have a number of advantages in patent litigation.  First, there is little risk of a counterclaim (other than a declaratory judgment counterclaim) because typically the only business of a NPE is licensing its patents.  Second, NPEs are usually represented by contingent fee lawyers and thus don’t feel the same “pain” of legal costs.  Third, NPEs usually don’t have many documents or witnesses, and therefore, companies sued by NPEs face disproportionate discovery burdens.

How can a company fight back against a NPE?  Here are five strategies from the front lines:

1.  Get Out of Dodge – Escape Unfavorable Venues

Not all patent venues are equal.  Indeed, according to a 2013 study by PricewaterhouseCoopers LLP: “Certain jurisdictions (particularly Virginia Eastern, Delaware, and Texas Eastern) continue to be more favorable venues for patent holders, with shorter time-to-trial, higher success rates, and greater median damages awards.”[1]  One example of this inequality is noted by PWC as follows:  “Of particular interest is that the two districts with the most identified NPE decisions, Illinois Northern and Texas Eastern, continue to present a dichotomy in relative NPE success rates. Texas Eastern ranks third highest (46.7%), whereas Illinois Northern ranks sixteenth (12.5%) in terms of overall NPE success rates.”  Id.

When faced with the prospect of litigating against a NPE in a statistically unfavorable venue, one strategy to consider is filing a motion to transfer.  Under 28 U.S.C. § 1404(a), if the facts are warranted, “a district court may transfer any civil action to any other district or division where it might have been brought.”  Although transfer motions were once viewed as long shots, Federal Circuit decisions in recent years have turned the tide in favor of defendants seeking to transfer, especially out of the Eastern District of Texas.  See, e.g., In re TS Tech USA Corp., 551 F.3d 1315 (Fed. Cir. 2008) (granting petition for mandamus transferring case out of the Eastern District of Texas); In re Genentech, Inc., 566 F.3d 1338 (Fed. Cir. 2009) (same).

2.  Strategic Use of Reexamination and IPR

Ex parte reeexaminations and inter partes reviews (IPRs) – which are official proceedings conducted at the U.S. Patent Office – can be effective tools to challenge patents asserted by NPEs.  In both proceedings, a company can challenge a NPE’s patent based upon prior art that renders the patent invalid as either anticipated (not novel) or obvious.  In an ex parte reexamination, the third party is a “requester” and has no direct input in the reexamination following the submission of the initial reexamination request.  In an IPR, the requester remains a party to the dispute has an opportunity to file opposition briefs and present evidence during the process.

There are several potential benefits that can be achieved by using either of these proceedings.  First, the district court may stay the case brought by the NPE pending the outcome of the reexamination or IPR, which can dramatically cut down on litigation costs.  Second, historical statistics for ex parte reexaminations (IPRs are a newer mechanism) are very favorable for patent challengers – 11% of patent claims have been knocked out and 67% of patent claims have been amended during reexaminations.  Thus, a positive outcome for patent challengers has been achieved in roughly 76% of reexaminations.  Even when patent claims are not knocked out or amended, the patent holder often makes critical admissions and/or arguments during reexamination proceedings, which can often provide key non-infringement distinctions.

A good example of how a reexamination proceeding can be effective is the case of BIAX Corp. v. Analog Devices, Inc. (E.D. Tex.).  In that case, an ex parte reexamination had been filed against one of the patents at issue.  The patent survived reexamination with no claims amended.  However, during the reexamination proceeding, the patentee made critical admissions and arguments on the record to get around the prior art.  Those admissions and arguments were then successfully used against the patent holder during a subsequent arbitration of the patent:  the arbitrator found no infringement and awarded attorneys’ fees in favor of Analog Devices.

3.  Early Claim Construction / Summary Judgment

Claim construction – the process by which the claims of a patent are interpreted by the court – is usually a fundamental aspect of every patent case.  Most courts rule on claim construction issues near or at the end of discovery.  But, there is nothing that precludes courts from ruling on these issues earlier, especially when there is a key claim limitation that may result in a finding of non-infringement.  To that end, one strategy that can be quite effective is to move for early claim construction combined with a summary judgment motion for non-infringement.  The advantage of this approach is obvious:  if you win, you can significantly reduce litigation costs.

Two case examples highlight the benefit of pursuing early claim construction and summary judgment.  In Parallel Networks, LLC v. Abercrombie & Fitch et al. (E.D. Tex. 2011), the district court conducted an early claim construction and summary judgment hearing on three claim terms that the defendants had argued were dispositive to the case.  After the hearing, the district court adopted the defendants’ construction on one of the three terms and granted summary judgment of non-infringement as to 99 of the 112 defendants in the case.  In issuing its ruling, the court applauded the defendants for their approach in seeking early claim construction: “The Court commends the parties in this case for working together to identify issues common to nearly all Defendants and moving the case to resolution of these important issues in a timely and economic manner.  By doing so, this case was resolved in a manner of months—as opposed to years—for the vast majority of Defendants.”

Another example is PSN v. Ivoclar Vivadent, Inc., (N.D. Ill. 2008).  In this case, the NPE plaintiff was seeking tens of millions of dollars in alleged damages.  Ivoclar moved for summary judgment of non-infringement on three particular issues early in the case, even though the court had not yet held a claim construction hearing.  After combined briefing on the summary judgment motion and claim construction issues, the district court ruled in Ivoclar’s favor and found no infringement.  This significant decision was affirmed by the U.S. Court of Appeals for the Federal Circuit.

4.  Unearth Prior Art and Patent Defenses

One of the typical defenses to a patent infringement lawsuit involves the assertion of invalidating prior art (typically, issued patents and publications).  Prior art can used quite effectively to defeat a NPE’s patent, either by invalidating the patent claims entirely or narrowing the scope of the claims.  However, often overlooked are other defenses such as 1) incorrect inventorship and 2) lack of standing to sue.  Incorrect inventorship can be asserted as a basis to invalidate a patent, and a dismissal of a patent lawsuit can occur when the plaintiff’s interest in the patent is found to be insufficient to establish standing.  If proven, these “non-typical” defenses (which are not investigated by the Patent Office) avoid arguing that the “Patent Office got it wrong” by failing to consider prior art, which is sometimes difficult for a jury to grasp, no matter how good the prior art.

A good example of using a non-typical defense to defeat a patent lawsuit is the case of Oasis Research LLC v. EMC Corp., No. 4:12-CV-526 (E.D. Tex. 2013).  In that case, defendants EMC and Carbonite defeated a NPE claim by proving that other inventors were improperly excluded from the patents at issue.  In particular, the patents only listed one person as an inventor, an engineer named Christopher Crawford.  EMC, however, uncovered evidence that Crawford worked with others when he allegedly conceived the ideas in the patents.  Crawford’s former co-workers claimed they significantly contributed to the patents and should have been listed as co-inventors.  After trial, the jury returned a complete defense verdict invalidating the patents for failure to name the correct inventors.  The Oasis Research case was featured on an episode of National Public Radio’s “This American Life” and can be found at the link below:

http://www.thisamericanlife.org/radio-archives/episode/496/when-patents-attack-part-two

5.  Reign in the Cost of Defense

NPEs know that to defend a patent infringement lawsuit can costs hundreds of thousands, if not millions, of dollars.  They know that companies will feel the financial sting of defending these cases. Because almost all patent cases settle before trial, any NPE knows (or assumes) it is only a matter of time before defendants will settle.

Whether your company is looking to resolve an NPE case cheaply and efficiently, or whether you want to fight back and take the case to trial, the best way to level the playing field against a NPE is to lower the cost of defense from the outset.  Not only does lowering the cost of defense take away the substantial leverage held by a NPE, it allows a company to better weigh the pros and cons of settling the case or fighting forward to trial, and to focus on the merits of the case.

To reign in the cost of defense, you may want to consider alternative fee arrangements such as fixed fees, capped fees, and performance-based hold-backs.  Also, with respect to any billing arrangement, it is important to set a case budget, implement a strategic plan, and monitor litigation costs closely.

By reining in the cost of defense, your company will cut down on the substantial leverage held by NPEs, who almost always are represented by contingent fee counsel and don’t feel the same “pain” of legal costs.  Whether your company’s goal in a NPE case is to obtain a fair settlement or to go to trial, lowering the cost of defense will help your company defend itself against a NPE.

 

Topics:  Patent Litigation, Patent Trolls, Patents

Published In: Civil Procedure Updates, Intellectual Property Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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