The Cost of Defending Against Patent Trolls

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It should come as no surprise that defending against Non-Producing Entities—most of which are Patent Trolls[1]—is expensive, especially for small businesses and corporations. In support of his ongoing legal battle with the patent troll Personal Audio, LLC, Adam Carolla has currently raised over $445,000 dollars towards litigation through the crowdfunding website FundAnything.com.[2] Yet, unless Personal Audio decides to drop the litigation entirely, Carolla’s legal costs will certainly climb much higher.

 AVERAGE COSTS OF DEFENDING AGAINST NPEs

Carolla estimates that defending against Personal Audio’s patent suit could cost around $1.5M. This number is a reasonable prediction based upon the average expenses of other defendants in patent infringement lawsuits brought by NPEs. In recent years, over half of plaintiffs in patent infringement claims have been NPEs. In 2013 alone, 67% of patent infringement cases were filed by NPEs.[3] The median litigation cost to defend against a patent infringement claim by a NPE where the amount in controversy is between $1M-$25M is a staggering $983,000 at the end of discovery and $1.75M after trial.[4] The mean litigation cost is even higher—1.3M after discovery and $2.0M after trial. Predictably, the cost of litigating against a NPE rises as the amount in controversy rises. If Personal Audio pursues its case to a judgment, it will likely cost Carolla at least $1M in legal costs.

SETTLEMENT AND PROGNOSIS

In his battle against Personal Audio, Carolla has determined not to settle and fund his legal defense out of pocket if necessary. Patent trolls are frequently criticized for pursuing settlement costs as a key source of revenue. Approximately 90% of patent infringement suits initiated by NPEs settle.[5] Of those that do not settle, many more are defeated at the summary judgment stage. Ultimately, only 26% of patent infringement claims by NPEs within the past few years have been successful.[6] Yet, of those patent infringement claims that do reach trial, 65% are successful. In light of the potential to be stuck with massive royalty damages and momentous litigation costs, it is little surprise that most defendants choose to settle. Personal Audio has previously offered to settle for $3M.[7] If, as Carolla believes, Personal Audio does not have a valid legal claim[8], there is a strong probability that he can win the case at the summary judgment stage.

COST-SHIFTING OF ATTORNEY’S FEES

In light of high legal costs and the tendency of patent troll entities to pursue litigation for financial gain, there has recently been a movement to reform patent law by granting attorney’s fees to the prevailing party in a patent infringement suit. Federal law does allow parties to recover attorney’s fees, but only in “exceptional” cases.[9] Recently, the Supreme Court has adopted a broader interpretation of what is an exceptional case in Octane Fitness, LLC v. ICON Health and Fitness.[10] Previously, a case was only exceptional if it was brought in bad faith or was objectively baseless. Under the Supreme Court’s new interpretation, an exceptional case in one that stands out from other similar cases with regards to the substantive strength of a party’s litigating position or the unreasonable manner in which the case was litigated.

 In theory, Octane Fitness may assist defendants like Carolla, but the determination is ultimately left to the trial court’s discretion and its interpretation of the plaintiff’s claim. Current law may likely be insufficient to compel courts to apply cost shifting against NPEs and encourage defendants to litigate patent infringement claims to a final judgment. The most popular jurisdictions, in which NPEs file over half of their patent infringement claims, are the Eastern District of Texas and Delaware.[11] These two districts have two of the highest success rates for NPE claims which reach a final judgment.[12] Though the full impact of Octane Fitness remains to be seen, given that NPE litigation is concentrated within two favorable jurisdictions, shifting the costs from defendants to patent trolls in vexatious cases could require a further legislative push.

In 2013, the Innovation Act (2013 H.R. 3309) passed in the House. This bill included a provision which allowed the prevailing party to recover reasonable attorney’s fees. But, previous attempts to pass patent reform targeted specifically at patent trolls through the Senate failed after Sen. Leahy (D-VT) pulled patent reform from the Senate’s agenda.[13] There were many bills being considered in the Senate, but the main bill was the Patent Quality Improvement Act (2013 S. 866). This compromise bill did not include a cost-shifting provision. Many news outlets have reported that the decision to pull patent reform was motivated by interests groups such as biotech, pharmaceuticals, Universities, and law firms.[14] These entities, which rely on their ability to assert patent rights, oppose cost-shifting reform.

CONCLUSION

The current risk of defending against patent infringement claims is very high. Because of high legal costs and the difficulty of recovering reasonable attorney’s fees, defendants are motivated to settle even when faced with claims that a defendant believes will be unsuccessful. If patent trolls are to be deterred in the future, it must become more cost effective for defendants like Carolla to mount a legal defense. Otherwise, settlements will continue, and patent trolls will continue to dominate patent infringement litigation.


[1] See RPX Corp., 2013 NPE Litigation Report 39, available at http://www.rpxcorp.com/wp-content/uploads/2014/01/RPX-2013-NPE-Litigation-Report.pdf.

[2] Adam Carolla, Save Our Podcasts Legal Defense Fund, FundAnything.com, https://fundanything.com/en/campaigns/patenttroll (last visited July 17, 2014).

[3] Pricewaterhouse Coopers LLP, 2014 Patent Litigation Study 2, available at http://www.pwc.com/en_US/us/forensic-services/publications/assets/2014-patent-litigation-study.pdf

[4] Am. Intellectual Prop. Law Ass’n, Report of the Economic Survey 35 (2013).

[5] John R. Allison et al., Patent Quality and Settlement Among Repeat Patent Litigants, 99 Geo L.J. 674, 694 (2011).

[6] Pricewaterhouse Coopers supra note 3, at 11.

[7] Brian Lund, Can Adam Carolla Defeat a Patent Troll and Save Podcasting?, Daily Finance (April 9th, 2014, 12:24 AM)http://www.dailyfinance.com/on/adam-carolla-patent-troll-podcasting-lawsuit-stakes/.

[8] Michael Pham, Carolla Going after the Patent Trolls, WinTech Blog (July 8th 2014) http://www.wintechblog.com/2014/07/carolla-going-after-the-patent-trolls/.

[9] 35 U.S.C.A. § 285 (West, Westlaw through 2014).

[10] Octane Fitness, LLC V. ICON Health and Fitness, 134 S.Ct. 1749 (2014).

[11] RPX Corp., supra note 1, at 18.

[12] These numbers are based upon patent infringement suits litigated by NPEs in the period from 1995-2013. Pricewaterhouse Coopers LLP, supra note 3, at 18.

[13] Sam Gustin, This is How the Patent Trolls Won, Time (May 24, 2014) http://time.com/111639/patent-reform/.

[14] See, e.g., Erin Mershon & Tony Romm, Patent Reform Hits Dead End in Senate, Politico (May 21, 2014) http://www.politico.com/story/2014/05/patent-reform-senate-106968.html.

Topics:  Patent Infringement, Patent Litigation, Patent Reform, Patent Trolls, Patents, Popular

Published In: Civil Procedure Updates, Civil Remedies Updates, Elections & Politics 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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