SCOTUS Roundup: How were patent trolls affected?

by Thompson Coburn LLP

SCOTUS 2014 - patent troll roundupWhile much of the attention this year has fallen on Congress and its now failed attempts to pass patent law reform, the U.S. Supreme Court may have quietly provided significant ammunition to those trying to curb abusive patent troll activity.

This summer, the Supreme Court heard an unusually large number of cases directed to patent law. In four of its decisions on these cases, the Supreme Court lowered the bar for receiving an award of attorneys’ fees in exceptional cases, and heightened the bar necessary to show induced infringement or receive a patent for computer software. While still early, each of these decisions could prove to be valuable tools for reigning in meritless patent troll litigation.

Octane Fitness, LLC v. ICON Health & Fitness, Inc./Highmark Inc. v. Alliance Health Mgmt. Sys., Inc.

Both of these cases dealt with the attorney fee-shifting provision of 35 U.S.C. § 285. That statute reads: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.” While this language may, on its face, seem straightforward, case law from the Court of Appeals for the Federal Circuit in 2005 made it virtually impossible for prevailing parties to show that a case was exceptional. In that case, Brooks Furniture, Mfg., Inc. v. Du tailier Int’l, Inc., the Federal Circuit said that a case could only be exceptional in two situations: (1) “when there has been some material inappropriate conduct,” or (2) when the litigation is both “brought in subjective bad faith” and “objectively baseless.” The result of this restrictive view of the term “exceptional” was an almost complete bar to obtaining attorneys’ fees in patent litigation.

It was in this context that the Octane Fitness and Highmark cases came before the Supreme Court. In Octane Fitness, a near unanimous court (Justice Scalia did not join in two footnotes) found that the 2005 Brooks standard set by the Federal Circuit was too rigid and mechanical and that the effect was to render § 285 a nullity. The Court looked to the term “exceptional” and held that “an ‘exceptional’ case [wa]s simply one that [stood] out from others with respect to the substantive strength of a party’s litigation positions (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.” The Court then held that determining whether a case is exceptional requires a consideration of the totality of the circumstances. The Court then held in the Highmark case that an appellate court should apply an abuse-of-discretion standard in reviewing all aspects of a district court’s § 285 determination.

The effect of these decisions was an immediate lessening of the showing necessary to receive attorneys’ fees in connection with patent litigation and a strengthening of the discretion given to the trial court in determining whether an award of attorneys’ fees is warranted.

The Billy Goat takeaway: Patent trolls who engage in frivolous litigation in an attempt to extort settlements or who stretch the scope of their patent claims to ridiculous lengths now face a real possibility of the imposition of attorneys’ fees — something that was all but impossible in the past.

Alice Corporation v. CLS Bank

In another of the Supreme Court’s much-anticipated rulings, the Supreme Court addressed the limits of software protectable by the patent law. In Alice, the Supreme Court was asked whether the mere implementation of an idea on a computer was patentable. Alice Corporation held patents for facilitating financial exchanges between two parties using a computer as a third party. But this third party intermediation was already a fundamental building block of the economy and a widely practiced technique in financial transactions. The only difference with the Alice patents was that a computer served as the third party intermediary instead of a person. The Supreme Court held that this mere implementation of an existing practice on a computer was insufficient to warrant patent protection.

The Supreme Court clarified its holding as compared to its precedent when it stated that the difference between the present case and those prior holdings is that the claims of the patents upheld in the past involved an improvement to an existing technological process, as opposed to merely transferring that process to a computer. The Court went on to state that the claims at issue were not patentable because they do not “purport to improve the functioning of the computer itself,” nor do they “effect an improvement in any other technology or technical field” but rather the claims at issue amount to nothing significantly more than “an instruction to apply the abstract idea of intermediated settlement using some unspecified generic computer.” The Court deemed this not “enough” to transform the abstract idea of intermediated settlement in to a patent-eligible invention.

The Billy Goat takeaway: Those sued by patent trolls wielding software patents have a strengthened invalidity defense if those patents merely implement well-known techniques on a computer. Since software patents are the domain of the vast majority of the patent trolls, this decision is likely to at least give pause to patent trolls who seek to liberally enforce software patents.

Akamai Technologies, Inc. v. Limelight Networks, Inc.

In Akamai, the Supreme Court looked at the issue of induced infringement of patents. The case centered on the Federal Circuit’s en banc holding that a party could show induced infringement where no single party performed all of the steps of a method claim but both the inducer and the induced party each performed some of the steps of the method claim. In the Federal Circuit decision, the court distinguished infringement under 35 U.S.C. § 271(a) from infringement under § 271(b). According to the Federal Circuit, while liability for infringement under 271(a) required a single entity to perform all of the claimed steps of a method, infringement could still lie under 271(b) if the infringer carried out some of the steps while relying on another party to perform the remaining steps. Thus, according to the Federal Circuit, while it was still necessary to show that there has been direct infringement as a predicate to finding induced infringement, there is no requirement that a single party be found liable for that direct infringement.

The Supreme Court disagreed. A unanimous Court held that there could be no liability for induced infringement under 271(b) unless there was direct infringement and that direct infringement required a single entity to perform all the claimed steps of the patented method.

The Billy Goat takeaway: It is now potentially harder for patent trolls to sue software developers and sellers for induced infringement.

With today’s complicated computer networks and systems, it’s not uncommon for a software developer or seller to operate its software on both the seller’s servers and on the user’s hard drive. Such software performs certain steps on the user’s computer while some steps are performed by the developer/seller on their computer. In such scenarios, neither the developer/seller nor the user are performing all of the steps — meaning there is no direct infringer. And without a direct infringer, there can be no induced infringement liability for the software developer/seller.

This removes a major arrow from a patent troll’s quiver and makes it harder for patent trolls to simply lump everybody involved in software operation into litigation, where things can be can sorted out during expensive discovery. Without some sort of explanation as to who is performing all of the required steps, there can be no direct infringement and the litigation cannot be maintained.


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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