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US Supreme Court decisions make patent trolling riskier

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May 21, 2014

This article was contributed by Adam Saunders

While the recent decision for Oracle on the copyrighting of APIs may be distressing to software developers, the Supreme Court of the US (SCOTUS) offered some comfort on a different issue a few weeks ago. The court dealt a significant blow to patent trolling.

Exhibiting an awareness of frivolous litigation plaguing the patent system, SCOTUS chose to hear oral arguments in two cases — Octane v. ICON, and Highmark v. Allcare — that focused on the awarding of legal fees for victorious defendants of weak-to-completely-baseless lawsuits for patent infringement. We looked at the cases in March.

Toward the end of April, SCOTUS made two 9–0 rulings in these cases. And these rulings will likely deter much frivolous patent litigation because they effectively create a threat of major financial loss to an unsuccessful plaintiff. For example, suppose a troll's business model relies on getting settlements of several tens of thousands of dollars from numerous defendants. If someone it threatens stands up to it, and gets a judgment that includes hundreds of thousands of dollars in lawyer's fees, that could make a major impact on the troll.

Writing for a unanimous court, Justice Sotomayor found [PDF] in favor of Octane in Octane v. ICON. The issue in the case was the standard by which a "court in exceptional cases may award reasonable attorney fees to the prevailing party." Sotomayor began by tracing the history of the rules for attorney's fee awards in patent litigation. The most recent change to the rules, Section 285 of the Patent Act, essentially inserted two words — "exceptional cases" — into those rules. Sotomayor noted that SCOTUS had previously ruled that those two words merely clarify the rules.

Following the addition of an appellate court for all patent matters in the US — the Court of Appeals for the Federal Circuit (CAFC) — in 1982, the status quo was largely upheld for over twenty years; that is, "the Federal Circuit [...] instructed district courts to consider the totality of the circumstances when making fee determinations under §285" (page 5). But when the CAFC came across a particular case nine years ago — Brooks Furniture v. Dutailier — it decided on its own to implement a new standard: a defendant could only get attorney's fees if the lawsuit was done "in subjective bad faith and [...] [it was] objectively baseless" (page 8).

The Supreme Court has now cast aside that restrictive standard. After looking at dictionary definitions of "exceptional", SCOTUS decided on this standard (pages 7–8):

That an 'exceptional' case is simply one that stands out from others with respect to the substantive strength of a party's litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated. District courts may determine whether a case is 'exceptional' in the case-by-case exercise of their discretion, considering the totality of the circumstances.

Accordingly, SCOTUS reversed the CAFC's ruling, and ordered that the case go back to the lower court to resolve the attorney's fee question by following the new standard SCOTUS had established.

As the other case, Highmark v. Allcare, also dealt with attorney's fees and Section 285, the ruling [PDF] was short. The particular issue in the case was how much deference appeals courts should give to district courts that award attorney's fees in patent infringement cases. If higher courts must defer to lower courts on these rulings, it could deter frivolous litigators, because it closes off an avenue for them to keep the threat of a lawsuit alive.

The CAFC ruled that no deference should be awarded to the lower courts. Speaking again for a unanimous SCOTUS, Sotomayor reversed this decision in light of the Octane ruling: "Because §285 commits the determination whether a case is 'exceptional' to the discretion of the district court, that decision is to be reviewed on appeal for abuse of discretion" (page 4). This effectively means that a higher court reversing an award of attorney's fees will become quite uncommon. As with Octane, SCOTUS ordered the case back to the lower courts, and for those courts to apply the SCOTUS ruling.

These rulings have already sent some waves through the patent-litigation world. Several experienced patent litigators have expressed a belief that the anti-patent-troll bill before the US Senate will now likely die because it also centered around the issue of attorney's fee awards. Some have suggested that, with the broad discretion now clearly granted to them, district courts will feel much more confident in awarding attorney's fees to successful defendants of frivolous patent litigation. Kristen Fries, an experienced patent attorney, stated on the popular patent blog "Anticipate This" that the rulings "may aid in thwarting certain 'patent trolls' from asserting patent claims that are meritless or brought in bad faith."

The US software industry may be able to relax a little. After these rulings, some potential malicious litigators may need to rethink their strategy. That could lead to fewer weak patent suits, which would at least be a step in the right direction.


(Log in to post comments)

US Supreme Court decisions make patent trolling riskier

Posted May 22, 2014 2:37 UTC (Thu) by xtifr (subscriber, #143) [Link]

Several experienced patent litigators have expressed a belief that the anti-patent-troll bill before the US Senate will now likely die because it also centered around the issue of attorney's fee awards.

Indeed, that seems to be what has happened now, and the EFF is none too thrilled!

(Assuming that's the same bill, which it certainly sounds like.)

US Supreme Court decisions make patent trolling riskier

Posted May 22, 2014 15:47 UTC (Thu) by felixfix (subscriber, #242) [Link]

I'm confused. If the Supreme Court ruled that appeals courts owe no deference to trials courts, doesn't that mean appeals courts can overrule trial courts at will where it concerns awarding attorney's fees? Why would that make reversals uncommon?

US Supreme Court decisions make patent trolling riskier

Posted May 22, 2014 15:55 UTC (Thu) by Max.Hyre (guest, #1054) [Link]

The appeals court ruled the appeals court should give no deference, and your worry was then correct. The Supremes just reversed this (9-0, yay!), so we’re back where we should be.

US Supreme Court decisions make patent trolling riskier

Posted May 22, 2014 16:00 UTC (Thu) by felixfix (subscriber, #242) [Link]

Dang, too many abbreviations and too little awake time yet.

US Supreme Court decisions make patent trolling riskier

Posted Jun 2, 2014 20:01 UTC (Mon) by poruid (subscriber, #15924) [Link]

The appellate court applies a marginal test where only the lower courts ruling will not be given deference when no reasonable court could have reached to the ruling under appeal. (I'm Dutch, so my judicial understanding of US law could be ...)

US Supreme Court decisions make patent trolling riskier

Posted Jun 2, 2014 20:13 UTC (Mon) by dlang (subscriber, #313) [Link]

basically it means that the appeals court isn't supposed to second guess the Judge who had to actually deal with the troll. If that Judge rules that the troll was unreasonable, the appeals court can fiddle with the numbers, but would have to really justify overriding the awarding of fees.

Patent correctness as an externality

Posted May 22, 2014 15:49 UTC (Thu) by Max.Hyre (guest, #1054) [Link]

Unfortunately, the people creating this mess are unaffected by it. There is zero blowback to the USPTO for awarding a meritless patent. Hence this modest proposal:

Given this change, maybe the bill which is in danger of evaporating should be modified so that, say, 1/10% of the awarded damages should come out of the salary of the examiner who granted the patent. The amount should be enough that the examiner would be inconvenienced by it, but not so much as to scare people away from the job.

Of course, this conflicts with the USPTO’s being (AIUI) given cash for each patent awarded, but that’s an argument for another day.

Patent correctness as an externality

Posted May 23, 2014 4:38 UTC (Fri) by k8to (subscriber, #15413) [Link]

Given that the individual examiners are already not given nearly enough resources/time to do a reasonable job, I fail to see how threatening them will help.

Better to take the money from the office's budget.

Patent correctness as an externality

Posted May 23, 2014 19:33 UTC (Fri) by rgmoore (✭ supporter ✭, #75) [Link]

Better to take the money from the office's budget.

Or change the system so it gives the PTO an incentive to do a good job rather than to rush through things. The fee for filing a patent should be enough to pay the examiner's salary for a thorough examination. Filer's should have to pay extra for extremely long and complex patents, and they should definitely have to pay every time they change the filing. There should be an ability to charge an extra fee for wasting the examiner's time if the submission is obviously invalid.

Patent correctness as an externality

Posted May 23, 2014 21:30 UTC (Fri) by Jonno (subscriber, #49613) [Link]

> There should be an ability to charge an extra fee for wasting the examiner's time if the submission is obviously invalid.

No need, just charge the same fee for an obviously invalid applications as for an issued patent.

Currently USPTO charges $1860 for an invalid application, while a granted patent cost $2820 for the first 4 years, or $15420 for a full 20 years (with 50% off if you qualify for "Small Entity Status"). Simply charging the full $2820 for invalid applications should remove the incentive to approve everything and letting the courts sort out the mess...

Also, reducing the $12000 fee for "Request for ex parte reexamination" might be a good way to get some clean-up where necessary. In my opinion it shouldn't really be more expensive than the original examination...

Patent correctness as an externality

Posted May 23, 2014 21:56 UTC (Fri) by raven667 (subscriber, #5198) [Link]

If they are going for cost recovery it might make more sense to go the other way, minimum charge of $12,000 for review regardless of whether it is approved or not. That should be able to cover the cost of an _actual_ review, which the $2800 fee clearly does not.

We can only hope

Posted May 22, 2014 16:27 UTC (Thu) by rgmoore (✭ supporter ✭, #75) [Link]

I'm worried this won't have as much effect as we hope. With some careful structuring, it should be possible to make a patent trolling company with essentially no assets apart from the patent. The whole point of a patent troll is that they aren't doing anything except suing people for violating their patent, so they don't have any other business to go after. When they succeed in extracting money, they keep only enough to go after the next victim and pass the rest on to their financial backers as a dividend. If they ever lose and have to pay court costs, they declare bankruptcy and walk away, leaving nothing much of value for the victor.

We can only hope

Posted May 24, 2014 19:38 UTC (Sat) by Jonno (subscriber, #49613) [Link]

> I'm worried this won't have as much effect as we hope. [...] If they ever lose and have to pay court costs, they declare bankruptcy and walk away, leaving nothing much of value for the victor.
Except that declaring bankruptcy means that all assets, including the patent in question, have to be liquidated in order to pay the verdict. While that won't stop patent trolls completely it will at least slow them down a bit, requiring them to acquire a "new" patent and set up a "new" shell company after each court defeat.

We can only hope

Posted May 27, 2014 10:25 UTC (Tue) by robbe (subscriber, #16131) [Link]

> [...] all assets, including the patent in question, [...]
A patent that has just been proven worthless in court.

It would be better to attack this from legislation forbidding these kind of shell-company-games. Aren't there already laws against these? After all the trick is applicable to a lot more areas than patents -- wherever there is a liability risk, basically.

We can only hope

Posted May 27, 2014 13:34 UTC (Tue) by anselm (subscriber, #2796) [Link]

A patent that has just been proven worthless in court.

Not necessarily. If the court finds that company X does not infringe the patent, that doesn't mean companies Y and Z don't infringe it, either. (Whether it is possible to make money off it is of course a different question – the logical course for X would be to ask Y and Z for licensing fees, but that would probably just keep the patent litigation wheels turning.)

We can only hope

Posted May 29, 2014 8:04 UTC (Thu) by filipjoelsson (guest, #2622) [Link]

This sounds a bit like the classic scam? Sell something that sounds good, but is bad (eg Florida real estate). When the buyer has seen the real value (it was a swamp), they sue - but you have already moved the money to another legal entity.

Surely this behaviour is proof of ill intent, and considered illegal?

We can only hope

Posted May 29, 2014 14:32 UTC (Thu) by Wol (guest, #4433) [Link]

And in UK law it would rip the corporate veil. Bankruptcy, disbarment, and possible jail-time for the directors would be likely.

It's clear evidence that the corporation is doing the will of its directors, and therefore the directors are liable for the corporation's actions.

The "correct" order of things is that the directors carry out the will of the corporation, which should be acting in its own best interests. Repeatedly suing with the likelihood of being destroyed when (not if) a suit goes pear-shaped is clearly not in the interests of the corporation.

Cheers,
Wol


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