By now, we've all heard the media recount the story of the patent troll. Patent trolls, or non-practice entities (NPE’s), are typically companies that don’t make products, but instead operate by licensing and enforcing patent rights against accused infringers. Since an NPE’s success hinges on its ability to draw profits from litigation and licensing fees, its incentives for filing claims and threatening infringement suits often do not mirror those of companies who are trying to protect their products on the market. Figures from United Patents, an organization whose goal is to reduce NPE litigation, report that 61% of all patent cases in 2014 involved NPE’s. Because litigating these suits costs billions of dollars on the economy each year, many organizations across industries and government see these suits as frivolous and burdensome on innovation. As a result, they are clamoring for changes to the system.
Congress Tries its Hand at a Fix
Earlier versions of the American Invents Acts (AIA), which passed in 2011, included provisions that would have reigned in oversized jury awards and limited low-quality patents from being issued. But these provisions were ultimately cut from the final revision of the bill. While the final version made large strides in patent reform, it did little to combat the proliferation of frivolous litigation.
In 2013, members of Congress tried a second time to solve the problem of frivolous litigation through provisions in the Innovation Act (H.R.3309), sponsored by Representative Bob Goodlatte. The proposed provisions aimed to curb frivolous patent litigation through fee shifting, as well as through reform to discovery procedures and pleadings. The bill garnered widespread bipartisan support and President Obama’s blessing. It passed through the House by a large margin. But the bill never passed the Senate because, in a somewhat surprising move, the Chairman of the Senate Judiciary Committee, Senator Patrick Leahy, announced he was taking the bill off the Committee’s agenda. It was rumored that lobbying pressure from the pharmaceutical industry was undermining Leahy’s ability to build bipartisan support for the bill.
Maybe the third time will be the charm: Rep. Goodlatte introduced a “new” version of the Innovation Act on February 5th of this year, which contains essentially the same provisions as the one passed by the House in 2013.
How Does Fee Shifting Work?
One prominent provision of the Innovation Act is a rule that would replace the default “American rule” of parties bearing their own litigation costs with a fee shifting provision where the non-prevailing party must pay the prevailing party’s attorney fees under certain circumstances.
Under the current rule, a court may award fees to the prevailing party if the case is “exceptional.” 35 U.S.C. § 285. Recently, the standard for determining if a case is “exceptional” was revisited in Octane Fitness, LLC v. ICON Health & Fitness, Inc., The Supreme Court stated that an exceptional case is “simply one that stands out from others with respect to the substantive strength of a party’s litigation position … or the unreasonable manner in which the case was litigated.” 134 S.Ct. 1749, 1756 (2014). The Court seemed to give lower courts considerable discretion in making this determination on a case-by-case basis by considering the the “totality of the circumstances” under a preponderance of the evidence standard. Id.
The proposed rule in the Innovation Act would change the question from whether the case was “exceptional” to whether the non-prevailing party’s position was “reasonably justified in law and fact.” H.R. 9 114th Cong. § 285(a) (2015).
If the court found that the non-prevailing party was reasonably justified, then no fees would be awarded. Otherwise, the non-prevailing party must pay the prevailing party’s fees. However, the proposed rule carves out an exception for awarding fees if “special circumstances (such as severe economic hardship to a named inventor) make an award unjust”. H.R. 9, 114th Cong. § 299A (b)(3) (2015).
Can Fee Shifting Actually Help the Cause?
How does fee shifting address the goal of reducing frivolous patent litigation? NPE’s wants to cash in on as many big payouts in the form of settlements and damage awards as possible. Therefore, under the current system, the NPE is incentivized to buy a bunch of lottery tickets in the form of patent lawsuits knowing that there will be some winners and some losers. The NPE hopes that their attorney’s fees for all of the lawsuits will be offset by big payouts from the winners. The proposed fee shifting arrangement aims to make NPE’s more reluctant to sue because they would not only have to pay their own attorney’s fees, but also potentially get left footing the opposing party’s bill if they lose.
So what would this mean for a company like Smartflash who, in addition to suing Apple, also sued Google, Amazon, and Samsung? Would the passing of the Innovation Act cause Smartflash to file fewer suits? Or even stop filing suits altogether? Again, to avoid paying the opponent’s fees, the non-prevailing party’s claims need to be “reasonably justified in law and fact.” Smartflash’s claim was strong enough to win a $533 million judgment against Apple. This suggests, granted with the benefit of hindsight, that their position would pass the reasonableness test. So assuming it has similar infringement claims, even if Smartflash lost its case against Google, the court may still find their position reasonable and not force them to pay Google’s attorney’s fees. Therefore, the fee shifting provision of the Act alone would probably not affect the activity of an NPE like Smartflash in bringing this kind of suit.
However, not all NPE’s have the resources or portfolio strength of Smartflash. It’s likely that at least some patent trolls would rethink their strategy with the added risk of paying the opposing party’s attorney’s fees. An NPE who is considering rolling the dice on a weak case and is tight on capital may be more reluctant to move forward with litigation under the fee shifting provision. The accused infringer, therefore, may be more confident to not settle early knowing the NPE will likely back down.
Sure, fee shifting may discourage some NPE’s from filing frivolous suits, but what effect will it have on start-ups and individual patent owners/inventors who may have legitimate infringement claims? If a start-up has a legitimate infringement claim against a big tech company, fee shifting may deter it from pursuing the claim because of the prospect of losing and subsequently paying the tech company’s million dollar attorney’s bills. Also, if the start-up faced a lawsuit for infringement, it may be more inclined to settle early and not risk having to pay the other side’s fees in a losing battle. Or it may not affect their decision because, regardless of a fee shifting provision, they wouldn’t have the resources to fund their own defense.
Although many support the intent of the bill - curbing frivolous litigation - the proposed law isn’t being welcomed with open arms. The proposal has come under heat from the Association of American Universities (AAU). In a letter to Rep. Goodlatte in February 2015, the AAU wrote on behalf of 45 universities (including Penn) to voice its concerns over the Innovation Act’s fee shifting provision. It warned that the Act would discourage patent holders from defending patent litigation. This in turn would discourage venture capitalists from investing in university patents and decrease research discoveries. The AAU urged Congress to take into consideration the recent judicial and administrative changes to patent law, including the enactment of the AIA and Supreme Court decisions like Alice Corp. v. CLS Bank Int’l before rushing to enact new legislation. 134 S. Ct. 2347 (2014).
At this time, we can only speculate on how the proposed fee shifting provision would change the landscape of patent litigation. Would changing from an “exceptional” standard to a “reasonably justified in law and fact” rule really alter the behavior of NPE’s? The bill takes a good shot at slaying the patent troll problem. But perhaps after allowing some time for the effects of the AIA and recent Supreme Court decisions to run their course, we may slowly see the patent troll problem die off without additional legislation.