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Bar News - June 21, 2017

Intellectual Property Law: You Say ‘Non-Practicing Entity,’ I Say ‘Troll’


Developments in an Ongoing IP Litigation Debate

In an economy and society increasingly built around the creation and monetization of information, the growing importance of intellectual property litigation – and its risks and rewards – is a natural development.

Many litigants and observers view this growth negatively, and seek to limit the impact of such cases. Others view the litigation as the only way “the little guy” can cope with the economic might of tech companies and similar colossi. Recent developments will affect how – and where – such cases are prosecuted in the future.

Texas-Sized Impact on Patent Litigation

The city of Marshall, Texas, county seat of Harrison County, sits in the northeast corner of the state, nearly into Louisiana. Marshall has a population of just over 24,000. Its main industries include insurance claim processing, education (over 2,000 students attend one of four institutions of higher education within the city), manufacturing, and tourism. Marshall claims to be the Birthplace of Boogie Woogie, hosts an annual Fire Ant Festival, and is the self-proclaimed “Pottery Capital of the World.”

Marshall also seats the United States District Court for the Eastern District of Texas. This court has an out-sized role in intellectual property litigation – 45 percent of all patent cases are filed here. One judge in this district reportedly sits on more patent litigation cases than all the federal judges in New York, California, and Florida, combined.

A “rocket docket” for patent cases is enforced through strict timetables, page limits on documents, and a clock limiting oral arguments. Clients tend to like the speed. But plaintiffs are particularly happy in Marshall: they have a 75 percent success rate, compared with less than 50 percent for cases in New York. Hence, the large number of initial filings.

Defendants claim the majority of these cases are frivolous nuisance suits, brought by “trolls” who have no interest in actually producing a product under a patent and only want to skim a toll from the business by trading license fees for the avoidance of litigation. Many of those described as trolls object to the characterization, and argue that they provide a valuable economic function.

Historical Usage: ‘Trolls’ Impede Travelers

The word “troll” originates with Norse legends, and refers to a monstrous, clumsy creature, originally created from stone – very strong, but not so very bright. Traditionally, trolls were said to collect a toll from those trying to cross a bridge, or to otherwise harass travelers in some way. Readers of J.R.R. Tolkien’s The Hobbit may remember Tom, Bert, and William, three trolls who captured Bilbo Baggins and his dwarf companions and prepared to eat them, only to be delayed by Gandalf the wizard and turned into stone by the new day’s sunlight. (A common occupational hazard for trolls.)

Modern Usage: ‘Trolls’ Impede Use of IP

An “Internet troll” is a person who disrupts normal exchanges conducted on a website or in a chat room, by starting arguments or posting inflammatory comments with some goal extraneous to the conversation in which others are engaging. The term has sometimes been used to describe various forms of cyber-bullying. The mass media increasingly uses the term to describe any aggressive or annoying Internet user.

In commerce, a “trademark or copyright troll” is a pejorative term for one who suddenly presents himself to a business using the same or a similar trademark to one under registration by the troll. The troll presents the producer with two choices: pay a license fee to continue the use, untroubled, or prepare to litigate. The fee is usually less than the anticipated cost of fighting the claim in court. Many defendants choose economic discretion over valor, and pay the fee.

Similarly, the term “patent troll” deprecatingly refers to a person or company that attempts to enforce patent rights against accused infringers, often by threatening litigation. Since by some estimates a patent defense can cost in excess of $1 million, and the costs of a full trial exceed $2.5 million, many of those who are contacted pay the fare to “cross the bridge” rather than fight the troll.

Patent litigation plaintiffs often do not manufacture products or supply services based on the patents in question; in such a case, they unsurprisingly prefer the descriptive term “patent assertion entity” or “non-practicing entity” (NPE) to “troll.” Indeed, an ongoing case in Sullivan County Superior Court involves a self-described serial inventor claiming various lawyers, bankers, and publishers defamed him when describing him as a “patent troll.” ATL LLC, et al v. American Bankers’ Association, et al. (Disclosure: the author represents a defendant lawyer and law firm in the case.)

Arguments for Restraining ‘Trolls’

Studies by accounting firms, universities, and governmental agencies attest to the billions of dollars in direct costs imposed on businesses as a result of patent litigation brought by “patent assertion entities.”

Up to two-thirds of all patent suits in 2014 were initiated by such entities. Between 2009 and 2013, Apple reports that it was sued 171 times for alleged patent infringement. The dollars and time spent on defending these suits supplants the money and energy that might otherwise go into research and development, employee compensation, and expansion.

Arguments for Letting NPEs Continue

It can also be argued that these entities add value to the marketplace by creating a market for patents that would otherwise not exist. If manufacturers decline to credit the invention, the inventor’s time and energy are otherwise uncompensated. Inventors thereby may have benefitted.

It is also charged that the pejorative terminology unfairly and inappropriately tilts the field in favor of large companies which ignore patents, resent those who assert them, and look for ways to avoid having to defend their inappropriate actions.

Legislative Efforts to Restrain Trolls

Congress has considered legislation aimed at patent litigation reform in the past, including the Innovation Act (HR 9) and the Protecting American Talent and Entrepreneurship (PATENT) Act (S. 1137), both of which were introduced (or, in the case of HR 9, reintroduced) in 2015.

The Innovation Act and the PATENT Act both sought to curb trolls through heightened litigation requirements. For example, both bills would require an identification of each patent and claim allegedly infringed, and an element-by-element analysis of the infringement.

The Innovation Act demanded further pleading specificity, such as a description of the authority of the plaintiff to assert the patent and a list of prior complaints filed involving the patent. In addition, the Innovation Act would make fee-shifting the default rule and presumptively award the prevailing party reasonable fees and expenses. Technology companies that have largely been the target of NPE litigation generally supported the legislation.

Critics of the proposals included independent inventors, startups, venture-capital associations, and universities. They argued that the bills failed to distinguish their legitimate interests from those of the “abusive” trolls, and that the heightened pleading standards and fee-shifting provisions would raise enforcement costs, potentially harming independent inventors and startups without the resources of established technology companies.

A total of 22 bills addressing patent litigation were introduced in the 113th and 114th Congressional terms. Despite success in their respective congressional committees, both of these bills, like their predecessors, stalled in Congress. There has been no serious effort to revive these bills in the current congressional term.

Case Law Restraining Trolls

Two Supreme Court cases from 2014 initiated long-range changes that are only now being appreciated. In Octane Fitness LLC v. ICON Health & Fitness LLC and Highmark Inc. v. Allcare Health Management System Inc., the Court changed the framework and criteria for awarding attorney fees to the prevailing party. Both gave substantial discretion and deference to the district court to determine when such fees were appropriate. The effect has been to limit the initiation of clearly frivolous claims or questionable defenses, and a curb on an overly aggressive approach to discovery and trial tactics.

More recently, the May 22, 2017, decision in TC Heartland LLC v Kraft Food Group Brands LLC, was a significant blow to patent trolls. In a dispute over the application of two different venue provisions in the United States Code, Justice Thomas, writing for a unanimous Court, declared that a domestic corporation “resides” only in the state of its incorporation. The result is that the number of filings in the plaintiff-friendly Eastern District of Texas should fall dramatically.

If the political climate of the next few years proves business-friendly, those seen as interfering with economic success will be treated poorly. With Congress unable to resolve whom to favor in that context, the Court seems to have taken the lead. There will be significant changes in litigation behavior as a result of a broader understanding of these cases.

William Saturley

Bill Saturley is a director of Preti Flaherty. He tries cases of all kinds, including those involving disputes over intellectual property. He practices from both the Concord and Boston offices of the firm.

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