For frequent patent asserters, things used to be simple: buy patents, allege infringement against anyone you could and then make settlement offers.
But a series of issues is forcing changes to the business model of companies that make money from patents they do not use to produce goods or services.
Known as “non-practicing entities” – or pejoratively as “trolls” – these organizations are increasingly making fewer but bigger demands for licensing fees from companies they allege have used their inventions without their permission.
That is because NPEs must invest more money up front in vetting their patents, lest a defendant use new legal weapons to invalidate their intellectual property or even force them to pay attorneys’ fees for the defendants.
“There appear to be new players, a second generation of patent owners using litigation as a business model,” says Ray Torgerson, a Houston-based partner at Porter Hedges.
A May decision from the U.S. Supreme Court is forcing the new NPEs to bring litigation outside the Eastern District of Texas, whose efficient judges and plaintiff-friendly rules had for years made it the go-to place to file infringement suits.
At least for now, experts say, a number of NPEs still use the old-school approach of asserting weak patents and asking for less money than it would cost to defend the case.
“Troll demands typically come in at $100,000 at the high end and routinely settle for well below $25,000,” says Jason Wietjes, a Dallas-based shareholder at Polsinelli.
When the NPE boom hit overdrive from 2005 through 2007, “multimillion dollar settlement demands were the norm and were expected,” he says.
“Cases used to drag on much longer. The plaintiffs would stay in the case and hold the defendants’ feet to the fire to extract top dollar settlements,” he says. “Now settlement is usually a foregone conclusion, with the demand coming very early in the case.”
PTAB, Alice reduce weak patent litigation
Still, even small-dollar trolls are taking steps to protect their patents early in the process of seeking licensing fees.
“NPEs may assert more patents and more claims, knowing that this increases the cost of bringing (administrative) challenges to the asserted claims,” says Jay Utley, a partner in the Dallas office of Baker McKenzie. “We’ve also seen more of a desire to negotiate early and for low amounts when NPEs bring cases based on suspect patents.”
The trolls’ party arguably began to wane in late 2012, when the U.S. Patent and Trademark Office launched an arm that allows outside parties to challenge other people’s intellectual property administratively.
Even if the IP emerges unscathed from a challenge before the Patent Trial and Appeal Board, “the parties have effectively added a small lawsuit’s worth of time and expense on top of the original infringement suit,” Torgerson says.
The U.S. Supreme Court delivered another blow to trolls in 2014, when its decision in Alice v. CLS Bank International created on-going confusion about what types of software-related inventions are patentable.
Since Alice, judges have more frequently killed patents for supposedly covering “abstract ideas,” which aren’t patentable under 35 USC 101, studies have found.
The justices in 2014 also made it easier for defendants to force trolls to pay their attorney fees for bringing weak cases or behaving unreasonably in litigation.
Eastern District Judge Rodney Gilstrap last year ordered one of the nation’s most-frequent filers of patent suits, Plano-based eDekka, to pay a combined $390,829 in attorneys’ fees for dozens of defendants.
When plaintiffs demand small settlements for baseless claims, judges increasingly toss out the suits and award defendants their attorneys’ fees, according to Justin Cohen, a Dallas-based partner in intellectual property litigation at Thompson & Knight.
“Most of these bad actors have moved on because of smaller potential profits and increased financial risk from exceptional-case motions,” he says.
TC Heartland: Tossed out of East Texas
Another nail in the coffin of low-dollar trolls was the justices’ May 22 decision in TC Heartland v. Kraft.
By sharply limiting venues where plaintiffs can bring patent cases, TC Heartland means East Texas will no longer be where high-volume plaintiffs bring most of their cases
But while NPEs may not sue as often, they now can pose a bigger financial risk when they do knock, experts say.
Adam Sanderson this summer spearheaded a defense verdict in East Texas against a well-funded NPE that sued only one defendant
“The NPE’s goal was not to extract a ‘cost of defense payoff.’ They were seeking millions of dollars,” says Sanderson, a partner at Dallas-based Reese Gordon Marketos.
Low-dollar settlements aren’t economically viable for NPEs that use better attorneys, acquire better patents and target fewer parties for infringement claims, he adds.
“Corporate defendants need to be prepared from the outset to present a strong defense at trial,” he says.
Ironically, the Supreme Court could revive low-dollar trolls to a degree if the justices rule that a popular PTAB proceeding for challenging patents is unconstitutional, experts say.
In a case pitting two Houston companies, Oil States Energy Services v. Greene’s Energy Group, the justices will decide if “inter partes reviews” – which Congress created as part of its 2011 patent reform law – should be conducted by Article III courts.
“NPEs would benefit if the Justices rule that IPRs before PTAB are unconstitutional,” says Richard Fladung, a Houston-based partner at Strasburger & Price.
In their current form, IPRs allow defendants to challenge patents both at PTAB and in court.
Defendants can also ask the judge to put the federal suit on hold during the IPR, something that increases plaintiffs’ costs and risks, experts say.
Eliminating IPRs could prompt more lawsuits based on lower quality patents, Sanderson says.
“When assessing a potential case today, you have to carefully analyze whether the patent can withstand an IPR challenge,” he says. “That analysis would become moot if the Supreme Court rules they are unconstitutional.”