Dealing with trolls: litigation trends and their impact on licensing strategies

Litigating against non-practising entities – classic “troll” companies, research institutions, universities and even practising corporations seeking to monetise intellectual property that is not being commercialised – will always present significant legal challenges. Historically, these entities have employed a variety of successful enforcement strategies in pursuit of their business model – licensing by litigating. First and foremost is the strategy of bringing suit in district courts that are demonstrably friendly to patent holders and, in particular, to non-practising holders of patent rights. When judging these entities using statistics compiled in various analytical studies of the patent troll phenomenon, their business model appears to be for the most part robust, at least when measured by their trial win rates and damage awards, as well as settlements extracted by litigation such as the US$612.5 million payment that Research In Motion made to end infringement litigation.

However, what does the future hold for non-practising entities? The balance of power in the courtroom has changed and is clearly shifting in favour of accused infringers. These trends include: 

• Rulings on available remedies in patent infringement litigation. 
• Damages awarded if the patent holder is successful. 
• Patent validity. 
• Venue issues.

Injunctions are no longer automatically available after winning at trial, and favourable jury verdicts on issues of liability or damages, or both, have been set aside in appeals by defendants to the Federal Circuit. Perhaps most importantly, patent holders can no longer assume with a high degree of certainty that filing a complaint in a favourable forum means that the case will actually be litigated there. For both patent holders and accused infringers, these judicial trends have taken hold and brought more significance to the strategic decisions that are made before the litigation begins.

The current state of non-practising entity affairs: PricewaterhouseCoopers 2009 Patent Litigation Study
How successful are non-practising entities in US patent infringement litigation? Some observers have characterised them as “thriving” and, if the statistics are accurate, that seems to be an appropriate description. According to the PricewaterhouseCoopers (PwC) 2009 Patent Litigation Study, at trial, non-practising entities are likely to win their infringement cases 67% of the time. In other words, they will win two out of every three infringement suits if the case reaches the trial phase – approximately the same win rate at trial as practising entities litigating their patents. When they win, non-practising patent holders appear to be recovering damages that are orders of magnitude greater than those recovered by practising entities when enforcing their patents. Consider these statistics.

In absolute terms, between 1995 and 2008, non-practising entities recovered damages at trial which were about twice the average award to practising entities. From 2002 until 2008, the median damage award at trial for a non-practising entity was about three times the median award to a practising entity. If the focus is only on the largest infringement litigation awards (ie, those exceeding US$100 million), 40% of them between 2005 and 2008 were recoveries by non-practising patent holders. And, depending on how one chooses to define a “non-practising entity” (eg, some would include practising entities that either lack the ability or choose not to compete in the market that exploits the patented technology), the number of those awards during that period rises to 70%.

It is only in those cases in which a district court is inclined to dispose of litigation through summary judgment that a non-practising entity is at a disadvantage compared to the practising patent holder. In these situations, the overall win rate in a lawsuit for non-practising patent holders falls to 29%, primarily due to a low summary judgment success rate of 11%. The success rates of practising entities are also affected by summary judgment rulings, but not to the same degree. Those entities succeed 19% of the time on summary judgment and have an overall win rate in infringement litigation of about 41%.

Enforcement strategies: how do non-practising patent holders typically litigate? 
The most common litigation strategy used by successful non-practising patent holders in US litigation is to sue in a district court that is friendly to patent holders. The PwC study indicates that the most friendly US federal court venue for a patent holder is the Middle District of Florida, where the win rate at trial is slightly less than 77%. In the more well-known Eastern District of Virginia and Eastern District of Texas federal courts, patent holder win rates at trial are 75% and almost 67%, respectively. As a comparison, throughout the US federal court system, the study indicates that patent holders win about 67% of their patent trials.

The time that it takes to bring a case to trial is often a factor in the outcome of the litigation. Generally speaking, the faster the court’s docket, the greater the advantage to a patent holder litigating in that district. One good example of this is the so-called BlackBerry litigation (NTP, Inc v Research In Motion, Ltd), filed in the Eastern District of Virginia, which went to trial in about 12 months. In this district the average time taken from filing of a complaint until the court conducts a trial is about 10 to 11 months. On average, cases filed in the Eastern District of Texas reach trial in about 21 to 22 months. Throughout the federal court system, the time that it takes to bring a case to trial after filing a complaint is about 25 months.

The Eastern District of Virginia and the Eastern District of Texas federal courts are particularly friendly venues for non-practising patent holders. This is primarily the result of a shorter-than-average time to trial in those districts and fewer dispositions of infringement lawsuits through summary judgment. The PwC study indicates that in Virginia, non-practising entities will succeed more than 64% of the time in lawsuits filed in that venue. In the Texas court, those patent holders will succeed 42% of the time overall.

As noted, the overall non-practising patent holder win rate throughout the rest of the federal court system is about 29%. The Delaware federal court is also a favourable forum for non-practising patent holders. The PwC study indicates that those entities will win more than 64% of the infringement lawsuits brought in that district. Similar to the Virginia and Texas federal courts, a contributory characteristic to this favourable judicial environment is the district’s less frequent use of summary judgment to dispose of lawsuits before trial. Another favourable characteristic of the Delaware court is its shorter-than-average time to trial. In terms of docket speed and overall patent holder success rates, the Virginia, Texas and Delaware districts are all within the top five most favourable venues for patent holders ranked in the PwC study.

The future for non-practising patent holders: judicial trends affecting US litigation strategies
Several clear judicial trends in the United States will alter the advantages held by patent holders and the disadvantages of being an accused infringer in litigation.

Injunctions: fewer, but with some alternatives 
The Supreme Court’s 2006 decision in eBay v MercExchange held that injunctive relief is not automatic in patent infringement litigation, and effectively set elevated standards for determining those cases in which such relief is appropriate. As a result, fewer motions for permanent injunctions have been granted by the US district courts. The district court judges making those decisions, with the approval of the Federal Circuit in a number of appeals (eg, Paice v Toyota), have awarded ongoing royalties as a substitute for injunctive relief to compensate patent holders for the post-judgment use of their patented technology. For those patent holders that do not meet the eBay standards, the courts have effectively taken away their option not to license their own technology.

Recently, a federal judge in the Western District of Wisconsin (another fast-track-to-trial district, ranking second after the Eastern District of Virginia in that category and popular for that reason with non-practising holders) followed the Federal Circuit’s Paice ruling in Ricoh v Quanta, denying injunctive relief to Ricoh because it chose to license its patents instead of competing commercially in the marketplace by selling products that used the patented technology.

One reaction of non-practising patent holders to these higher standards for injunctive relief has been to file a complaint with the US International Trade Commission (ITC) seeking an exclusion order against the import of overseas companies’ products. It is the general consensus that the eBay decision does not govern the issuance of exclusion orders in ITC proceedings, and that the ITC has been receptive to proceedings filed by non-practising patent holders such as Paice. Non-practising entities must rely on licensing to establish the existence of a “domestic industry” in the United States – a requirement to initiate a so-called Section 337 action for patent infringement. In its recent Coaxial Cable decision the ITC went even further, ruling that a non-practising entity that is litigating – and, as a result, licensing – its patented technology meets this requirement.

Damages: less
Since the Supreme Court’s ruling in eBay, the Federal Circuit has actively intervened in damages issues in patent infringement litigation. Its Seagate decision in August 2007 raised the standard for a finding of wilful infringement to “objective recklessness” and made it more difficult for patent holders to recover enhanced damages. Beginning with Judge Rader (now the Federal Circuit chief judge) in the Cornell district court litigation, and later the court in Lucent, two US$100 million-plus damages awards (one exceeding US$500 million) have been set aside because the evidence offered did not support the broad royalty base underlying the award or reflect the contribution of the invention to advancing the patented technology. In a more recent decision, ResQNet, the Federal Circuit again vacated an award because the licence agreements relied on by the patent holder’s expert as evidence to support his opinion on damages were not commensurate in scope with the methodology that he used. Overall, these rulings have heightened the evidentiary standards required to support damages awards and require the patent holder, through an expert witness and factual evidence, to provide adequate proof to support its damages methodology.

Venue: new possibilities
Under US jurisprudence, a petition to a US federal appellate circuit court to issue an order of mandamus is considered to be a request for extraordinary relief and thus they are infrequently granted. Yet since the end of 2008, the Federal Circuit has issued a series of mandamus orders – five in total up until June 2010 – in which different judges of the Eastern District of Texas have been directed to transfer lawsuits filed therein to other districts. These orders (In re TS Tech (December 2008); In re Genentech (May 2009); In re Hoffmann-LaRoche (December 2009); In re Nintendo (December 2009); and In re Zimmer Holdings (June 2010)) have by themselves significantly altered the litigation landscape for patent holders.

This is particularly true for plaintiffs filing in those districts that are considered to be friendly forums for patent holders. In each of these cases the Federal Circuit directed that the lawsuit be transferred elsewhere, because there was no real presence in Texas or no real connection to Texas of the parties, the witnesses or the evidence relevant to the litigation. As a result, the predictability normally associated with filing a complaint in certain venues has changed significantly.

Win rates: lower
A significant shift on a substantive (as opposed to procedural) level in the Federal Circuit’s rulings on validity issues is also reshaping litigation strategies. Not long after the Supreme Court’s KSR decision, the Federal Circuit, in its Leapfrog (May 2007) decision, upheld a district court’s judgment of invalidity for obviousness that found secondary considerations, such as commercial success, insufficient to overcome strong technical evidence of obviousness. In its Translogic (October 2007) ruling the court vacated a district court judgment rejecting an obviousness invalidity defence in view of a contrary ruling in a parallel US Patent and Trademark Office re-examination proceeding.

Since then, in a number of opinions, including its recent decisions in Anascape (April 2010), Orion (May 2010) and Master Lock (July 2010), the court has set aside district court verdicts rejecting invalidity defences, finding the litigated patents invalid as they failed the non-obviousness test and other requirements of US patent law.

The patent litigation future for non-practising entities: summing up
What is the likelihood that non-practising patent holders will be able to convince a court to grant a permanent injunction against the defendants in their lawsuits? The clear trend is that fewer injunctions will be granted; however, at least for now, it seems that the courts will require compensation for the use of the patented inventions in the form of ongoing royalties, and that these royalties could be significant. Further, for the time being, the option of using an ITC proceeding to exclude products made outside the United States through exclusion orders will be a serious and significant alternative form of relief that is available to patent holders.

The negative news for non-practising entities, however, is the Federal Circuit’s recent trend of active intervention in substantive patentability issues and damages awards at the appellate level.

All things considered, the most significant judicial trend that is most likely to affect the litigation strategies of non-practising entities is the availability of new venue possibilities as a result of the Federal Circuit rulings on petitions for mandamus directing the district court judges in the popular Eastern District of Texas to transfer lawsuits filed there elsewhere. This is because the venue where a dispute is litigated is often a decisive factor in determining the outcome of a lawsuit. To sum up briefly, although non-practising patent holders are undoubtedly holding their own in patent infringement litigation, the balance of power is shifting and different challenges will inevitably lead to changes in how these entities litigate to license. On the one hand, accused infringers will benefit from new possibilities to transfer a litigation to more defendant-favourable district courts; while on the other, non-practising entities can offset district court disadvantages by using the ITC as an alternative forum, or even a second venue, in which to litigate.

This article first appeared in Intellectual Asset Management magazine'sLicensing 250, published by The IP Media Group (www.theipmediagroup.com).