Patently Contentious -- Fighting Patent Trolls

by Rene Ciria-Cruz

See update below.

To corporate counsel in the high-tech industry, being attacked by nonpracticing entities (NPEs)?also known pejoratively as trolls?is very much like coming under siege. As usually defined, NPEs create no products from the high-tech patents they own. Corporate counsel see them as just racking up earnings by taking other companies captive, releasing them only for a handsome ransom of licensing fees?or the damages awarded in a patent-infringement lawsuit. And just like during a military offensive, such activity can leave a company cut off from the open market, often tying up product development and locking it into costly litigation.

There's no question patent litigation is expensive. For a single defendant fighting a patent claim?with $1 million to $25 million sought in damages?the average cost of litigation last year was $3.1 million, according to the American Intellectual Property Law Association (AIPLA). In 2005 Microsoft said it was spending close to $100 million annually to defend itself against 35 to 40 patent actions at any given time.

"The troll's lawsuit can cripple a business. It's disgusting," fumes Lee Cheng, general counsel of Newegg, the Internet electronics retailer based in City of Industry. "The patent troll patent-infringement lawsuit is replacing securities class action as the extortionary weapon of choice in the business world," says Cheng.

But these days, high-tech firms are arming themselves to the teeth. They are challenging the very patents NPEs wield against them, staring down the NPEs with aggressive litigation tactics, and pooling resources with many companies to fight the onslaught of patent-infringe-ment claims.

NPEs have been around for more than 15 years, but their numbers grew sharply during the dot-com bust. Today, they are as busy as ever: More than 280 NPEs are active in patent litigation. In the year ended September 2008, 2,909 patent infringements were filed, including 514 in California. And for the 850 U.S. patent suits brought in the first four months of last year, patentees in 14 percent of the cases were nonpracticing entities, reports the trade group Global Semiconductor Alliance (GSA).

Three licensing companies?Acacia Technologies, Rates Technology, and Ronald A. Katz Technology Licensing?filed the most litigation from 2003 to 2008, according to research group PatentFreedom. But Acacia Technologies is no troll, says Paul Ryan, the chief executive officer of its parent company, Acacia Research of Newport Beach. Small firms and universities "outsource the licensing of their patents to us," Ryan says. " 'Trolls' is what small companies are called for doing what big companies do, which is make a profit off of their patents."

"Remember," Ryan adds, citing figures from Intellectual Ventures, another NPE, "60 percent of all patents are owned by small companies, universities, and the like, while big companies that 'doth protest too much' earn 99 percent of the profits from the fewer patents they own."

Further muddying the waters is that accusations of trolling are hurled against some well-known companies that do create their own technologies. Los Altos?based Rambus, a provider of high-speed chip interfaces, is among them. But its senior vice president and general counsel, Tom Lavelle, laughs off blogs that rebuke the company for "trollish" behavior.

Rambus, Lavelle says, has developed its own technology since 1990. And most of the patents it licenses have been developed in-house. "We've mainly decided not to concentrate on manufacturing our own products and to go the licensing route. If that makes us a troll, then a lot of other major corporations who cross-license their patents are too."

Rambus has sued for patent infringement at least eleven times since 2000. Compared with NPEs, PatentFreedom reports, Rambus ranks sixth in the number of patent families owned (a patent family is a single invention patented in several countries). "Inventors must be justly compensated for the use of their intellectual property, or innovation will be killed," insists Lavelle. "IP and its protection made this country Number One. If the [court] trials are very long and you spend hundreds of millions of dollars protecting your patent, and yet you get only a smaller amount in damages, what's the point in inventing anything?"

Still, filing patent-infringement claims can be a lucrative business model. In 2009 the resulting legal fees and settlement payments were more than $3 billion, estimates the GSA. Meanwhile, the median damage award won by patentees from 2005 to 2009 was $5.29 million, according to Professor Paul Janicke of the University of Houston Law Center.

With millions of dollars to be made, patent holders use a variety of tactics to protect their intellectual property. Often, critics say, NPEs will buy and enforce broad software and business-process patents that shouldn't have been granted in the first place. "Software isn't intended to be patented," says Newegg's Cheng. "You can't patent software in the European Union or China."

Defendants blame underfunding and understaffing of the U.S. Patent and Trademark Office (USPTO) for the preponderance of questionable patents. "Any new wave of technology is hard for the USPTO to keep up with, since they lack the necessary experts. That's how many dubious patents get past it," says Cheng.

Another way that NPEs attack tech companies is by filing claims with multiple defendants?even dozens. This causes "defense-coordination problems, court-management issues, and drives up litigation costs," says Emily Ward, associate general counsel for patents at eBay. The online auction pioneer has successfully defeated a number of NPE lawsuits, including claims brought by Netcraft, MercExchange, and one by Acacia subsidiary Peer Communications against Skype (which eBay then owned).

Defense attorneys say multidefendant cases let NPEs pick off defendants that can't afford to go to trial and are willing to settle. For example, reports Cheng, Newegg's four co-defendants in a patent-infringement claim that Soverain Software filed in 2007 have opted to settle. In an email, Soverain denied that it is a "troll," pointing to its flagship product, Transact, which it has sold to customers in 25 countries. Citing pending litigation, the company declined to comment further.

NPEs are also increasingly trying to outflank defendants by filing claims in the U.S. International Trade Commission (USITC), a quasi-judicial federal agency that probes trade matters and adjudicates cases involving imports that allegedly infringe intellectual-property rights. The USITC doesn't award damages, but "it can issue an injunction against your imported product, forcing you to settle," Cheng says.

Another long-standing NPE strategy is to file suits in jurisdictions and venues where trials go faster and the damage awards are more generous. The win rate in the Eastern District of Texas, for example, is the same as in other districts, but the trials usually conclude more quickly. Plus, the median damage award there in the past five years was between $34 million and $41 million, says University of Houston's Janicke. That compares with a $7 million median in the Central District of California?the third busiest venue, after the Northern District of California and the Eastern District of Texas.

But this strategy is starting to catch up with NPEs, and the number of patent claims filed in the Eastern District of Texas is now falling: The heavy caseload has caused delay; it now takes from 26 to 30 months to get to trial, according to AIPLA. And though patent work now comprises up to 30 percent of the district's cases, it amounts to 75 to 80 percent of Eastern District Judge T. John Ward's workload, he told the association. The district also has come under criticism from the Federal Circuit, which has urged the Eastern District to limit the number of cases it takes by requiring that parties have more substantial links to East Texas before allowing a claim to proceed.

Also, just last month, the Federal Circuit gave NPEs a setback in the form of a new strategy that patent-infringement defendants can use to influence selection of the trial venue. The court ruled that a company receiving notices of possible infringement from a patent holder can sue for declaratory relief, even if the notices don't explicitly threaten litigation (Hewlett-Packard Co. v. Acceleron LLC, 2009 WL 4432580 (Fed. Cir. 2009)). Such preemptive litigation gives the potential target of the NPE more control over the venue choice under the "first to file" rule that courts routinely apply. The key is making sure the first case has proper jurisdiction to begin with. (See Acceleron, LLC v. Egenera, Inc., 634 F. Supp. 2d 758 (E.D. Tex. 2009).)

To be sure, accused patent infring- ers have been sharpening their defenses. If their opponent is a corporation that also uses patents, for example, they may counter-sue for unfair competition or trade-secret violations.

But because NPEs don't create products, it's often impossible to sue them for patent infringement. So defendants are also increasingly requesting patent reexaminations at the patent office. For example, in November Santa Clara?based Nvidia?which develops graphics-processing units and chipset technologies?succeeded in getting the USPTO to reject several Rambus patents.

"Defendants might allege that new prior art invalidates the claims of a patent, and this can lead to the cancellation of a plaintiff's patent and a stay of litigation while reexamination is taking place," explains Matthew Brigham, an IP litigation partner at Cooley Godward Kronish in Palo Alto.

Rambus's Lavelle laments this tactic as unfair to the plaintiff: "The 'request for patent invalidity' defense essentially gives the defendants two separate proceedings-your patent's validity is already being examined in court, and yet it's also being scrutinized by the USPTO. Defendants get two bites of the apple."

Lavelle is also critical of another common defense tactic?the spoliation charge?which involves a contention that a party has destroyed evidence. "The problem with the spoliation charge is it allows the other side to put the plaintiff on the defensive," he says. "Even though discovery rules leave some room for human error, the rules of discovery are such that any misstep you make in retaining a document can make you vulnerable to the spoliation charge."

In addition to these defense tactics, some big corporations with deep pockets are simply going toe-to-toe with the NPEs in court. For example, Google intends to curb the growth of NPE lawsuits by going to trial rather than settling, Catherine Lacavera?a senior litigator at Google?told Bloomberg.com last February. Ebay has adopted a similar policy, Ward confirms.

In eBay Inc v. MercExchange, L.L.C. (547 U.S. 388 (2006)), the U.S. Supreme Court ruled that an injunction shouldn't automatically be enforced against eBay simply because it allegedly infringed an online technology patent owned by MercExhange. "Thank God for eBay taking on MercExchange all the way," says Cheng. "And thank God for Microsoft taking a leading role in deterring NPEs by not settling." Bloomberg reports that BlackBerry-maker Research In Motion also has adopted an aggressive defense against NPEs.

Finally, many companies are using a new weapon against NPEs: the defensive patent aggregator (DPA). In a business model that emerged two years ago, a DPA buys patents or patent rights strictly to provide inoculation against NPEs; it then issues licenses to companies it signs up as clients, based on an annual membership fee.

San Francisco?based RPX, a membership-based company funded by three venture capital firms, chooses and purchases patents for its members for between $35,000 and $4.9 million in annual fees (these depend on a member's operating income). RPX has bought at least 1,000 U.S. and international patent assets since it started in 2008, and its current members include Cisco, IBM, Samsung, Hewlett-Packard, and TiVo.

Another DPA is the nonprofit Allied Security Trust of Lambertville, New Jersey, whose CEO founded PatentFreedom. It has 15 member-companies, all of them with annual product revenue above $1 billion. Members contribute to an escrow fund for buying patents, and they participate in purchasing decisions. Among its members are Hewlett-Packard, Cisco, Motorola, Avaya, Ericsson, and Philips.

To Lavelle, defensive patent aggregation "isn't necessarily a bad idea. It emphasizes the value of patents and strengthens the market for them." But it provides only limited immunity from infringement claims, he says, adding, "Your aggregator provides you licenses for specific patents, but if your product uses more patents than it has licenses for, you're still vulnerable."

UPDATE: In "Patently Contentious" [January 2010], we reported that the research group PatentFreedom ranked Rates Technology (RTI) among the three licensing companies filing the most litigation from 2003 to 2008. Three months after publication, however, PatentFreedom chairman Daniel P. McCurdy noted in a statement that RTI "is clearly distinguishable from many NPEs (Non-Practicing Entities) that primarily - or exclusively - base their enforcement activities on patents either purchased from others or from which they have obtained enforcement rights."

Rene Ciria-Cruz is an associate editor at California Lawyer.

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