Thought Leadership

Fate of the Despised - A Concise Chronicle

Client Updates

A troll is an ugly mythological creature that lives under a bridge, waiting to extort a hefty fee from whomever crosses the bridge. This vivid description of a patent troll often provides a sufficient reason to despise such an entity without giving it a second thought. However, missing from this picture is that the so-called patent trolls, often referred to as non-practicing entities (NPEs) or patent assertion entities (PAEs), actually own the bridge. A string of recent news reports seems to portray impending victory against the notorious troll: patent trolls were ordered to pay attorney’s fees;1 the original PAE law firm announced its shutdown;2 a number of PAEs have dramatically laid off employees;3  others announced that the environment has been so hostile and the business model is no longer feasible.4  However, today’s perceived success of the crusade against patent trolls may have come with a significant price.

Innovation is a primary driver of U.S. economic growth and national competitiveness. Economists estimated in a 2016 report released by U.S. Commerce Department that IP-intensive industries support at least 45 million U.S. jobs and contribute more than $6 trillion dollars to, or 38.2 percent of, U.S. gross domestic product (GDP).5   It should come as no surprise to anyone that PAEs had emerged as a distinct business model, whose primary activities are enforcing patent rights. Despite the anti-trolling rhetoric, few would deny that PAEs can serve a useful role in enforcing patent rights and realizing the value of patents.6   The public’s disdain of PAEs originates not from a strict economic analysis of PAEs but from the widely perceived predatory litigation by PAEs, such as filing frivolous or bad-faith lawsuits to extract money, particularly from small businesses and end users.7  Motivated to address the patent troll problem, government action taken in the past decade has had an impact far beyond patent trolls, shifting the landscape of patent litigation.

In 2006, the Supreme Court took heed of the patent troll issues. In eBay v. MercExchange,8 the Court made it more difficult for a patent owner to obtain a permanent injunction. In effect, the Court removed the presumption of irreparable injury from patent infringement. While the eBay opinion rested on the “traditional principles of equity,” Justice Kennedy made the policy consideration clear in his concurring opinion, stating that an injunction “can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent.”9   This decision did not address the frivolous litigation commonly associated with a patent troll but lowered the bargaining power of a patent owner, particularly a PAE.

In 2011, Congress successfully enacted the America Invents Act (AIA), a major overhaul of the U.S. patent system. The AIA was considered helpful in curbing the patent troll problem in two respects. First, the AIA venue joinder rule makes it more difficult for a patent holder to assert a patent against multiple accused infringers in one suit.10 A patent holder may have to pursue multiple defendants separately and forgo the various strategic and financial advantages of proceeding against joint defendants. The joinder rule not only increased the operating cost of a PAE but also impacted the cost of patent enforcement generally. Second, the AIA created new methods for third parties to challenge issued patents in the USPTO, including inter partes review (IPR). While an IPR is by no means an inexpensive proceeding, it provides a lower-cost option to challenge the validity of a patent under more favorable legal standards. For example, while Article III courts would require a challenger to prove patent invalidity by clear and convincing evidence, an IPR proceeding only requires the challenger to establish unpatentability by a preponderance of the evidence. Additionally, a different claim construction standard is used during an IPR proceeding, broadest reasonable construction,11 which could potentially sweep in a broader scope of prior art references than in district courts. While IPRs may be helpful to weed out low quality patents at a lower cost, they also threaten other strong patents and reduce patent value due to the added uncertainty of a potential IPR challenge. Early on, the PTAB had such a high rate of finding patents invalid that then-Federal Circuit Chief Judge Randall Rader called the PTAB “death squads killing property rights” at the AIPLA annual meeting in October 2013.12   While the invalidation rate has since decreased, the PTAB remains a favored venue to challenge patents.13   Nevertheless, even though an IPR proceeding is not as expensive as a full-blown litigation, it is still more expensive than what a small business or an individual can typically afford. Accordingly, IPR proceedings provided little direct relief to those small businesses and individuals who were plagued by nuisance lawsuits by patent trolls.

In 2014, the Supreme Court took issue with software patents, which were believed to be a major source of those dubious infringement suits brought against helpless users. In Alice Corp. v. CLS Bank International,14 the Supreme Court dusted off the doctrine of judicial exceptions to patent eligible matter and found Alice's claims did no more than require a generic computer to implement the abstract idea of intermediated settlement by performing generic computer functions, which is not enough to transform an abstract idea into a patent-eligible invention. While the Court did not hold software patents as per se ineligible, a significant number of software patents became vulnerable under Alice. Although some considered the abstract idea doctrine a mess and unworkable,15 others praised the Alice decision as wise.16  The Alice Court’s two-step test for determining an abstract idea may be unwieldy. Given the number of low-quality software patents fueling patent troll litigations and the difficulty of improving patent quality overnight, Alice could be viewed as a policy decision to remove a vast number of software patents as outside the purview of patentable subject matter thereby lifting the burden of analyzing the novelty and obviousness issues. However, whatever the Court’s intentions were, Alice significantly reduced the scope of patent law protection, particularly in the fast-growing software industry.

In 2014, the Supreme Court’s twin decisions in Octane Fitness17 and Highmark18  changed the dynamics of attorney fee awards in patent litigation. The Octane Fitness Court rejected the Federal Circuit’s “overly rigid” and “demanding” standard in finding “exceptional cases” under 35 U.S.C. §285.19  Instead, the Supreme Court held, among other things, that “an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party's litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”20 Octane Fitness and Highmark empowered district courts with a discretionary power in granting attorney fee awards. Both the number of motions for attorney fees and the rate of granting them have significantly increased after Octane Fitness and Highmark.21  The Supreme Court’s decision in Octane Fitness is particularly notable in contrast with other decisions motivated by PAE suits. Here, the litigation behavior of a party, not just the status of the party, were the focus of the attorney fee award analysis. Consequently, it is likely to deter frivolous patent troll litigations with less collateral damage to patent owners’ rights.

On May 22, 2017, the Supreme Court handed down the widely anticipated ruling in TC Heartland v. Kraft Foods22 regarding forum shopping issues related to patent litigation. The Court reversed the Federal Circuit, ruling that 28 U.S.C. 1400(b) is the only applicable patent venue statute and venue is therefore not proper in every jurisdiction in which a defendant is subject to personal jurisdiction. Under TC Heartland, patent infringement lawsuits can only be filed in districts within states where the infringing defendant is incorporated, or in districts where there has been an act of infringement and the defendant has a regular and established place of business. While this case itself does not involve a PAE, the news media and the public widely associated this decision with patent troll control.23  It is believed that this decision will significantly reduce the patent litigation cases on the dockets of the Eastern District of Texas, which is home to approximately 40% of all patent litigations because it is perceived to be patent-owner friendly and is a preferred forum for PAEs. However, it is too early to tell the full impact of TC Heartland, as it will take some time for the courts to define the precise scope of “a regular and established place of business.”24  Nevertheless, TC Heartland will limit a patent owner’s choice of venue.

Finally, just as some were celebrating the defeat of patent trolls, the pendulum may be ready to swing back. On June 12, 2017, in a surprising move, the Supreme Court granted certiorari in Oil States Energy Services LLC v. Greene’s Energy Group, LLC25 to review the constitutionality of IPR proceedings. Many perceive the Oil States case as presenting a legal issue of whether patent rights are a private property right that cannot be taken away by an Article I court without a jury trial or a public property right. However, both sides of the dispute will have no trouble in finding some support in the patent law jurisprudence for its arguments and will be able to formulate arguments distinguishing and limiting the scope of prior adverse opinions.26  The key issue is whether IPRs strike the right policy balance of weeding out the low quality patents without severely impairing overall patent rights. A 2015 article estimated that the AIA and IPR proceedings had “wiped out about $1 trillion in the US economy.”27  The U.S. Chamber of Commerce now ranks the U.S. patent system tenth worldwide in a tie with Hungary, a steep drop from the number one position in 2016.28  The recent 12th Annual Advanced Patent Law Institute hosted by the USPTO, University of Texas Law School, and Antonin Scalia Law School, George Mason University painted a rather dismal picture of U.S. patent law system.29  The consensus of a panel discussion, titled “The Current Patent Landscape in the US and Abroad,” was “that dramatic changes to the US patent system are driving investment in research and development outside the country and threatening the future of American innovation.”30  Perhaps, the Supreme Court will take the above policy issues into consideration as it formulates the legal analysis of private rights and public rights. Hopefully, the Court is well aware that the fate of the despised is closely intertwined with that of the patent law system critical to the prosperity of this country.

1 Vera Ranieri, The Death Knell is Tolling for Shipping & Transit LLC, ELECTRONIC FRONTIER FOUNDATION (July 11, 2017)
2 Joe Mullin, Original “patent troll” law firm is shutting down, ARS TECHNICA (January 23, 2017)
3 Roy Schestowitz, Xinova is a Patent Troll With Connections to Microsoft and Intellectual Ventures, the World’s Largest Troll, TECHRIGHTS (February 28, 2017)
4 See, e.g. Richard Lloyd, “We’re not sure that investing significant amounts of capital in patents really makes sense,” says Wilan Ceo, IAM MEDIA BLOG (Apr 18, 2017); Richard Lloyd, IV pulls back from patent acquisition market to focus on monetizing existing portfolio through sale and license, IAM MEDIA BLOG (Apr 17, 2017)
5 Intellectual Property and the U.S. Economy: 2016 Update, U.S. Commerce Department (2016)
6 Patent Assertion Entity Activity: An FTC Study 26-27, Federal Trade Commission (October 2016); Clifton B. Parker, Patent trolls serve valuable role in innovation, Stanford expert says, STANFORD NEWS (February 23, 2015)
7 See, e.g., Scott Shane, Congress Needs to Help Small Business by Deterring Patent Trolls, SMALL BUSINESS TRENDS (July 18, 2016)
8 eBay v. MercExchange, 547 U.S. 388 (2006).
9 eBay, 547 U.S. at 396 (Kennedy, J. concurring).
10 Tracie L. Bryant, The America Invents Act: Slaying Trolls, Limiting Joinder, 25 Harv J. L. Tech. 673, 695 (2012).
11 Cuozzo Speed Technologies, LLC v. Lee, 136 S. Ct. 2131 (2016).
12 Tony Dutra, Rader Regrets CLS Bank Impasse, Comments on Latest Patent Reform Bill, BLOOMBERG BNA (October 29, 2013)
13 See Samson Vermont, IPR Statistics Revisited: Yep, It’s A Patent Killing Field, PATENTATTORNEY.COM (February 8, 2017)
14 Alice Corp. v. CLS Bank International, 134 S. Ct. 2347 (2014).
15 See, e.g. Darin Gibby, The Abstract Swing: Major League Problems In Patent Law, LAW360 (February 8, 2017)
16 See Julie Samuels, Patent Trolls Are Mortally Wounded, The Supreme Court gets it right when it comes to software patents, SLATE (June 20, 2014)
17 Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014).
18 Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744 (2014).
19 Octane Fitness, 134 S. Ct. at 1756, 1758.
20 Id. at 1755, 1756.
21 Benjamin E. Leace & Christopher H. Blaszkowski, Is Fee-Shifting an ‘Exceptional’ Risk fo rPatent Trolls?, THE LEGAL INTELLIGENCER (June 3, 2015)
22 TC Heartland LLC v. Kraft Foods Group Brands LLC, 581 U.S. ____ (2017).
23 See Adam Liptak, Supreme Court Ruling Could Hinder ‘Patent Trolls’, THE NEW YORK TIMES (May 22, 2017) available at; Andrew Chung, U.S. top court tightens patent suits rules in blow to ‘patent trolls,’ REUTERS (May 22, 2017); Steve Brachmann, House IP subcommittee looks for further ways to curb patent trolls after TC heartland decision, IP WATCHDOG.COM (June 18, 2017)
24 Matthew Bultman, Cary Suit Stays in E. Texas As Gilstrap Outlines Venue Test, LAW360 (June 30, 2017)
25 Oil States Energy Services LLC v. Greene’s Energy Group, LLC, 639 F.App’x 639 (Fed. Cir. 2016), cert. granted (June 12, 2017) (No. 16-712).
26 Compare Gene Quinn, Supreme Court to decide if Inter Partes Review is Unconstitutional, IP WATCHDOG.COM (June 12, 2017) with Kenneth Harston, Why High Court Should Find IPR Constitutional, LAW360 (June 16, 2017)
27 Richard Baker, America Invents Act Cost the US Economy over $1 Trillion, PATENTLYO.COM (June 8, 2015) Contra R.J. Lehmann, No, the America Invents Act did not cost ‘the economy’ $1 trillion, RSTREET.ORG (June 9, 2015)
28 U.S. Chamber International IP Index, Global Intellectual Property Center, U.S. Chamber of Commerce (2017); See also Bruce Berman, Passage of STRONGER Patent Act is likely to spur innovation and jobs, IP CLOSEUP (June 26, 2017)
29 See Kevin Madigan, An Ever-Weakening Patent System is Threatening the Future of American Innovation, Center for the Protection of Intellectual Property, George Mason University (April 28, 2017)
30 Id.

Related Professionals