Postcard from the Valley: Patent trolls alive and kicking in 2016?

The AmeriKat was up early watching another 
airplane take off over Levi's Stadium
 - otherwise known as 
this year's SuperBowl stadium

At 6:30AM the planes started taking off from San Jose's airport.  Turns out the hotel is in a flight path.  Win.  Normally, this would have woken the AmeriKat but she was already wide awake.  Was it the thrill of turning a year older?  Unlikely.  Was it the jet lag?  Maybe.  Was it the excitement of being in a valley so inundated with innovation you can't swing a Kat without hitting a patent?  Most definitely.  January is almost always an incredibly bleak month in northern Europe (weather wise).  Cold, dark, rainy and miserable.  So the AmeriKat has decided to perk up her whiskers by taking a dose of California sun and American innovative spirit by relocating to Silicon Valley where she reports on the latest goings-on in the world of US patent litigation.

Much ado about the patent troll problem:  Earlier this month, an analysis published by RPX Corp reported that non-practicing entities (NPEs) filed over 3,600 patent cases in the US in 2015. This was an increase of over 700 cases from the previous year.   With NPEs being the most active in the high tech sector, it is no surprise that their 2015 top target was Samsung with 71 cases brought against it by NPEs.  AT&T (50), HP (43), Apple (40) and Dell (40) were not too far behind.

Some commentators have expressed surprise at this increase, especially in light of recent developments that should have started to stem the tide of troll-originated patent litigation in the US.  Such developments have included fee-shifting, increased pleading standard requirements and the Supreme Court's 2014 decision in Alice Corp v CLS Bank International which has seen lower courts cull several computer implemented inventions.  Indeed the AmeriKat, a sometimes subscriber to Mark Twain's take on statistics, hunted for further support that this was indeed the trend in 2015.  She found it by way of statistics published by San Jose based company UnifiedPatents. UnifiedPatents, a member-based organization, uses its membership fees to implement strategies aimed at reducing the amount of NPE litigation against its members, including by filing Inter Partes Reviews against NPE-owned patents (and with the success rate in IPRs, this is a tactic that should bear fruit).  UnifiedPatent's results found that of all NPE litigation in 2015, almost all (92%) were brought by patent assertion entities (PAEs - presumingly "trolls"), as opposed to small companies or individuals ["So a PAE is always a NPE, but a NPE is not always a PAE?" muses Merpel]

These numbers may not be wholly unexpected as reports over the summer suggested that patent trolls were already breaking records (see links here).  Indeed, the topic had even earlier reached the heights of HBO where John Oliver dedicated an entire segment to the issue in his show Last Week Tonight (click here to watch the excellent episode).  In that report, Oliver cited this 2011 article published in The Georgetown Law Journal that found that settlements accounted for 90.5% of outcomes where patents were repeatedly litigated, as is the case in NPE litigation, as opposed to once litigated.  Why such a high settlement rate?  Settlements avoid the high cost and risk that is associated with defending a case to trial.  Companies thus have to conduct a cost-benefit analysis when deciding how to respond to troll litigation - fight or settle.

This morning's Financial Times' interview with Alan Trefler founder and CEO of Cambridge, Massachusetts based software company Pegasystems (with offices just down the road in Cupertino) illustrated this assessment.  In 2013, Pegasystems was faced with patent infringement claims brought by a troll in respect to their key product, SmartBPM.  Although it would have cost less to settle, Trefler chose to fight.  And, in the end, he did win.  Despite the win, Trefler still called the process "incredibly slow and incredibly expensive" and "torturous".  However, he stated:

“Some people at Pegasystems thought it would be more cost-effective to settle.  And you know what? They were right, it would have been. But I strongly believe that, if a patent claim is without merit, then it’s your moral obligation to step up and defend yourself, not just for the good of your company, but for the good of the patent system as a whole.”

Such tactics seem to work, as Newegg has found.  After adopting their 2007 strategy to never ever settle with trolls, they have pretty much been left alone (see the latest run-in here).  In an interview with Ars Technica in 2013 following their Court of Appeals for the Federal Circuit (CAFC) win in the Soverain "online shopping cart" case, Newegg's Chief Legal Officer Lee Cheng stated:

"We basically took a look at this situation and said, 'This is bull***. '  We saw that if we paid off this patent holder, we'd have to pay off every patent holder this same amount. This is the first case we took all the way to trial. And now, nobody has to pay Soverain jack squat for these patents."

The experiences of Pegasystems and Newegg seem to suggest that it pays not to settle with a patent troll (despite other studies, including the results of this survey published in the Stanford Technology Law Review, suggesting perhaps the opposite).  But for companies who may still not feel brave enough to endure a white-knuckle ride to the CAFC, last Friday's decision in Lumen View Technology LLC v Findthebest.com, Inc (see decision here) may help.  In this case, the CAFC upheld the award of attorney's fees against a patent troll under the new fee-shifting rules.  This decision follows the US Supreme Court's 2014 decision in Octane Fitness where the Court helpfully reminded district judges that they enjoyed broad discretion to award attorneys fees in particular circumstances.  The CAFC in Lumen View upheld District Judge Cote's decision to award fees holding that

"[t]he allegations of infringement were ill-supported, particularly in light of the parties’ communications and the proposed claim constructions, and thus the lawsuit appears to have been baseless."  

However, the CAFC vacated the amount awarded by the lower court.  The judge had awarded double the amount of attorneys fees in order to act as a deterrent to ongoing predatory strategies for baseless litigation.  However, the CAFC concluded that:

"...deterrence is not generally a factor to be considered in determining a reasonable attorney fee under § 285. Although deterrence may be a consideration when determining whether to award attorney fees, it is not an appropriate consideration in determining the amount of a reasonable attorney fee, which is principally based on the lodestar method."

But judicial tools for deterrence can only go so far (as the courts often remind us). If a problem really needs to be addressed, Congress needs to do something about it.  And indeed, at one time there was presidential backing to enact further patent reform legislation to tackle the claimed troll problem.  In his 2014 State of the Union Address, President Obama stated:

"And let's pass a patent reform bill that allows our businesses to stay focused on innovation, not costly and needless litigation."

However, despite Congressional debate and the promise of reform, nothing happened.   Tackling this issue at the Consumer Technology Association (CES) conference held in Las Vegas earlier this month, a panel was asked what was the one thing that they considered most needed to be fixed in the patent system.  The panel, which included Lee Cheng (Newegg), Congressman Darrell Issa (Chair of the IP Subcommittee within the House Judiciary Committee) and Laurie Self (Qualcomm), entered into a heated debate about how to target abusive patent litigation conduct, how to define the term"NPE" and who was to blame for stalling patent reform legislation.  It doesn't take long to identify quite a clear difference of opinion between at least three panelists (who have been faced with troll litigation) and Qualcomm on the issue (see article by Laurie Self on patent reform here and from Qualcomm's General Counsel in the New York Times here ).  The AmeriKat suggests watching the proceedings from minute 45 where you can start to see some fireworks.  The debate helps to illustrate the issues on both sides of the issue that have presented roadblocks to Congress in progressing patent reform legislation aimed at tackling abusive patent litigation conduct.  A summary from the moderator of the session, Mike Masnick, is found here.

So will 2016 be the year that Congress finally tackle the issue?  House Judiciary Chairman Bob Goodlatte's optimism seemed circumspect, as reported by The Hill.  Although leadership is open to bringing patent reform legislation to the floor again, he said, the time and manner in which it happens is crucial.  The AmeriKat can't help but wonder if that is code for "unlikely, but I am not about to destroy the hope of a bipartisan bill in an election year."  In the meantime, one presidential candidate seems to be distracted with something arguably bigger than the patent troll problem - taxes.  In response to a question at a campaign stop in Iowa earlier this month, Hillary Clinton suggested that the US use the patents of large corporations as leverage to get them to pay higher taxes.  Although no details were provided as to how this leverage would be gained, the AmeriKat would still struggle to take this suggestion completely seriously - it is campaign season after all, she was in Iowa (see why Iowa is important here) and Clinton is racking up maximum individual donations (a less than eye watering $2700) from major players in Silicon Valley.  Not a recipe for suspending an innovative company's patents.  

Although Clinton's and the other presidential candidates' attentions (save, perhaps, for Fiorina's) are not yet focused on patent reform, the AmeriKat suspects that in light of the recent NPE statistics, this issue may yet enter the presidential debate. In the meantime, the Californian afternoon sun is demanding the AmeriKat's nap attention...