What has happened in US patent litigation since the Octane Fitness LLC v Icon Health and Highmark v AllCare Health Management decisions? Have patent assertion entities taken a step back?
During the second half of 2014, it looked that way. Following the Supreme Court’s rulings in Octane Fitness LLC v Icon Health and Highmark v AllCare Health Management, as well as its ruling on patentable subject matter in the Alice case, all in 2014, there was a major drop in patent cases filed in the second half of last year. But patent case filings have rebounded in 2015.
That said, the data does indicate that there has been an increase in the number of fee awards since Octane and Highmark, and that courts are granting a higher percentage of motions for fee awards. However, there has not necessarily been a lot of success in collecting those awards. Many argue that patent assertion entities often set up complex corporate structures that make them effectively judgment-proof from any kind of attorney’s fees awards. The issue is something that has been included in both the House of Representatives and Senate versions of the pending patent reform bills.
So Highmark and Octane weren’t the game changers that many had hoped?
In part, it’s too early to say for sure. Because a patent case can take several years from initiation to final ruling, virtually all of the fee award rulings since Octane and Highmark were in cases filed before the Supreme Court’s ruling. So it may be another year or two before the data shows whether patent assertion entities (PAEs) have been deterred by the rulings. On the other hand, attorney’s fees motions are generally only made when a case is resolved on the merits—not when the case is settled out of court. The overwhelming majority of cases are settled, though.
After Octane and Highmark, defendants might be emboldened to fight to the finish, to show that they will win and get their attorney’s fees awarded. Data from LexMachina suggests that defendant victories on the merits have increased slightly. It is possible that this is attributable to defendants litigating more cases to resolution after Octane and Highmark .
Do the Highmark and Octane decisions give defendants false hope?
I wouldn’t call it false hope. The increased availability of fee awards after Octane and Highmark is an important change.
But it was well known, even before those cases were decided, that complex PAE corporate structures could make it difficult to collect attorney’s fee awards.
Will PAEs be allowed to continue to avoid paying attorney’s fees even if their cases are based on meritless claims?
Not necessarily—there are a few solutions. The Alice decision has resulted in the invalidation of a lot of patents in the fields of technology favoured by many PAEs. One would think that the Alice decision is affecting the business model of PAEs.
Pleading standards is another solution. For complex, historical reasons, it’s easy to file a lawsuit for patent infringement in the US. That has made it straightforward and cheap for PAEs to file lawsuits, and because of procedural rules involved, like discovery and the timing of summary judgement, it can be very expensive to get to the first milestone, before the case can be defeated on the merits. That cost of litigation has been a big driver of a number of PAEs. That reflects not the value of the patents, but the value to defendants of avoiding the cost of litigation.
The pleading standard is going to change on 1 December 2015 through a reform and periodic updating of the Federal Rules of Civil Procedure. That’s independent of any kind of patent reform. That may change the equation considerably after 1 December.
Both houses of Congress are also trying to deal with this ability-to-pay question. Under Section 3(c) of the House’s proposed Innovation Act, if attorney’s fees are awarded, interested parties may be joined to the litigation, if the plaintiff isn’t able to pay the fee award.
The Senate bill has a different procedure. At the outset of the case, if a defendant suspects that a plaintiff is a PAE and it can’t satisfy its fee awards, then it can file a motion and the plaintiff then has to certify, under oath, that it either has enough money to pay attorney’s fees awards, or identify others that do.
Those identified are then notified that they are being brought into the suit and they have a choice of getting involved or disclaiming their interest.
It is a complex process and any time you burden plaintiffs with needing to demonstrate ability to pay, particularly at the outset of litigation, you run the risk of closing the courthouse doors to a small company that’s invented and is trying to market its own inventions.
Will defendants then have to tread carefully and cleverly, if they are dealing with a PAE?
Unless the law has changed in order to compel plaintiffs to disclose whether or not they have enough money, it’s going to be very hard to force that, in the absence of financial disclosures.
Part of it is looking at what’s going to right the ship in the patent litigation world, so that we have rights holders that are able to appropriately collect value from infringers, while at the same time, deterring those who seek solely to exploit the system, for example, by seeking settlements based on litigation cost-avoidance, rather than on the true value of the patented technology.
However you look at the rhetoric, there are a lot of companies that monetise IP without practicing the inventions, but not in a ‘patent troll’ kind of way.
Dean Kamen, the inventor of the Segway, testified to Congress that under some of the broad definitions of ‘patent troll’, he would be considered one, because he primarily licenses his technology to manufacturers, rather than manufacturing the products he invented.
And there are a lot of operating companies that have spun off their IP to their subsidiaries, creating corporate structures that could be inadvertently swept up in the corporate-disclosure provisions of the pending patent legislation.
What will be the biggest change if the patent bills are made law?
I’m particularly interested to see what will happen with the change in pleading standards because, once it becomes harder and more expensive to do the legwork before filing a lawsuit, we may see a drop of what are viewed as illegitimate patent cases.