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Changes Ahead for NPE Patent Litigation

June 4, 2014

Changes Ahead for NPE Patent Litigation

June 4, 2014

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This article first appeared in The Metropolitan Corporate Counsel and is reprinted with permission.

Editor: Share a little bit with us about your practice at Fish & Richardson and some recent successes.

Scherkenbach: My practice is focused on complex high-technology litigation with a particular emphasis on computer software, semiconductors and medical devices. I earned my BS degreeFrank Scherkenbach - Changes Ahead for NPE Patent Litigation in mechanical engineering from Stanford University before I went to Harvard Law School, so litigating patent disputes in a wide range of technologies is the perfect confluence of my skills. I have been fortunate to work with some of the biggest technology companies in the world and also some small and particularly innovative ones, helping to protect their intellectual property assets around the globe.

Early in my career, I began representing a small Silicon Valley semiconductor company named Power Integrations, and they continue to be one of my most active clients. I tried their first jury trial in 1999 and have tried a string of them since. Most recently, in March 2014, my team won a $105 million damages award in federal district court in San Francisco, with a jury finding that Fairchild Semiconductor willfully infringed Power Integrations’ patents. I have represented Power Integrations in its ongoing litigation against Fairchild and its subsidiaries since 2004, securing victories against these defendants in a series of litigations, including obtaining injunctions against over 100 infringing products. Over the course of these parties’ litigation, we have been able to prove, and the courts have noted, Fairchild’s “industrial stalking” and “blatant copying” of Power Integrations’ patented technology, while repeatedly affirming the validity of Power Integrations’ patents. We’ve fought these battles in the federal courts, at the ITC, and on appeal at the Federal Circuit, and we continue to be fortunate in securing victories for Power Integrations, so this is very satisfying work.

Editor: What is the biggest issue in patent litigation right now?

Scherkenbach: Right now, too many bad cases still get too far. We need better tools for separating the cases that deserve more attention, but can’t get it due to court congestion, from the cases filed primarily to extract settlements by leveraging the cost and uncertainty of litigation. This latter group of cases represents, in my opinion, the lion’s share of patent litigation today. Judges and litigants can do more with the tools we have, such as summary judgment and Daubert. And, of course, the Supreme Court’s twin April 2014 rulings in Octane Fitness and Highmark are a big step in the right direction. These decisions significantly lowered the standard for awarding attorney fees and restored the district court’s discretion in awarding fees. The rulings should give patentees pause before filing questionable suits, as they are now more likely to wind up paying fees if they lose, and those awards are more likely to withstand appellate review.

The rulings might also blunt at least some of the ongoing congressional effort to rein in the excesses of so-called “patent trolls,” since much of that effort has focused on making it easier for prevailing parties to collect attorney fees.

Editor: Tell us more about the U.S. Supreme Court’s decisions in Highmark and Octane Fitness.

Scherkenbach: In Octane Fitness v. ICON Health & Fitness, the Court unanimously ruled that the term “exceptional” in 35 U.S.C. § 285, which empowers the district court to award attorney fees “in exceptional cases,” refers to a claim that “stands out” from others or to litigation conduct that is “unreasonable.” An exceptional case can be proven merely by a preponderance of the evidence. The Court noted that the statute vested discretion in the district courts from its inception – discretion that the Federal Circuit had consistently applied until 2005, when the court “abandoned that holistic, equitable approach in favor of a more rigid and mechanical formulation.”

Under Brooks Furniture v. Dutailier, the Federal Circuit held that attorney fees could be awarded only for “material inappropriate conduct” or litigation that was both “brought in subjective bad faith” and “objectively baseless,” and in both cases under a clear-and-convincing standard. The combination of the legal test for what was and was not “exceptional” and the high “clear and convincing” burden of proof made attorney’s fees awards hard to get, and hard to defend on appeal.

In Octane Fitness, the district court, applying the Brooks Furniture standard, denied the accused infringer’s motion for attorney fees, finding that ICON’s claim was neither objectively baseless nor brought in subjective bad faith, and the Federal Circuit affirmed. The Supreme Court reversed, finding instead that the “ordinary” meaning of 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.” The Court also found the Brooks Furniture standard “so demanding that it would appear to render § 285 largely superfluous” and instead emphasized the importance of respecting the district court’s discretion. Finally, the Court in Octane Fitness also struck down the requirement that attorney fees be proven by clear and convincing evidence; instead, a preponderance of the evidence will suffice.

Then, in Highmark v. Allcare Health Management System, the Court again unanimously ruled that the Federal Circuit should henceforth review Section 285 decisions for abuse of discretion. The district court there found the patentee had engaged in “vexatious,” “deceitful,” and “frivolous” conduct and awarded nearly $5 million in attorney fees. The Federal Circuit, however, mostly reversed the award, applying de novo review of the “objectively baseless” standard for attorney fees set forth in Brooks Furniture. The Supreme Court vacated the Federal Circuit’s ruling and instead held that attorney fee determinations are subject to abuse-of-discretion review.

Editor: How will these recent Supreme Court decisions impact future NPE patent reform legislation?

Scherkenbach: They might already have. On May 21, 2014, the U.S. Senate pulled legislation targeting non-practicing entities and their litigation practices. Last year, the House passed a sweeping bill that would change many aspects of patent litigation, including by presumptively awarding attorney fees to the prevailing party. The attorney fee provision in particular has sparked significant controversy among patent holders and has been the subject of intense negotiations in the Senate. Any change to existing patent law will impact a diverse group of litigants, and potential litigants, so finding compromise is going to be difficult.

Long term, it is unclear how exactly the Octane Fitness and Highmark rulings will affect the congressional debate, but clearly there is a lessened sense of urgency for legislative reform with respect to fees now that these cases lowered the standard for awarding attorney fees. Of course, there are other aspects of the proposed reforms, and I do not expect those will be impacted by the recent fees-related rulings.

Editor: What impact will these new rulings on attorney’s fees have on non-NPE litigation?

Scherkenbach: Any company that brings baseless litigation will potentially have much to lose under these new rulings. There are many cases that most reasonable people would agree should never have been brought, or were brought for the wrong reasons. I do not say this as a “defense” lawyer since I represent both plaintiffs and defendants. Legitimate plaintiffs with legitimate cases should have no fear of these rulings. But what they will do, or at least should do, is deter the many cases that get filed largely to leverage the cost of litigation.

Editor: If a company is targeted by an NPE, what should it do?

Scherkenbach: It is important to recognize that NPEs exist on a spectrum. At one end are pure patent-holding companies that acquire patents in order to assert meritless or highly questionable claims to generate “cost of litigation” or nuisance settlements. At the other end are entities that do not make their patented inventions, but do develop IP and enforce their legitimate patent rights even though they do not themselves make products or employ methods that practice their patents. Universities, for example, fall into the second category, and so do companies that license out technology that is not core to their businesses, like IBM.

How a company responds depends largely on the type of NPE and the merits of the individual case. Defendants will do themselves a disservice if they rush to file fees motions in too many cases, including those that are not appropriate for fees even under the new standards, since that could well result in some unfavorable early case law.

Editor: Are there other Supreme Court patent cases that you are watching?

Scherkenbach: The Supreme Court is currently considering two particularly interesting cases centered on software and the cloud that could affect many other technologies. The first is Alice Corp. v. CLS Bank International, where the Court is considering how much technical detail about a particular implementation one needs to add to an abstract idea before it is eligible for a patent. If the Court rules broadly, it could jeopardize many patents on things that look like computerized versions of business methods – though it seems pretty certain that the Court will not alter the patentability of core technical computer science concepts, like encryption and graphics processing.

The second is Limelight Networks, Inc. v. Akamai Technologies, Inc., where the Court is considering whether, and how, multiple parties acting together can infringe a patent on a method. The case is important for cloud computing because often the alleged infringement is a combination of actions by different entities involving a server system and a remote device, like a smartphone or tablet. The case could be important in other areas too, like medical diagnostics, where certain steps of a patented invention are performed by an attending physician and others are performed by a laboratory.

The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.