Thursday, May 8, 2014

U.S. Supreme Court Cracks Down on Patent Trolls

The Supreme Court last week struck a blow to patent owners who made a living off threatening others with frivolous litigation by loosening the standard for the prevailing party to collect legal fees. Patent owners that do not sell products or services, but earn or try to earn the majority of their income by enforcing their patents through frivolous litigation are commonly known as “Non-practicing entities” (NPEs) or “Patent Trolls.” For years, some NPEs would buy patents for the sole purpose of using their new ownership rights against corporations by demanding licensing fees, or litigation. The cost of paying a licensing fee frequently outweighed the cost of litigation because Federal Courts rarely allowed the prevailing party to recoup expensive legal fees. Under 35 U.S.C. § 285, “the court in exceptional cases may award reasonable attorney fees to the prevailing party.” (Emphasis added). The test for exceptional cases, outlined in Brooks Furniture Manufacturing, Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378 (Fed. Cir. 2005), required the prevailing party to prove that both (1) the litigation was brought in subjective bad faith, and (2) the litigation was objectively baseless. This was so rigid that many chose to pay licensing fees, rather than prevail in litigation but still pay more in legal fees.

Last week, the Supreme Court ruled on two cases that loosened the “exceptional cases” test: Octane Fitness, LLC v. Icon Health & Fitness, Inc., and Highmark Inc. v. Allcare Health Management System, Inc. In Octane Fitness, Justice Sotomayor threw out the Brooks Furniture 2-part test, by holding “nothing in [section] 285 justifies such a high standard of proof. Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.” Furthermore, the Court strengthened it’s new stance on §285 by throwing out the Brooks Furniture test again in Highmark Inc. “Our opinion…rejects the Brooks Furniture framework as unduly rigid and inconsistent with the text of §285.” In Highmark Inc., the court held that since “exceptional” is in the judgment of the District Court, the decision on appeal may only be reviewed for abuse of discretion.

Since the Supreme Court’s reinterpretation of section 285 allows the sitting judge more flexibility to determine “exceptional cases,” newly empowered patent owners may be able to fight back against frivolous litigation. Interestingly, approximately 200 patent infringement cases were filed around the time of these decisions. This is a definite upswing in the volume that is normally filed. It’s possible that the increase is due to adverse ruling for patent trolls and the accompanying legislation in congress taking place to curb NPEs. One NPE in particular filed 87 lawsuits in April in Texas.

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