6 Litigating the Infringement of Patients

1. Patent Litigation^[1]

Suits for patent infringement can arise in three ways: 1) the patent holder may seek damages and an injunction against the infringer in federal court, requesting damages for royalties and lost profits as well; 2) even before being sued, the accused party may take the patent holder to court under the federal Declaratory Judgment Act, seeking a court declaration that the patent is invalid; 3) the patent holder may sue a licensee for royalties claimed to be due, and the licensee may counterclaim that the patent is invalid. Such a suit, if begun in state court, may be removed to federal court.

In a federal patent infringement lawsuit, the court may grant the winning party reimbursement for attorneys’ fees and costs. If the infringement is adjudged to be intentional, the court can triple the amount of damages awarded. Prior to 2006, courts were typically granting permanent injunctions to prevent future infringement. In 2006, the Supreme Court ruled that patent holders are not automatically entitled to a permanent injunction against infringement during the life of the patent. Courts have the discretion to determine whether justice requires a permanent injunction, and they may conclude that the public interest and equitable principles may be better satisfied with compensatory damages alone.

Proving infringement can be a difficult task. Many companies employ engineers to “design around” a patent product—that is, to seek ways to alter the product to such an extent that the substitute product no longer shares the invented elements safeguarded by the patent. However, infringing products, processes, or machines need not be identical; as the Supreme Court said in 1929, “one device is an infringement of another…if two devices do the same work in substantially the same way, and accomplish substantially the same result…even though they differ in name, form, or shape.” This is known as the “doctrine of equivalents.” In an infringement suit, the court must choose between these two extremes: legitimate “design around” and infringement through an equivalent product.

An infringement suit can often be dangerous because the defendant will almost always assert in their answer that the patent is invalid. The plaintiff patent holder thus runs the risk that his or her entire patent will be taken away if the court agrees. In ruling on validity, the court may consider all tests for patentability, such as novelty and obviousness, and rule on these independently of the conclusions drawn by the Patent Office.^[2]

2. Patent Misuse

Although a patent is a monopoly granted to the inventor or their assignee or licensee, the monopoly power is legally limited. An owner who misuses the patent may find that they will lose an infringement suit. One common form of misuse is to tie the patented good to some unpatented one—for example, a patented movie projector that will not be sold unless the buyer agrees to rent films supplied only by the manufacturer of the movie projector, or a copier manufacturer that requires buyers to purchase plain paper from it. Another form of patent misuse is a provision in the licensing agreement prohibiting the manufacturer from also making competing products. Although the courts have held against several other types of misuse, the general principle is that the owner may not use their patent to restrain trade in unpatented goods.

3. Patent Trolls^[3]

Patent owners whose primary source of income is collecting money from purported infringers of their patents go by many names: patent assertion entities, non-practicing entities, patent monetization entities, or (more commonly) patent trolls. While specific definitions of these terms vary, the shared attribute among them is that each utilizes a patent licensing model to make money through direct patent licensing or infringement litigation. For ease of presentation, this text uses “patent trolls” (or “trolls”) as shorthand for this group of business models.

Though the practices of individual patent trolls vary, the generalized business model begins by obtaining patents arguably practiced by working businesses. Once the patents are purchased, demand letters offering to sell a license to the patents are sent to anyone who arguably uses the claimed technology. The patent troll will then file an infringement lawsuit against some subset of those receiving demand letters and aggressively seek to settle before trial.

It is notable that the literature recognizes several variations on this theme, some of which deviate from the above generalization. One sub-group targets a small number of very large alleged infringers, hoping that their patent will be deemed valid and infringed, leading to a single large payday. A second type—“bottom feeder trolls”—target a very large number of purported infringers, with hopes of obtaining a settlement below the target’s cost to defend the allegations in court. The patent’s validity is not important to bottom feeders, as they hope to settle prior to a validity challenge. Patent aggregators are the third variation; they amass huge numbers of patents in a technological area and offer licenses to use the entire group.

Trolls now own a large number of the most-litigated patents and file most of the infringement lawsuits in the United States. The significant majority of these cases end in settlement, commonly priced below the defendant’s expected cost of litigation (per the “bottom feeder” troll’s modus operandi). When patent trolls go to trial, they usually lose, with one study finding that they win only 9.2% of cases that reach a decision on the merits (including default judgments). The expense of pursuing a likely-losing trial is however, a necessary one. A willingness to go to trial furthers a troll’s future bargaining power by establishing a reputation to force defendants to incur the expense of a full trial should they prove recalcitrant.

Critics of this business model allege that it is a “tax on innovation,” which undermines patent law’s goal of encouraging invention. Several studies argue that the prospect of troll-litigation encourages corporations to rationally divert funds from research and development activities. Other commenters note that venture capitalists shy away from investments because of troll entanglements, including one study that estimated $21.7 billion more would be invested were it not for trolls. Similarly, a survey of 200 venture capitalists found that every participant “might refrain from investing” in a company with a patent asserted against it.

For more information on patent trolls, see http://www.ipwatchdog.com/patent-trolls/ .