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7 May 2015AmericasJay Nuttall

The patent ‘troll’ tide is turning

Patent litigation has been on the rise for decades, with the number of cases filed increasing six times since the 1980s. Most of the growth in the last decade can be attributed to a class of litigants who file lawsuits for a living.

These plaintiffs call themselves patent aggregators or non-practising entities (NPEs), but are sometimes referred to as patent ‘trolls’. They acquire patents with no intention of using the underlying technology. They never manufacture or sell anything.

Instead, many monetise their patents by aggressively filing infringement lawsuits. Because they don’t manufacture anything, they have no need to worry about infringing any competitor’s patents, and have no fear of countersuits. It’s actually the more the merrier: as they pile on cases, they create economies of scale that enable them to bring legal actions at a relatively low cost.

The patent troll’s signature move is to acquire a vague patent covering some widely used technology (such as adding a flash drive to an implantable medical device), and then wait silently until there has been widespread use. Only then will the patent troll send out a batch of infringement notices: letters demanding settlements that the trolls disguise as licensing fees. Those fees are sometimes set far below the prospective cost of a court battle in order to entice companies to pay up.

It’s easy to see why the patent troll business has seen explosive growth. It’s a shakedown that works. According to RPX Corporation,which provides patent risk managementservices, patent trolls filed 63% of all new patent infringement cases in 2014—more than double their share of cases in 2009.

The bulk of this litigation has been aimed at e-commerce companies, software developers, and computer hardware manufacturers. Medical devices currently represent only 3% of NPE litigation, whereas they make up around 10% of overall patent litigation.

Although the biotech and pharmaceutical industries are the second highest sector in overall number of patent lawsuits, they have so far been the subject of very few NPE cases. RPX counted only four NPE cases in biotech or pharma last year. In a 2013 survey, Santa Clara Law School professor Colleen Chien found that while 90% of venture capitalists in the technology sector had fielded a demand from a patent troll, only 13% of pharmaceutical and medical device investors had been hit.

But that tide is turning. In 2009, plaintiffs filed nine medical device patent infringement cases. In 2014, they filed 93. In the coming years I believe the number of filings may increase by around 15% to 20% every year. The number of infringement cases closely corresponds to the number of new patents: RPX’s research found a 96% correlation. There has been a 15 to 25% increase in medical device patents issued in the past few years.

Many NPEs have been using their well-stocked war chests to build massive patent portfolios in the medical technology industry.

  • In 2012, Acacia Research bought more than 1,900 medical technology patents and applications.

  • Intellectual Ventures has a medical device portfolio with an estimated 1,000 patents.

  • Last year, IPNav acquired approximately 500 patents from Medtronic—a deal that led medical technologies giant Stryker Corporation to launch an anti-competition case against both parties.

  • In a large study of NPEs, Harvard University finance professor Lauren Cohen found patent trolls most commonly file complaints against defendants they perceive to be cash-rich and high-margin. The medical device industry’s robust revenue and relatively high profit margins make irresistible targets for NPEs.

As for biotech and pharma patents, so far the trolls seem uninterested. Unlike new technology or software, which is inexpensive to develop, iterative, and typically has hundreds of component parts, drugs often cost hundreds of millions of dollars to develop.

Pharmaceuticals may not be the lowest hanging fruit, but in the 2014 report, “ Patent trolling: Why bio & pharmaceuticals are at risk”, University of California Hastings College of the Law professorRobin Feldman and Harvard Law Schoolprofessor W. Nicholson Price II warn that it is still a vulnerable industry.

In a cursory search of the patent portfolios at five universities, Feldman and Price found dozens of patents that could be monetised against pharmaceutical companies. And these were not just patents on chemical compounds, but on manufacturing processes, dosage methods, and treatment applications, including using a 3D printer to make controlled-release pills and prescribing ultra-low doses of oestrogen to postmenopausal women.

Whatever you may think of their utility or fairness, patent infringement cases are not to be taken lightly. Damages awarded in medical device infringement suits are among the highest in any industry: the median, according to professional services company PricewaterhouseCoopers (PwC), is around $15 million to $16 million—about $10 million higher than the overall median infringement verdict.

More bad news: when medical device cases go to trial, the plaintiffs win more often. Across all industries, PwC found plaintiffs won just 33% of cases, but won nearly 40% of medical device cases. When NPEs win, their median damages are nearly triple those won by practising entities. You can be sure that trolls know these figures by heart.

How to protect yourself

When you receive an infringement notice, a settlement may be an enticing option. Litigation seems risky, disruptive, and expensive. And, after you’ve already spent hundreds of millions on research and development, getting held up in court may seem a fate far worse than paying off an NPE.

Acceding to a patent troll’s initial demands, however, will only incentivise trolls to keep coming back to the well. The surest way to defend against future attacks is to develop a reputation as an aggressive adversary who’s not worth the trouble.

Here are some tips:

1. Know the landscape and the land mines

Take a look at the intellectual property out in the marketplace—the patents owned by your competitors, companies in potential growth areas, and by patent trolls. Foster collaboration between your research and legal teams to ensure that you avoid using technology that could be used to substantiate a troll’s claim.

2. Be an aggressive defendant

Instead of settling quickly or dragging your feet in the vain hope that the patent troll will somehow lose interest, roll up your sleeves and get to work. Put the plaintiff on notice early of your claims and defences. Begin by investigating these basic questions:

  • Does the plaintiff actually own the patent?If it doesn’t properly own the patent or others (prior employers, ex-spouses, etc) own some or all of the patent, the case may be invalid.

  • Has the patent troll done the requisite pre-trial enquiry? Some patent trolls do not do their due diligence before sending out sheaths of letters to defendants. If that’s the case, the Federal Rules of Civil Procedure’s rule 11 may be of use. Rule 11 requires an attorney to make a reasonable enquiry into the facts before filing a case. If they haven’t done this work, then they may be sanctioned, including court costs and attorney’s fees. Such an action will have a chilling effect on other trolls.

3. Press your advantage

Ask the US Patent and Trademark Office to take another look at the patentability of the claims through inter partes review (IPR) before the Patent Trial and Appeal Board. Filing IPRs and early summary judgment motions can put the patent troll’s only assets, its patents, at risk.

In the last year there has been a 150% increase in IPR petitions filed against NPEs, according to RPX’s research. The top three NPE defendants, Apple, Google, and Samsung, each faced about 40 new NPE patent infringement cases in 2014 and each filed more than 40 IPR petitions.

4. Seek attorney’s fees

Recently, judges have been increasingly amenable to such requests, both as remuneration for a wronged defendant and as a punitive measure against patent trolls that over-reached.

Conclusions

There’s a storm coming. With the number of medical device patents on the rise and the damages figures for the industry dwarfing the median numbers, it’s a sure bet that large, well-funded patent aggregators will continue to build up their portfolios and ready themselves for attack.

Preventive moves and confident, aggressive responses are the best protection for your company and your IP.

Jay Nuttall is a co-managing partner of the Chicago office of law firm  Steptoe & Johnson. He can be contacted at: jnuttall@steptoe.com