Fighting trolls with fire

Faced with mounting costs and headaches stemming from litigation by NPEs (non-practicing entities, or "patent trolls"), more and more operating companies are resorting to a novel means of addressing the problem. As part of their defensive patent strategy, tech giants (and top troll targets) Microsoft, Sony, and Nokia recently joined with startup company RPX.

In business for a little over a year, RPX ranks among the pioneers in the Defensive Patent Aggregation movement. It was created to offer operating companies a solution to the growing problem of lawsuits from NPEs. Until now, most companies have had to go it alone in mounting costly, risky, and unpredictable legal defenses. RPX criticizes the NPE business model for creating inefficiency via high transactions costs. But unlike Microsoft and others who have lobbied the U.S. Congress in the hopes of securing anti-NPE legislation, RPX insists that "[t]the optimal remedy" for NPE patent assertions is a market solution, or "fight[ing] fire with fire."

To that end, RPX strategically buys up patents, thus limiting the number of patents on the market that can be leveraged against operating companies. Unlike the NPEs, however, RPX does not initiate or directly profit from patent assertions; instead, it offers a form of insurance. All patents that RPX purchases into its Defensive Patent Aggregation are licensed in bulk to its members, in exchange for an annual subscription fee. Early this year, RPX reported that it had so far spent $130 million to acquire more than 1,000 tech patents.

Though perhaps the most popular, RPX is not the only company offering defensive aggregation services. Other networks include Allied Security Trust and the Open Invention Network. With the advent of such entities, the trend in patent litigation circles has changed from getting rid of NPEs altogether to managing the costs of NPE patent litigation -- offering yet another indication that the so-called trolls are here to stay.

NPEs find a friend in the ITC

It seems to be the topic du jour: NPEs are on their way to becoming downright respectable. In April the United States International Trade Commission (ITC) delivered a boon to these once-scorned entities. The Commission's decision in Certain Coaxial Cable Connectors, Investigation No. 337-TA-650, stated that an NPE's patent enforcement litigation activity can establish a "domestic industry" in a product -- sufficient to prevent the importation of infringing items into the U.S.

To win an exclusion order, an ITC complainant must show that it has established, or is in the process of establishing, a domestic industry in relation to a disputed patent. Under the Tariff Act of 1930, 19 U.S.C. § 1337(a)(2) and (3), this may be accomplished by demonstrating a "substantial investment" in exploiting the patent in the United States, including related licensing activities. In Certain Coaxial Cable Connectors, complainant PPC sought to bar multiple respondents from marketing an item on which PPC owned the patent. PPC did not manufacture the product, own a plant or equipment, or employ workers. Instead the company argued that its legal bills that resulted from enforcing its patent constituted a significant investment in exploiting its patent. Therefore, PPC claimed, it had a domestic industry that deserved protection. The ITC agreed.

For its reasoning the ITC relied largely on the Tariff Act's plain meaning and legislative history. In 1988, the U.S. Congress deliberately added licensing as a qualification for domestic industry, specifically in order to overturn the ITC's previous Gremlins decision. From this the Commission concluded that Congress intended to encourage the practical application and propagation of patents and their protected products. Thus, any licensing-related activity that tends to bring a patented item to use or to the market may pass muster -- even if the activity is intended solely to earn revenue from the item.

The Commission did limit its decision. Patent enforcement litigation in itself may not constitute exploitation, because it does not necessarily involve licensing. But a patent enforcement lawsuit or other activity may qualify, if the documented activity is "related to licensing and pertain[s] to the patent at issue." Merely owning a patent won't meet the domestic industry requirement; a patent owner must actively take steps "leading to the exploitation of the intellectual property." And whether a complainant's investment is "substantial" must be determined according to the facts of each case. But it's notable how broad a reading the ITC gave for licensing activities, which may include, "among other things ... sending cease and desist letters ... conducting a patent infringement litigation, conducting settlement negotiations, and negotiating, drafting, and executing a license."

Unfortunately for NPEs, the ITC cannot order an award for damages. It can, however, issue an injunction barring an infringing product from importation into the United States. In this way an ITC order provides a patentee with a useful bargaining chip to potentially obtain a sizable settlement from an infringer. According to The Prior Art blog, this can matter quite a lot, since

"... only a tiny fraction of district court infringement cases go to trial, with the typical defendant paying an estimated average of $5 million per case. By contrast, 40 percent of ITC cases go to trial and the average defendant there can expect to rack up as much as $10 million in litigation costs over a much shorter period of time."

Ricoh undercuts NPE profit potential

If other U.S. courts follow the lead of Wisconsin District Court Judge Barbara Crabb, NPEs (non-practicing entities, or "patent trolls") may soon see an end to their massive settlement winnings. Last month, office equipment manufacturer Ricoh won an infringement action against Taiwanese company Quanta Computer. But Crabb rejected Ricoh's request for an injunction to prevent Quanta from selling the patented optical drives at the heart of the suit. Pointing to eBay (547 U.S. 388 (2006)), the judge diverged from traditions of presumptive injunctive relief in cases of patent infringement cases, and instead appeared to establish certain criteria for distinguishing among types of patent holders. Such criteria seemed intended as a direct hit against NPEs.

Crabb was unpersuaded that Ricoh would suffer irreparable harm if an injunction did not issue. To justify this analysis, she relied on the eBay concurring opinion:

"When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest."

This language appears to specifically target NPEs; Judge Crabb explicitly contrasted such "entities" with researchers, independent inventors, and direct market competitors -- the latter classes apparently being more deserving of injunctive relief against infringers. Because Ricoh does not manufacture or sell the patented optical disc drive, Crabb reasoned that the plaintiff was not Quanta's direct competitor, and thus would not suffer irreparable harm in the absence of an injunction.

But she also turned an eye to the plaintiff's intent; since Ricoh had previously licensed its patent to numerous companies, Crabb decided that Ricoh's main motive was not "to narrowly limit the practice of its invention," but was rather to "simply maximize a potential licensing fee." And: "[b]ecause that is not an adequate ground for an injunction, plaintiff’s motion for a permanent injunction will be denied." The parties were ordered to negotiate a compulsory license for future use.

This policy-based decision may be one court's way of addressing the U.S. Congress's failure to heed the pleas of large companies and end the plague of the "patent trolls." It does remove one bargaining chip from the NPEs' stable of tricks. By hitting NPEs where it hurts -- in their pocketbooks -- the court may well accomplish what Congress never could.

Read the decision here.