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Gallagher: Recent Supreme Court rulings could help end patent trolls

December 17, 2014

 

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By Douglas Gallagher

There have been recent efforts in Congress and state legislatures to address the issue of so-called patent trolls, also known as patent assertion entities. This year, at least three of the six patent-related decisions by the Supreme Court of the United States have been widely regarded as impacting PAE activity. Although these decisions are only six months old, they appear to be on a path to help curb these unwanted lawsuits.

What is a patent troll, a.k.a., PAE?

There is no specific legal definition for a “patent troll.” Typically, a PAE is regarded as a business that does not make products covered by the patent, but instead acquires patents and asserts these patents against companies that make or sell products.

PAEs often sue large numbers of relatively small businesses instead of suing larger businesses with the financial resources to fight an expensive patent-infringement suit. When faced with the high cost of defending such a lawsuit, the smaller businesses typically settle for a comparatively small amount – on the order of tens of thousands of dollars – generating an income stream for the PAE.

No patents for abstract ideas

The Supreme Court case appearing to have the largest immediate impact on PAEs this year is Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (U.S. 2014), in which the court unanimously invalidated a patent for the computer-implementation of an abstract idea. Since much of the outcry concerning patent trolls involves the assertion of computer-related patents, this opinion was thought to have substantial potential for curbing PAE activity.

The patent at issue in Alice involved a computer process for ensuring parties who have agreed to exchange financial instruments live up to their agreement. The court held the patent invalid because the claims, the part of the patent defining the boundaries of the patent, were drawn to a patent-ineligible abstract idea, and generically carrying out the steps of an abstract idea on a computer does not transform that abstract idea into a patentable invention.

The opinion implicitly accepted the notion that computer software can be patent-eligible if the software involves something other than an abstract idea or if the software transforms an abstract idea, but gave little guidance on what these requirements are, other than saying the patent-at-hand did not meet the test.

So far, the Alice decision appears to be impacting computer-related patent lawsuits and computer-related patent applications. In one recent example, Ultramercial v. Hulu, 2014 U.S. App. LEXIS 21633 (Fed. Cir. Nov. 14, 2014), the Court of Appeals for the Federal Circuit reversed its previous ruling and invalidated a software patent as claiming a patent-ineligible abstract idea. The U.S. Patent and Trademark Office has also implemented rules for its corps of examiners to consider Alice when evaluating software patents, which seems to have increased the number of software patents being rejected as claiming ineligible subject matter, which I have personally witnessed.

Penalties for frivolous lawsuits

A pair of simultaneously decided cases by the Supreme Court, Highmark Inc. v. Allcare Health Mgmt. Sys., 134 S. Ct. 1744 (U.S. 2014), and Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (U.S. 2014), were generally directed at the ability of District courts to impose penalties on marginally valid patent cases.

In Octane Fitness, the standards for determining when the loser in a patent suit should pay the winner’s attorney fees were relaxed. The Federal Circuit had previously established that fees could be awarded in cases where inappropriate conduct affected the outcome of the case or where the lawsuit was baseless and brought in bad faith. However, following Octane Fitness, fees may now be awarded if a case “stands out from others,” either with respect to strength/weakness of a party’s case or the unreasonable actions of one of the parties.

Not only did Octane Fitness make the test to award attorney fees easier, it also lowered the amount of proof required to pass this test; now only a preponderance of the evidence is required to prove a case was exceptional and award fees.

In addition to making it easier to prove a case was exceptional, Highmark raised the deference given to a District Court’s award of attorney fees, replacing the Federal Circuit’s de novo standard with an abuse of discretion standard. As a result of these decisions, it is expected that District courts will have wider latitude in awarding attorney fees against patent trolls.

Is sweeping reform still needed?

There is little question that patent trolls are profiting in ways many people view as unfair. However, the ability to broadly define this unwanted activity and pass a new law without adversely impacting good actors, such as universities, is proving to be very difficult.

The “I know it when I see it” definition is typically very difficult, if not impossible, to legislate; courts are better equipped to handle these types of issues on a case-by-case basis. With the new ammunition given to the courts by the Supreme Court, it may be prudent to see how this new jurisprudence plays out before enacting sweeping new laws.•

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Douglas Gallagher is an attorney with Bingham Greenebaum Doll LLP. He focuses his practice on assisting new and established businesses with developing and protecting their intellectual property assets while respecting the intellectual property rights of others. He can be reached at 317-968-5543 or dgallagher@bgdlegal.com. The opinions expressed are those of the author.

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