Recent Trends in NPE LitigationJuly 2012 – The Lawyers, July 2012
1, What is an NPE?
Due to the prospects for large damages awards in U.S. patent litigation, patent litigation itself has become a booming business. Patent litigation is used not only by competitors, but also by companies that do not practice the patents being asserted. Indeed, litigation often occurs in situations where the patents-in-suit have been purchased using capital invested by investors for the sole purpose of enforcing the patents.
In the U.S., companies that purchase patents for the sole purpose of enforcing them have been tagged “Patent Trolls” – a term that has a derogatory undertone. In this article, we use the neutral term “Non-Practicing Entity” or “NPE” to refer to entities that do not practice its patents.
NPE litigation presents many issues for defendants. Since the NPE is by definition not a competitor, a counterattack using the defendant’s own patents is off the table. Similarly, an attempt to offer a cross-license to the NPE would go nowhere. Instead, defendants in an NPE litigation are often left to decide between (A) taking on the cost and distraction of defending the litigation or (B) attempting to settle the lawsuit for less than the expense of defending. Because it is often desirable for a defendant to reach an early settlement rather than investing in the defense of an unpredictable litigation, NPEs have enjoyed success. However, recent trends show that the typical NPE strategy may become more difficult.
2, Recent Trends in NPE Litigation
(1) Difficulty in Obtaining a Permanent Injunction
NPEs will often seek a permanent injunction against defendants in addition to money damages. Seeking equitable relief in the form of a permanent injunction provides an NPE with additional negotiating leverage in settlement negotiations with defendants.
Until recently, U.S. district courts routinely granted permanent injunctive relief upon a finding of patent infringement. In eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), however, the U.S. Supreme Court made it clear that prior to granting a permanent injunction, a four factor test must be applied. Under the four factor test, in order to succeed, a plaintiff must show: (1) that plaintiff has suffered an irreparable injury; (2) that remedies available at law are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. Because it is difficult for NPEs – who do not practice the patent being asserted – to satisfy factors (1) or (2), permanent injunctions have been hard to come by for NPEs post-eBay.
However, CSIRO v. Buffalo Tech., Inc., 492 F. Supp. 2d 600 (E. D. Tex 2007) received a lot of attention because the court granted a permanent injunction for an NPE, even after eBay. Plaintiff Commonwealth Scientific and Industrial Research Organization (“CSIRO”) licenses the results of its research to third parties, and funds further research using the capital gained by the licenses. CSIRO sued Buffalo alleging infringement of patents relating to wireless LAN technology, and obtained a permanent injunction from the district court. The district court judge applied the four factor test set forth in eBay. Regarding factor (1) irreparable injury and factor (2) the adequacy of remedies at law to compensate for the injury, the judge decided in favor of CSIRO based on his finding that (i) since a big portion of CSIRO’s research fund consists of its royalty revenue, the cost of pursuing its infringement suit resulted in lost research opportunities; (ii) the distribution of infringing products harms CSIRO’s reputation; and (iii) because license agreements used by CSIRO can contain substantial limitations or conditions other than the payment of royalties, mere compensation cannot account for such limitations or conditions. Since this judgment was vacated and reversed by the Federal Circuit on the issue of obviousness, the Federal Circuit did not review the district court’s finding regarding the permanent injunction. This case is instructive, though, because it gives us insight as to under what facts an NPE might be able to obtain a permanent injunction under the eBay test.
NPEs have historically favored the U.S. District Court for the Eastern District of Texas (“EDTX”) as a venue. EDTX has a reputation for being a patent-friendly venue, and for its juries having a willingness to grant large damages awards. In 2011, however, three EDTX judges, including Judge Ward, retired, so it remains to be seen if EDTX’s patent-friendly reputation will be sustained.
Recently, there has been an increase in patent litigation filings in the U.S. District Court for the District of Delaware (“DE”). In DE, Markman Hearings and summary judgment are often deferred until the discovery phase is completed. Accordingly, there are fewer opportunities in DE to assess the potential outcome of the case in the early stages of the litigation. This gives plaintiffs more time to attempt to enter into favorable settlements with defendants who are concerned about the expense and unpredictability of the litigation. In addition, because many companies are incorporated in Delaware, personal jurisdiction is easily satisfied, and there is a lower risk that the action will be transferred to another court. For the above reasons, it is expected that DE will continue to be a favored venue for patentees including NPEs.
Of course, the NPE’s choice of forum does not always bind the defendants. Courts will sometimes transfer the case to another court in response to a defendant’s motion to transfer.
Although historically EDTX judges have resisted transferring their cases, such decisions have not always been upheld by the Federal Circuit. In In re TS Tech USA Corp., 551 F.3d 1315 (Fed. Cir. 2008), for example, the Federal Circuit held that because the parties did not maintain offices in the Eastern District of Texas, and because key evidence and witnesses were located in Ohio or Michigan instead of Texas, the Southern District of Ohio was a more convenient forum. The Federal Circuit therefore ordered the case transferred.
Similarly, the mere fact that a company is incorporated in DE does not guarantee that DE will be the proper venue. However, in In Re Link_A_Media Devices Corp., Misc. Docket No. 990 (Fed. Cir. Dec. 2, 2011), the Federal Circuit noted that the place of incorporation is not a dispositive factor in the venue transfer analysis. In deciding to transfer the case to the Northern District of California, the Federal Circuit considered the following facts: (1) defendant’s headquarters was located in California; (2) almost all of defendant’s employees worked in California; (3) plaintiff, a Bermuda-based company, had a related company in California; (4) the inventor of the patent was located in California; and (4) evidence related to the patented invention was located in California.
Given the potential for transfer, some patentees (including NPEs) have started a new “anchor case” strategy in an attempt to secure a favorable venue. Under this strategy, the plaintiff first files its suit (e.g., in EDTX) against a single defendant who will have difficulty having the case transferred (e.g., a company having its principal office in EDTX). After the case has matured, the plaintiff may sue other defendants in the same court alleging infringement of the same patent. Under this strategy, the plaintiff can argue that the court should reject a motion to transfer because judicial economy dictates that the case should be heard by the court already familiar with the patents. While the Federal Circuit has not yet weighed in on the validity of such a strategy, we must take note that NPEs are eagerly thinking about strategies to maintain a favorable venue.
(3) Limitation of Joinder of Accused Infringers
Before the AIA became effective last year, it was typical for NPEs to sue many defendants in a single lawsuit, even if the defendants were not related to each other. Such a strategy provides the plaintiff with a more efficient and cost-effective way of dealing with many defendants than proceeding in many litigations in various courts at the same time.
However, this strategy is no longer valid under the provisions of the AIA. Under new 35 U.S.C. § 299, a plaintiff may only assert a patent against multiple defendants where: (1) (i) defendants are jointly and severally liable; or (ii) infringement arises out of the same transaction, occurrence, or series of transactions or occurrences relating to the making, using, offering for sale, selling in the United States, or importing into the United States; and (2) there are questions of fact common to all defendants. Thus, under new § 299, examples of where multiple defendants may be named include a situation where two companies jointly develop an infringing product and each company makes and sells such product, or a situation where one company’s product contains parts made by another company, which are alleged to be infringing.
35 U.S.C. § 299 applies to all suits filed on or after September 16, 2011 -- the date of enactment of the AIA. We have already observed that the average number of defendants per suit has substantially decreased. Patent attorney James C. Pistorino’s article 2011 Trends in Patent Case Filings shows that, for example, in EDTX, the average number of defendants has decreased from approximately 10 to approximately 2.7 since the enactment of the AIA.
In response to the AIA, NPEs may turn to Multidistrict Litigation (“MDL”). In MDL, when civil actions are pending in different districts, and where such actions have one or more common questions of fact, the cases may be transferred to any one of the districts and consolidated for pretrial proceedings. The pretrial proceedings include, but are not limited to, discovery, claim construction proceedings, including a Markman hearing, and summary judgment. For a plaintiff, MDL may decrease its litigation expenses and avoid the risk of being given inconsistent decisions by different courts. Thus, by using MDL, an NPE plaintiff can enjoy some of the same benefits of multiple-defendant litigation. The Judicial Panel on Multidistrict Litigation (“JPML”), which decides whether to transfer cases for pretrial proceedings, has held that the limitation of joinder under new 35 U.S.C. § 299 is irrelevant to MDL. In re Bear Creek Technologies, Inc., MDL No. 2344 (J.P.M.L. May 2, 2012). This decision is extremely important for NPEs because it confirms that MDL is a tool available for NPEs who can no longer sue many defendants in a single action.
(4) Reduce the Defendant’s Burden of E-Discovery
Defendants typically bear a heavy burden of extensive discovery in NPE patent litigation. On the other hand, an NPE’s burden of discovery is typically much less because, by definition, the NPE does not make any patented products, and often was not involved in the development of the claimed inventions. This unbalanced burden of discovery may weigh in favor of a defendant’s settling the litigation. Recently, the demands of electronic discovery have increased the burden of discovery. As a result, courts have started to make new rules regarding e-discovery to reduce the parties’ burden of discovery.
For instance, in 2011, the Federal Circuit drafted a Model E-Discovery Order as an example that could be adopted by U.S. district courts to help manage e-discovery. This Model Order provides that requests for production of e-mail must identify specific issues, and the requesting party must identify (i) custodians, (ii) search terms, and (iii) a search period. The disclosing party is only required to disclose e-mails that meet these three conditions. In addition, under the Model Order, the number of custodians and the number of search terms is limited. If a requesting party requests e-mails beyond those satisfying the limitations, the requesting party shall bear all reasonable costs incurred by such additional discovery. If the district court limits e-discovery in accordance with the Model Order or a similar order, a party’s burden of discovery will be substantially decreased.
The Model Order is just that – a model – and the adoption of such an e-discovery order is left to the discretion of judges. To date, both the Northern District of California and the Eastern District of Texas, which are both popular venues for patent litigation, have adopted the Model Order. Other courts, such as the District of Delaware, have adopted similar e-discovery orders.
These trends are welcomed by defendants who are concerned about the heavy burden of discovery, and disfavored by NPEs who favor the settlement pressure derived from burdensome discovery obligations.
(5) Attorneys’ Fees Award
Under 35 U.S.C. § 285, the court may in “exceptional cases” award reasonable attorneys’ fees to the prevailing party. Although § 285 provides no definition of an “exceptional case,” the Federal Circuit has held that a case that was litigated in bad faith or one that involves a patent that was obtained through inequitable conduct before the U.S. PTO qualify as “exceptional.” Brasseler, U.S.A. I, L.P., v. Stryker Sales Corp., 267 F.3d 1370 (Fed. Cir. 2001). Recently, the Federal Circuit has held that a case in which the NPE’s strategy is to sue many defendants with the objective of securing settlements is an “exceptional case,” and has required the NPE to compensate defendants for their attorneys’ fees where the NPE does not prevail.
In Eon-Net LP v. Flagstar Bancorp., 653 F.3d 1314 (Fed. Cir. 2011), the Federal Circuit held that absent litigation misconduct or misconduct in securing the patent, sanctions under § 285 may be imposed against the patentee only if both (1) the patentee brought the litigation in bad faith; and (2) the litigation is objectively baseless. Here, the NPE plaintiff filed over 100 lawsuits against a number of diverse defendants alleging infringement of its patents, and then plaintiff offered a quick settlement at a price far lower than the cost of litigation. The Federal Circuit found that while NPE plaintiff assumed little risk by filing suit (e.g. less likely to be counterattacked by defendant’s patents), defendant was strapped with considerable attorneys’ fees and burdens of discovery even if the suit was baseless. The Court held that the NPE plaintiff’s suit was an objectively baseless infringement action trying to extract a nuisance value settlement by exploiting the high cost imposed on defendant to defend against plaintiff’s baseless action brought in bad faith. Accordingly, the Court held that the case was exceptional, and ordered plaintiff to reimburse defendant for its attorneys’ fees.
Eon-Net should serve as a warning to NPEs who file baseless suits with the objective of seeking early settlements. If the defendants prevail in such cases, the NPE may face the risk of an award of the defendants’ attorneys’ fees.
3, Increase of ITC Cases Filed by NPEs
Recently, more and more NPEs have been turning to the U.S. International Trade Commission (“ITC”) as a venue for asserting their patents. Under 19 U.S.C. § 1337 (referred to as § 337), if the ITC finds a violation of a U.S. intellectual property right, it is authorized to issue an exclusion order, barring the importation of infringing goods.
Unlike district court litigation, money damages are not available at the ITC. However, if an exclusion order is issued, defendant’s business would be seriously harmed. Thus the NPE can use the possibility of an exclusion order as leverage to get a favorable settlement. Therefore, the ITC is recognized as a valuable strategic tool for NPEs. Although the effect of an ITC exclusion order is similar to that of a permanent injunction ordered by a district court, the four factor test under eBay is not applied by the ITC in granting an exclusion order. Spansion v. ITC, 629 F.3d 1331 (Fed. Cir. 2010). Under 19 U.S.C. § 1337(d)(1), if the ITC determines that a patent has been infringed, the ITC will issue an exclusion order absent special circumstances such as a finding that the exclusion order would be contrary to public policy. Accordingly, NPEs – who may have difficulty satisfying the four factor test of eBay – may turn to the ITC.
Another advantage of the ITC for NPEs is the fact that a complainant is not restricted by the new provision of the AIA restricting joinder (35 U.S.C. § 299). In fact, it is common for an ITC complainant to name 10 respondents, or more.
In addition, the ITC is a favorable forum for NPEs because it is very rare that that ITC will grant a motion to stay based on a pending reexamination before the U.S. PTO. Filing for reexamination – followed by a motion to stay the case in its early stages – has become one of the favored strategies for defendants sued by an NPE in district court. Although the granting of a motion to stay is within the court’s discretion, many courts tend to grant such motions and stay litigation until the U.S. PTO makes a final decision on the reexamination. ITC respondents have attempted a similar strategy, but without much success. Because the ITC is required by law to conclude its investigations “at the earliest practicable time” it cannot wait for the outcome of a reexamination, which can take upwards of two years or more to complete.  Most ITC investigations are completed in just over a year.
Thus, the ITC provides some tactical advantages for NPEs, and it is anticipated that the number of NPEs using the ITC will increase in the future.
4, Defensive Patent Aggregation
NPEs enforce patents as their business. However, recently, a new service that decreases the risk of attack from NPEs has come to the forefront as another type of business. This new service is called defensive patent aggregation (“DPA”). In short, DPA is a service whereby patents are purchased in markets in which NPEs may be interested, and licenses to these patents are provided to member companies that invest or pay a certain fee.
Well known DPAs in the U.S. include Allied Security Trust (AST) and RPX Corporation (RPX). However, these two DPAs have adopted totally different methods.
AST is a kind of cooperative. Under AST’s approach, member companies receive information relating to patents in a particular market, and if a member company thinks that the patents may be related to its business, the member company places capital in a trust administrated by AST. Then, AST purchases the patents on behalf of the member companies using the capital in trust. After the acquisition of the patents, AST sells the patents to third parties subject to licenses to the member companies that have placed capital in the trust to buy the patents. This has been referred to as “catch and release.” Under this “catch and release” system, member companies can recoup part of their initial outlay. As a result of this system, AST does not become an owner of patents, but gives information to member companies and does the administrative work.
RPX, on the other hand, purchases patents based on its own judgment, using capital obtained from venture capital. RPX then provides licenses to the patents to member companies, which pay certain membership fees. RPX generally does not sell purchased patents like AST.
AST’s scheme benefits its member companies in that they can get licenses to patents that are necessary in order to protect their business. On the other hand, RPX’s scheme is beneficial in that its decision to buy is fast, and member companies do not have to undertake due diligence before the patents are purchased. There are many members in both AST and RPX, including Japanese companies.
Because such research is difficult, it is unclear how much the DPAs defend member companies from attacks by NPEs. However, it is clear that the advent of DPAs is a concern to the business of NPEs. In March 2012, an NPE sued RPX and its member companies for violation of anti-trust laws, and the result of this suit will be of great interest. Cascades Computer Innovation v. RPX, HTC, LG, Motorola, Dell, Samsung (N.D. Cal. 2012). According to the complaint, RPX asked member companies who received a license offer from the plaintiff not to negotiate individually, and RPX as the sole contact has negotiated with plaintiff and offered to pay an extremely low royalty. Plaintiff alleges that the actions of RPX and its member companies are a joint boycott, which is banned under the anti-trust laws. This litigation should be watched closely.
While the new laws and development of the case law have addressed some of the concerns raised by NPE litigation in the U.S., NPEs have continued to seek new methods and strategies for their survival. I think that NPEs who intend to obtain profit by enforcing patents are here to stay so long as U.S. patent litigation can result in high damages awards, and the expense of litigation remains high. For Japanese companies – often favored targets of NPEs – it is important to seek the advice of counsel continuously, and understand the development of the laws and case law relating to NPE litigation in the U.S. in order to develop a strong negotiating position with NPEs.
Published in Japanese (see above pdf link)
 Tomoyoshi Furukawa: Associate, Ohara Law Office, Osaka Japan; legal trainee at Oblon Spivak. Mr. Furukawa is an attorney at law admitted to practice in Japan and New York. He is a graduate of Kyoto University Faculty of Law and Boston University School of Law (LLM with concentration in intellectual property).
 Thomas J. Fisher: Partner, Oblon, Spivak, McClelland, Maier & Neustadt, L.L.P., Alexandria, Virginia. Mr. Fisher litigates intellectual property disputes before the United States District Courts and the International Trade Commission (ITC). He is a graduate of George Mason University School of Law and the University of Pittsburgh (BSEE).
 See also Harris Corp. v. Federal Express Corp., No. 6:07-cv-1819 (M.D. Fla. Feb. 28, 2011) (granting a permanent injunction for an NPE upon finding that defendant’s infringement activities would interfere with NPE’s licensing opportunities and distinguishing this case from the cases that NPEs use boilerplate licenses).
 James C. Pistorino, Susan J. Crane, (2012) 2011 Trends in Patent Case Filings, BNA’s Patent, Trademark & Copyright Journal.
 Although 28 U.S.C. § 1407 requires “common questions of fact,” the JPML may consider common questions of law (e.g. claim construction) in patent litigations. See In re Cygnus Telecom. Tech., LLC, Patent Litigation, 177 F. Supp. 2d 1375 (J.P.M.L. 2001).
 The Federal Circuit acknowledged this problem in Eon-Net LP v. Flagstar Bancorp., 653 F.3d 1314, 1327 (Fed. Cir. 2011).
 District Courts adopting the Model Order may adjust, e.g., the numbers of custodians and search terms. Also, we have seen orders in which the court allows the requesting party to take a deposition in order to identify appropriate custodians, search terms, and the search period. See EDTX’s order. http://www.txed.uscourts.gov/page1.shtml?location=rules
 For instance, in Certain Portable Communication Devices, ITC Inv. No. 337-TA-827, which was instituted in January 2012, the NPE filed a complaint against 21 foreign and domestic electronic device manufacturers.
 For instance, in Certain Blu-Ray Disc Players, Components Thereof and Products Containing the Same, USITC Inv. No. 337-TA-824, Order 13 (April 16, 2012), ALJ denied motion to stay. One of the reasons of the denial was the possibility of a significant length of time passing before the reexamination proceeding concludes. Note that the complainant of this case was NPE.
 According to the USPTO’s announcement, the average pending time is 21.1 months for ex-parte reexamination, and 31.9 months for inter-partes reexamination. http://www.uspto.gov/patents/stats/Reexamination_Information.jsp
 According to USITC Annual Performance Report (FY2011), the average completion time of 17 cases which were concluded in FY 2011 is 13.7 months.
 The basic difference between AST and RPX is explained at David Hetzel, Intellectual Asset Management, Embracing the new IP reality, May/June, 2010.
 An overview of plaintiff’s allegation and complaint is available at Patently-O, RPX: Patent Aggregator and Alleged Antitrust Conspirator (May 12, 2012). See http://www.patentlyo.com/patent/2012/03/rpx-patent-aggregator-and-alleged-antitrust-conspirator.html.