Do policies that prohibit non-practicing entities (NPEs) from filing patents discourage innovation in an industry?
That question has yet to be answered, but a new U.S. Supreme Court decision may take us one step closer.
In the beginning, U.S. founding fathers studied the British patent system, where patent fees were 11 times the per capita income of the average citizen and patent holders required to manufacture their patents (Khan, 2005).
High fees and working requirements skewed invention toward large, incumbent, capital-intensive industry players. In the 18th century, the U.S. was an agrarian economy dependent on its imports. Its standard of living was lower than many South American countries (Engerman & Sokoloff, 1994). Individuals or small-business owners would not have the funds to finance a patent—let alone enforce its infringement—or manufacture a good idea.
The U.S. patent system was, therefore, in some ways, a reactionary system to the British one. It lowered fees to invite inventors without the means (or desire) to commercialize their inventions, referred to today as “non-practicing entities,” hoping that these inventors would create new industries and promote competition among firms of all sizes through exploratory research to spark economic growth.
Today, the term NPE is usually replaced by the more derogatory term, “patent troll.” From this term, we can see how a once venerated class—the poor, individual inventor—is now vilified.
Are NPEs to be protected or prosecuted?
The problem is, the U.S. litigation system is being clogged with lawsuits—some more frivolous than others. As more and more Americans seek the famed rags to riches story via patent filings, NPE lawsuits have gone on the rise.
In 2013, NPEs—defined as any person or company that does not produce its patents and earns the majority of its revenue from litigation awards—sued 11 percent more companies and filed 18 percent more lawsuits than in 2012, according to the Internet Infrastructure Coalition.
In 2013, there were 3,134 suits brought to court by NPEs, which is more than half of all patent suits in the U.S. Some experts, like InsideCounsel Magazine, believe the 40 percent increase in patent troll suits between 2007 and 2011, shows that patent trolling is a continuing problem.
The Supreme Court tends to agree.
In Octane Fitness v. ICON and a companion case, the high court held that previous decisions by the Court of Appeals for the Federal Circuit, which is the specialized court for patent appeals, had imposed standards that went far beyond what Congress intended when it added a “loser pays” provision to the patent code, reports Forbes.
Now, courts are allowed to impose opposing counsel’s legal fees on the losers of misconduct in patent litigation.
The court also reduced the Federal Circuit’s ability to overturn fee awards by lower-court judges.
“Litigants will still have their chance to have their day in court, but once you’ve had your day, you need to know when it’s time to fold your cards,” wrote Brian H. Pandya, a partner with Wiley Rein who submitted an amicus brief in the litigation on behalf of a Blue Cross subsidiary, according to Forbes.
What does this mean for lawyers representing NPEs?
First, litigation involving patents has now become even higher-stakes. If you win, they’re that much more profitable.
However, it also means your firm might reconsider taking patent cases on a contingency or alternative fee arrangement. Because, if you lose, your firm risks assuming opposing counsel fees, as well.
In the end, will this ruling decrease NPE litigation, as desired?
It’s uncertain. Imposing opposing counsel legal fees on the loser also opens up cases for non-payment or delay of payment, even appeal.
Whatever the outcome of this ruling, what is certain for your firm is that it’s time to add a strategic plan for taking on patent-related suits.
Speaking of issues with IP, check out The Center For Competitive Management’s course: “To Pin or Not To Pin: Pinterest and Your IP, What Every Corporate Counsel Needs to Know.”
As corporate counsel try to keep up with this fast-paced social media trend, this program discusses the trademark, copyright, and privacy issues presented by the use of Pinterest.
- Engerman, Stanley L. and Kenneth L. Sokoloff. Factor Endowments: Institutions, and Differential Paths of Growth Among New World Economies: A View from Economic Historians of the United States, National Bureau of Economic Research Historical Working Paper No. 66, 1994.
- Khan, B. Zorina. The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920, Cambridge University Press, 2005.