Patent Trolls

The term “Patent Troll” typically refers to companies or individuals who aggressively enforce their patents, usually with no intention to manufacture or market the patented invention themselves, to extract royalties and other licensing income. Some say 1 out of 6 patent suits involve trolls. Others say the percentage may be as high as 50%. The difference between these two estimates lies in how you define a “troll.”

Everyone seems to agree that holding companies that acquire patent and primarily litigate for money are trolls. But if the key determinant is whether the plaintiff intends to produce products or services covered by the patent, the term can also apply to many other, perhaps less sinister, entities.

Are Trolls Evil?
Trolls have been much maligned as increasing the cost of doing business without any corresponding benefits. Often the patents they seek to enforce are also criticized as claiming obvious or just plain unpatentable ideas. But there is also another school of thought. The contrary argument is that they increase the value of patents and promote innovation by those who are forced to “engineering around” their claims. Additionally, by creating an orderly market for patents, they increase the liquidity of patents and they level the playing field for individual patentees – small inventors – who might otherwise lack the financial resources to enforce their patents.

Famous Patent Trolls
Some say the term “patent troll” was first used when Jerome Lemelson, a prolific U.S. inventor with over 500 patents teamed up with his lawyer to sue General Motors, Ford, Chrysler, Mitsubishi and many others for patent infringement and collected hundreds of millions of dollars. By some estimates, Lemeulson and his estate ultimately collected over a billion dollars.

Today’s patent trolls include not only individuals but also companies established to acquire diverse patents in a field and license them to each company in a target industry. For example, Eolas Technology was a patent holding company that successfully sued Microsoft on a patent covering browsers like Internet Explorer that could enable interactive applications embedded in Web pages and was won a half billion-dollar verdict in 2003. Microsoft settled for an undisclosed sum in 2007. (Last summer Eolas filed suit against 22 other companies including Apple, Google, Amazon and e-Bay on another of its patents.)

NTP was another successful Patent Troll. NTP won a judgment against RIM, the maker of Blackberry smart phones and threatened to obtain an injunction that would have silenced millions of Blackberry users until a settlement was reached in 2006 for over 600 million dollars.

Other trolls have targeted Apple’s wildly successful iPhone. Opti, Inc. won a 21 million dollar verdict against Apple this year on a patent claiming methods to more efficiently transfer data among the CPU, memory, and "other devices." (Opti Inc. is a legitimate manufacturer of semiconductor devices but arguably falls into the troll category because the company doesn’t sell any products covered by the patent claims they enforced against Apple.) Apple is currently appealing the district court ruling. EMG, another patent holding company, has also sued Apple, alleging infringement by the iPhone of their patent on smart phone web-surfing.

Where are the trolls going?
Increasingly, patent troll infringement suits are brought in an obscure federal district courts far removed from Washington, New York, Chicago or other major cities where foreign-based companies do most of their business. For example, the Eastern District of Texas, a sparsely populated region of Texas, has been the most popular court for patent litigation for several years running.


District-by-District Filing Statistics
The popularity of the Eastern District of Texas for patent litigation is highlighted by statistics recently reported by Legalmetrics, which looked at all patent infringement suits filied in 2008:

Rank _____District __________Filings _______% of Total
1_________Eastern D. Texas_______ 307 ___________ 11.2
2_________Northern D. California___229 ____________ 8.3
3 ________ Central D. California_____201 ____________ 7.3
4 _________D. Delaware _________ 168 _____________6.1
5 _________D. New Jersey ________161 _____________ 5.9
6 _________N. D. Illinois ________ 152 ______________5.1
7_________ Southern D. New York __ 111______________ 4.0

There are several factors that apparently contribute to the popularity of the Eastern District of Texas as a forum for trolls to enforce their patents. Up until recently, the district boasted of a so-called “rocket docket,” in which cases would go to trial within one year. At present, the median length of time to trial has increased to about 18 months, which is still considerably better than most of the districts that serve large metropolitan areas like New York, Chicago or LA.

The Eastern District has adopted comprehensive rules governing patent cases – and several of the judges of the district has also marketed themselves as especially interested and experienced in hearing patent jury trials. One facet of the rules postpones hearing summary judgment motions until late in the proceeding – after a formal claim construction hearing – thereby providing more pressure on defendants to settle or face considerable expenses before case dispositive motions can be heard.

Finally, there is the perception that the Eastern District is more pro-patentee.

District Success rates
The perception that the Eastern District is more pro-patentee is perhaps more than a perception. Statistics gathered by PriceWaterhouseCoopers looked at all of the patent case decided over a twelve year period from 1995 to 2007 and some interesting results among the districts that handled large volumes of patent litigation:

Rank___District _______Trial Success Rate___S/J Success Rate
1 ______Eastern D. Texas_____71.9%_______________ 8.3%
2 ______N. D. California______57.5%______________12.5%
3 ______C. D. California______68.0%______________34.5%
4______D. Delaware________ 62.5%______________ 18.0%
5______ D. New Jersey_______50.0%______________25.8%
6______D. Illinois__________51.2%_______________23.7%
7 ______S. D. New York______52.0%________________8.3%

Escape From Texas?
In patent litigation, the plaintiff must be able to prove that such jurisdiction exists over each defendant in the district in which the action is brought. If a defendant can prove that personal jurisdiction is absent, it can move to dismiss. When it comes to corporations, the basis rule was laid down over fifty years ago by the U.S. Supreme Court in International Shoe Co. v. Washington (Int'l Shoe Co. v. Washington, 326 U.S. 310, 316-17 (1945)), in which the Court held that personal jurisdiction exists over a corporation if it has sufficient “minimum contacts” with the forum to reasonably anticipate being sued there.

Personal Jurisdiction Inquiry
The minimum contacts test typically poses certain questions:
• Does the Defendant have a regular place of business in the district?
• Are products sold in the district?
• Are products advertised in the district?
• Do the contacts within the district relate to the alleged patent infringement?

An example to show how hard it is to avoid personal jurisdiction in the Eastern District of Texas is the case of Aten International v. Emine Technology and Belkin, Inc. decided last summer. The Plaintiff, Aten Technology, was the U.S. based subsidiary of a Taiwanese company. Aten was incorporated in California and its principal place of business was Irvine, California. Emine was a Taiwanese company with a principal place of business in Taipei, Taiwan. The other defendant was Belkin, Inc. a Delaware corporation with a prinicipal place of business in Compton, California. Emine’s only contact with Texas was indirect. It sold products to Belkin, who then marketing them using Belkin’s own trade names. In fact Emine sold its products to a Taiwanese trading house who, in turn, shipped them to Belkin using free-on-board shipping terms. Judge Davis of the E.D. Texas was not impressed with Emine’s efforts to isolate itself from the U.S. market. He found that the evidence led to a strong conclusion that Emine knew or should have known that its products consistently were marketed and sold by Belkin in Texas. Hence the minimum contacts test was met.

Non-Convenient Venue
There is another possible escape route from Texas. The Federal Rules of Civil Procedure permit a district court, for the convenience of the parties, in the interest of justice, to transfer any civil action to any other district or division where it might have been brought. Historically, the district court judges of eastern Texas have been largely unwilling to part with any case filed in their district. However, the appeal courts have begun to carefully scrutinize these decisions denying transfer motions. Several recent decisions from the Court of Appeals for the Federal Circuit (CAFC) has criticized the judges of the Eastern District of Texas for retaining cases when the plaintiff’s ties to Texas are dubious and for not transferring cases to other federal courts that are more convenient for the parties.

Stay Pending Reexamination
One final strategy worth mentioning for companies who find themselves sued by trolls in Texas or elsewhere is to seek reexamination of the patent-in-suit by the U.S. Patent Office and request that the federal court litigation be stayed while the Patent Office reconsiders the patent.

Recent changes in federal law, new commitments by the U.S. Patent Office and a growing amount of statistical data suggest that an administrative challenge to a dubious patent may be an effective defense strategy – and may also be a way to put costly federal court litigation on hold. See my previous blog (January 2010) on Reexamination.

- Tom Engellenner

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.