The Supreme Court Takes on Patent Trolls
flickr.com/photos/60588258@N00/3293465641 Recent public concern about “patent trolls” has provoked Congress to consider passing a reform bill to confront the perceived problem, while the judicial system has also begun responding to these concerns.
Current U.S. patent law provides as follows: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.” 35 U.S.C. § 285 (“Section 285”). This means that if a court judges that a litigation involved such egregious conduct as to be “exceptional”, it can punish the losing side by making it pay the winning side’s attorney fees. However, in reality this is something that very rarely happens. As a result, Section 285 has never been an effective deterrent against patent trolls, but that may be about to change.
During its current term, the Supreme Court will hear arguments in Octane Fitness, LLC v. Icon Health and Fitness, Inc. in which the Court will consider lowering the Section 285 standard for applying attorney fees. This would encourage courts to punish trolls who bring frivolous patent cases. At this time, if a “patent troll” files a baseless complaint against an accused infringer there is only a remote chance that a court will make the troll pay the attorney fees of the accused in the event that the accused party wins. In fact, attorney fees are granted in only about 1% of all patent cases that are filed, with patent owners being almost twice more likely to win an award of fees than accused infringers. Consequently, there is virtually no deterrent in current law against the filing of frivolous patent infringement suits by trolls. Arguably, the high costs that patent litigation will almost certainly inflict on accused infringers means that there is an incentive for trolls to file a complaint in the belief that most accused infringers will agree to a quick settlement, rather than be subjected to serious financial harm.
Not Every Patent Troll Looks Like A Troll
In the Octane Fitness case, a manufacturer and seller of exercise equipment called Icon Health & Fitness, Inc. (“Icon”) owned a patent for an elliptical machine (U.S. Patent No. 6,019,710). Icon did not sell any of the type of elliptical machines covered by the patent. A smaller startup company, called Octane Health & Fitness (“Octane”), started to produce its own elliptical machines, which sold well, and Icon decided to launch a competing product. However, in addition to launching a competing product Icon also elected to begin litigation against Octane by using Icon’s own elliptical machine patent, which Icon’s internal emails described as an “old patent we had for a long time that was sitting on the shelf.” This is an excellent illustration that although the term “patent troll” has become commonly associated with a group of lawyers who have raised some money to acquire patent rights, and who then go on to threaten litigation for profit, this is not always the case. Many cases that can fit the troll paradigm involve companies that are seeking to leverage the unused parts of their patent portfolio for competitive commercial advantage.
The High Cost of Defense
Octane chose to fight, and after spending over $1,300,000 on litigation, won a summary judgment that its machines did not infringe Icon’s patent. However, much to Octane’s chagrin, although it had succeeded in defending itself against what it saw as thoroughly baseless accusations of patent infringement, the court refused to punish Icon by making it pay Octane’s legal fees. The court applied the prevailing Section 285 standard for awarding attorney fees, which dictates that not only must Icon’s litigation have been “objectively baseless”, but also that Icon must have acted in “subjective bad faith” (meaning Icon knew it had no legitimate basis to litigate). Octane refused to take this lying down, and in an unusual move for an infringer that has won in court, opted to appeal all the way to the Supreme Court to argue that the current standard for awarding fees is set too high and should be lowered to remove the need to show “subjective bad faith”.
Legislating from the bench?
Naturally enough, Icon has argued in response to Octane that there is no evidence that supports the idea that its litigation was objectively baseless or that it acted in knowing bad faith, and in addition that the current standard for awarding fees is just fine the way it is. Furthermore, Icon argues that if the Supreme Court lowered the standard for awarding attorney fees, then the Supreme Court would in effect be legislating from the bench and usurping the role of Congress. In fact, Icon has argued that the current patent reform legislation pending before Congress provides a sound reason for the Supreme Court to leave matters where they currently lie.
Pick Your Poison
The advantage of having the Supreme Court lower the standard for application of Section 285 is that it will in effect implement the kind of “loser pays” provision contained in the pending legislation without necessarily having to define what a “patent troll” is. By allowing courts greater discretion to consider the circumstances of each individual case, it could be argued that there is a greater chance of punishing the true “patent trolls” while avoiding the unintended consequence of chilling legitimate litigations. Set against that are arguments that the current balance of patent law has tilted too far towards enforcement of bad patents that do nothing to enhance progress or innovation – which is after all what the purpose of patent law is meant to be. In this view, having Congress pass legislation that decisively tilts the law against non-practicing entities (the polite term for “patent trolls”) is worth the risk that some legitimate litigations may not be launched for fear of the potential costs of losing.
Given the pace at which legislation proceeds through Congress, it is more likely that a decision will be made by the Supreme Court before a patent reform bill is signed. The final outcome in the Octane Fitness case is difficult to predict, but a general tendency of recent Supreme Court patent cases has been to loosen rigid rules in ways that tilt against the owners of patent rights, which would favor a decision to lower the Section 285 standard.
