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Defending Chief Judge Rader: Judges Can Make Patent Trolls Pay


Written by Gene Quinn
Patent Attorney & Founder of IPWatchdog, Inc.
Principal Lecturer, PLI Patent Bar Review Course
Posted: June 24, 2013 @ 7:00 pm

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Chief Judge Randall Rader of the CAFC

Three weeks ago Chief Judge Randall Rader of the United States Court of Appeals for the Federal Circuit authored an op-ed article in the New York Times titled Make Patent Trolls Pay in Court. He co-authored this article with Law Professors Colleen Chien (Santa Clara) and David Hricik (Mercer). The premise of the article is simple: there are bad actors who abuse the patent litigation system by buying up and then seeking to enforce dubious patents with vague allegations of infringement that don’t seem to pass muster.

But exactly how do these bad actors abuse the litigation system? Chief Judge Rader explained the business model as follows: “[T]rolls… make money by threatening companies with expensive lawsuits and then using that cudgel, rather than the merits of a case, to extract a financial settlement.”  Indeed, these patent trolls rely on the inefficiencies of the litigation process and bring lawsuits solely for the purpose of settling the case for nuisance value before the lack of merit in the case is exposed.

While it may be difficult for some to believe that this type of activity happens, those within the industry with first hand knowledge know it to be true. The problem is real, the damage it causes is significant and the frequency with which it occurs is astonishing. Rader, Chien and Hricik are absolutely correct!

According to Chief Judge Rader, Chien and Hricik, the patent troll problem is the result of an inherent strategic advantage they have in litigation proceedings. They explain:

The problem stems largely from the fact that, in our judicial system, trolls have an important strategic advantage over their adversaries: they don’t make anything. So in a patent lawsuit, they have far fewer documents to produce, fewer witnesses and a much smaller legal bill than a company that does make and sell something…

…Trolls, moreover, often use lawyers to represent them on a contingent-fee basis (lawyers get paid only when they win), allowing trolls to defer significant legal costs that manufacturers, who generally must pay high hourly fees, cannot.

With huge advantages in cost and risk, trolls can afford to file patent-infringement lawsuits that have just a slim chance of success…

The article goes on to explain that District Court Judges have latitude to reign in the truly nefarious conduct and “make trolls pay for abusive litigation.” The authors specifically cite 35 USC 285 and Rule 11 of the Federal Rules of Civil Procedure.

Last Tuesday evening Chief Judge Rader was on a panel with U.S. District Court Judge Lucy Koh of the United States Federal District Court for the Northern District of California. Law.com reports that Jude Koh took a shot at Chief Judge Rader’s NY Times op-ed article, calling it “a little bit unfair.” Koh took issue with the articles suggestion that District Court Judges have the ability to shift fees in frivolous patent cases. According to Law.com, Judge Koh went on to explain that attorneys fees can only be awarded in “exceptional cases,” which she explained was “a really high bar.” Her final dig at the Chief was saying: “We can’t cite a New York Times editorial as authority.”

I was not at the panel discussion last Tuesday evening, so I cannot verify that Judge Koh said these things reported in Law.com, although I have no reason to doubt the veracity of the reporting. But if Judge Koh did say what is reported her comments are utterly astonishing. What is “a little bit unfair” is her characterization of the New York Times op-ed article, and she completely ignores the fact that District Court Judges have tremendous authority to administer their courtrooms and orchestrate a case to ultimately achieve a just result. That includes issuing sanctions and attorneys fees.

It was an unnecessary and gratuitous dig for Judge Koh to say that she cannot cite a New York Times editorial for authority. While true, she can certainly cite 35 USC 285, 28 USC 1927, and Rules 11, 26, 30 and 37 of the Federal Rules of Civil Procedure, as well as any number of precedential cases that authorize the awarding of attorneys fees to address litigation abuses, such as but not limited to discovery abuses and knowingly engaging in misrepresentations.

35 USC 285

Section 285 of Title 35 explains simply:

“The court in exceptional cases may award reasonable attorney fees to the prevailing party.”

The types of conduct that could support a showing of exceptional circumstances resulting in the award of attorneys fees include, but are not limited to, willful infringement, inequitable conduct before the Patent and Trademark Office, litigation misconduct, and vexatious or unjustified litigation or frivolous suit.

In one particular patent troll case that reached the Federal Circuit — Eon-Net v. Flagstar Bancorp — the Federal Circuit affirmed the district court’s rulings and cited with approval the district court’s characterization of the underlying lawsuit as bearing “indicia of extortion.”

Indeed, patent troll cases are almost always characterized by dubious patents, non-specific claims of patent infringement and a sweetheart offer to settle the case for $25,000 to $50,000. Some trolls go on to point out that this is merely a small fraction of the average costs of defending a patent litigation, which is well over $2 million. Such behavior is abusive and is properly characterized as extortion-like, as several district courts have done and the Federal Circuit has recognized. If a plaintiff brings a case that bears “indicia of extortion” how is that case not exceptional?

Judge Koh would be right to recognize that attorneys fees are rarely awarded pursuant to 35 USC 285. Chief Judge Rader is equally right to recognize that it doesn’t have to be that way.

My opinion is that it is absurd to suggest that a District Court Judge doesn’t have the inherent authority to prevent his or her courtroom from being used as part of an extortion scheme. Judge Koh is misleading when she suggests otherwise.

28 USC 1927

Section 1927 of Title 28 says:

“Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.”

In Roadway Express v. Piper, 447 U.S. 752 (1980), the United States Supreme Court addressed the question of “whether federal courts have statutory or inherent power to tax attorney’s fees directly against counsel who have abused the processes of the courts.” The question arose specifically in relation to Section 1927. In the case the Supreme Court recognized that the general rule is that a litigant cannot recover attorneys fees, but that the general rule “does not apply when the opposing party has acted in bad faith.” Further, the Supreme Court recognized that a bad faith “award of attorney’s fees is not restricted to cases where the action is filed in bad faith.” Ultimately, the Supreme Court upheld the attorneys fees leveled against counsel.

Patent trolls bringing lawsuits on dubious patents for the purpose of forcing a quick nuisance settlement without regard to the merits of the case. If that is not bad faith, vexatious litigation then what is? I am hard pressed to understand how and why litigation that bears the “indicia of extortion” would not suggest that the litigation was brought in bad faith and thereby allow District Court Judges to award attorneys fees.

Federal Rules of Civil Procedure

There are several Rules that authorize attorneys fees, including Rules 26, 30 and 37. However, the big gun in the closet is Rule 11, which addresses frivolous litigation directly. In relevant part Rule 11(b) states:

“By presenting to the court a pleading, written motion, or other paper… an attorney or unrepresented party certifies that… it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation…”

Everyone who has gone to law school has become familiar with Rule 11 and likely upon learning of it had a very satisfying feeling that justice would be done in Court and Judges would not allow the federal process to be manipulated in unseemly fashions. But as soon as you learn about Rule 11 you then learn that it is virtually never utilized. District Court Judges are not keen on finding that a party or attorney is abusing the process and engaging in frivolous litigation. This in no small part is owed to the fact that many, if not most or nearly all, Appellate Courts are averse to allowing Rule 11 sanctions to stand.

Nevertheless, recently the Federal Circuit has taken a more aggressive look at Rule 11 and has authorized sanctions. In December 2012, the Federal Circuit issued a precedential opinion in Raylon v. Complus Data that gives hope to defendants everywhere who face objectively baseless patent infringement claims. In this case the District Court denied Rule 11 and other sanctions, but on appeal the Federal Circuit found Raylon’s offered claim constructions were objectively frivolous because there was absolutely no support anywhere in the evidence for the construction offered, and Raylon continued to file motions urging the same claim construction over and over again. The majority remanded the case for further determination applying the appropriate Rule 11 standard. Interestingly, however, Judge Reyna had seen enough. He wrote separately concurring but said he would prefer to find that the case was an exceptional case and remand only for determining the appropriate sanction to be leveled.

When you read their decisions and hear them speak at industry events and CLEs it becomes clear that more and more Judges on the Federal Circuit have had enough of the litigation abuses they see.

Conclusion

Judge Koh is wrong to say or even suggest that District Court Judges are without the ability to issue sanctions and retake control of their courtrooms. Courtrooms all across the country are being used as the unwitting linchpin in what can only legitimately be characterized as a shakedown scheme that uses litigation inefficiencies to extort payments from defendants.

While my own personal definition of what a patent troll is likely more limited than some, there is no doubt that there are bad actors out there. I have no problem with companies who own patents bringing patent infringement lawsuits to enforce their rights. But when patent owners seek to extract several thousands of dollars without regard to whether there is actual infringement of a valid claim there is a problem. District Court Judges that do not recognize this is happening are simply not looking closely enough, and it is high time that District Court Judges take a more active role in managing patent litigation in the early stages to ensure that they are not unwittingly allowing extortion-like activity to occur.

District Court Judges should engage patent litigations much earlier and require sufficient articulation of the patent owner’s theories within the first few months after a case is filed. This could be accomplished by requiring detailed claim charts and factual assertions that allow the Court and the defendants to see whether the case is legitimate or simply a shakedown for nuisance value.

I understand that District Court Judges are very busy and overwhelmingly patent litigations will settle, so why spend time early in the case? It is precisely because patent trolls know this sentiment that they fly under the radar. So as to not unnecessarily waste the Court’s time it would be best for Judges handling patent infringement cases to have a standing order that requires information from the patent owner within several months after filing. I would prefer to see this even before the defendants have to file an Answer.

If District Court Judges more liberally use their powers and police their courtrooms that would put a far more significant dent in the abusive patent litigation problem than any White House proposal ever could.

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Posted in: Federal Circuit, Gene Quinn, IP News, IPWatchdog.com Articles, Patent Litigation, Patent Trolls, Patents

About the Author

is a Patent Attorney and the founder of the popular blog IPWatchdog.com, which has for three of the last four years (i.e., 2010, 2012 and 2103) been recognized as the top intellectual property blog by the American Bar Association. He is also a principal lecturer in the PLI Patent Bar Review Course. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.

 

4 comments
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  1. A key reason [ignored in the J. Rader et al editorial] why 35 USC 285 is not applicable in almost all troll suits is that almost all defendants settle by payments the trolls before trial [to avoid the large discovery burdens and other large patent litigation costs], so there is no “prevailing party” and thus 35 USC 285 simply cannot apply, even if the additional and very high level requirements [set by Fed. Cir. case law iself*] for proving it was an “exceptional case” is met.

    *E.g., requiring proof that the litigation was “objectively baseless” and that the “infringement allegations [were] such that no reasonable litigant could reasonably expect success on the merits” Checkpoint Systems Inc. v. All-Tag Security S.A., Case No. 12-1085 (Fed. Cir., Mar. 25, 2013). Plus proof that “the litigation [was] brought in subjective bad faith” per the legal framework recently articulated by the Court in Highmark v. Allcare Health Mgmt.

  2. Considering also the suggested applicability of 28 USC 1927 to troll suits, how does a typical troll merely filing a complaint and then collecting a settlement before trial meet the statutory terms “multiplies the proceedings .. unreasonably and vexatiously?” Contingent fee attorneys for trolls do not usually want to waste their own time. Are excessive troll attorney discovery demands that run up defendants costs [allowed by the courts] and not needed or used by the troll attorneys, sufficient for this statute? Also, this 28 USC 1927 sanction only applies to attorneys, not parties, and only provides financial recovery for the unreasonable and vexatious conduct, not for other parts of patent litigation defense costs. So, I don’t see this as any serious impedement to the highly successful patent troll businesss model either. But keep looking!

  3. Paul-

    If bringing a lawsuit purely for the purpose of extorting a settlement and without regard to the merits of the case is not vexatious then I don’t know what ever could satisfy that standard.

    With these extortion cases, which actually do really exist and in greater numbers than many would ever expect, the entirety of the case is vexatious and unnecessarily multiplies proceedings that were never warranted in the first place.

    I also think that defendants should bring RICO counterclaims and antitrust counterclaims as well. Whether I agree or not the Supremes always call a patent a monopoly right. Abuse of monopoly power should be alleged. The fight needs to be taken to the truly bad actors to rid the industry of this scourge.

    -Gene

  4. In our case the patentee wants more to settle the case then the profit we made on 17 years of business. We are forced to pay hundreds of thousands in fees regardless of the outcome. The technology accounts for about 1/400 of what our software does and we removed the feature the day we were served. Barely anyone used it. This whole process is sick. Total abuse of the system in every regard.