LEGAL ISSUES

In Supreme Court Patent Troll Cases, You Can Win and Lose

In a best-case scenario, small businesses might emerge slightly ahead of patent trolls in the evolving legal world of patents.
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The Supreme Court heard two appeals Wednesday that are likely to affect the way you protect yourself against patent trolls in the future.

Patent trolls are people or shell companies that buy up rights to expired or soon-to-expire patents with no other purpose than launching lawsuits against small companies. Up until now, the cost of a patent suit has been enough of a threat for most small business owners to make them settle out of court rather than pursue costly litigation.

The cases before the High Court are Octane Fitness, llc v. Icon Health & Fitness, Inc. and Highmark Inc. v. Allcare Health Management Systems, Inc. 

The complaints, while highly technical, deal with how easily prevailing parties in patent cases can collect attorney's fees. Also at a stake is the review standard that the appellate court must use when hearing cases sent up from a district court.

The best outcome in the first case is probably a "win some, lose some" situation where it will be easier for you to collect legal fees if you pursue litigation, but it also makes it more likely the other side could collect from you if you lose. The second case could give more authority to lower court judgments, which could affect the way the higher court rules on appeal.

Phillips argued before the Supreme Court on behalf of Icon

Bottom line: "Litigation costs will go up," says Carter Phillips, chair of law firm Sidley Austin's executive committee, who argued on behalf of Icon in yesterday's proceedings before the Supreme Court. Phillips represents Icon.

As for small businesses, the court's decisions "will clearly affect their calculations to pursue litigation, and they could end up in situations where people with valid [patent] claims will say it is too expensive to take the risk," Phillips adds.

He further noted that the courtroom was packed Wednesday, and the Justices were in good spirits, as they asked lively questions. They also did not give a strong indication of how they would rule, although they have until June to make a decision, Phillips says.

'Win Some, Lose Some'

In Octane, it's important to remember that neither Icon nor Octane is a troll, Phillips and other legal experts say. The case began as a patent infringement issue between two companies that make gym equipment, and it has since evolved over the past couple of years into one debating the context under which attorney's fees are awarded in "exceptional cases." The term comes from section 285 under Title 35 of the U.S. Code, which involves patents.

Exceptional cases must meet two standards for you to collect legal fees, says James Blank, partner and a patent litigation specialist at Kaye Scholer, a law firm in New York. That includes proving that the case was "objectively baseless," or frivolous, and that the case was brought in "subjective bad faith."

Over the past 50 years, those two standards have been ambiguous and extremely hard to prove, resulting in awards in about 1 percent of cases, Blank says. (That low success rate is also one of the reasons patent trolls have launched so many cases.)

"In Octane, the Supreme Court will resolve whether that two-prong standard will remain intact, or will it be lowered to a kinder, gentler standard," Blank says.

While that may make it easier for you to collect attorney's fees if you win, it also makes it more likely you'll have to pay your opponent's fees if you lose.

In some respects, that's similar to where things are now, with small businesses settling with trolls, rather than fighting their suits, because of the expense. "The cost of losing [patent cases in general] will be enormous and could bankrupt a small company," Blank says.

Except, there's a difference: Patent trolls will also have something to lose. "The specter of a patent troll having to pay attorney fees if it loses should result in fewer cases being brought by patent trolls."

Giving Deference

Meanwhile, the second case, which involves Allcare, an alleged troll, might give the district courts' decisions more weight. At issue is something called a "de novo" review, where the Federal Appeals court typically considers an appeal from scratch. In this case, the court did just that, reaffirming Highmark's win, but reversing the monetary award for attorney's fees the district court had granted it.

The Supreme Court will decide if it will change the standard to something called "abuse of discretion," whereby the Federal Appeals court will take the lower court's ruling into account. Many judicial districts, such as East Texas, have developed patent expertise that may exceed that of the appeals court, the Supreme Court acknowledged on Wednesday.

The upshot? "If you win in the lower court, and the standard of review is abuse of discretion, you’re likely to win on appeal, but if it's de novo, you have a 50-50 chance on appeal," Phillips says.

IMAGE: Everett Collection
Last updated: Feb 27, 2014

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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