TECHNOLOGY

Supreme Court Deals Death Blow to Patent Trolls

Two Supreme Court cases decided Tuesday give small businesses a fighting chance against patent trolls.
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The Supreme Court levels a one-two punch against so-called patent trolls.

In two rulings likely to have widespread implications for small business owners beset by patent trolls, the Supreme Court decided Tuesday to ease the standards by which prevailing parties in patent infringement cases may recoup court fees. The High Court also pushed the reset button on how easily the Federal Court of Appeals can reverse decisions made by district courts in such cases.

The decisions are critical to small businesses, which have been beset by expensive and often frivolous lawsuits brought by "patent trolls" in recent years. Patent trolls, or non-practicing entities, purchase rights to expired or soon-to-expire patents and then sue businesses for infringement, with no other goal than a quick monetary settlement. Small businesses frequently settle, rather than face hundreds of thousands to millions of dollars in court costs.

The cases, known as Octane Fitness, llc v. Icon Health & Fitness, Inc. and Highmark Inc. v. Allcare Health Management Systems, Inc., were argued before the High Court at the end of February. Octane Fitness dealt with the awarding of fees in patent cases, and Highmark pertained to federal court case review standards.

"The simplest way to look at this is how weak does a case have to be before the prevailing party gets a fee," says Rudy Telscher, a partner at Harness Dickey & Pierce, who argued the case on behalf of Octane Health. "Now a district court judge can say this was not a frivolous case, but it was weak and should not have been brought and you [plaintiff] must pay the fees."

The Upshot

In a nearly unanimous ruling--Justice Antonin Scalia dissented on two relatively minor footnotes--the High Court held that previous standards, enacted in 2005 in a case called Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., were far too rigid and restrictive, encumbering the right of the district courts to grant fee awards. In so doing, the justices reversed nearly a decade of patent law, where awarded fees only went to prevailing parties in exceptional cases, and where the winner essentially had to prove that the other party had acted fraudulently, frivolously, or in bad faith.

In Highmark, the justices ruled that the Federal Circuit Court must examine the totality of evidence, basically, all the evidence reviewed by the lower district court in making its ruling. Previously, the Federal Court could make a "de novo" ruling, which is Latin for "from the beginning." In effect, this means the court could more easily overrule findings in the lower courts, which often know the cases more intimately.

"The district court judge is the one who has lived with this case for two years, and listened to the briefings, and seen the demeanor of the lawyers, and so is in a better situation to see abuse than the appeals court, which just looks at the record," Telscher says.

Small businesses mounted 3,400 legal defenses in 2011 for patent cases, a 32 percent increase over the prior year, according to a research paper from 2012 by Boston University law professors James Bessen and Michael J. Meurer. That cost to small companies was about $11 billion in 2011, also a 32 percent increase over the prior year.

The total median awards to trolls is now nearly twice as high as those to legitimate patent holders, whose median reward fell about 30 percent to $4 billion, according to a 2013 report by PricewaterhouseCoopers.

Taken together, says Jeanne Gills, a partner at Foley & Lardner law firm in Chicago, the rulings will "probably benefit more the accused infringers in [non-practicing entity] cases than the NPE filing party." 

IMAGE: Newscom
Last updated: Apr 29, 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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