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By: Matthew Bernstein, Perkins Coie LLP.
THE MAJORITY OF PATENT CASES ARE BROUGHT BY non-practicing entities (NPEs), also called patent trolls or patent assertion entities (PAEs). These parties litigate or license their patents but have no real products or services. NPE Lawsuits are commonly brought against U.S. companies and pose unique challenges. For example, many NPEs are represented on a contingent fee basis, and because NPEs do not have products, a defendant typically cannot level the playing field by asserting its own patents against the NPE. Whether you should litigate aggressively through trial or try to negotiate a quick settlement depends on your view of NPEs and the circumstances of the case.
This article discusses possible ways to respond to an NPE presuit notice letter and complaint, discovery considerations, and how to approach settlement negotiations.
A target company typically learns of an NPE assertion through either a pre-suit notice letter or a complaint. Regardless of the method of notice, you should immediately research:
Research the Patent
You should research whether the asserted patent has been the subject of a federal court case or a proceeding before the United States Patent and Trademark Office (USPTO) including:
Prior litigation documents may provide useful insight into the strength and weakness of the patent, as well as indicate a successful defensive strategy against the NPE. The NPE’s history of litigation may also provide some guidance as to how it will approach the current matter. In particular, you should check relevant dockets and proceeding histories for:
If there is a pending validity challenge to the patent at the USPTO or Patent Trial and Appeal Board (PTAB), then the actual validity of the patent is in doubt. If a validity challenge was filed but dismissed before resolution, you have a head start on your invalidity argument. On the other hand, if the patent survived a completed validity challenge, it may indicate a stronger patent. Research the NPE In addition to the asserted patent, determine whether the NPE has previously asserted rights in its patent. Understanding how the NPE has handled earlier litigations may indicate its overall litigation strategy—for example, whether it is looking for a quick settlement or willing to litigate extensively. You should also investigate whether the NPE has any pending patent applications that could issue as additional patents to be asserted against you. You should try to determine through Internet or corporate record searches who owns the NPE, be it a one-off type company or a larger NPE, such as Acacia Research Corporation. While it is often difficult to know anything for certain early on, information on how the NPE is funded can indicate what the NPE may be able to afford to do in the litigation. The NPE’s outside counsel is generally the person who signs the notice letter or files the complaint. You should review this attorney’s website, ask colleagues for information about the person, and search docket sources to learn about his or her litigation history. Specifically, you should try to learn if the attorney:
Research the Court Most NPE cases are brought in the Eastern District of Texas, followed distantly by the District of Delaware. Absent your filing of a declaratory judgment action against the NPE somewhere else (see Declaratory Judgment Actions below), do not be surprised if you are sued in one of these two jurisdictions. While transferring venue, especially out of the Eastern District of Texas, is difficult, you should research if there is a legal basis to make a motion. Determine how the assigned judge and other judges in the district rule on motions to transfer and the applicable standard for transfer. For more on transferring venue in NPE cases, see Motion to Transfer Venue later in this article. Responding to a Pre-suit Notice Letter NPEs typically send pre-suit notice letters to:
A pre-suit notice letter may allege infringement or simply provide notice of patents, and there is no one-size-fits-all approach to responding. Take an objective look at the patent and potentially or actually accused products from a potential exposure standpoint. Initially, you should assess:
Remember that at the start of the dispute, before any discovery, you know much more than the NPE about how your products work, the direction your company is taking, and your sales and what drives those sales—all of which will factor into your response strategy of:
If and How to Respond
While a notice letter may start the clock running for damages and constitute notice for enhanced damages, you are not legally required to respond to a notice letter. Some companies choose not to respond, wanting to first see if the NPE will actually sue or follow up with a second letter. Conducting research on the NPE’s history of bringing lawsuits is useful on this point. See Research the NPE above. But understand that if you are sued without ever responding, the NPE will raise this fact in its request for enhanced damages.
Regardless of your response approach, you still should evaluate the risks posed by the asserted patent in light of the Supreme Court’s decision in Halo Electronics v. Pulse Electronics, 136 S. Ct. 1923 (U.S. 2016), which may make it easier for NPEs to recover enhanced damages.
Some companies enter into negotiations with the NPE after receiving a pre-suit notice letter, hoping to avoid protracted and expensive litigation. Discuss this possibility with your client and consider whether and when to engage in negotiations with the NPE. For a discussion on negotiations, see Negotiating with NPEs later in this article.
Declaratory Judgment Action
After receiving a notice letter, one option is to file a declaratory judgment action in your home jurisdiction alleging that your client did not infringe and/or that the asserted patent is invalid. This may help to keep the case out of the Eastern District of Texas, where many NPEs file suit. While probably not the overwhelmingly plaintiff-friendly jurisdiction it once was, the Eastern District of Texas remains a tough place to defend a suit.
However, filing for declaratory judgment is an aggressive strategy and carries the following drawbacks:
Whether to File an IPR before Suit
While most IPR requests are filed after an NPE files suit, you may file an IPR request before the NPE files. This is an even more aggressive strategy than filing a declaratory judgment action because of the costs associated with preparing and filing for the IPR.
After the NPE serves the complaint and summons (or even earlier if possible), consider how to respond and other potential litigation tactics, including whether to:
IPR or Other PTAB Proceedings
An IPR can be an effective tool against NPEs because:
IPRs put pressure on the NPE because the asserted patent is subject to an invalidity challenge that will likely get decided before any parallel district court case goes to the jury. Even where a favorable NPE jury verdict comes first, if the IPR invalidates the patent before final judgment after all appeals, then the PTAB’s invalidity finding nullifies the jury verdict. Also, NPEs often hire litigation counsel on a contingent fee basis for litigation but retain inexpensive or inexperienced counsel to defend against an IPR. Even the thought of having to defend an IPR could bring an NPE to the settlement table. A precondition to filing a winning IPR is finding good patents or printed publication of prior art. An IPR will likely be unsuccessful if the prior art is not good. If there is even a possibility you will file an IPR, start looking for prior art as soon as possible.
Considerations against Filing an IPR
IPRs, however, may not be appropriate in every case. Consider the following before filing an IPR:
Motion to Dismiss
The defendant typically responds to an NPE complaint by answering the complaint or filing:
There are other grounds for moving to dismiss (such as lack of personal jurisdiction), but those are not particular to NPE cases.
Alice / Section 101 Motion
Section 101 concerns patent-eligible subject matter. While abstract ideas that are not inventive are not patentable, these patents do issue, and NPEs often obtain and assert these types of patents. If defending such an action, consider filing a Rule 12(b)(6) motion to dismiss under Alice Corp. Pty. Ltd. v. CLS Bank Int'l, 134 S. Ct. 2347 (U.S. 2014) and all of the related Federal Circuit cases invalidating these types of patents.
Filing an early and strong Alice motion is a good strategy because it puts immediate pressure on the NPE to spend money defending the motion.
Defendants frequently move to dismiss based on the NPE’s failure to sufficiently plead infringement or willful infringement under Twombly and Iqbal, which require allegations to state a “plausible” claim for relief. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (U.S. 2007); Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009).
NPEs tend to file bare-bones complaints lacking any detail, parroting the language of the patent statute and the asserted patent without providing much factual detail specific to the accused infringer. Indirect infringement (inducement and contributory infringement) allegations are particularly susceptible to these types of motions, and with the abolishment of Form 18,1 challenges to direct infringement allegations will likely increase. The Supreme Court’s recent decision in Halo Electronics may impact how and when a motion to dismiss can be made against a willful infringement claim.
While defendants have prevailed with these motions (especially on indirect infringement), and they require the NPE to expend resources in opposition, their value is questionable because dismissals are almost always granted with leave to amend. So, while you may win the motion, and the NPE may have to provide more detail in an amended complaint, the case will typically not be over.
Additionally, keep in mind that some courts, such as the Eastern District of Texas, often will not stay any discovery or other case deadlines pending resolution of a motion to dismiss on insufficient pleadings. Determine how your judge treats these motions before making the decision as to whether to file this type of motion.
If there is no legitimate argument in support of dismissal (either Alice or insufficient pleadings), or if the client does not want to spend the money on a motion, you must answer the complaint.
The answer contains the defendant’s responses to the complaint’s allegations, its affirmative or other defenses, and any counterclaims, cross-claims, or third-party claims the defendant intends to bring. Before drafting the answer, coordinate with your client and conduct a reasonable inquiry into the complaint’s allegations to respond in good faith. FRCP 11(b).
Before including counterclaims with your answer, check the local rules to see if including these would result in your having to bring employees for deposition to the district where the case is pending as opposed to where they reside or work.
Motion to Transfer Venue
Decide whether to move to transfer early in the case to avoid having delay be a basis for denial. Conduct thorough research on the possibility and potential benefit of a transfer. See Research the Court above.
The costs of filing a transfer motion can be considerable, consisting not just of the expense of briefing but also any venue discovery sought by the NPE. Additionally, do not expect the NPE to stop prosecuting the case while the court considers whether to transfer.
Your transfer motion should not rely on general statements, but should identify with specificity how the parties and especially third party witnesses would benefit from a transfer to the desired venue.
Companies generally take one of the following approaches when negotiating with an NPE:
While some NPEs seek unrealistically excessive damages awards, others are more reasonable and want to settle for less than the cost of defending the suit. If you choose to negotiate with the NPE before the start of major discovery, consider the following:
Also, push the NPE to provide a detailed infringement claim chart. NPEs often simply claim infringement without giving any details or provide a hastily put-together claim chart that was used for dozens of other companies with little change. Make the NPE spend the time and money to specifically identify how your client infringes.
Consider sharing any strong noninfringement argument with the NPE (under an NDA), but know that NPEs typically do not give much weight to a piece of prior art at this stage, given the presumption of validity and the time it takes to invalidate a patent with prior art. You should still notify the NPE that you are willing to use the prior art to invalidate its patent, especially if an IPR is part of your litigation strategy. If applicable, also articulate Alice / Section 101 deficiencies in the asserted patent, especially if the patent is similar to any invalidated by the Federal Circuit.
NPEs often sue multiple companies on the same patent for efficiency, and most cases involve the defendants entering into joint defense groups (JDGs). Joining a JDG is almost a necessity, and its advantages include:
The downsides to joining a JDG include:
Rule 26(f) of the Federal Rules of Civil Procedure requires federal litigants to confer early in a case to develop a discovery plan and submit a written report to the court outlining the plan. The conference generally occurs before discovery begins and aims to streamline the process and avoid discovery disputes.
When negotiating your 26(f) discovery plan, consider including:
If you belong to a JDG, consider your individual discovery needs. Much of the discovery is shared among the JDG members, such as the interrogatories and deposition time, including Fed. R. Civ. P. 30(b)(6) and expert deposition time. To protect your client’s interests, push for as much individual offensive discovery as possible, and include explicit language in the Rule 26(f) plan for such discovery above and beyond what the JDG has proposed as a whole. In addition to deposing the inventor and the NPE’s 30(b)(6) witnesses, ensure that you have separate time to depose the NPE’s infringement and damages experts, since those opinions are specific to your case.
Discovery from NPE
NPEs should be required to provide discovery on:
You should also push the NPE for its positions on conception, reduction to practice, priority claims, and other issues that require the NPE and its counsel to do work digging up witnesses and evidence, unless the NPE will concede the issues.
Inventors often have at best a loose relationship with the NPE, and sometimes they are openly hostile to the NPE. For NPEs that failed as real businesses, digging up records and source code, as well as friendly witnesses, can be difficult, but you should push for this discovery. Conception and reduction to practice (i.e., the invention story) is a key theme for a patent plaintiff at trial, and it is a theme NPEs often struggle with if they do not or cannot make considerable effort prior to and during the lawsuit.
Discovery from Defendants
Defendants generally have to produce:
Some NPEs are content with just the discovery they actually need, but many others propound burdensome, unnecessary, and unreasonable discovery solely to harass the defendant into settling. Push back against this, and do not be afraid to go to the court to resolve discovery issues if the NPE is unreasonable. Rule 26 specifically calls for proportionate discovery, and most NPE patents relate to a small feature of a product.
If the NPE serves discovery requests on a dubious damages theory, consider raising it with the court or moving for summary judgment on damages-related issues. Even if you lose, you can educate the judge on the issues, facts, and law.
Also, do not hesitate to file Daubert motions to exclude questionable expert damages opinions, such as for improper use of (or complete failure to use) the entire market value rule, the comparability of relied upon licenses, and foreign sales. Patent damages law has been trending pro-defendant, and accused infringers facing an NPE seeking unreasonable damages should challenge the NPE at all opportunities. See, e.g., LaserDynamics Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012).
Matthew Bernstein is the managing partner of Perkins Coie's San Diego Office, co-managing partner of the Taipei office, and a partner in the firm's Patent Litigation Group. His practice focuses on patent litigation and patent trial work. The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect the views or opinions of the law firm with which they are associated.
RESEARCH PATH: Intellectual Property & Technology > IP Litigation & Enforcement > Patent > Practice Notes > Litigation > Patent Litigation Strategies against NPEs
For a more detailed discussion on PTAB proceedings, see
> THE FUNDAMENTALS OF POST-ISSUANCE CHALLENGE PROCEDURES: IPR, PGR & CBM
RESEARCH PATH: Intellectual Property & Technology > PTAB Proceedings > Post-Issuance > Practice Notes > Post-Issuance Challenge Procedures
For information on patent pre-litigation notification letters, see
> PATENT INFRINGEMENT CEASE AND DESIST OR NOTIFICATION LETTERS
RESEARCH PATH: Intellectual Property & Technology > IP Litigation & Enforcement > Patent > Practice Notes > Notification Letters
For detailed information on responding to a patent notice letter, see
> RESPONDING TO PATENT NOTICE LETTERS
RESEARCH PATH: Intellectual Property &Technology > IP Litigation & Enforcement > Patent > Practice Notes > Notification Letters
For a detailed list of the steps to take upon the receipt of a pre-litigation notification letter, see
> CHECKLIST—RESPONDING TO PATENT NOTICE LETTERS
RESEARCH PATH: Intellectual Property & Technology > IP Litigation & Enforcement > Patent > Forms > Pre-Litigation Actions
For a sample response letter to a patent notice letter, see
> RESPONSE TO PATENT INFRINGEMENT CEASEAND DESIST OR NOTICE LETTER
RESEARCH PATH: Intellectual Property &Technology > IP Litigation & Enforcement > Patent > Forms > Pre-Litigation Actions
For a comprehensive explanation about post-grant proceedings for challenging the validity of patents before the PTAB, see
> NAVIGATING PTAB TRIAL PROCEDURES IN AIAPROCEEDINGS
RESEARCH PATH: Intellectual Property &Technology > PTAB Proceedings > Post-Issuance > Practice Notes > Post-Issuance Challenge Procedures