Law360, New York (June 25, 2014, 10:45 AM ET) -- Patent reform to address the harm caused by patent trolls is a significant issue before Congress. Proposed substantive legislation to address these harms is coming under heavy criticism from the bar, the patent office and the judiciary.
On one side of the debate are the examples of true innovators — individuals and companies that have made their inventions, contributed to society, and are now seeking to enforce their constitutionally struck bargain through patent litigation against an infringer. On the other side of the debate are those individuals and companies who have made nothing, merely filing and collecting patents; and are now seeking to indiscriminately enforce those patents against entire markets.
The blatant and willful malfeasance by these patent trolls has caused substantial harm to entire markets, consumers and the integrity of the patent system. However, the legislative reaction, or over reaction, to these harms may create more damage to the patent system, while doing little to remedy the harm caused by the trolls.
Rather than focus on the substantive patent law and restricting the discretion of district court judges, as the current legislative response has done, the debate should instead look toward civil procedure as a means to remedy the patent troll problem. A relatively minor amendment to the Federal Rules of Civil Procedure, and limiting this amendment to cases arising under the patent laws, would eliminate the vast majority of egregious conduct and harm that flows from the patent troll problem.
Rule 68 is a little-known provision of the Federal Rules of Civil Procedure. It provides that if a defendant makes an offer of judgment and the plaintiff does not recover more than the amount offered, the plaintiff has to pay the defendant's “costs” that were incurred in the litigation after the offer was made. This rule has not been substantively amended since 1946. The courts, unfortunately, have interpreted the term “costs” as excluding attorney and expert fees in most situations. Consequently, this provision has not seen much use.
Relatively minor changes to Rule 68 could provide significant benefits to patent litigation, while doing little or no harm to the patent system, and the legitimate rights of patent owners. Thus, Rule 68 should be amended to provide that for any case arising under the patent laws, “costs” shall include all attorney fees, expert fees and all other expenses associated with the litigation. Rule 68 should be further amended to provide that any counsel under a contingency fee arrangement shall be jointly and severally liable for the award of such costs.
These small changes would level the patent litigation playing field and resolve the vast majority of problems associated with patent trolls. In essence, these amendments would cut patent trolls down to a size that can be easily, fairly and cost-effectively dealt with.
These changes would move patent litigation closer to the British system of loser pays, but only after a patent owner had the opportunity to settle the case fairly and refused to do so. These changes would encourage the prompt settlement of suits, and thus, reduce the overcrowding and delay in dockets across the country. These changes would also eliminate the vast majority of shake down patent suits; yet still protect a patent owner who was seriously and wrongfully harmed by an infringer.
For example, presume that an entity has never made an invention, or sold a single thing, but instead collected a portfolio of patents on the use of electron means with detailed but unintelligible processes to conduct the sale of merchandise in a big box store. The vast majority of people would think that such an entity — a patent troll — contributed nothing to society, would question how the patent office could have issued such patents, and would believe that the patent troll should not be entitled to any recovery. Nevertheless, the patent troll will be able to find a contingency fee lawyer and systematically bring suit against every big box retailer in the country.
Because these patents are very likely invalid and not infringed, the retailers could make an offer of a relatively small amount: for example, $20,000. If the patent troll refused the offer, rolled the dice, went to trial and lost or recovered less than $20,000, the patent troll and its attorney would have to pay all of the defendant's litigation expenses that were incurred after the offer was made, including all attorney and expert fees.
Take another example — a venture capital startup company develops a new synthetic fuel and obtains a patent on it. The patent owner brings an infringement suit against a large energy company, which makes an offer of judgment of perhaps $750,000. This is a substantial sum, but not one that reflects the true value of the invention, and the level of harm caused by the defendant. The offer is refused, the case is tried and the patent owner recovers $50 million. In that situation, no costs would be awarded against the patent owner.
Taking this example one step further, the defendant this time recognizes the seriousness of the case and makes a fair offer of $10 million. The patent owner would have to evaluate the offer much more seriously, because now it must balance the risk of getting more than $10 million against the likelihood of paying all of the defendant's true costs. The patent owner may have only valued the case in the $15 million range. Thus, the heightened risk of trying the case, balanced against the small benefit of obtaining an amount above the offer, would not be worth it. The case would settle at $10 million.
Thus, these changes to Rule 68 will require patent owners and defendants to look at their cases earlier, in greater depth and more realistically. They will hold patent owners who ignore a fair settlement offer, and roll the dice in hopes of getting a runaway jury verdict, accountable for the harm that they cause to defendants, the patent system, and consumers.
Moreover, making contingent fee lawyers jointly and severally liable with their clients in these situations will increase lawyer accountability. Such shared liability will also guarantee that an award of costs has teeth, and will not be entered solely against a judgment-proof shell of a patent troll. From a standpoint of fairness, when the lawyer and the client are financially intertwined through a contingency fee agreement, there would be little reason or bases to dispute that they should not also be jointly and severally liable for a failure to fairly and properly negotiate a settlement.
Thus, these small changes to Rule 68, in the context of patent litigation, will cut patent trolls down to size, substantially remedy the harms they are causing, while preserving the legitimate rights of patent owners.