`================================================================
`
`In The
`Supreme Court of the United States
`
`--------------------------------- ---------------------------------
`
`OCTANE FITNESS, LLC,
`
`Petitioner,
`
`v.
`
`ICON HEALTH & FITNESS, INC.,
`
`Respondent.
`
`--------------------------------- ---------------------------------
`
`On Writ Of Certiorari To The
`United States Court Of Appeals
`For The Federal Circuit
`
`--------------------------------- ---------------------------------
`
`BRIEF OF PROFESSOR ROBIN FELDMAN
`AND THE U.C. HASTINGS INSTITUTE
`FOR INNOVATION LAW AS AMICI CURIAE
`IN SUPPORT OF NEITHER PARTY
`
`--------------------------------- ---------------------------------
`
`ROBIN FELDMAN
`Counsel of Record
`UNIVERSITY OF CALIFORNIA,
`HASTINGS COLLEGE OF THE LAW
`200 McAllister Street
`San Francisco, CA 94102
`(415) 565-4661
`feldmanr@uchastings.edu
`
`Counsel for Amici Curiae
`
`================================================================
`COCKLE LEGAL BRIEFS (800) 225-6964
`WWW.COCKLELEGALBRIEFS.COM
`
`
`
`i
`
`TABLE OF CONTENTS
`
`Page
`TABLE OF CONTENTS ......................................
`i
`TABLE OF AUTHORITIES .................................
`ii
`INTEREST OF THE AMICI CURIAE .................
`1
`SUMMARY OF ARGUMENT ..............................
`3
`ARGUMENT ........................................................
`6
`
`I. THE
`“EXCEPTIONAL CASE” LAN-
`GUAGE OF § 285 SHOULD BE INTER-
`PRETED IN A MANNER CONSISTENT
`WITH THE PROVISION’S PURPOSE:
`TO DETER PATENT HOLDERS FROM
`ABUSING THE PATENT SYSTEM ..........
` II. THE FEDERAL CIRCUIT’S TWO-PART
`EXCEPTIONAL CASE TEST HINDERS
`§ 285’s INTENDED PURPOSE TO DETER
`ABUSE OF THE PATENT SYSTEM .......... 13
` III. UNDER § 285, COURTS SHOULD BE
`PERMITTED TO FIND CASES EXCEP-
`TIONAL WHERE PATENT HOLDERS
`EXPLOIT THE PATENT SYSTEM ........... 19
`CONCLUSION ..................................................... 21
`
`
`6
`
`
`
`ii
`
`TABLE OF AUTHORITIES
`
`Page
`
`CASES
`Apple, Inc. v. Motorola, Inc., No. 1:11-CV-
`08540, 2012 WL 2362630 (N.D. Ill. E. Div.
`Jun. 7, 2012) .............................................................. 4
`Automated Bus. Cos. v. NEC America, Inc., 202
`F.3d 1353 (Fed. Cir. 2000) ......................................... 2
`Brooks Furniture Mfg., Inc. v. Dutailier Int’l,
`Inc., 393 F.3d 1378 (Fed. Cir. 2005) ................ passim
`Catch Curve, Inc. v. Venali, Inc., CV 05-04820
`DDP AJWx, 2006 WL 4568799 (C.D. Cal.
`Feb. 27, 2006) (filed Nov. 3, 2008) .......................... 15
`eBay, Inc. v. MercExchange LLC, 547 U.S. 388
`(2006) ......................................................................... 8
`Fromson v. W. Litho Plate & Supply Co., 853
`F.2d 1568 (Fed. Cir. 1988), overruled by
`Knorr-Bremse Systeme Fuer Nutzfahrzeuge
`GmbH v. Dana Corp., 383 F.3d 1337 (Fed.
`Cir. 2004) ................................................................... 8
`F.T.C. v. Actavis, Inc., 133 S. Ct. 2223 (2013) ............ 19
`Georgia-Pac. Corp. v. U.S. Plywood Corp., 318
`F. Supp. 1116 (S.D.N.Y. 1970), modified sub nom.
`Georgia-Pac. Corp. v. U.S. Plywood-Champion
`Papers Inc., 446 F.2d 295 (2d Cir. 1971) ............... 8, 9
`Handgards, Inc. v. Ethicon Inc., 601 F.2d 986
`(9th Cir. 1979) ......................................................... 16
`Honeywell Int’l, Inc. v. Universal Avionics Sys.
`Corp., 343 F. Supp. 2d 272 (D. Del. 2004),
`aff ’d, 488 F.3d 982 (Fed. Cir. 2007) ........................ 16
`
`
`
`iii
`
`TABLE OF AUTHORITIES – Continued
`
`Page
`
`Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S.
`28 (2006) .................................................................. 18
`Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861
`(Fed. Cir. 1985), overruled on other grounds
`by Nobelpharma AB v. Implant Innovations,
`Inc., 141 F.3d 1059 (Fed. Cir. 1998) ........................ 16
`Mathis v. Spears, 857 F.2d 749 (Fed. Cir. 1988) .......... 3
`Professional Real Estate Investors v. Columbia
`Pictures Industries, 508 U.S. 49 (1993) ................ 2, 4
`In Re Terazosin, 335 F. Supp. 2d 1336 (S.D.
`Fla. 2004) ................................................................. 15
`
`
`CONSTITUTION AND STATUTES
`U.S. Const. art. I, § 8, cl. 8. ........................................ 12
`35 U.S.C. § 284 (2006) .................................................. 8
`35 U.S.C. § 285 (2013) ........................................ passim
`
`LEGISLATIVE SOURCES
`S.Rep. No. 1503, 79th Cong., 2d Sess. (1946),
`reprinted in 1946 U.S. Code Congressional
`Service 1386 ............................................................ 20
`
`
`RULES
`Supreme Court Rule 37.6 ............................................. 1
`
`
`
`
`
`iv
`
`TABLE OF AUTHORITIES – Continued
`
`Page
`
`OTHER SOURCES
`James E. Bessen & Michael J. Meurer, The
`Direct Costs from NPE Disputes, 99 Cornell
`L. Rev. ___ (forthcoming 2014), available at
`http://papers.ssrn.com/sol3/papers.cfm?abstract_
`id=2091210 ............................................................. 12
`Tom Ewing, Indirect Exploitation of Intellectual
`Property Rights by Corporations and Inves-
`tors, 4 Hastings Sci. & Tech. L.J. 1 (2012) ............... 7
`Tom Ewing, Practical Considerations in the
`Indirect Deployment of Intellectual Property
`Rights by Corporations and Investors, 4 Has-
`tings Sci. & Tech. L.J. 109 (2012) ............................. 7
`Exec. Office of the President, Patent Assertion
`and U.S. Innovation (June 2013) ............................. 2
`Robin Feldman, Intellectual Property Wrongs,
`18 Stan. J.L. Bus. & Fin. 250 (2013), availa-
`ble at http://papers.ssrn.com/sol3/papers.cfm?
`abstract_id=2333291 ........................................... 2, 14
`Robin Feldman, Ending Patent Exceptionalism
`& Structuring the Rule of Reason: The Su-
`preme Court Opens the Door for Both, 15 Minn.
`J.L. Sci. & Tech. ___ (forthcoming 2013),
`available at http://papers.ssrn.com/sol3/papers.
`cfm?abstract_id=2333291 ......................................... 2
`Robin Feldman et al., The AIA 500 Expanded:
`Effects of Patent Monetization Entities (April
`9, 2013), UC Hastings Research Paper No. 45,
`available at http://ssrn.com/abstract=2247195 ........... 11
`
`
`
`v
`
`TABLE OF AUTHORITIES – Continued
`
`Page
`
`Robin Feldman, Public Comment on Intellectu-
`al Property Assertion & Monetization, FTC
`Patent Assertion Entity Activities Workshop
`(Mar. 27, 2013) ........................................................ 14
`Robin Feldman, Rethinking Patent Law (Har-
`vard 2012) ............................................................ 1, 14
`Robin Feldman, The Role of Science in Law
`(Oxford 2009) ............................................................. 1
`Robin Feldman, Patent and Antitrust: Differing
`Shades of Meaning, 13 Va. J.L. & Tech. 5
`(2008) ....................................................................... 17
`James Gibson, Risk Aversion and Rights Accre-
`tion in Intellectual Property Law, 116 Yale
`L.J. 882 (2007) ......................................................... 15
`Edmund W. Kitch, The Nature and Function of
`the Patent System, 20 J.L. & Econ. 265 (1977) .......... 10
`Mark A. Lemley, Rational Ignorance at the
`Patent Office, 95 Nw. U. L. Rev. 1495 (2001) ......... 11
`Mark A. Lemley & Carl Shapiro, Probabilistic
`Patents, 19 J. Econ. Persp. 75 (2005) ..................... 18
`Fiona Scott Morton & Carl Shapiro, Strategic
`Patent Acquisitions, available at http://papers.
`ssrn.com/sol3/papers.cfm?abstract_id=2288911 ....... 13
`Gideon Parchomovsky & R. Polk Wagner,
`Patent Portfolios, 154 U. Pa. L. Rev. 1 (2005) ........ 10
`
`
`
`
`
`
`vi
`
`TABLE OF AUTHORITIES – Continued
`
`Page
`
`Jeff John Roberts, Famous judge spikes Apple-
`Google case, calls patent system “dysfunc-
`tional”, GigaOM (Jun. 8, 2012), available
`at http://gigaom.com/2012/06/08/famous-judge-
`spikes-apple-google-case-calls-patent-system-
`dysfunctional/ ............................................................ 4
`
`
`
`1
`
`INTEREST OF THE AMICI CURIAE1
`Amicus curiae Professor Robin Feldman is an
`
`expert in intellectual property law, particularly issues
`involving the sciences, intellectual property moneti-
`zation, and the intersection of intellectual property
`and antitrust. She is a Professor of Law at the Uni-
`versity of California, Hastings College of the Law,
`and holds the Harry & Lillian Hastings Chair. Pro-
`fessor Feldman is Director of amicus curiae the
`Institute for Innovation Law, focused on innovation at
`the crossroads of intellectual property and emerging
`technology. She also directs clinical programs in
`intellectual property, including the Startup Legal
`Garage, and writes extensively about intellectual
`property issues. She has received multiple awards for
`teaching and scholarship, and has published two
`books, Rethinking Patent Law (Harvard 2012) and
`The Role of Science in Law (Oxford 2009), in addition
`to numerous articles in law reviews and the New
`England Journal of Medicine. Professor Feldman has
`testified before Congress and the California legisla-
`ture on intellectual property issues, and has provided
`commentary for the Federal Trade Commission, the
`Department of Justice, and the Patent & Trademark
`Office. Her empirical work on patent trolling was
`
`1 Counsel for all parties has consented to the filing of this
`
`brief, as indicated by consents lodged with the Clerk of this
`Court. No counsel for any party had any role in authoring this
`brief, and no person other than the named amici and their
`counsel has made any monetary contribution to the preparation
`of this brief. See Rule 37.6.
`
`
`
`2
`
`cited in the 2013 White House Report on Patent
`Assertion.2
`
`Amici curiae Professor Feldman and the Institute
`
`for Innovation Law at the University of California,
`Hastings College of the Law submit this brief to
`highlight for the Court the critical role fee shifting
`provisions, like 35 U.S.C. § 285 (2013) at issue here,
`play in preventing abusive exploitation of the intel-
`lectual property system, particularly in light of the
`growing trend of monetization and magnification
`across all types of intellectual property.3 By importing
`to the patent context this Court’s heightened test for
`the “sham” exception to the doctrine of immunity in
`antitrust cases,4 the Federal Circuit has hindered
`§ 285’s essential role as a deterrent to ‘improper
`bringing of clearly unwarranted suits’ for patent
`infringement.” Automated Bus. Cos. v. NEC America,
`Inc., 202 F.3d 1353, 1355 (Fed. Cir. 2000) (quoting
`
`
`
`
`2 Exec. Office of the President, Patent Assertion and U.S.
`
`Innovation (June 2013).
`
`3 Portions of this brief were adapted from two of Professor
`Feldman’s most recent articles, Intellectual Property Wrongs, 18
`Stan. J.L. Bus. & Fin. 250 (2013), and Ending Patent
`Exceptionalism & Structuring the Rule of Reason: The Supreme
`Court Opens the Door for Both, 15 Minn. J.L. Sci. & Tech. ___
`(forthcoming 2013), available at http://papers.ssrn.com/sol3/papers.
`cfm?abstract_id=2333291.
`
`4 See Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393
`F.3d 1378, 1381 (Fed. Cir. 2005) (citing Professional Real Estate
`Investors v. Columbia Pictures Industries, 508 U.S. 49, 60-61,
`113 S. Ct. 1920, 123 L.Ed.2d 611 (1993)).
`
`
`
`3
`
`Mathis v. Spears, 857 F.2d 749, 754 (Fed. Cir. 1988)).
`Importantly, as the Federal Circuit has itself recog-
`nized, § 285 “is the only deterrent” to suits brought to
`enforce “obviously
`invalid or unenforceable pa-
`tents. . . .” Mathis, 857 F.2d at 754 (emphasis added).
`
`--------------------------------- ---------------------------------
`
`SUMMARY OF ARGUMENT
`
`In recent years, a troubling trend has occurred in
`the intellectual property system in the United States.
`Large numbers of intellectual property rights have
`been stripped away from underlying products, re-
`packaged, grouped, and traded as monetized assets, a
`phenomenon known as intellectual property rights
`“monetization.” Some of this activity involves legiti-
`mate enforcement of rights, but much of it is oppor-
`tunistic, inappropriately capitalizing on the costs and
`risks of litigation. In addition, the intellectual proper-
`ty system is plagued by uncertainty regarding the
`boundaries of rights, lack of a quick and reasonably
`priced method for resolving disputes regarding the
`boundaries of those rights, and potential damages
`that are out of proportion to the nature of the harm.
`These factors allow rights holders to bargain for
`returns far beyond the value of those rights, a situa-
`tion known as “magnification.” Together, magnifica-
`tion and monetization are creating opportunities for
`behavior that is harming innovation, creating dys-
`function in markets, and wasting vast amounts
`of resources, both litigant and judicial. As federal
`district court judge James Roberts noted recently, in
`
`
`
`4
`
`frustration, “the court is well aware that it is being
`played as a pawn.”5
`
`Against this backdrop, the Federal Circuit’s
`
`current two-part “exceptional case” test for fee shift-
`ing under 35 U.S.C. § 285 merely provides fuel to the
`fire. Permitting fee shifting under § 285 only if both
`(1) the litigation is brought in subjective bad faith,
`and (2) the litigation is objectively baseless (Brooks
`Furniture, 393 F.3d at 1381 (citing Professional Real
`Estate Investors, 508 U.S. at 60-61)), creates a stand-
`ard so high it presents no meaningful deterrent to the
`pursuit of wholly unwarranted lawsuits. It is re-
`markably difficult to show that any patent lawsuit is
`both objectively and subjectively baseless, when, for
`example, the interpretation of the language of a
`patent is fraught with uncertainty. In such cases,
`courts are reluctant to find that even tremendously
`weak arguments satisfy the two-part test.
`
`Amici urge the Court to articulate a standard for
`
`fee shifting under § 285 which empowers courts to
`remedy schemes that exploit the patent system. The
`key to identifying exceptional cases and thereby
`disrupting the practice of patent holders distorting
`
`
`
`
`5 See Jeff John Roberts, Famous judge spikes Apple-Google
`
`case, calls patent system “dysfunctional”, GigaOM (Jun. 8, 2012),
`available at http://gigaom.com/2012/06/08/famous-judge-spikes-
`apple-google-case-calls-patent-system-dysfunctional/ (discussing
`Apple, Inc. v. Motorola, Inc., No. 1:11-CV-08540, 2012 WL
`2362630, at *1 (N.D. Ill. E. Div. Jun. 7, 2012)).
`
`
`
`5
`
`and inflating the value of their patents lies in the
`distinction between the legitimate use of the patent
`right and the illegitimate use of the patent system. By
`highlighting this system deployment versus right
`deployment dichotomy, the Court can provide lower
`courts a useful starting point from which to assess
`the myriad patent assertion schemes as they are
`presented. Where a patentee brings a cause of action
`that attempts to enforce the boundaries of its patent
`and nothing more, the patentee is appropriately
`deploying its patent rights, and is doing nothing
`exceptional for purposes of § 285. Conversely, where
`the patentee’s actions have allowed it to reap or
`potentially reap rewards far in excess of the value of
`the patent through abuse of the patent system (as, for
`example, asserting a never-commercialized arguably
`obsolete patent as Petitioner argues was done here),
`the court should have the discretion to look more
`closely at all the factors in play and, in its discretion,
`award § 285 fees where appropriate.
`
`
`
`--------------------------------- ---------------------------------
`
`
`
`
`
`6
`
`ARGUMENT
`I. THE “EXCEPTIONAL CASE” LANGUAGE
`OF § 285 SHOULD BE INTERPRETED IN
`A MANNER CONSISTENT WITH THE
`PROVISION’S PURPOSE: TO DETER PA-
`TENT HOLDERS FROM ABUSING THE
`PATENT SYSTEM
`
`The Federal Circuit’s current interpretation of
`the exceptional case doctrine has aided in the prolif-
`eration of business practices that would make
`Rumpelstiltskin proud. With virtual impunity, more
`and more companies are spinning worthless patents
`into golden income streams and competitive advan-
`tages. The schemes companies have used to achieve
`these fairy tale ends are numerous and varied, but
`they share one underlying idea: Find a patent, deploy
`the patent system, and the riches will follow.
`
`The combination of uncertainty regarding the
`
`boundaries of rights, the lack of a quick and inexpen-
`sive method for resolving that uncertainty, and the
`possibility that damages awarded may be out of
`proportion to the nature of the harm make the mod-
`ern patent system a complex and multi-dimensional
`strategy game. When patent holders take advantage
`of these system inefficiencies it is possible for them to
`distort and inflate the value of their patents. This
`value magnification occurs for several reasons. First,
`it is simply impossible to know the full boundaries of
`a patent at the time the patent is granted. A patent is
`not a physical object, but a verbal description of
`something that may not even exist in tangible form.
`
`
`
`7
`
`As a result, it can be very difficult to say exactly what
`is included within the boundaries of a given patent,
`especially as time passes and technology develops.
`The sheer volume of modern patents adds to the
`challenge. The patent system allows patents to be
`overlapping, and the millions of patents active in the
`United States makes determining the boundaries of
`each one impossible. Moreover, the massive number
`of patent applications filed each year in comparison to
`the number of patent examiners ensures that exam-
`iners will spend very little time on each application,
`leaving the litigation system to weed out patents as
`they become commercially significant.
`
`Second, the patent system lacks a quick and
`
`inexpensive way to resolve the uncertainty about the
`boundaries of a particular patent. Scholars estimate
`that the average patent trial lasts from nine to fifteen
`months and costs from one to six million dollars.6 In
`addition to the problems of uncertainty and the costs
`of resolving that uncertainty, the remedy system in
`patents can create a distortion between a patent’s
`value and the return that a patent holder can gain.
`With a finding of infringement, a patent holder can
`receive an injunction against the infringer. Although
`
`
`6 Tom Ewing, Indirect Exploitation of Intellectual Property
`
`Rights by Corporations and Investors, 4 Hastings Sci. & Tech.
`L.J. 1, 34, 63 (2012); Tom Ewing, Practical Considerations in the
`Indirect Deployment of Intellectual Property Rights by Corpora-
`tions and Investors, 4 Hastings Sci. & Tech. L.J. 109, 119, 131
`(2012).
`
`
`
`8
`
`the pace of injunctions has slowed in the wake of
`eBay, Inc. v. MercExchange LLC, 547 U.S. 388 (2006),
`courts still grant injunctions in a significant number
`of cases. Thus, when a company producing an actual
`product is threatened with an infringement claim by
`a patent holder, the company must decide whether to
`risk having its entire product shut down. If the
`patent claim relates only to a small aspect of the
`product, the threat of injunction creates an inordinate
`risk, one much more costly than the value the patent
`could possibly contribute to the whole product.
`
`Injunctions are not, however, the only risk to a
`
`threatened patent infringement defendant. The dam-
`age measurements available in patent cases signifi-
`cantly heighten the risk of magnification. According
`to the Patent Act, courts are to award damages
`“adequate to compensate for the infringement, but in
`no event less than a reasonable royalty for the use
`made of the invention.” 35 U.S.C. § 284 (2006). The
`language is perfectly reasonable in the abstract; it is
`the application of the language that has been prob-
`lematic. Part of the problem flows from the so-called
`“Georgia-Pacific” test that many courts use to deter-
`mine reasonable royalties. It is an elaborate, 15-part
`test introduced by a district court in the 1970s, in
`which not all factors are relevant to all cases and
`courts do not always use the same factors. See Geor-
`gia-Pac. Corp. v. U.S. Plywood Corp., 318 F. Supp.
`1120 (S.D.N.Y. 1970), modified sub nom. Georgia-Pac.
`Corp. v. U.S. Plywood-Champion Papers Inc., 446
`F.2d 295 (2d Cir. 1971). With such variability, the
`test has been described as involving more the talents
`of a conjuror than a judge. See Fromson v. W. Litho
`
`
`
`9
`
`Plate & Supply Co., 853 F.2d 1568, 1574 (Fed. Cir.
`1988), overruled by Knorr-Bremse Systeme Fuer
`Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337
`(Fed. Cir. 2004) (describing a practitioner’s comment).
`
`The Georgia-Pacific test is particularly troubling
`
`in the way it has been applied to complex multipart
`products. When a product is made up of many compo-
`nents, the price of the product may reflect not just
`one patented process or component, but also dozens of
`other patented inventions. The price may also reflect
`unpatented technology included in the product, as
`well as the value added by the manufacturer in
`putting everything together and marketing the
`product. The Georgia-Pacific test does not adequately
`take all of this into account, and patented inventions
`that make a small contribution to an overall product
`have received damage awards well beyond their
`contribution to the whole, or based on a distorted
`view of the whole.
`
` Magnification, in combination with the increas-
`ingly popular practice of patent monetization, has
`created the perfect storm for patent abuse. The
`patent system has long operated with the comfort of
`knowing that only a tiny percentage of patents will
`ever earn a return. But, today, large numbers of
`patents that would not have garnered any return in
`the past are being traded and monetized. Their
`presence in the market, particularly in the form of
`commoditized, tradable rights, enhances the uncer-
`tainty and game playing that allows patent holders to
`obtain rights above the value of the patents them-
`selves. The current rush toward monetization is
`
`
`
`10
`
`contributing to the ability of patent holders to bar-
`gain for more than the patent is worth, as well as
`creating distortions in the market for patents. Tradi-
`tionally, the patent system has operated with a high
`percentage of “shadow patents” – patents that are
`never actualized but remain largely invisible, on the
`periphery of the patent system. The vast majority of
`patents have never directly earned a return for the
`patent holder. Estimates suggest that the number is
`well above 90%. Gideon Parchomovsky & R. Polk
`Wagner, Patent Portfolios, 154 U. Pa. L. Rev. 1, 5
`(2005) (noting that estimates suggest that less than 5
`percent of patents hold any value); see also Edmund
`W. Kitch, The Nature and Function of the Patent
`System, 20 J.L. & Econ. 265, 267 (1977). These
`patents do have some impact. Among other things,
`they clog the patent system, making it even more
`difficult for manufacturers to know whether a
`potential product would infringe any existing rights.
`Nevertheless, they do not extract any direct returns
`for their inventors.
`
`In fact, many of these shadow patents were never
`
`intended to earn a direct return. When a company
`patents a particular invention, the company will
`engage in a series of defensive patents that are
`intended to cover variations or improvements that
`others could come up with. The intent is not to create
`new products, but to keep others out of the commer-
`cial space in which the product is operating, and to
`protect the company if competitors try to sue. Many
`of these unrealized patents, along with patents in
`
`
`
`11
`
`general, are of questionable validity. The patent
`approval system has nowhere near the resources
`necessary to weed out patents that are weak. One
`scholar estimates that the average patent examiner
`spends 18 hours over a period of two to three years
`examining a particular patent. Mark A. Lemley,
`Rational Ignorance at the Patent Office, 95 Nw. U. L.
`Rev. 1495, 1500 (2001). This is a remarkably small
`amount of time to evaluate highly technical docu-
`ments that may contain dozens or even hundreds of
`separate claims.
`
`If it is too great a burden on the patent office to
`
`examine each patent application extensively, imagine
`what would happen to the entire patent system if
`every patent, or even large numbers of the shadow
`patents, were to become monetized. That, however,
`is precisely what is happening in the modern patent
`system. According to a recent analysis of all patent
`litigation filed in four years, 2007-2008 and 2011-
`infringement
`litigation by patent
`2012,7 patent
`monetization entities has risen dramatically over a
`remarkably short period of time. The study analyzed
`roughly 13,000 cases involving almost 30,000 assert-
`ed patents, and perhaps the most notable finding was
`that, in 2012, litigation by patent monetizers repre-
`sented a majority of the patent litigation filed in the
`
`7 Robin Feldman et al., The AIA 500 Expanded: Effects
`
`of Patent Monetization Entities (April 9, 2013), UC Hastings
`Research Paper No. 45, available at http://ssrn.com/abstract=
`2247195.
`
`
`
`12
`
`United States. Specifically, patent monetizers filed
`58.7% of the patent lawsuits in 2012. This was a
`sharp rise from 2007, when patent monetizers filed
`just 24.6% of patent infringement litigations. Addi-
`tionally, the data showed that the parties who filed
`the highest number of patent lawsuits were generally
`monetizers. Of the 10 parties who filed the greatest
`number of patent cases in the years studied, all were
`patent monetizers.
`
`The modern combination of magnification and
`
`monetization is playing out in ways wholly incon-
`sistent with the goals of the patent system. The
`Constitutional language explains that the goal of the
`patent system is “to promote the progress . . . of the
`useful arts.” U.S. Const. art. I, § 8, cl. 8. In other
`words, patents do not, for example, seek to promote
`science for the sake of science but, rather, encourage
`the creation of products that will be useful and bene-
`ficial to society. Although enormous amounts of
`money are being paid through patent assertion, there
`is no evidence to suggest that much in the way of new
`products are emerging from all of the modern patent
`assertion activity. As Professors Bessen and Meurer
`have estimated, patent demands by monetizers cost
`U.S. companies 29 billion dollars in 2011 alone.8
`
`
`
`8 See James E. Bessen & Michael J. Meurer, The Direct
`
`Costs from NPE Disputes, 99 Cornell L. Rev. ___ (forthcoming
`2014), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_
`id=2091210.
`
`
`
`13
`
`Moreover, in what economists are calling the “leaky
`bucket,” very little of that money flowed back to in-
`ventors or innovation.9 Only an estimated 20% of 29
`billion dollars flowed back to original inventors or went
`into any internal R&D by the monetizers themselves.
`Instead of rewarding innovation, the patent system
`has begun to look like the Wild West with no sheriff
`in sight. Courts should – indeed, must – have the
`discretion to look more closely at all the factors in
`play and, in their discretion, award § 285 fees where
`appropriate as a meaningful deterrent to the pursuit
`of wholly unwarranted lawsuits.
`
`
`II. THE FEDERAL CIRCUIT’S TWO-PART
`EXCEPTIONAL CASE TEST HINDERS
`§ 285’s INTENDED PURPOSE TO DETER
`ABUSE OF THE PATENT SYSTEM
` When the Federal Circuit conflated this Court’s
`two-part definition of sham litigation in antitrust
`cause of actions with § 285 fee shifting, it elevated
`the exceptional case standard to unreachable
`heights. To establish that a lawsuit is an exceptional
`case, one must show that the suit is both objectively
`and subjectively baseless. Brooks, 393 F.3d at 1381.
`With the vast uncertainty involved in interpreting
`the language of any patent, it is remarkably difficult
`
`
`
`
`9 See id.; Fiona Scott Morton & Carl Shapiro, Strategic
`
`Patent Acquisitions, available at http://papers.ssrn.com/sol3/papers.
`cfm?abstract_id=2288911.
`
`
`
`14
`
`to show that any patent lawsuit is both objectively
`and subjectively baseless. Feldman, Rethinking
`Patent Law, at 168 (“Proving sham litigation, howev-
`er, requires satisfaction of a remarkably high bur-
`den. . . .”). An argument can always be made in
`patent law that there was reason to believe someone
`might construe language somewhere in some claim in
`a way that is favorable. Even if the argument is tre-
`mendously weak, courts are reluctant to find that it
`satisfies the two-part test. Robin Feldman, Public
`Comment on Intellectual Property Assertion & Mone-
`tization, FTC Patent Assertion Entity Activities
`Workshop (Mar. 27, 2013).
`
`Indeed, overcoming the two-part test in patent
`
`cases has proven difficult in a variety of contexts.
`Consider the case of an electronic fax company that
`acquired broadly worded patents and asserted them
`against numerous competitors.10 The patents were
`related to telephone switchboard technology. Many of
`those against whom the patents were asserted chose
`to settle, and a couple of those competitors were
`subsequently acquired by the electronic fax company.
`A few defended against the infringement claim, with
`one competitor filing an antitrust counterclaim. The
`district court rejected the antitrust claim on summary
`judgment on the grounds that the claim could not
`overcome the Federal Circuit’s stringent two-part
`
`
`
`
`10 See Intellectual Property Wrongs, 18 Stan. J.L. Bus. &
`
`Fin. 250, 284-292 (2013).
`
`
`
`15
`
`test. One aspect of the summary judgment decision is
`particularly striking. The court felt that, although
`prior suits were not resolved by a court or jury on the
`merits and no prior court had construed any of the
`patent claims, the fact that prior cases had ended in
`settlements should be considered “litigation success.”11
`The court did not discuss any of the other factors at
`play, including allegations setting forth a pattern of
`aggressive behavior, unsupportable patent interpre-
`tations, and intimidation aimed at a broad array of
`competitors. Notably, the court reasoned that, be-
`cause the patent owners sought an injunction or
`damages through an infringement suit, the fact that
`the defendants paid licensing fees reflected a success-
`ful case.
`
`The problem with this logic is the feedback loop it
`
`creates.12 In the modern world of patent monetization,
`
`11 See Catch Curve, Inc. v. Venali, Inc., CV 05-04820 DDP
`
`AJWx, 2006 WL 4568799 (C.D. Cal. Feb. 27, 2006) (filed Nov. 3,
`2008) at 18; see also In Re Terazosin, 335 F. Supp. 2d 1336, 1358
`n.13 (S.D. Fla. 2004) (noting that “ ‘[T]he court cannot agree
`with Plaintiffs that a plaintiff who has filed suit and receives the
`relief sought (e.g., monetary compensation, a change in conduct,
`etc.) could only have been deemed to have ‘won’ under PRE if it
`continued to litigate the case and received a favorable judgment
`from the court”).
`12 Cf. James Gibson, Risk Aversion and Rights Accretion in
`
`Intellectual Property Law, 116 Yale L.J. 882, 882 (2007) (arguing
`that “[s]eeking a license where none is needed is problematic
`because ‘the existence (vel non) of licensing markets plays a key
`role in determining the breadth of rights, [so] these . . . decisions
`eventually feed back into doctrine, as the licensing itself be-
`comes proof that the entitlement covers the use.’ ”).
`
`
`
`16
`
`an aggressive and well-financed patent holder can
`pressure smaller or less sophisticated targets into
`settling, simply because the costs of litigation are too
`burdensome. By choosing one’s targets wisely, a savvy
`monetizer can target vulnerable plaintiffs early on
`and establish a string of settlements, which can then
`be used to convince other targets to settle and con-
`vince a court that the entire campaign was meritorious
`from the outset. Significantly, in some electronic fax
`cases that have actually proceeded to determination
`of patent applicability, the telephone switchboard
`patents at issue were held not to apply to electronic
`fax technology. That decision is cold comfort to those
`who paid for licenses and those who were unable to
`overcome the two-part test.
`
`Compounding this unfortunate conundrum, the
`
`Federal Circuit in Brooks suggested that the burden
`for proving sham litigation should be even higher in
`cases that involve patents, on the grounds that pa-
`tents are presumptively valid. See Brooks, 393 F.3d at
`1382; see also, e.g., Loctite Corp. v. Ultraseal Ltd., 781
`F.2d 861, 876 (Fed. Cir. 1985), overruled on other
`grounds by Nobelpharma AB v. Implant Innovations,
`Inc., 141 F.3d 1059 (Fed. Cir. 1998); Handgards, Inc.
`v. E