Finding IP Value
The “Patent Assertion Escrow” as a Limit against Abusive, Coercive Litigation
How would the dynamic of patent infringement litigation change if Patent Assertion Entities, who file lawsuits serially, faced a higher level of scrutiny over their pre-lawsuit investigation? This post explains how to accomplish this with due regard for attorney-client privilege and attorney work product.
In its study of the Patent Assertion Entity (“PAE”), the Federal Trade Commission defined PAEs as firms that acquire patents to generate revenue through litigation. Like any patent holder, a PAE must reasonably investigate before filing a lawsuit. However, a serial PAE might sue dozens or hundreds of players in an industry with a cookie-cutter complaint, and some attempt to exploit the fact that each target is likely to spend more money on a successful defense than it would cost to settle early.
The possibility of a financial wound for filing a clearly unwarranted lawsuit would help solve the problem of coercive, abusive litigation by a limited number of PAEs. Certainly, 35 U.S.C. § 285 provides the authority to shift fees.1 Notably, § 285 is meant to deter patent holders “from bringing clearly unwarranted suits,” Lakim Indus., Inc. v. Linzer Prods. Corp., 2013 WL 1767799, at *2 (C.D. Cal. Apr. 24, 2013), and to prevent a defendant from incurring attorney fees “it should not have been forced to incur.” Kilopass Tech., Inc. v. Sidense Corp., 738 F.3d 1302, 1313 (Fed. Cir. 2013). Even so, the force of § 285 is limited because a PAE need not worry about fee shifting at the beginning of a case, and because years of litigation can alter a deficient pre-lawsuit investigation even when the PAE loses the case.
Accordingly, preserving some indicia of the pre-lawsuit investigation – and making a static picture out of it – would benefit the judicial system. A “patent assertion escrow” is a way to do this in the cases where it is needed most. A patent assertion escrow would not involve money – but documentation.2
The idea would be for courts to consider an early motion to order a serial PAE to provide a deposit to be held in escrow, containing indicia of a responsible investigation (hereafter, “Deposit”). Examples of such indicia might include (i) a claim chart identifying the elements of asserted claims found in the Accused Instrumentality; (ii) in which those identifications also use the claim construction rulings from other cases involving the same patent; (iii) evidence supporting the breadth of claim scope reflected in the claim chart; and (iv) copies of website information, product literature, or other publicly available information that links the Accused Instrumentality to claim elements. If granted, the moving defendant would pay an agent to retain the Deposit unchanged, thereby ensuring a reliable chain of custody over it. The Deposit would be produced, if at all, only if the defendant prevails and files a § 285 motion, and production could be made in accordance with the protective order.
Courts have discretion to grant a motion for a patent assertion escrow in the control of their dockets, and the toll of PAE litigation on American businesses offers a compelling reason to do so in certain cases. A study by the National Conference on State Legislatures reported that patent infringement lawsuits by PAEs cost legitimate businesses in the tens of billions of dollars in legal expense.3 Accordingly, in appropriate cases, support for such a motion may include the number of lawsuits filed against American businesses under the same patent or family of patents; instances where a serial PAE has taken claim construction positions that are contradicted by court rulings in previous cases; or other record evidence showing improper behavior in prior cases.
Handled correctly, patent assertion escrows would enhance judicial economy. PAEs would be incentivized to file cases responsibly. The shotgun approach used by some PAEs would have less impact on the judicial system. Courts would spend less time on clearly unwarranted cases. Responsible plaintiffs would not face delay because of so many clearly unwarranted cases diverting the courts’ attention. Requiring a Deposit would help courts when ruling on § 285 motions. It would bring clarity to the pre-lawsuit investigation and prevent muddying the picture through years of litigation activity.
Of course, a serial PAE will oppose such a motion. However, the indicia for a Deposit should exist, in readily available form, before any PAE sues a target defendant. It would require scant time or resources to separate the indicia from any privileged communications. Plus, the very same type of information must be produced later in the case. Because the Deposit could not be produced prior to judgment, this proposal is less invasive on attorney work product than requiring infringement contentions and a claim construction brief later in the case.
Some might argue that this proposal departs from the status quo. But the burgeoning PAE industry is also a departure that only started fairly recently, and PAE activity continues to expand. Consider: if a single PAE sues 50 defendants and demands a $100,000 “license” from each, it effectively forces all of them to either pay $100,000 or incur more in defense costs – producing a multi-million dollar hit on American businesses. Monetization programs on this scale are common. While some are legitimate, too often they involve marginal patent rights and coercive tactics. More needs to be done to curb the unduly coercive practices of a few.
In making this proposal, the author understands certain details must be solidified before actual motion practice occurs. Even so, the procedural approach suggested here is reasonable. Patent assertion escrows would not create an undue burden on anyone, yet they could produce substantial benefits to courts and patent litigants.
1 “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”
2 “Escrow” means “a bond, deed, or other document kept in the custody of a third party, taking effect only when a specified condition has been fulfilled.”
3 Bills like the Innovation Act of 2015 have been proposed because of this toll. The bill would, among other steps, require more information to be included in the complaint or otherwise provided to target defendants at filing; remove Form 18 from consideration; and shift the burden in terms of showing a reasonable legal and factual basis to assert the action.