Patent Trolls Get Warning Shot With RICO Suit
By Ryan Davis
Law360, New York (February 08, 2013, 7:30 PM ET) -- For companies seeking novel ways to counter infringement litigation by patent trolls and other nonpracticing entities, a recent decision throwing out Cisco Systems Inc.'s racketeering suit against a company called Innovatio IP Ventures LLC is a setback, attorneys say, but won't be the end of efforts to fight back against NPEs.
The suit claimed Innovatio had made false statements in patent licensing letters sent to thousands of hotels, cafes and other businesses that used Cisco products to offer Wi-Fi to customers. Its actions amounted to a racketeering scheme that used "fear and extortion" to get the recipients to settle quickly, Cisco argued.
A judge dismissed the Racketeer Influenced and Corrupt Organizations Act claims Feb. 4, ruling they "do not establish that Innovatio's licensing campaign alleging infringement of the Innovatio patents is a sham."
By accusing Innovatio of racketeering, Cisco was going to bat for its customers sued for infringement and trying to make it riskier for nonpracticing entities to threaten suits against small companies that are likely to settle, said Robin Feldman, a professor at the University of California Hastings College of the Law.
"Cases like these do send a signal — even if they're ultimately unsuccessful — that the larger players are going to push back on behalf of their customers," she said.
Peter Brann of Brann & Isaacson, who has defended retailers in patent litigation, said he was disappointed to see that Cisco's RICO strategy didn't gain traction. However, he said, companies will continue to seek new tactics to use against nonpracticing entities.
"The people trying to fight the onslaught of these claims will have to go back to the drawing board and see if there's some other way to solve this problem of patent litigation run amok," he said.
Small businesses like the individual hotel franchises Innovatio has sued have little sophistication about patents and are often willing to pay a small settlement rather than risk costly litigation, attorneys say.
Because nonpracticing entities don't make any products and can't be countersued for infringement, they "face close to zero risk" in mounting extensive patent licensing campaigns, said Ann Fort of Sutherland Asbill & Brennan LLP. Cisco was seeking to change the calculus by raising the specter of racketeering liability, she said.
"A lot of people are trying to find ways to make the mass blanketing of end users with demand letters less attractive," she said. "They're trying to raise the downside for the nonpracticing entities."
According to Feldman, "the goal is to make patent monetizers think twice before suing. The large companies are saying, 'We're going to make it tougher and more expensive for you.'"
The dismissal of Cisco's suit doesn't mean similar claims might not be viable in another case, said Fort, who described this type of racketeering allegation as "the nuclear option." It simply shows the judge didn't see Innovatio's licensing efforts as legally problematic, she said.
"I don't view this as a decision saying licensing campaigns can never rise to the level of racketeering," she said. "The facts here didn't reach that level."
Nevertheless, the ruling highlights the difficulty of alleging that a patent licensing campaign amounts to racketeering, said Jeffrey Matsuura of Alliance Law Group LLC.
"RICO is a pretty hard case to make," he said. "It's an open question whether, if racketeering didn't work, there is some other kind of legal argument that might be more useful if I'm Cisco and I'm ticked at patent holding companies pushing around my customers."
The complaint by Cisco and fellow Wi-Fi manufacturers Motorola Solutions Inc. and Netgear Inc. was filed in October as part of a multidistrict litigation that consolidates numerous suits Innovatio has filed against scores of businesses that offer Wi-Fi and manufacturers of Wi-Fi devices.
Among other claims, the companies allege that Innovatio's demand letters are misleading because the Wi-Fi devices are already covered by licenses, Innovatio has an obligation to license its patents on reasonable terms, and the letters falsely state that its patents are essential to wireless standards.
In dismissing the RICO claims, U.S. District Judge James Holderman of the Northern District of Illinois ruled that Innovatio's letters are protected by the First Amendment and the Noerr-Pennington doctrine, which shield parties from liability if they petition the government.
The judge ruled that the demand letters amounted to petitions, which are protected unless they are shown to be sham litigation. Innovatio's letters were not a sham, he concluded, because the company's infringement claims were not so objectively baseless that no reasonable litigation could expect to win.
The ruling makes clear that the standard for sham litigation was not designed for patent litigation and would need to be updated by Congress or the U.S. Supreme Court before it could be effective in such cases, according to Feldman. There's virtually no way to prove that a patent suit is so baseless that no one could imagine it would succeed, she said.
"With patent litigation, the meaning of a patent is so uncertain, the objectively baseless standard is almost impossible to overcome," she said.
The judge let some of Cisco's claims stand, including breach of contract claims alleging Innovatio had failed to license the patents on reasonable terms.
Cisco general counsel Mark Chandler said in a statement that the company was "disappointed the court interpreted the right to 'petition the government' so broadly as to immunize from RICO liability Innovatio's misleading statements that were intended to induce thousands of U.S. businesses to pay money that Innovatio knows they do not owe since they are already fully licensed."
"We do not believe those misleading demands should be immune from liability, and we will review the steps available from here to vindicate our customers' rights," he added.
Matthew McAndrews of Niro Haller & Niro Ltd., lead counsel for Innovatio, said that the company "pleased with, but not surprised by, the court's ruling," which he said will now shift the focus of the litigation to the merits of the infringement claims against the defendants.
"I never believed Cisco's fraud-based claims had any merit at all," he said. "I was involved in the licensing activities they complained of, and I knew we didn't cross the line, but it's always nice to get confirmation from a judge."
It remains to be seen whether other companies will try to file similar suits alleging that licensing letters like Innovatio's constitute racketeering, McAndrews said.
"I certainly think Judge Holderman's decision ought to serve as a deterrent, but you never know what defendants are going to do," he said.
Cisco, Motorola and Netgear are represented by Steven Cherny, Gianni Cutri, Adam Alper and Michael De Vries of Kirkland & Ellis LLP.
Innovatio is represented by Matthew McAndrews, Raymond Niro Jr., Brian Haan and Gabriel Opatken of Niro Haller & Niro Ltd. and Jean Kuelper, Gregory Schodde, Peter McAndrews, Ronald Spuhler and Shawn Peterson of McAndrews Held & Malloy Ltd.
The case is In re: Innovatio IP Ventures LLC Patent Litigation, case number 1:11-cv-09308, in the U.S. District Court for the Northern District of Illinois.
--Editing by Kat Laskowski and Katherine Rautenberg.