Patent Troll' Suits Face New Obstacles At ITC
By Ryan Davis
Law360, New York (February 11, 2014, 7:21 PM ET) -- As Congress debates legislation to crack down on so-called patent trolls, a little-noticed ruling may have an immediate impact on nonpracticing entities, raising the bar for them to file sue at the U.S. International Trade Commission.
In a Jan. 9 decision clearing Hewlett-Packard Co. and others of infringement, the ITC reversed long-standing precedent and held for the first time that in order to use licensing activities to satisfy the domestic industry requirement for suing at the ITC, nonpracticing entities must prove that there are products that practice the patent.
The ITC had previously held that licensing alone could satisfy the requirement, regardless of whether licensees used the patents in their products. Proving the existence of products covered by the patents may be difficult for nonpracticing entities and could discourage them from suing at the ITC, attorneys say.
"This raises the threshold for patent owners relying on licensing activities to come to the ITC," Christopher Paulraj of McDermott Will & Emery LLP said. There has never been such a requirement, "so it is going to be a change in practice, especially for NPEs," he said.
Just because a company licenses a patent doesn't necessarily mean that it is using the patent in its products, which could trip up nonpracticing entities seeking to comply with the new requirement, said Charles Sanders of Goodwin Procter LLP.
"There are many reasons to license, even if the licensee isn't practicing the patents," he said.
Many well-funded nonpracticing entities keep close tabs on their licensees' use of patents, but those that don't are now on notice that they might have to make significant efforts to prove the existence of products covered by the patents to ensure they have a viable ITC case, Sanders said.
"I think this creates another hurdle, but it depends on the type of NPE," he said. "The big, sophisticated NPEs are already doing this, but for smaller, less sophisticated NPEs, it's going to be an issue."
The ability of nonpracticing entities to file suit at the ITC, where they can obtain an order barring imports of infringing products if they prevail, has been controversial in recent years.
At a congressional hearing in 2012, several major companies said NPEs should not be able to use licensing to meet the domestic industry requirement, arguing that they can use the threat of an import ban to leverage excessive settlements. Some lawmakers said they were considering legislation to change the requirement.
During the past year, though, the ITC has introduced its own measures aimed at nonpracticing entities, including a pilot program to determine early in a case whether a company has met the domestic industry requirement.
Perhaps as a result, the anti-patent troll bills that have gained momentum in Congress in recent months, such as the Innovation Act, have focused on district court litigation and do not mention the ITC.
"The commission has definitely evolved in its thinking on the licensing-based domestic industry requirement," Paulraj said.
While the commission had previously said that the existence or articles that practice the patent could be helpful in meeting the domestic industry requirement, "with this recent decision, it's pretty clear that it is now an absolute requirement," he said.
In the January decision, the ITC concluded that nonpracticing entity Technology Properties Ltd. LLC, which accused Hewlett-Packard and others of infringing patents on flash memory card readers, had failed to prove that its licensing activities met the domestic industry requirement.
The provision requires that, in order to bring claims at the ITC, patent owners that don't make products themselves must show that they have made a substantial investment in exploiting the patent though engineering, research or licensing.
The ITC said that although it had never before required patent owners to demonstrate the existence of products that practice the patents to use licensing to meet the requirement, a recent Federal Circuit ruling compelled a new standard.
The commission pointed to the Federal Circuit's January 2013 decision in a holding that nonpracticing entity InterDigital Inc.'s licensing activities met the domestic industry requirement. The court wrote that licensing "must pertain to products that are covered by the patent that is being asserted."
Though it said parts of the Federal Circuit's decision were "susceptible to being misconstrued," the ITC concluded that the "only plausible interpretation" was that licensees must prove the existence of products covered by the patent to meet the requirement.
"The existence of articles is, in view of recent Federal Circuit authority, a requirement for demonstrating the existence of a domestic industry," the commission wrote.
That did not sit well with ITC Commissioner Shara Aranoff, who dissented and said the new rule would hinder the ability of small companies and startups to use the ITC.
She said that the Federal Circuit ruling was "ambiguous" and in her view, did not require changing the ITC's long-standing rule that the existence of articles practicing the patent is not required.
Sanders said that the ITC "often goes a step farther than what the Federal Circuit requires it to do," and the new standard is an example of that tendency.
Part of the challenge for patent owners under the ruling is that "anyone who licenses an NPE's patent doesn't do it with a smile on their face," he said.
To comply with the ruling, nonpracticing entities may find themselves "in the difficult position of getting evidence from parties that don't want to cooperate and prove that their products practice the patents, which they may not," Sanders said.
That information can be obtained through subpoenas, but it will be another layer of work involving in filing an ITC suit.
"Certainly it's not insurmountable," Paulraj said. "A sophisticated licensing entity would know which of its licensees' products meet the claims of the patent. But it's something you have to do that goes beyond what was required previously."
The case is Certain Computer and Computer Peripheral Devices and Components Thereof and Products Containing the Same, investigation number 337-TA-841, at the U.S. International Trade Commission.
--Editing by John Quinn and Chris Yates.
All Content © 2003-2014, Portfolio Media, Inc.
