Lawsuits

The Supreme Court Takes on Patent Trolls


Apple (AAPL) and Google (GOOG) say they’re tired of being slapped with baseless patent suits that cost them millions in legal fees. Now they’re asking the U.S. Supreme Court to let them hit back. The two are leading a group of companies urging the court to make it easier for businesses to recover legal costs when they win a patent infringement suit. In two cases to be argued this month, the justices will hear them out.

More than 100,000 businesses were threatened in 2012 by “patent assertion entities.” Often derided as patent trolls, these companies get most of their revenue from licensing patents and from suing other companies for infringement. They filed 19 percent of all patent lawsuits from 2007 to 2011, according to the Government Accountability Office.

Apple and Google have each been sued more than 125 times in the past five years by such companies, according to the researcher PatentFreedom. For every case that reaches court, Apple says, it gets dozens of letters demanding royalties. “Technology companies are seeing an onslaught of patent claims,” says Charlene Morrow, a patent lawyer with Fenwick & West in Mountain View, Calif., which represents some of Silicon Valley’s biggest businesses. Neither of the Supreme Court cases was brought by Apple or Google, but the tech giants are putting their weight behind them in briefs filed with the court. A favorable ruling, Morrow says, “should make it less profitable to bring frivolous claims.”

The cases, to be argued on Feb. 26 and decided by early July, give the justices two different avenues for allowing more fee awards. One involves Octane Fitness, which is seeking to recover as much as $1.8 million in fees after defeating a patent suit. Octane was sued in 2009 by Icon Health & Fitness, a rival exercise equipment maker, over a component in elliptical machines. Octane is challenging the standard for awards established in 2005 by the U.S. Court of Appeals for the Federal Circuit, which handles patent cases: The Federal Circuit allows a company to recover fees if a suit is “objectively baseless” and was filed in bad faith.

This standard has drawn criticism from some of the biggest names in tech, including Facebook (FB), Cisco Systems (CSCO), Intel (INTC), Verizon Communications (VZ), and Yahoo! (YHOO), which have filed briefs in the cases. Octane, in Brooklyn Park, Minn., says trial judges should instead award fees when a patent holder “unreasonably pursues a case having an objectively low likelihood of success.” The U.S. Patent Act says fees can be awarded “in exceptional cases,” leaving it to the courts to interpret that phrase.

Google, joined by 13 other companies, told the justices that patent assertion entities have an unfair advantage because they don’t make products of their own, leaving them effectively immune from countersuits. Icon says its case is the wrong one to deal with that problem. The company, based in Logan, Utah, has been making exercise equipment for more than three decades and sells the NordicTrack and ProForm machines. The issue Octane and its allies are asking the court to resolve “is not presented in this case, which all concede does not involve a patent troll,” Icon argues in court papers. It contends that the Federal Circuit’s standard for awarding fees gives trial judges ample leeway to punish frivolous suits. This position isn’t garnering much support: In an unusual twist, no outside group has filed a brief with the court backing Icon.

The other case does involve accusations of patent trolling. A judge awarded $5 million in fees after ruling that Highmark, a Pennsylvania insurer, wasn’t infringing a patent owned by Allcare Health Management Systems. The patent covered a system that lets doctors enter symptom data into a computer and receive a list of possible treatments. In making the fee award, a federal district judge in Fort Worth said Allcare had engaged in deception, conducting a fake survey as a means of identifying targets for its royalty demands. The Federal Circuit ordered the judge to reduce the award, saying one aspect of Allcare’s argument was “not unreasonable.” The question for the Supreme Court is whether the Federal Circuit must defer to a trial judge’s conclusion that fees are warranted.

Together the decisions could make such awards more common. For the tech companies, that could finally mean some relief from multimillion-dollar legal bills. In court papers, Apple told the justices that it faces 228 unresolved patent claims and employs two attorneys just to respond to letters demanding royalties. It has been sued 92 times by patent assertion companies in the past three years, settling 51 cases, with most of the rest pending. “Apple has rarely lost on the merits,” the company said in its court filings. “But victory figures as small consolation because in every one of these cases, Apple has been forced to bear its legal fees.”

The bottom line: Companies whose business is suing others for infringement filed 19 percent of all patent suits from 2007 to 2011.

Stohr is a reporter for Bloomberg News in Washington.
Decker is a reporter for Bloomberg News in Washington.

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