Contingency Model Undermined by New USPTO Post Grant Proceedings

Non-practicing entities or “patent trolls” are generally those plaintiffs that seek to enforce patent rights against an industry in which they themselves do not compete. Stated another way, an NPE’s only business is patent litigation.

Often times the patents an NPE is enforcing were purchased from a traditional technology company for the sole purpose of exacting royalties from the relevant industry. In the hands of an NPE, which has no technological industry subject to a patent counter suit by their industry targets, the NPE patents become especially powerful weapons of economic coercion.  

Over the last decade, law firms have recognized the efficacy of NPE litigation campaigns and have signed on in great numbers to get a piece of the action. Typically, an NPE will team up with a law firm that will conduct the campaign on their behalf in exchange for a contingent fee arrangement. (i.e., percentage of the collected settlements)

NPEs team up with law firms, at little to no cost, to launch patent assertion campaigns against entire industries. This profiteerring business model has lead to a significant proliferation of patent infringement suits in the last decade. As litigating a patent infringement suit can take years, and cost millions of dollars, a counter-suit for settlement leverage is not possible. Coupled with the fact that some plaintiff friendly jurisdictions like the Eastern District of Texas (EDTX) routinely return damage verdicts in the tens (if not hundreds) of millions of dollars, most defendants will settle relatively quickly for significant sums of money. For this reason, contingency relationships for even a single, seemingly weak patent are almost always worthwhile for law firms. Whether or not the patent is invalidated years down the road by one of a multitude of defendants does not detract from the easy, short term profits.

But the NPE landscape will forever change on September 16, 2012

On September 16th, 2012 the new post grant patent proceedings of the America Invents Act (AIA) become available for patent challengers. The speed of these new proceedings will be a game changer for the traditional NPE contingent fee business model.

Although patent reexamination has long existed to challenge patents at the USPTO, and is far, far, less expensive relative to litigation, reexamination takes years to complete. As such, unless the lawsuit is stayed pending patent reexamination, (relatively uncommon in EDTX or ITC, for example) relief will not come in time for many defendants. So, law firms, especially the small ones that seem to dominate EDTX filings, are still clamoring to take a chance on almost any patent lawsuit. 

In plaintiff friendly jurisdictions like the EDTX, judges are loathe to delay their determination for the 5-7 years it will take a patent reexamination to run its course. However, once patent challengers begin utilizing the new AIA proceedings, namely Inter Partes Review (IPR), Post Grant Review (PGR), or Transitional Program for Covered Business Method Patents (TPCBMP), courts will need to stay their proceedings for only 12-18 months. This is because, IPR, PGR and TPCBMP must conclude within that time by statute.

It would seem very unlikely that even judges of the EDTX or ITC will not be forced to stay newly initiated infringement suits for 12-18 months while three judges (all with engineering or science backgrounds) of the Patent Trial & Appeal Board make a patentability determination that could moot the case, or at least greatly simplify the necessary invalidity analysis. Indeed, with many courts taking 12-18 months (or longer) to even get to a Markman Order, the ability to stay a lawsuit pending a USPTO proceeding is greatly enhanced by the speed of the new proceedings, if not flat out guaranteed for TPCBMP. (significant legislative history suggesting such, as well as interlocutory review of a stay denial)

So, law firms considering a contingency arrangement to enforce a small, or weak NPE portfolio, will now have to account for the likelihood that the dispute will almost certainly transfer over to the unfamiliar USPTO forum. Once there, the cost to conduct the proceeding for a challenger will be on the order of 10-20% of the cost of patent litigation. With the litigation stayed and the corresponding cost pressure off the challenger, and with the added benefit of the lower standards of proof accepted by the USPTO to prove unpatentability, plaintiff attorneys may find that the risk of investing in such NPE portfolios is no longer a worthwhile bet.