A Judicial Solution To Non-Practicing Patent Holders' Suits Vs. End Users?

Litigation by "patent-assertion entities" (PAE) was back in the news again last weekwith a jury decision from the Eastern District of Texas. The jury found that patents held by Alexsam Inc. which purportedly cover a system for processing pre-paid electronic gift cards were valid, allowing Alexsam's infringement claims against Best Buy , Barnes & Noble , Gap , Home Depot , McDonald's , JC Penny, and other retailers to advance. Whether the actions will proceed or the retailers decide to cut their losses and settle is unclear.

Claims by patent-assertion entities rarely get to the stage at which the gift card litigation currently stands. This is especially true when patent holders target purchasers and users of technology which allegedly infringe on their rights, rather than (or in addition to) the technology's producers. When posed with the choice of investing six-figures defending a product you didn't even create, or paying the PAE a four- or five-figure licensing fee, most small businesses will choose the latter, no matter how weak the legal claims may be.

Online technology journal Ars Technica has shined a spotlight on some of these PAE litigation threat campaigns. Several stories (here and here) document one anonymous patent holder's systematic targeting of small businesses and even some individuals who use scanners that can send the scanned files via e-mail. The "scanner-trolling scheme," as Ars calls it, divides up the U.S. into six areas, and in each area, a separate shell company demands $800-$1,200 licensing fees per employee to avoid a lawsuit. Another story focuses on how a Luxembourg-based PAE is suing cash-strapped public transit systems over their use of vehicle-tracking systems. The Electronic Frontier Foundation recently stepped in to request a reexamination of this PAE's patent. Other stories have documented the litigation crusade of Innovatio, which has sued businesses offering Wi-Fi service on their premises. One law firm even has an entire section of its website devoted to the suits.

Such targeting of end users has led to calls from leaders in business and Congress to immunize such companies and individuals from patent lawsuits. While that may sound promising to under-assault small businesses, their next thought will likely be, "how many years did it take to pass the America Invents Act?"

In the meantime, technology end users should consider the academic advice recently offered by a Santa Clara University Law School professor and a law firm partner in a forthcoming Boston University Law Review article, "Expanding Patent Law's Customer Suit Exception." Authors Brian Love and James Yoon encourage the federal courts to revive and modernize a doctrine "lurking in the forgotten recesses of patent caselaw" which allows for the stay of patent suits against customers if the seller/manufacturer files a declaratory judgment action against the same patent plaintiff.

As Love and Yoon explain, the courts (primarily the Federal Circuit) have imposed severely limiting conditions on the customer suit exception, including that the customer defendants are "mere resellers" and that the manufacturer is the sole source of the infringing product. Judges also frame their analysis around the interest of judicial economy, and don't consider the broader policy benefits of deterring future litigation and empowering the entity best positioned to question infringement: the manufacturer.

These limits undermine the doctrine's effectiveness in this new era of patent litigation, where products are "overwhelmingly constructed (at least in part) using discrete components sourced from multiple manufacturers." Love and Yoon recommend changes to the customer suit exception that reflect this new reality, such as expanding it beyond the context of customers as resellers. They also urge that when judges evaluate the interests of judicial economy, they "consider more than just the short-term consequences."

Such common law doctrine evolution doesn't happen quickly, and it won't happen at all unless targets of PAE litigation — manufacturers and end users alike — give the courts a reason and an opportunity to act. But thanks to this first-of-its-kind scholarly article, at least there is a road map of sorts for opening a new front in the fight for reform.