Patent enforcement by non-practicing entities ("NPEs") is an increasingly contentious topic. Such entities, sometimes pejoratively called "patent trolls," operate asymmetrically in the sense that they pursue patent infringement claims against companies that manufacture products or provide services, even though they do not themselves provide products or services that create exposure. Additionally, NPEs often pursue multiple targets simultaneously, whether the claims are articulated in cease and desist letters or initiation of litigation, so that a company can receive claims from multiple NPEs in a month. Furthermore, such claims often provide insufficient information for meaningful evaluation, so that counsel is hard pressed to estimate economic exposure or chances of success, much less to determine how to handle each claim.

Accordingly, for over a year, intellectual property reform advocates and their allies in Congress have sought to advance legislation designed to curb NPE abusive patent infringement activities. The effort to write a new patent law began only two years after President Obama signed into law the America Invents Act, a sweeping overhaul of the patent system enacted in 2011.

Until recently, prospects for reform appeared favorable, as lawmakers pursued legislation that would, among other things: (1) require more disclosure about who owned an asserted patent and who would benefit from a lawsuit, (2) require a judge to determine early in the process whether a given patent was valid, (3) allow patent infringement cases to be stayed more easily while patent office challenges are pursued, and (4) impose constraints on frivolous demand letters. Unfortunately, a major piece of such legislation, known as the Patent Transparency and Improvements Act of 2013, became mired in the Senate over a provision that would have required a patent plaintiff to post a bond to cover the potential payment of the winning side's legal fees.

With no end to the current NPE practices visible in the immediate future, companies that are approached by NPEs should consider a variety of strategies regarding how to respond and defend against NPEs.

1. Keep Calm

Typically, the first time a business learns about an NPE is when (1) it receives a letter from an NPE containing an "invitation to license" or (2) a complaint arrives, typically followed by an invitation to participate in licensing discussions. Being blindsided by either of these communications often invokes panic, anger, or some combination thereof, particularly when the documents appear to be part of a mass mailing effort by the NPE to find a willing target. While emotional responses are natural, consider attenuating them in favor of a rational approach that does not hinder the ability to deal effectively with the NPE or risk unnecessary economic exposure.

2. Objectively Evaluate Whether Further Action Is Needed

Emotions aside, the claim should be reviewed objectively to determine the merits and potential exposure. For example, a determination that the claim has no merit will obviously help drive litigation strategy and shape how, if at all, to respond.

NPEs who send claims to a plethora of targets often fail to investigate or state, for each target, what products infringe which patent claims, and why, much less to articulate the basis for any economic damages claimed. Therefore, if one can form a reasonable belief that a license is not needed, the best strategy may be not to respond, since responding may increase the likelihood of placing the business higher on the target list. Doing nothing carries some risk, however, because if the accused infringer is later found liable for infringement, the court may determine that the accused infringer acted recklessly and is subject to up to three times the monetary damages. Therefore, it is important to select outside patent counsel who understands your business and long-term goals and can advise appropriately based on that understanding.

In many cases, NPEs assert their claims against end users of products or services because there are more targets at the end user level and those targets may be more likely to pay a nuisance value to neutralize the litigation threat, particularly in cases there the technology at issue is not central to the end user's core business. In these situations, it may be difficult to evaluate the merits of the claims without assistance from outside patent counsel.

3. Consider Obtaining An Opinion Of Non-infringement Or Invalidity

In certain cases, even if the decision is not to respond, it may be advisable to obtain a written opinion from outside patent counsel. Often, opinions of counsel are a first line of defense against claims of willful patent infringement of a patent that was known by a defendant. Although the Federal Circuit's opinion in In re Seagate Technology, L.L.C., 497 F.3d 1360 (Fed. Cir. 2007) seems to downplay the importance of non-infringement opinions, the Federal Circuit's more recent rulings give more significance to these documents.

For example, the Federal Circuit ruled in Commil USA v. Cisco Systems Inc., 720 F.3d 1361 (Fed. Cir. 2013) that a good faith belief in a patent's invalidity may negate requisite intent for induced patent infringement. The Federal Circuit previously held that an accused inducer's good-faith belief of non-infringement is relevant to prove that it lacked the intent required to be held liable for induced infringement, see, e.g., DSU Medical Corp. v. JMS Co., Ltd., 471 F.3d 1293, 1307 (Fed. Cir. 2006), and that the failure of a party to obtain a non-infringement opinion may actually be probative of intent to induce infringement. See Broadcom Corp. v. Qualcomm Inc., 543 F.3d 683, 699 (Fed. Cir. 2008). The Broadcom, Commil, and DSU cases thus collectively suggest that a party accused of induced infringement should not only consider obtaining an opinion of counsel regarding the potential non-infringement and invalidity of the asserted patents as affirmative evidence of lack of intent, but also should consider that if it does not obtain such an opinion, the failure to obtain the opinion may be used against it if it offers a defense of good faith belief of non-infringement or invalidity.

Within the realm of opinions, it may be necessary to further evaluate whether an expensive full opinion, a less formal opinion, or no written opinion is needed. Each decision is a fact-intensive inquiry with no one-size-fits-all right answer.

4. Consider Whether Issuing Litigation Hold Memorandums Is Necessary

In many cases, companies face a risk of increasingly expensive penalties for failing to preserve email and business records from the earliest possible moment after a dispute arises. Therefore, once the business can reasonably anticipate the probability that the business will pursue or have to defend against a legal claim, or otherwise be required to produce its records in connection with a legal claim, it may be necessary to send a document retention memorandum.

Outside patent counsel may assist with determining the appropriate scope of litigation hold memorandums, which can be difficult to gauge when NPE overtures are vague, and which can impose a considerable burden on business operations and sometimes engender ill will for in house counsel. In any event, the scope of the retained material and the identity of the individuals to whom notice should be sent needs to be carefully defined so as to avoid unnecessarily retaining millions of pages of documents.

5. Consider Notifying Potential Indemnitors and/or Insurance Providers

Once it has been determined that there may be some merit to the infringement claims, the next step is to determine what products are at issue and whether the allegedly infringing features can be traced back to a supplier that is obligated to indemnify the business against infringement claims. If so, it may be worthwhile to locate copies of purchase or supply agreements to determine the terms of any such indemnification clauses. For example, certain clauses require notification within a certain period of time and/or may require that the case be turned over to the indemnitor to handle the defense. Once the terms of the indemnification clauses are clear, evaluate whether it may be more beneficial to rely on the supplier to handle the defense or to negotiate a settlement with the NPE without involvement of the indemnity.

In certain circumstances, the supplier may have prior knowledge of the claims and may have already negotiated a license for the supplied components. Obtaining information from the supplier regarding non-infringement or invalidity evaluations may also be a source of leverage in future negotiations with the NPE, should that become an option.

It may be worthwhile to also evaluate the company's insurance policies to determine whether those policies may provide coverage for alleged patent infringement. Many businesses mistakenly assume that no coverage exists if the business does not own a specific intellectual property insurance policy. In certain cases, however, standard commercial general liability ("CGL") policies may provide coverage for alleged patent infringement under the "Advertising Injury" provisions. For example, business method patents related to e-commerce and web-based products and services may involve advertising or marketing.

To evaluate the availability of such coverage, consider having outside insurance counsel examine the complaint for any allegations causally related to advertising activities, as well as having outside patent counsel evaluate the asserted claims to determine whether any asserted claim involves advertising or marketing. In many cases, prompt notice to the insurance provider is needed because many policies contain time frames within which a claim must be reported, or state that a claim must be reported as soon as possible. Coverage may also be limited to claims reported during a policy period.

6. Hold The NPE To Its Legal Obligations

In many cases, the NPEs provide at best an "exemplary claim chart" of one product. The information set forth in the claim charts may not be sufficient to show that a reasonable effort was made to ascertain evidentiary support demonstrating that the accused products will meet the key limitations of the patent claims. Judin v. United States, 110 F.3d 780, 784 (Fed. Cir. 1997). Thus, the accused infringer is within its rights to demand adequate claim charts for each accused product.

In addition, it may be worthwhile to submit a series of clarifying questions to the NPE, which should be in writing to ensure a record. The main goal is to have the NPE provide clear and detailed explanations of how the asserted claims are infringed.

7. Determine Whether To File a Declaratory Judgment Action

If the business receives a license offer letter from the NPE and no suit has been filed, consider quickly evaluating whether a declaratory judgment (or "DJ") lawsuit is appropriate. In doing so, it is important to consider (1) the strength of a case of non-infringement or invalidity (or both) on the merits, (2) whether there is personal jurisdiction over the NPE, and (3) whether the letter from the NPE provides subject matter jurisdiction for a DJ lawsuit.

Once the statutory basis for filing a DJ has been confirmed, the next step is to evaluate the pros and cons of filing a DJ action. Filing a DJ action provides distinct advantages of forum selection and being a DJ plaintiff rather than a defendant in a patent infringement lawsuit. Often, the DJ action may provide sufficient settlement leverage to obtain a covenant not to sue in return for dismissal of the DJ action. The major downside of filing a DJ action is that giving up the possibility that the NPE will never pursue the business in a lawsuit.

8. Evaluate Options To Respond To An Infringement Action

If the NPE filed an infringement suit, the option of filing a DJ action may not be appropriate. Nevertheless, one should still consider the possibility of a transfer motion, particularly if the NPE filed suit in a plaintiff-friendly jurisdiction such as the Eastern District of Texas.

Another option is a Rule 11 motion regarding the lack of adequate pre-filing investigation by the NPE, which may be particularly effective if the NPE has not sued many defendants and did not customize the complaint to the accused products. For example, a plaintiff has an obligation to attempt to obtain the accused device or a technical description of it. See Judin, 110 F.3d at 782; Q-Pharma, Inc. v. Andrew Jergens Co., 360 F.3d 1295, 1300-01 (Fed. Cir. 2004).

One should also consider a motion to demonstrate that the case is exceptional under 35 U.S.C. § 285 as a way to shift attorneys' fees. For example, Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014) is one of two U.S. Supreme Court decisions issued on April 29, 2014 regarding patent lawsuit fee-shifting (the other case being Highmark Inc. v. Allcare Health Management System, Inc., 134 S. Ct. 1744 (2014)). The Supreme Court essentially made it easier for courts to make the loser pay for all attorney costs if the lawsuit is regarded as frivolous. These recent decisions may seriously pressure the NPE into a quick settlement if a reasonable case can be made to show the lawsuit is frivolous.

Consider joint defense groups. Part of the leverage that NPEs count on is the cost of defending a lawsuit to sway an accused infringer toward early settlement. By joining with other defendants, litigating the case becomes a more attractive option and may provide additional leverage to negotiate a lower settlement.

9. Consider Challenging Validity in the Patent Office

With the recent advent of various post grant proceedings, there are now true, accelerated alternatives to patent litigation, such as for example, Inter Partes Review in the Patent Office. Statics show that currently, the Inter Partes Review is not a mechanism that favors patent owners. Consequently, the contingency fee model that often drives NPE litigation may soon become a much riskier proposition. Simply stated, the contingency representation will now have to account for the likelihood that the dispute may be determined primarily in the Patent Office, while the litigation (even if filed first) may be stayed in the meantime. Additionally, the cost to conduct the proceeding is far less expensive than the cost of a court based litigation proceeding, which may also provide additional leverage to negotiate a lower settlement with the NPE.

10. Evaluate Settlement Options

Because NPEs generally act in a rational business manner to generate maximum license revenue with minimal effort, and because the infringement claim can often involve products that are peripheral to the viability of a company's business, it can sometimes make sense to settle the matter for nuisance value or less. Even though one's first instinct when approached by an NPE may be to fight the merits, early evaluation and settlement may be an option to consider, as may be other potential options such as not practicing the patent or getting indemnification. By focusing on economic defenses and/or other options that may assist in leveraging a better bargaining position, NPEs can sometimes settle for a relatively nominal value.

Conclusion

This Top Ten provides a short overview of key factors that should be considered in the context of a dispute with an NPE. While each of these factors may not be applicable to every situation, they are intended to provide a general framework for dealing with NPEs.