Third-party patent licensing demands have become increasingly common over the last few years. Many of these demands come from non-practicing entities (NPEs), that is, shell companies that have no intention of using the patented technology other than to grant licenses in exchange for money. Typically sent as a letter from an unrecognized entity, licensing demands allege that a product offered by a company infringes one or more patents. Sometimes the patent holder has already filed suit and now seeks to resolve the litigation by negotiating a settlement. How a company chooses to react initially to the licensing demand carries significant risks for the future and can also make a favorable outcome more or less likely.
Ignoring the letter or lawsuit is not a tenable position. If the NPE files suit or has filed suit, infringement damages can be increased up to three times if proven that a company had prior notice of the patent and willfully infringed. See 35 U.S.C. § 284. Although 35 U.S.C. § 298 (2013) provides that failure to obtain an opinion of counsel cannot be used to prove willful infringement, a favorable opinion of counsel can be a concrete tool to help rebut a charge of willfulness. Additionally, an opinion of counsel can help to negate the specific intent required for a patent holder to show induced infringement. DSU Med. Corp. v. JMS Co., Ltd., 471 F.3d 1293 (Fed. Cir. 2006); Bettcher Indus., Inc. v. Bunzl USA, Inc., 661 F.3d 629 (Fed. Cir. 2011).
Prior to responding to the licensing demand, however, learning as much as possible about the NPE and the asserted patent should be the first step. The goal here is to determine how serious the opponent is, or whether it is casting nets far and wide to see who quickly forks over settlement money out of fear. Some NPEs hope to find the low hanging fruit through this approach. However, other NPEs are more serious and have specifically targeted a company. Ignoring them simply will not work, but a company can (and should) fight back.
Online resources can provide valuable information to learn more about the NPE. Check the United States Patent and Trademark Office (USPTO) assignment database to learn what other patents are held by the entity. See http://assignments.uspto.gov/assignments/?db=pat. The secretary of state where the NPE was formed might also maintain information about the NPE. Next, investigate the litigation history surrounding the entity: how many suits has it filed, in which venues, and whether there have been any settlements or trials. For example, if the NPE has filed 100 lawsuits on the same set of patents, but never has gone to trial on any of them, and according to the court docket sheets settlements were achieved relatively quickly, then it is plausible that the NPE is willing to settle early and for a relatively small amount. Increasingly, courts are finding software-related patents invalid as outside the definition of patentable subject matter under 35 U.S.C.§ 101 and the U.S. Supreme Court's recent decision in Alice Corp. Pty. Ltd. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014). The patent asserted against a company could be subject either to a motion to dismiss because of invalidity under Alice, or may have already been declared invalid by a district court. That information could ultimately limit or eliminate any potential recovery and can be leveraged against the current licensing demand. Information about past and pending litigation can be found on www.pacer.gov, www.docketnavigator.com, www.rfcexpress.com, and www.courtlink.com.
The file history for the asserted patents should also be examined to determine any weaknesses. Prosecution disclaimers or post-grant proceedings will not be evident from the face of the patent, and most NPEs are not forthcoming about setbacks found only from a file history review. Some patent file histories are available for free via the USPTO's PAIR service (http://portal.uspto.gov/pair/PublicPair), or can otherwise be ordered from third parties (www.reedfax.com and www.thomsonfilehistories.com).
Lastly, simple Google searches of the patent holder and/or patent number can also yield helpful information.
A company should also investigate the accused product to determine how any negotiations with the patent holder might proceed. Two aspects of the product can influence how to respond: (1) whether the product is supplied by a third party and subject to an indemnity agreement; and (2) the size of the product on a revenue basis for the company. If covered by an indemnity agreement from a third-party supplier, consider contacting the supplier to request indemnification and defense prior to expending company resources against the NPE. Additionally, the size of the accused product, on a revenue basis, can also impact any settlement negotiations. NPEs typically have pie-in-the-sky ideas about how much revenue or profit a company makes based on the accused technology. Reality, however, might dictate otherwise and can serve as a good leverage point to properly frame settlement negotiations.
After researching the NPE and the patent, deciding whether or not to respond involves weighing the risks.
If further contact appears inevitable, it is less risky to respond directly to the patent holder. At minimum, the reply should state that the company does not infringe any valid claim of the asserted patent and that the patent is likely invalid (assuming, of course, the company believes that there are valid reasons for both non-infringement and invalidity). There are some benefits to responding to the demand letter. If applicable, the third-party supplier may be willing to take over the defense and respond on its own behalf. If not already specified, the patent holder might make a licensing offer for far less than the cost of litigation. Substantive infringement positions might be communicated, which would also help to establish equitable estoppel if the patent holder brings suit in the future. Disputing any infringement or that the asserted patent is valid also sets the stage for a company to file a declaratory judgment suit in a chosen venue, an action that most NPEs would prefer to avoid.
On the other hand, if it appears that the NPE has taken a grapeshot approach, sending more demand letters than it can be expected to pursue, then it might be worthwhile to wait until follow-up contact. Keep in mind, though, that follow-up contact could be by service of a complaint in an undesirable venue.
Factors to Consider
The company decided to respond to the demand letter, but the NPE sends a counter-reply indicating that a lawsuit is imminent without a license. Does the company settle or fight? The ultimate goal should be a favorable end to the present dispute for the company. Multiple factors should be considered to determine what that favorable ending looks like: the importance of the accused technology to the business, risk of repeated claims by this NPE (and others), the level of funding for the NPE, the cost and effort to litigate the patents, the cost of settlement versus litigation, and the strength of defense(s) against the patent. Some companies have a policy of not settling any NPE patent suits, holding to the view that settlements will invite more NPEs to emerge from the woodwork. Others, however, more readily settle, especially if the license amount is far lower than paying for any significant defense work. Consideration should be given to each of those factors before deciding whether to settle or fight.
The Scorpion Approach
The Scorpion Approach should also be considered, especially against those NPEs that are not highly motivated, or whose patents are already severely weakened. Complaints to federal regulators and the state attorney general can help to apply outside pressure to the NPE to settle or disappear altogether, particularly if the demands are false or misleading. As discussed above, third-party suppliers should be contacted to motivate them to act. Proceedings before the Patent Trial and Appeal Board at the USPTO, including reexamination, inter partes review, and other post-grant proceedings should be considered, but not without first understanding the high cost of filing and the prosecution fees, and the statutory estoppel effects of taking any such approach.
Patent licensing demands from NPEs are beginning to affect every technology sector, and the energy industry is no exception. However, experience from other industries that have long-dealt with such demands can lessen the burden for a company. It is very important to research both the NPE and the strength (or lack thereof) of the asserted patent prior to deciding whether to respond to a licensing demand. By performing due diligence beforehand, businesses will be better equipped to proactively address a licensing demand.