An IP Primer – Part 3: What are the first steps an organization should take when accused of infringement?

December 29, 2014

courtroom juryFor the three primary areas of intellectual property – patent, trademark and copyright – any company can be the target of a suit, even if that company owns no patents, holds no copyright registrations and has no registered trademarks.

According to federal judicial caseload statistics located at uscourts.gov, IP cases account for less than 3 percent of total civil cases. This statistic, however, is misleading, as virtually every corporation holds some form of IP and mere threats of litigation often lead to actions that are not included in this statistic. A corporation’s IP often consists of creative expressions that infringe another’s copyrights, logos or advertisements that could be confusingly similar to another’s trademark or technologies that potentially infringe another’s patent.

Patent holders have become notorious in recent years for filing suits considered “frivolous.” However, frivolous suits are often filed in the other IP areas, including copyrights, trademarks, trade dress and even theft of trade secrets. Therefore, the first steps corporate counsel should take when accused of infringement are to (1) evaluate whether the suit is frivolous, (2) determine if the patent is valid, (3) raise defenses to infringement and (4) determine if the cost of litigation can be recovered.

To protect against a patent suit, for instance, a corporation’s attorneys need to know what technologies that corporation is using. In today’s world, it is virtually impossible to predict what a patent holder might accuse a company of infringing. The same is true for copyright suits. For trademark infringement, if a company uses any trademark, whether registered or unregistered, corporate counsel should ask if that mark is likely to cause confusion with another company’s trademark. A common mistake non-lawyers and some lawyers make is to assume a logo must be an exact copy of a trademark to be infringing. A logo, advertisement or other communication used in commerce need only be likely to cause confusion in the marketplace.

If there is any chance that an infringement suit may succeed, and sometimes even if there is no chance, corporate counsel will want to negotiate a license agreement. For patents, what often occurs is that the patent holder asks for a fee in exchange for an exclusive license to certain inventions forming the subject matter of a patent or several patents and “any improvements thereto.” Corporate counsel will want to include the “improvements” clause in case the patent holder builds upon any granted patents for a new invention. Patent holders often times interpret this clause to cover only future inventions covered by the licensed patent. Licensees want this clause to cover any invention with any relation to that patent, effectively immunizing the company from any further patent litigation. In this situation, as with any negotiation, a meeting of the minds is essential, or corporate counsel could end up litigating over the interpretation of that clause. If the parties intend for rights to be granted to future inventions that may compete in the marketplace, a clause detailing the arrangement should be provided with a firm cut-off date. This will make it easier for a court to dismiss a future claim against the licensee, as most courts would like to avoid interpreting what aspects of a technical patent exist in another technology.

If negotiations fail, litigation is always a possibility. Some companies, such as online retailer Newegg.com Inc. have developed reputations for refusing to negotiate with patent holders and are willing to fight allegations in court. Corporations have shown apprehension in negotiating with patent holders out of a desire to deter claims with little merit. Fighting patent infringement accusations in court, however, can be expensive and time-consuming. Avoiding litigation with a settlement is often the most viable option.

If corporate counsel decides to resolve a dispute with litigation, the attorneys can take new approaches for the company’s defense. One defense a few defendants have taken is to assert a violation of Federal Rule of Civil Procedure 11, which enables courts to impose sanctions for dishonesty and fraudulent litigation. Because patent holders have a duty to investigate if a patent is infringed from an accused device before filing an infringement suit, a simple accusation without this investigation can be deemed to have violated this rule. Such a violation can result in expensive sanctions for the accuser.

Another defense that is becoming a viable option for suits with multiple patents is an antitrust argument involving patent misuse through tying. In September a Delaware federal judge struck down objections to security software provider Symantec’s claim that patent assertion entity Intellectual Ventures “tied” patents in a license to other unwanted patents. As a result of such tying, IV was collecting royalties from invalid patents and discouraging parties from challenging the validity of other patents in IV’s licenses, according to Symantec. By bundling these rights, IV was maintaining an impermissibly restrictive monopoly over certain technologies, Symantec said.

Even if the initial complaint is determined to have met the non-frivolous threshold and determined not to have violated antitrust laws, courts can award defendants attorney fees for patent infringement cases deemed “exceptional” pursuant to Section 285 of the Patent Act, 35 U.S.C.A. § 285. In Octane Fitness LLC v. Icon Health & Fitness Inc., 134 S. Ct. 1749 (2014), the Supreme Court held that the threshold for determining if a case is exceptional is at the discretion of the court. No longer does it involve a complex evaluation of whether clear and convincing evidence must show a suit was “objectively baseless” and “brought in subjective bad faith.” The high court in Highmark Inc. v. Allcare Health Management Systems Inc., 134 S. Ct. 1744 (2014), also eased the requirement for fee-switching on appeal. Now an appeals court such as the Federal Circuit is required to review factual aspects of district court decisions to determine if attorney fees should be awarded.

The results of these cases can be used as leverage to negotiate a lower rate for a patent license, as patent-holders are more likely to pay for litigation following the Supreme Court holdings in April. In the event a negotiation still falls through, corporate counsel should still be familiar with these cases to know when to move for attorney fees and what chances a defendant has of receiving them.

In the end, informed corporate counsel can minimize the cost of defending against any IP infringement allegations while deterring future suits IP holders might wage against the company.

Visit Corporate Counsel Connect to view Part 1 of the IP Primer series.