Patent Reform and the Law of Unintended Consequences (Part II)

In our last post, we noted that the passage of the America Invents Act hasn’t had a noticeable positive impact on the NPE problem.  While the joinder provision in the new law has had the expected impact of causing a decrease in the number of defendants per suit, the overall number of suits is up sharply compared to the same period last year.  Total NPE cases in district court nearly doubled from 721 in 2010 to 1,312 in 2011, while unique defendants rose from 2,814 to 3,089.¹

It may turn out that the most salient change produced by the AIA will be more crowded dockets.  It’s too soon to tell how judges will react to presiding over a dozen separate cases on the same patent often in multiple jurisdictions, where a single case used to suffice.

These kinds of inadvertent outcomes are not new to the patent space.  Previous attempts to rationalize the patent litigation process have often spurred unforeseen side effects, and the AIA could turn out to be the latest example of how legislative and judicial solutions to the patent litigation problem can produce unintended – and often detrimental – consequences.  For example, the Supreme Court in MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007) lowered the standard for determining whether a case or controversy exists (essentially eliminating a “reasonable apprehension of suit” from the criteria), and in so doing eased the ability to file declaratory judgments.  In other words, the lower standard has spurred an unexpected increase in infringement litigation as plaintiffs began to file suit first rather than initiate contact before filing.  Following the ruling, NPE suits increased on average 7% month over month.  In the six months immediately following the MedImmune decision, filings for declaratory judgment actions fell 22% compared to the previous six-month period.

It is largely undisputed that in the wake of MedImmune, NPEs have increasingly dispensed with assertion letters or exploratory discussions, choosing instead to quickly and quietly file patent infringement actions before an operating company can seek a preemptive declaratory judgment.  The result: more litigation and less negotiation.

Another example of unintended consequences can be found in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).  Here, the Supreme Court ruled that a finding of patent infringement should not automatically result in an injunction against the defendant found to infringe the patent.  The court reaffirmed the four factors that have been traditionally applied to determine if an injunction should issue, including irreplaceable harm to the plaintiff if an injunction did not issue.

Because this ruling has made it more difficult for NPEs to obtain an injunction or to credibly threaten an operating company with an injunction if successful in litigation, NPEs have instead increasingly turned to the International Trade Commission (ITC), where an automatic injunction is the remedy granted.  Again, an action that initially appeared to moderate and rationalize the impact of litigation actually spurred an increase in legal conflict.  NPE ITC investigations have risen from only three in 2009 to 16 in 2011, while the number of respondents in those actions rose from 25 to 170.

At RPX, we support the goals of patent reform.  At the same time, we believe that legislative efforts at reform cannot succeed in a vacuum; they must be accompanied by broader adoption of market-based solutions.  Doing so would help move patent monetization out of the courts and minimize the inefficiencies and waste inherent in using litigation and precious judicial resources as the primary determination of value of patent assets.