According to an often-cited study on the number of invalidated patents, nearly half of litigated patents were held invalid. Moreover, a new study published in March of 2011 has found that even the “most-litigated” patents, defined as patents that have been litigated eight or more times, fare very poorly in patent litigation. Perhaps not surprisingly, nearly 70% of merit-based losses in the most-litigated patent cases are due to findings of invalidity of the repeat plaintiffs’ patents. This data is particularly interesting in light of the current debate about non-practicing entities (NPEs) that simply hold patents they do not practice, because almost two-thirds of these most-litigated patents are owned by NPEs. Given that NPEs, even those that own heavily litigated patents, very rarely prevail in trial on the merits, but almost nine out of ten lawsuits involving NPEs end up in settlement, one must question whether a number of these settlements might be based on invalid patents.
The importance of deterring patent settlements based on potentially invalid patents need not be particularly stressed, as scholars have repeatedly found that invalid patents have significant innovation-stifling/anticompetitive effects. As such, invalid patents can disturb the delicate balance between the patent system and antitrust laws. Although antitrust laws protect robust competition while the patent system enables patentees to suppress competition for extended periods of time, modern thinking has dismantled the concept that the patent system and antitrust laws are in conflict. The common view is that the two bodies of law are actually complementary, as both share the common goal of promoting innovation and enhancing consumer welfare. Consequently, the grant of a patent exempts the holder from the normal prohibition against monopolies, but nevertheless, such immunity might be stripped if the patent at issue is invalid.
This Article will examine the issue of deterring patent settlements involving NPEs based on potentially invalid patents. This Article focuses solely on NPEs, because NPEs appear to own a substantial number of the most-litigated patents, they are more likely to enforce them, and, as will be explained in Part II of this Article, NPEs are primarily interested in settling their patent disputes, because their business model is typically based on enforcing patents and extracting lucrative settlements. The Article asserts that although recent court decisions have made it more challenging for NPEs to obtain very lucrative settlements, the current legal framework is still ill-suited to deter patent settlements based on invalid patents. Moreover, the Article suggests that the fact that recent court decisions have ostensibly made it more difficult for NPEs to obtain lucrative settlements could actually be counter-productive, as sued entities might now find it even more cost-beneficial to settle the case rather than take it to trial. Consequently, the validity of a patent at issue might never be litigated, which is a very concerning fact, given that NPEs own almost two-thirds of the most-litigated patents. As a major part of the solution to the NPE problem, this Article argues in favor of expanding the role of consumer-led private litigation in deterring NPE patent settlements based on invalid patents, particularly those procured by defrauding the PTO.
To be sure, the Article does not suggest that patent settlements are undesirable, even though it is worth noting here that the generally favorable attitude towards settlements does not necessarily apply to the patent system because of its interaction with antitrust laws. Along the same lines, the Article does not suggest that all NPE patents are invalid, nor that just because a substantial number of litigated patents were found invalid, settled patents are also likely to be invalid. The Article merely argues that the available data and cases suggest that validity of patents in NPE settlements is a legitimate issue and, because of NPEs’ unique business model and the need to maintain the delicate balance between the patent system and antitrust laws, the role of consumers in addressing this issue ought to be expanded.
The Article has seven parts and is divided as follows: Part II of this Article discusses in modest detail the business model of NPEs, and explains why they are so controversial and successful in obtaining lucrative settlements. Part III reviews recent court decisions, including three major Supreme Court decisions that directly affect settlements involving NPEs. Part IV points out that the “new environment” does not adequately solve the NPE problem and argues that it might actually be counter-productive in deterring NPE settlements based on invalid patents, particularly those procured by defrauding the PTO. Part V discusses the issue of consumer standing to bring antitrust claims based on invalid patents via Walker Process claims that, in certain circumstances, can subject the patent holder to punitive antitrust damages. Part V underlines that courts and commentators are currently split on the issue of consumer standing to bring antitrust claims based on invalid patents via Walker Process claims. Part VI discusses a very recent decision from the Second Circuit—the first appellate treatment of the underlying consumer standing issue—in which the Second Circuit has introduced a novel follow-on consumer litigation approach.
Part VII first addresses the criticism of the Second Circuit’s opinion. Part VII then points out that the Supreme Court has recently denied certiorari in the case decided by the Second Circuit, so the underlying consumer standing issue is destined to play out in lower courts. In fact, in two very recent 2011 decisions, lower courts reached opposite conclusions on the issue of consumer Walker Process standing. Furthermore, Part VII suggests that just as Justice Kennedy has taken into consideration NPEs’ unique business model and practices while analyzing policy justifications for granting injunctive relief, lower courts should do the same when analyzing policy justifications for limiting consumer Walker Process standing to follow-on litigation. Finally, the Article concludes that the Second Circuit’s policy considerations for limiting consumer standing to a follow-on litigation do not necessarily apply to NPEs, particularly to those NPEs that the Federal Trade Commission has labeled as patent-assertion entities (PAEs) in its new report released in March of 2011. Therefore, lower courts should lean towards allowing consumers unconditional Walker Process standing in NPE cases in order to deter NPE settlements based on invalid patents. Part VII ends by addressing possible criticism to arguments in favor of expanding the role of consumers in Walker Process litigation.