A pair of U.S. Supreme Court rulings could improve companies' legal protection against patent -infringement claims brought by competitors as well as nonpracticing entities often called “patent trolls.”
The nation's highest court unanimously overturned legal standards that the U.S. Court of Appeals for the Federal Circuit in Washington had used last year to assign patent-infringement liability to Nautilus Inc. and Limelight Technologies Inc.
A three-judge panel of the Federal Circuit Court had rejected Vancouver, Washington-based fitness equipment manufacturer Nautilus' argument that a competitor's patented design for hand-held heart rate monitors failed to meet the legal “definiteness” standard necessary to sustain an infringement lawsuit.
The lower court said patent claims can be invalidated for indefiniteness only if they are “insolubly ambiguous.”
On review, the Supreme Court disagreed, noting that the insoluble ambiguity test lacked “the precision that (the statute) demands.”
“A patent must be precise enough to afford clear notice of what is claimed, thereby apprising the public of what is still open to them,” Justice Ruth Bader Ginsburg wrote in the high court's opinion, which was unanimous. “To tolerate imprecision just short of that rendering a claim "insolubly ambiguous' would diminish the definiteness requirement's public-notice function and foster the innovation-discouraging "zone of uncertainty.'”
Wayne Bolio, senior vice president of law and human resources at Nautilus, said the Federal Circuit's previous standard for determining indefiniteness encouraged patent applicants to draft their patents as broadly as possible to maximize their enforceability against other companies.
“That breeds excessive litigation and encourages patent trolls, which basically are in business to extract licensing fees through agreements, and use the threat of litigation to do it,” Mr. Bolio said.
The Supreme Court, in its June 2 ruling, ordered the Federal Circuit Court to apply a higher standard of “reasonable certainty” to the definiteness of the patent Nautilus is accused of infringing.
The high court also overturned an August 2012 Federal Circuit Court decision against Tempe, Arizona-based software developer Limelight Networks, where the lower court ruled companies can be liable for indirect or “induced” patent infringement even if there has been no direct violation.
“Liability for inducement must be predicated on direct infringement,” Justice Samuel Alito wrote in the court's opinion. “The Federal Circuit's contrary view would deprive (the statute) of ascertainable standards and require the courts to develop two parallel bodies of infringement law. The notion that conduct which would be infringing in altered circumstances can form the basis for contributory infringement has been rejected, and there is no reason to apply a different rule for inducement.”
Philip Maynard, chief legal officer at Limelight Networks, said the Federal Circuit Court's ruling would have been dangerous for industries that rely heavily on patented methods of providing services electronically, such as financial services and online retailers.
“It's a bullet dodged for the business and innovative communities,” Mr. Maynard said. “It would have exposed a much broader range of companies to infringement claims brought by (nonpracticing entities), as well as create greater uncertainty as to whether companies' activities will expose them to liability for patent infringement.”
By emboldening patent trolls to pursue litigation, Mr. Maynard said the Federal Circuit Court's decision also likely would have exacerbated rapidly escalating costs of defending infringement lawsuits
Those defense costs “divert resources away from research and development for the purpose of funding these stunningly expensive patent lawsuits,” Mr. Maynard said.
Although the companies pursuing litigation against Limelight and Nautilus are competitors, patent attorneys and consultants said their clients' interests in the short- and long-term ramifications of the Supreme Court's rulings have been focused primarily on lawsuits brought by nonpracticing entities.
A recent report by San Francisco-based patent consultant RPX Corp. found that nonpracticing entities accounted for 67% of new patent infringement plaintiffs in 2013 vs. 47% in 2011.
Ironically, experts said the Supreme Court rulings may increase the volume of patent infringement litigation rather than reduce it, at least in the near term, as companies become more optimistic about their chances of invalidating a nonpracticing entity's competing patent even before the Federal Circuit Court of Appeals develops new definiteness and indirect infringement standards. The circuit court has exclusive jurisdiction over patent appeals.
“Both of these decisions could give companies one more reason to consider going to court vs. paying the licensing fee,” said Shawn Ram, national technology practice leader at Aon Risk Solutions in San Jose, California. “For those companies that are purchasing patent insurance, that would impose more claims for defense costs against those policies.”
In time, experts said the ruling in Nautilus ultimately could dampen nonpracticing patent owners' efforts to assert infringement against practicing firms.
“Frankly, there are a lot of terms that might have multiple meanings,” said Scott Doyle, the Washington-based chair of Shearman & Sterling L.L.P.'s intellectual property practice. “If it's unclear what a certain term means within the context of a patent, that patent will probably be found to be indefinite and, therefore, invalid.”
“I think it's going to motivate a lot of companies to rethink their position, whether they're defending or prosecuting an infringement claim,” said Jura Zibas, a New York-based partner at Wilson Elser Moskowitz Edelman & Dicker L.L.P.
Experts said the Supreme Court's ruling for Limelight likely is more immediately beneficial, but only for limited industries.
“There are a lot of software- and Internet-based method patents where you don't have a single entity performing all of the elements of the method,” said Harold Wegner, a Washington-based partner at Foley & Lardner LL.P. “Suddenly, under the Limelight ruling, those patents are no longer considered infringing.''