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High & Low Finance

Extracting a Toll From a Patent ‘Troll’

It looks as if “patent trolls” are going to lose a big one.

The Supreme Court announced this month that it would hear two appeals of decisions by the federal appeals court that oversees all patent cases. In each case, the company that was sued for patent infringement won on the merits but did not prevail in having its legal fees paid by the losing party.

The court will decide whether to make it much easier for victors in patent suits to force their opponents to pay their legal fees. If it does so — and patent watchers generally assume that the court would not have agreed to hear the appeals if at least some justices were not sympathetic to the companies being sued — that could make it much more expensive to file a frivolous suit, and perhaps scare patent holders away from filing meritorious suits. Losing such a suit could conceivably bankrupt a small company if it was forced to pay the other side’s legal bills, which can run into the millions of dollars.

There are two ways to look at many types of civil litigation. Is the plaintiff’s lawyer seeking to defend the rights of his client, and perhaps those in similar situations? Or is the lawyer abusing the process in the hope of forcing a settlement out of a company that prefers to avoid the costs of litigation?

In recent years, it is the latter view that has tended to prevail, in the Supreme Court and, to some extent, in Congress. In the 1990s, it became harder to bring a class-action suit alleging securities fraud. Court decisions and a law passed in 1995 made it much easier for defendants to have cases dismissed before the plaintiff could gather any evidence from the defendant. And the court ruled that only the government — not a fraud victim — could file suit for aiding and abetting a fraud.

In a number of states, medical malpractice cases, which are bitterly resented by physicians and hospitals, have become harder to prove and harder to win. States have limited maximum rewards and required plaintiffs to find an expert to say the health care provider did something wrong before the suit is filed, and thus before some evidence can be discovered.

Under the patent law, each side pays its own legal fees when a patent holder contends a company is infringing its patent — unless the case is deemed “exceptional.” Then the loser can be forced to pay the winner’s legal fees.

And what is exceptional? That question is at the heart of the cases the Supreme Court will hear.

At the moment, the United States Circuit Court of Appeals for the Federal Circuit, which hears all patent appeals from district courts across the country, has established a standard that companies are asking the Supreme Court to overrule. That standard says that for a company accused of patent infringement to have its legal fees paid, it must show that the accusations in the suit were objectively baseless and that there is clear and convincing evidence of bad faith on the part of the plaintiff.

It is not as difficult for a patent owner to have its lawyer’s fees paid by the other side after it wins a case. Then a case is deemed exceptional if the company that infringed the patent acted despite “an objectively high likelihood” that it was in the wrong.

All this makes sense if you think of the patent holder as a noble inventor, possibly deprived of his just rewards by a big company that has stolen his work without compensation. Clearly, it should be hard to make such an inventor, who may have little money, pay his opponent’s legal fees, even if he does lose the suit. That would discourage inventors from standing up for their rights.

And that is where the so-called patent trolls come in. They are widely disparaged.

“The onslaught of litigation brought by ‘patent trolls’ — who typically buy up a slew of patents, then sue anyone and everyone who might be using or selling the claimed inventions — has slowed the development of new products, increased costs for businesses and consumers, and clogged our judicial system,” said a New York Times Op-Ed article published earlier this year while the Supreme Court was considering whether to take the cases. It was written by Randall R. Rader, a judge on the Federal Circuit, and two law professors.

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An elliptical machine from Octane Fitness. The Supreme Court will hear a case involving the company and fees in a patent suit.Credit...Octane Fitness

In a televised question-and-answer session in February, President Obama weighed in. “They don’t actually produce anything themselves,” he said of trolls. “They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

The polite term for patent trolls is “nonpracticing entity,” or N.P.E., referring to a company that is not actually in business using patents but merely owns them to collect royalties and damages.

One of the cases the Supreme Court will hear was decided by the Federal Circuit sitting “en banc,” on a 6-to-5 vote, with Judge Rader in the minority. It did not involve a troll but rather was a suit in which Icon Health, a maker of fitness equipment, accused a smaller competitor, Octane Fitness, of violating a patent. Octane Fitness prevailed after spending $1.3 million on the case and argued that the claim was obviously baseless. It asked for its legal fees to be paid. The district court judge refused and a majority of appellate judges sustained that ruling.

“Because the Federal Circuit has made it virtually impossible for successful defendants to recover attorney’s fees, both N.P.E.’s and others can assert weak patent claims to extract royalties and/or harm smaller competitors without fear of having to pay fees to compensate the defendant in any way,” wrote Octane Fitness’s lawyer, Rudolph A. Telscher Jr. of Harness, Dickey & Pierce, in a brief asking the Supreme Court to hear the case.

He wants the court to rule that rather than requiring fees only in a case that is “objectively baseless,” it should allow them in cases where there is an “objectively low likelihood” that the plaintiff will win the case. In an interview, Mr. Telscher said he thought such a standard would deter litigation and added that he expected numerous business groups to file friend-of-the-court briefs supporting his client.

The other case the court will hear involves Highmark Inc., a health insurer that denied it was violating a patent on computer software. It prevailed and persuaded the district court judge to order the patent owner to pay legal fees. The judge said the complaint was baseless and was, in fact, “the kind of case that gives the term ‘patent troll’ its negative connotation.”

The Federal Circuit overturned that decision, saying it reviewed the facts on its own and decided the judge was wrong. That appeal asks the high court to order that district court opinions on the issue be granted more deference by appellate judges.

The high court could rule for Highmark without doing much to change the law, because the district court in that case said it applied the Federal Circuit standard. But if it overturns the Octane Fitness decision, that could bring a fundamental change in the law, making it far more risky to file a patent infringement suit.

A few years ago, there was less hostility to patent holders than there is now. But by one count, more than 60 percent of all patent suits are now filed by nonpracticing entities, up from 19 percent in 2006. And that does not count suits that are threatened but never filed because the target agrees to a settlement that would be cheaper than fighting the case.

This year, Nexis counts 80 articles in major American newspapers that mentioned “patent trolls” and were published before the high court agreed to hear the cases. That is more than in the previous four years combined.

It is risky to ascribe the views of a judge to the president who appointed him or her, but the split in the Federal Circuit may indicate a changing attitude of Democrats toward patent holders. In the Octane Fitness case, the five judges appointed by Republican presidents, including Judge Rader, split 3-to-2 in favor of the patent holder and against Octane Fitness. The six judges appointed by Democrats split evenly. The three appointed by President Bill Clinton sided with the patent holder. The three named by President Obama all backed Octane Fitness.

“Patent trolls” may be a derogatory term — in one pending case a plaintiff is said to have complained that the chief executive of a defendant company committed a “hate crime” by saying the patent holder was a troll — but it appears to be a term that has helped to change the public view and may make it much riskier to file a patent infringement suit.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Extracting A Toll From A Patent ‘Troll’. Order Reprints | Today’s Paper | Subscribe

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