United States: Responding To Patent Litigation Threats From AR/VR Non-Practicing Entities

Introduction

The recent surge in augmented reality and virtual reality ("AR/VR") technology throughout the world has naturally led to increases in granted patents covering this technology. With this has come more patent litigation in the AR/VR space. We have begun tracking AR/VR litigation in our AR/VR Litigation Update article series. In this article, we focus on AR/VR patent litigation by non-practicing entities ("NPEs"). NPEs are business entities that do not develop or sell products but assert patents against companies that do. As an example, our first post in the AR/VR Litigation Update Series summarizes recent cases filed by an NPE asserting an AR/VR patent.

Not all NPEs are created equal. Some companies that produce and sell goods or services strategically consolidate their intellectual property holdings into a bankruptcy-remote non-practicing entity. Other NPEs are not connected to any development of goods or services, but instead center their business strategy around purchasing patents and asserting them against target companies who develop and sell products. This article focuses on NPEs whose core business consists solely of collecting licensing fees and whose settlement offers are often anchored to the target company's expected litigation costs rather than the market value of the asserted AR/VR patents. It is important for AR/VR companies to understand NPE business strategies and their options when defending against an NPE. This article addresses both of these topics.

Why NPEs Succeed

Before we discuss how to deal with AR/VR NPEs, it is important to understand why these entities often succeed in enforcing their patents. NPEs are immune from countersuit on a target company's patent because they do not have their own products that they manufacture. Without producing anything, they cannot infringe another patent. On the other hand, the threats of reasonable royalty damages and a permanent injunction, however remote a possibility, gives NPEs significant negotiation leverage over targeted companies that do manufacture their own products. Thus, NPEs are often in a position that leads to success in procuring license fees or damages from target companies.

NPEs have other advantages during litigation as well. Venue is easily established nationwide for large companies; thus, they can sue wherever is most convenient for them. The emergence of contingency-fee litigation allows NPEs to litigate nearly risk-free, and the possibility of treble damages can pressure companies into settling early in the case.

Furthermore, the development of the IP marketplace has exacerbated the NPE problem. Newcomers can buy patents and become NPEs quite easily, and established NPEs can amass a war chest of patents to assert against practicing companies.

Typical NPE Litigation Strategy

A common litigation tactic used by NPEs involves building a war chest for litigating their patents against larger target companies. NPEs prefer to settle cases early because of the lower cost to them and greater certainty; they do not really want to get into drawn-out litigations. We often see NPEs offer licenses to their targets for prices below the cost of litigation. When they do file a lawsuit, they sue companies with lower damages exposure and sue a large number of companies in the hopes that at least some will settle. They settle cases early against companies that are less likely to put up a fight, and then use the settlement proceeds to finance litigation against companies who will not settle easily.  Also, NPEs will often retain attorneys on a contingency fee, allowing them to minimize their own litigation expenses and maximize the target's litigation expenses.

Targeted Company's Concerns and Response Strategy

Upon receiving a license offer-or a cease and desist or threat of litigation-from an NPE, a targeted company typically has four main priorities: (1) avoid litigation; (2) avoid payment to the NPE; (3) avoid money and time expenses, both internally with company time spent, and externally with outside attorneys' fees; and (4) continue its commercial activity and pursue business opportunities as usual. With the knowledge of an NPEs litigation strategy in mind, targeted companies might choose to test the NPE's commitment levels or perform a strategic case analysis.

An NPE's commitment level can be tested in a variety of ways. Ignoring arbitrary deadlines can be useful to see if the NPE is keeping up with its own agenda. Asking for an explanation or claim charts might show whether the NPE has seriously considered its legal argument for patent infringement. Companies can also bait an NPE into an infringement accusation, allowing them to file a declaratory judgment action in their preferred-often more favorable-jurisdiction.

In a strategic case analysis, a targeted company has at least five options to consider in response to an NPE's litigation threat: (1) do nothing; (2) seek a non-infringement opinion; (3) seek an invalidity opinion; (4) take a license; or (5) file a declaratory judgment action.

Doing nothing may be appropriate when an NPE's case is totally meritless, however, it is not recommended in general. The company may be sued unexpectedly, caught unprepared, and haled into the NPE's preferred litigation forum. Additionally, there is no closure to the issue if the company does nothing.

A targeted company may seek legal counsel for an infringement or validity opinion. Seeking a non-infringement opinion is generally more cost-efficient because typically only the independent claims need be analyzed. However, such an opinion requires careful consideration of the accused product or process. If the allegedly infringing product is not one of the target company's but a supplier's, the company may be able to pressure the supplier and seek indemnity. Alternative designs may be suitable for the company's product, and the company may engineer and patent such designs to circumvent the NPE's patent and future litigation.

Seeking an invalidity opinion is generally more expensive and time-consuming. Every claim must be addressed and an exhaustive search for prior art is required. However, there may be settlement advantages in seeking an invalidity opinion. If the patent is likely invalid, they may consider filing (or responding with the threat of) a declaratory judgment action to gain negotiation leverage over the NPE. Filing a declaratory judgment action is an aggressive move that puts the targeted company on the offensive against the NPE. It puts the NPE's entire business model at risk by jeopardizing the NPE's potential settlements with all other companies it is targeting. Also, the targeted company may be able to pick a more favorable forum for its litigation against the NPE. And settlement remains a viable option after the declaratory judgment action is filed.

If the patent is likely valid and the targeted company is likely infringing, or if the cost of litigation is not worth a good outcome in litigation, the company may consider taking a license. Taking a license costs money, but it can be cheaper than litigation. Taking a license also provides certainty to the outcome and frees up the company to take advantage of business opportunities in the marketplace. Some companies would rather pay the money for a portfolio license upfront to ensure that the NPE will leave them alone.

A Target Company's Litigation Strategies Against NPEs

Targeted companies often select their litigation strategies to (1) impose costs on the NPE and (2) delay the NPE's recovery of damages.

The NPE's costs increase when the target challenges the patent's validity and impose actual litigation costs on the them. Challenging the patent's validity attacks the NPE's business model and puts their cases against all other targets at risk. Developing a record of the NPE's unreasonable conduct, deposing witnesses, and discovery motion practice can all be used against the NPE to increase its litigation costs.

Several motions are commonly used to delay the NPE's recovery of damages. The case may be dismissed with a Rule 12 motion. A successful motion to transfer venue may move the case to a favorable forum. A motion to stay the case pending a USPTO proceeding, such as an inter partes review ("IPR"), may further delay the NPE's recovery of damages. Motions to stay the case offer several additional advantages because they have a high win rate pending IPRs or other reexamination proceedings; buy time to prepare for the district court case, to implement design alternatives, and to search for additional prior art; encourage the NPE to settle; and can force withdrawal of the case entirely.

Targeted companies have a greater likelihood of success when challenging an NPE's patent at the USPTO, through IPR, covered business method review ("CBM"), or post-grant reexamination ("PGR"), than in a district court. Detailed statistics on USPTO case results through January 31, 2020 can be found here.  These results show that challenging an NPE's patent could be a worthwhile strategy.

Conclusion

As we see NPEs start asserting AR/VR patents more frequently, it is important to be prepared and understand their business priorities and litigation strategies. That being said, it is as just important for targeted companies to understand the options available to them in response.

Originally published 31 March, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.