Apple Wins an Unlikely Ally in War on Patent Trolls

  • The U.S. court favored by patent owners may be cracking down
  • Half of biggest patent verdicts issued by jurors in district

The Sam B. Hall Jr. federal courthouse in Marshall, Texas. Photographer: Mario Villafuerte/Bloomberg

Apple Inc. and Dell Inc. found an unlikely ally when they were sued over a patent for camera technology in a courthouse that has a reputation for siding against big companies in such fights: the judge.

The Marshall, Texas, jurist not only threw out the case last month, he encouraged them to try and get compensation for their legal fees.

The Eastern District of Texas is known for quickly bringing cases to trial and rendering hefty patent awards against large technology companies. There are 94 federal districts, but Texas’s eastern, mainly in Marshall and Tyler, gets more than a third of all patent cases, including ones brought by the owners of questionable patents looking for quick payouts.

Those times may be changing, however, according to a former judge there who says the notorious court has joined the rest of the country in cracking down on nuisance suits by so-called trolls -- firms that buy up unused patents for the sole purpose of reaping cash windfalls often from technology companies. Half of the biggest patent verdicts of all time were issued by jurors in the district, though none has been sustained on appeal.

“The district has been the poster child for the ‘troll problem,”’ said retired District Judge Leonard Davis, who served there from 2002 to 2015 and thinks the criticism is unfair. “I think the ‘troll problem” would exist even if we weren’t around. We’re trying to solve it and I think we’re making good progress.”

Of 94 U.S. district courts, the Eastern District of Texas gets a third of all patent cases.

Improved Odds

Hundreds of lawsuits have been thrown out in the district, often with a single ruling. Patent owners now have a 60 percent chance of winning at trial, down from 70-80 percent over the last decade, PricewaterhouseCoopers LLP’s PwC found. Some 57 percent of requests to transfer cases out of Texas are being granted, far higher than in past years, according to an analysis by Greg Lantier of Wilmer Hale in Washington.

It’s not enough, say Washington trade groups who are pushing Congress to change the rules on where lawsuits can be filed to reduce the number of cases in Texas. The Supreme Court is being asked to consider the issue as well.

As an example of the changes underway, Davis pointed to cases in which he and other judges tossed a large number of suits with a single ruling within a year of the original suit filing. In September, Judge Rodney Gilstrap threw out infringement claims against Dell, Apple and other electronics makers by Iris Connex LLC, saying there was no way they used the camera technology in their phones and laptops.

Frivolous Suit?

The tech companies questioned whether the entity even exists since it listed its headquarters in a corporate office suite with other patent owners who had filed a lot of lawsuits. Gilstrap’s ruling opened the door to a request by Dell to sanction Iris Connex and its lawyers for filing a frivolous suit.

To avoid that, Iris Connex said its parent company filed for bankruptcy in California and then said under federal law all litigation in Texas had to stop. Gilstrap expressed skepticism about Iris Connex’s “intended shield” and, in an Oct. 7 order, said Dell could proceed.

“Iris Connex’s only stated justification for seeking bankruptcy protection is entirely contingent on the outcome of the very proceedings it now seeks to stay,” Gilstrap said.

The number of patent lawsuits nationwide -- and in Texas -- is down this year, according to analyst firm Lex Machina. Of the 3,376 lawsuits filed in the first nine months, 35.4 percent were filed in the Eastern District, compared to 43 percent of all new complaints a year ago.

There were 1,195 suits filed in the district in the first nine months of 2016, compared with 1,823 in 2015.

One reason for the dip nationally and in Texas this year is because patent owners rushed to file before a new rule went into effect Dec. 1 requiring them to provide more specific information about their claims, said Brian Howard, Lex Machina’s legal data scientist.

To some degree, the district has been a victim of its own success -- what was known as a rocket docket is now taking longer to go to trial.

“It’s harder to bring any case than it once was,” said Derek Gilliland of Nix Patterson & Roach in Dallas, who represented a company called DataTreasury Corp. that had sued banks over check-imaging technology. “It probably came out of necessity because the dockets were overwhelmed.”

‘Bad Actors’

Texas judges also had no choice but to crack down on nuisance suits after a series of Supreme Court rules, including ones that put limits on what kinds of software is entitled to patent protection, and made it easier to force the winner in a patent case cover some of the losers’ legal fees.

The district lags national averages when it comes to invalidating patents under the new rule -- challengers have a 55 percent success rate nationwide and only a 28 percent success rate in eastern Texas, Lantier said.

Much of the criticism of patent law is really about so-called “high-volume filers,” who sue and then offer to settle for less than the cost of litigation simply to get companies to pay them off. Each year since 2012, between 12 and 14 percent of all lawsuits were filed by the top 10 filers, Howard said.

“What you have to do is identify those bad actors who are basically suing to settle for defense costs,” said Davis, who now works at the Fish & Richardson law firm. He said his successors in Texas are getting better at figuring out which cases are likely to go to trial, and which are designed to settle for nuisance costs.

Push to Settle

The trial costs in Texas -- where much of the discovery process is upfront -- often make settling more attractive for large companies, critics say. The U.S. Federal Trade Commission, after conducting a study of patent litigation firms, recommended limiting the amount defendants need to turn over early in the case, and greater transparency as to who’s really behind a lawsuit.

“It’s not about the merits, it’s that it economically makes more sense to settle,” said Matt Levy, patent counsel for the Computer & Communications Industry Association, a Washington trade group with members including Google and Microsoft Corp. “There’s enormous pressure to say ‘Here’s some money, just go away.”’

Levy’s group is among those pushing Congress to change the rules on where lawsuits can be filed, saying they should be located where the defendant is headquartered or incorporated. He also supports the FTC recommendation to limit the amount of information defendants have to turn over early in a case so there’s less incentive to settle bogus suits.

While Apple and Alphabet Inc.’s Google have won trials against patent owners in the past year, the verdicts sometimes still swing the other way. Last month, a jury decided Apple should pay $302.4 million to VirnetX Holding Corp.

Apple has spent a lot of money in legal fees fighting in the Texas courts. In 2011, Davis tossed a $625 million damage award it was ordered to pay Mirror Worlds LLC. Earlier this year, Apple won a new trial in Smartflash LLC’s $533 million patent verdict. And the VirnetX decision was the third trial between the two companies and may never result in a payment by Apple because the U.S. Patent and Trademark Office invalidated VirnetX’s patents.

To be sure, the death knell for the district has been rung before, like in 2012 when Delaware briefly overtook Texas as the most popular district for patent suits.

Gilliland said that, even with the changes, eastern Texas will remain popular because the judges “know how to move cases along,” while they can languish for years in other courts.

Davis said the problematic patent suits will continue to decrease.

“The problem’s not solved, but it’s definitely on the downturn,” Davis said.

(Corrects sixth paragraph to say patent owners’ success rate at trial is 60 percent.)
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