Patent monetization companies should be encouraged by the U.S. Supreme Court’s decision in Commil USA v. Cisco Systems Inc. because, although the justices noted the public policy problem of so-called patent trolls, they interpreted the law in a reasonable way, some attorneys said.

In a 6-2 opinion written by Justice Anthony Kennedy, a majority of the high court ruled that a good-faith belief in the invalidity of a patent was not a defense against induced infringement by a a third party. The decision reversed a ruling by the Federal Circuit and sent the case back to the district court.

The high court “is well aware that an ‘industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees,” Justice Kennedy wrote.

“Some companies may use patents as a sword to go after defendants for money, even when their claims are frivolous.

The Justice went on to describe the tactics pursued by these non-practicing entities such as overly broad and vague demand letters designed to obtain payments that are based more on the costs of defending litigation than on the merit of the patent claims.

“This behavior can impose a ‘harmful tax on innovation,’ “Justice Kennedy added.

To be sure, the majority opinion noted that “no issue of frivolity” was raised in the Commil USA case, nor did it arise on the facts presented to the high court.

“Nonetheless, it is still necessary and proper to stress that district courts have the authority and responsibility to ensure frivolous cases are dissuaded. If frivolous cases are filed in federal court, it is within the power of the court to sanction attorneys for bringing such suits.

“It is also within the district court’s discretion to award attorney’s fees to prevailing parties in ‘exceptional cases,’” Justice Kennedy wrote, citing the high court’s own ruling in Octane Fitness LLC v. ICON Health & Fitness Inc

“These safeguards, combined with the avenues that accused inducers have to obtain rulings on the validity of patents, militate in favor of maintaining the separation expressed throughout the Patent Act between infringement and validity. This dichotomy means that belief in invalidity is no defense to a claim of induced infringement.”

A dissent written by Justice Antonin Scalia and joined by Chief Justice John Roberts, actually used the pejorative term “patent troll,” which the courts have typically avoided, in stating that the majority’s rejection of the good-faith belief in invalidity as a defense against induced infringement “increases the in terrorem power of patent trolls.”

“We certainly know what side Justice Scalia is on,” said Chandran Iyer, a partner with Sughrue Mion LLC in Washington, D.C., who typically represents patent owners. “It didn’t really bother me. NPEs have been called worse.”

“What stood out to me is that even though Justice Kennedy talked about the NPE industry, the proof is in the pudding. They reached the correct decision that a good faith belief in invalidity is not a defense against induced infringement. If they had gone the other way it would have been a lot worse for NPEs.”

Iyer said the high court’s ruling stands in sharp contrast to what’s happening in Congress where lawmakers are writing new law to solve the public policy problem of patent trolls with potentially “horrible unintended consequences for all sorts of industries.”

“They didn’t overreact to correct the NPE problem by creating bad law, which they could have done,” Iyer said. “They got the law right and decided this is not the vehicle to address the NPE issue.”

Moreover, Iyer said Justice Kennedy’s opinion emphasized that defendants have other avenues to combat abusive NPE practices such as seeking sanctions and fee shifting under the precedence of the high court’s Octane Fitness ruling.

Not everyone is convinced that the decision is just about the law or that the majority got it right.

“The Commil majority and dissenting opinions epitomize the current dialogue about nonpracticing entities,” said Daniel Lev, an a patent attorney at Pierce Atwood in Boston in a note to clients after the ruling.

“Against the backdrop of pending legislation, supported by the Obama Administration, that targets nonpracticing entities, the majority decision devotes an entire section to demonstrating that the Court is not oblivious to companies that ‘use patents as a sword to go after defendants for money, even when their claims are frivolous’—companies that the dissent unabashedly calls ‘patent trolls’ that exercise ‘in terrorem power.’ 

“The solution, according to the majority, is to ‘stress that district courts have the authority and responsibility to ensure frivolous cases are dissuaded’ by exercising their discretion to sanction attorneys and award attorneys’ fees to prevailing parties, citing its Octane Fitness, LLC v. ICON Health & Fitness, Inc. decision from last term, which lowered the bar for obtaining attorneys’ fees under 35 U.S.C. § 285. Perhaps because Commil is a nonpracticing entity, the Court appears defensive in drawing attention to the work it did last term to advance the law against the interests of nonpracticing entities.

In an interview, Lev said “it’s been another banner year for the Supreme Court in IP. They’ve been coming down on the anti-patent assertion side for a year now.”

Lev said it was unclear why the majority felt obligated to mention the debate over patent trolls, though he said it’s clear they are cognizant of public policy issues.

“I agree with Justice Scalia,” Lev said. “If this was just about the law, then why say anything about the practical implications. Those considerations shouldn’t matter.”

Lev said the majority’s nod to the anti-patent assertion industry concerns was perhaps aimed at signaling to Congress that additional patent law reform wasn’t necessary and to put to rest concerns that NPEs had too much power.

“A lot has changed since the America Invents Act of 2011 was passed,” including several major Supreme Court rulings including Octane Fitness and Alice v. CLS Bank, Lev said.

“Congress is fighting an old battle. So much has changed with what the AIA and the Supreme Court have done to weaken the hand of NPEs.”

Other attorneys agreed that the decision was favorable to NPEs, though they don’t see a pro-NPE trend.

“I definitely agree that the opinion is favorable to patentees in general, and NPEs may well benefit from it,” said Mark Lemley, William H. Neukom professor, Stanford Law School, director, Stanford Program in Law, Science, and technology senior fellow, Stanford Institute for Economic Policy Research, and partner, Durie Tangri LLP in an email.

“I'm not sure I would see it as the beginning of a trend in the pro-patentee direction at the high court, however," Lemley said. "All the Justices noted their concern over the nuisance-value litigation business model.”

For his part, Iyer said going forward, the high court’s focus on getting the law right in the Commil USA v Cisco should be encouraging to other NPEs including Vringo Inc. (VRNG).

Earlier this month, Vringo asked the high court to review a Federal Circuit decision that threw out a $30 million award and running royalty that could have been worth hundreds of millions of dollars against Google Inc.

New York-based Vringo’s petition argued that the Federal Circuit should have shown more deference to the trial court in the case than it did when it completed a de novo review and invalidated the patents in suit.

Vringo is hoping the high court will reverse based on its own decision in Teva Pharmaceuticals USA v. Sandoz, which emphasized the need for the Federal Circuit to review factual findings of the trial court deferentially.

“The opinion tells you they’re looking at the law and not some public policy issue,” Iyer said. “They’re asking: 'What does the law require?’ I still think Vringo will be decided the right way. It’s going to go the way of Teva with deference to the fact finder.”

For his part, Pierce Atwood’s Lev said he would be surprised if the high court chooses to hear Vringo’s appeal. More likely, he said the high court will send it back to the Federal Circuit in a grant-vacate-remand ruling, telling the Federal Circuit it made the ruling under the wrong standard.

“If they think Vringo was wrongly decided based on Teva, I think they’ll GVR it,” he said.

To reach the reporter responsible for this article, please contact Dan Lonkevich at 707 318-7899 or at dan@thepatentinvestor.com