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Non-practicing entities (NPEs) filed 58.7 percent of all patent infringement cases in 2012. That statistic, along with the rapid rise in NPE cases in recent years, has captured the attention of the legal and business communities, the press, the Federal Trade Commission, Congress, the President—just about anyone with a stake in innovation.

While the Internet and computer industries have been the primary NPE targets to date, NPEs now seem to be setting their sights on the medical device industry. And the medical industry would be wise to take note. Thus far, the NPE success rate in medical device patent litigation is higher than in other industries, and the median damages awarded to NPEs is over $20 million. Further, relatively large NPEs are aggregating medical device patents at a rapid clip.

This article offers strategies for medical device companies targeted by NPEs. Because NPEs often look to the cost of defense as a yardstick for settlement, we propose strategies for efficiently defending NPE litigation to drive down the cost.

NPEs Filed the Majority of U.S. Patent Litigations in 2012

An April 2013 study analyzing all patent litigations from 2007-2009 and 2011-2012 observed that NPE-filed cases represented 58.7 percent of all patent cases filed in 2012, as compared to only 24.6 percent in 2007. (Robin Feldman et al., “The AIA 500 Expanded: The Effects of Patent Monetization Entities.”) Although that study attributed some of the increase to new joinder rules under the America Invents Act (AIA), there is no debate that NPE patent litigation has been and remains on the rise.

A 2013 study published by PricewaterhouseCoopers (PwC) clarified that, despite this dramatic increase in suits filed, only 16 percent of court decisions in 2012 pertained to NPEs, indicating that NPE suits have a higher tendency toward settlement. In cases that did not settle, NPEs were successful only 24 percent of the time, with most of that success due to a 66 percent success rate at trial, versus only a 2 percent success rate at summary judgment. But for medical device targets specifically, NPE success rates were substantially higher than average—at or above 40 percent:

(PwC, “2013 Patent Litigation Study”.) Further, the median damages awarded to NPEs against medical device targets was over $20 million.

NPEs are Acquiring Medical Device Patents

A number of NPEs have begun to acquire large portfolios of medical device patents. Between 2012 and 2013, Acacia Research acquired “over 1900 patents and applications” relating to stent, vascular and bypass grafts, graft retrieval, vena cava filters and filter retrieval, and vascular devices. Commenting on this trend, Acacia CEO Paul Ryan stated, “We are rapidly expanding our presence as a leader in patent licensing in the medical device, diagnostics and life sciences sectors . . . We’re seeing the medical sector as a major area of growth.”

Intellectual Ventures, generally ranked as the largest NPE, has also acquired patents directed to “medical devices, diagnostic tools and advancements for the life sciences,” and holds “more than 1000 patents and patent applications.” Intellectual Ventures’ vice president Daniel Hawkins stated, “The medical device universe is just starting to hear from us.”

Other examples include Orthophoenix LLC, which acquired over 500 kyphoplasty patents in 2013, and Kardiametrics LLC, which acquired embolic filter patents in 2013. Both companies quickly asserted those patents against medical device targets.

Strategies for Reducing the Cost of Defense

Litigation costs are generally low for NPEs because they have few documents to produce and few witnesses, they cannot be countersued for infringement and many cases are taken on contingency. But for accused infringers, discovery can be expensive, time consuming and a management distraction.

Given these differences, it is not surprising that many accused infringers strongly consider their settlement options with an eye toward the cost of defense. Unless medical device companies have a policy against settling with NPEs, it does make sense to determine whether the NPE lawsuit is a naked shakedown that can be disposed of for a fraction of the cost of defense.

But medical device companies do not necessarily need to settle. Recent developments in the courts and in Congress suggest that there will be a leveling of the playing field. But even now, there are several strategies available to medical device companies to more efficiently handle NPE litigation and drive down the cost of defense.

An IPR and Motion to Stay

In the past 18 months, the U.S. Patent and Trademark Office has instituted a request for inter partes review (IPR) in 82 percent of the 278 cases filed. Although IPR outcome data is not yet available, we know that under the older inter partes reexamination regime, only about 12 percent of challenged patents emerged with all claims intact. For these reasons, medical device companies with strong invalidity positions in view of the prior art, but weaker noninfringement positions, may wish to consider filing an IPR, along with a motion to stay the litigation. The decision to pursue this strategy requires careful evaluation of the prior art and the court’s treatment of motions for stay.

Limiting E-discovery and Claim Count

In 2012 and 2013, the Advisory Council of the Federal Circuit issued two Model Orders. The first limits e-discovery and the second limits asserted claims. Although the Model Orders do not have the force of law, certain jurisdictions have adopted some of their key provisions. The Local Rules in the Eastern District of Texas and the Southern District of California, for example, limit the number of custodians and search terms for electronically stored information. See E.D. Tex. L. R. at App’x P; S.D. Cal. Patent L. R. at 84. In a case handed down before the Model Orders, the U.S. Court of Appeals for the Federal Circuit affirmed a district court decision requiring an NPE to reduce the number of asserted claims from 1975 to 64. See In re Katz (Fed. Cir. 2011). Other cases have followed suit.

Summary Judgment

At the summary judgment stage, NPEs are successful only 2 percent of the time. (2013 PwC study.) Medical device companies should, therefore, consider filing targeted motions for summary judgment based on their best merits positions. To the extent strong noninfringement positions exist, an early motion for summary judgment, or a motion for leave to file one, may make sense. Researching the presiding judge’s preferences and prior treatment of early summary judgment motions is, of course, highly recommended.

Structuring the Case to Support a Fees Petition

While district courts are sometimes reluctant to shift fees, fee motions filed by accused infringers have been granted and affirmed in NPE cases. In Marctec v. Johnson & Johnson (2012), the Federal Circuit affirmed an exceptional case finding and a $4.68M award of fees against an NPE. Similarly, in Eon-Net v. Flagstar (2011), the Federal Circuit affirmed a fee award, noting (i) the plaintiff’s status as an NPE, (ii) its practice of filing nearly identical complaints against over 100 defendants, and (iii) the “indicia of extortion” involved in “exploiting the high cost to defend complex litigation to extract a nuisance value settlement.” Documenting any improper litigation tactics throughout NPE litigation is certainly warranted.

Other helpful strategies to consider include investigating the NPEs’ background, size and resources, along with any prior suits/settlements. Formation of joint defense groups is another useful strategy.

It is also worth noting that Congress is currently considering a number of bills targeting abusive NPE lawsuits. The bills include provisions concerning heightened pleading requirements and fee shifting, to name just a few. It is too early to predict, however, if or when any of these will become law.

The Bottom Line

Medical device companies can prepare for potential NPE threats by monitoring and tracking public information on patent acquisitions to determine if NPE aggregation is occurring in their markets. If hit by an NPE suit not subject to a reasonable settlement, a medical device company should consider employing the foregoing strategies to reduce the cost of defense.

Jonathan A. Harris is a partner of Axinn, Veltrop & Harkrider based in Hartford, Connecticut, and practices in the firm’s intellectual property and biomedical groups. Diane C. Ragosa is a New York-based associate of Axinn and focuses her practice on patent litigation in the pharmaceutical and medical device industries. Thara L. Russell is also a New York-based associate of Axinn in the firm’s intellectual property group, and also focuses on patent litigation in the pharmaceutical and medical device industries.