A New Wrinkle in the Patent Troll Wars

A New Wrinkle in the Patent Troll Wars Illustration by David Saracino

Companies made $29 billion in direct payments to patent trolls in 2011, according to the Electronic Frontier Foundation’s website, Trolling Effects. The overall cost of patent trolls to the economy has been estimated at approximately $80 billion per year. And now there’s a worrisome new wrinkle. There’s a trend for trolls to target end users of fairly common technologies, such as Wi-Fi, and demand that the end user pay or face a lawsuit.

DataTern is a prime example. It has filed multiple lawsuits against dozens of customers of Microsoft’s and SAP’s software products. These included such high profile companies as Comcast Corp., Harley-Davidson Inc., Chevron USA Inc. and PepsiCo Inc..

In 2009 DataTern began filing actions in Texas district court. As part of its case, the company submitted claim charts alleging infringement based on Microsoft’s ADO.NET and SAP’s BusinessObjects software. Unsurprisingly, given the fact that the cost of defending a patent case through trial is approximately $2 million, several of the customers demanded that Microsoft and SAP indemnify them.

In 2011, in response to these demands from customers and based on the infringement allegations leveled against their products, Microsoft and SAP filed declaratory judgment actions in the Southern District of New York, asking the court to rule that the software did not infringe DataTern’s patents and declare the patents invalid. DataTern filed a motion seeking to throw the cases out of court, claiming that the court did not have jurisdiction to render the decision Microsoft and SAP were seeking. Specifically, DataTern argued that there was no live controversy because DataTern never approached Microsoft or SAP about taking a license, never accused Microsoft or SAP of infringement and had even indicated that it did not intend to sue Microsoft.

DataTern went on to argue that because Microsoft and SAP were not obligated to indemnify the customers, they did not have a sufficient legal interest in DataTern’s infringement allegations in the customer lawsuits. The company also asserted that the risk to Microsoft and SAP of losing customers based on the lawsuit was “remote and hypothetical.”

In February 2012, the New York district court denied the motion to dismiss, and DataTern appealed the ruling to the U.S. Court of Appeals for the Federal Circuit. Microsoft and SAP argued that even though they had no duty to indemnify the customers, they nonetheless had a right to bring their lawsuit because the customer lawsuits were based on Microsoft and SAP software. The Federal Circuit rejected this argument. The court went on to hold that even if an obligation to indemnify existed, Microsoft and SAP would not be entitled to bring a separate declaratory judgment action in a different jurisdiction, but would have to act to indemnify in the existing (customer) action.

The court also rejected Microsoft and SAP’s argument that the customer lawsuits automatically gave rise to jurisdiction over DataTern’s induced infringement allegations. The Federal Circuit analyzed the DataTern claim charts in the customer lawsuit to parse where DataTern based its allegation of direct customer infringement on instructions from Microsoft and SAP in user manuals. In those instances, where the claim charts specifically indicated that Microsoft and SAP had provided the instructions, the Federal Circuit held that Microsoft and SAP had a right to seek a declaratory judgment on those patents. This resulted in the New York court having jurisdiction for Microsoft in one of two patents and for SAP on both patents.

Microsoft also argued that DataTern’s aggressive litigation strategy, including suing more than 100 entities for infringement of the patents-in-suit, supported the existence of a substantial controversy. The Federal Circuit was “sympathetic” to the argument, but noted that DataTern’s litigation strategy focused on suing software users, not suppliers. Accordingly, this history could not form the basis for Microsoft’s belief that it had an actual controversy with DataTern. DataTern had been careful to sue the end users first—likely both to secure quick settlements to fund its litigation and also to avoid having to face off against Microsoft and SAP too early.

Judge Randall Rader, in a dissent that was subsequently withdrawn amid the events that led to his stepping down as the Federal Circuit’s chief judge, argued that the totality of the circumstances supported declaratory judgment jurisdiction over both patents. He argued that the majority improperly reviewed each alleged fact in isolation. Rader argued that Microsoft and SAP’s lawsuit would resolve DataTern’s claims in the most efficient manner in a single focused case. He warned that DataTern and other trolls “would like to find a way to keep Microsoft and other major corporations on the sidelines while seeking numerous settlements with their customers who cannot afford the cost of a major lawsuit.”

The Microsoft v. DataTern lawsuit will give suppliers an opportunity to bring a declaratory judgment action to protect their customers, but the facts have to align just right. The troll has to base its allegations against the customers quite specifically on the supplier instructions or other documentation. In many instances, crafty trolls will be able to carefully avoid supplying the facts needed for declaratory judgment jurisdiction. As Rader noted before he resigned his position and stepped down from the Federal Circuit in June, the majority decision was of “special importance because it shows DataTern and its successors a way to achieve that lucrative objective.”

Melissa Nott Davis is a partner in the law firm of McDermott Will & Emery, and is based in the firm’s Boston office. She has litigated patent cases against trolls on behalf of suppliers and customers in both federal court and the International Trade Commission. She was not involved in the DataTern case.

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