The automotive industry has discovered something that the electronics industry has known for years: Nonpracticing entities — also known as “NPEs” or “patent trolls” — can inflict significant costs through the filing and prosecution of patent infringement lawsuits. Now more than ever, companies in the automotive industry find themselves named as defendants in NPE litigation, and thus need to be ready for the fight and prepared with the tools and knowledge that best help repel NPEs, avoid liability and save costs.

A High-Impact Problem

As the name suggests, NPEs are patent owners who do not practice their patents by marketing any tangible product. Instead, they exist solely to assert their patent rights against others to extract licensing fees and settlements. Commentators have estimated that NPE lawsuits were responsible for half a trillion dollars of lost wealth from 1990 through 2010, resulting in an average of more than $80 billion of lost wealth per year during the last four years alone, as James Bessen, et al., wrote in “The Private and Social Cost of Patent Trolls,” a paper written for the Boston University School of Law.

NPEs most often focus on obtaining and asserting patents for computer-implemented methods and systems, such as software, computer and business method patents. For the automotive industry, the target has become electronic features and functionalities added to today’s new vehicles — such as global position systems (GPS), advanced cruise control, voice-activated technology and other electronic gadgetry. The cost of a defendant’s litigation against NPEs can be substantial, and is typically much greater than the cost expended by the NPE. For example, the NPE generally has far less of a discovery burden because it has no design or manufacturing documents to produce. The NPE can also utilize much of its work across an array of multiple defendants, while defendants must each prepare their noninfringement defenses, and produce their respective manufacturing and sales documents.

The New Models

Recent cases demonstrate that companies in the automotive industry have become prey for NPE litigation.

In March 2010, Balther Technologies sued 35 automotive manufacturers in the Eastern District of Texas, alleging infringement of a patent relating to an automatic directional control system for vehicle headlights in Balther Technologies v. American Honda Motor Co. Inc ., No. 10-CV-078 (E.D. Tex. March 8, 2010).

In April 2010, Stragent LLC and SeeSaw Foundation filed suit against 11 major automotive manufacturers, alleging infringement of three patents directed to methods and systems for controlling vehicle deceleration in an adaptive speed-control system based on vehicle speed in Stragent LLC v. Audi AG , No. 6:10-CV-227 (E.D. Tex. April 29, 2010). Stragent later filed two additional complaints, expanding its allegations.

In October 2011, in the District of Delaware, Beacon Navigation GmbH brought what is thus far the largest group of suits by an NPE against a total of 52 automotive manufacturing entities, from A to V — Audi to Volvo. Due to the passage of the America Invents Act in September 2011, Beacon filed 38 separate suits against the defendants because they allegedly made, used or sold distinct accused products.

In other recent cases, automotive manufacturers have been named as defendants among a long list of electronic consumer goods companies. One case, which began in the fall of 2011 as a suit by NPE Norman IP Holdings against two defendants in the computer and printer industry had grown by early 2012 to a suit with 24 defendants, including a number of major automakers. Norman alleged infringement of five patents relating to various computer, wireless communication and processor technologies in Norman IP Holdings v. Lexmark International Inc., No. 6-11-00495 (E.D. Tex. Sept. 15, 2011).

NPEs most frequently sue on patents claiming software and business method inventions because they often have what have been called “fuzzy boundaries,” meaning that the scope of these patents is not particularly clear and the claims are often written using vague language. It is thus difficult to identify in advance the patents that are later asserted. And most significantly, it is unlikely that an automotive defendant would even attempt to identify such risks when it is merely the purchaser of the accused technology, which is then implemented in the defendant’s vehicles.

Safety First

Manufacturers in the automotive sector can prepare for, or protect against, patent infringement lawsuits through a number of precautionary steps and measures. First and foremost, automotive companies should have the strongest possible indemnification obligation from their sources. Indeed, there is little reason why an automotive company should not have both its defense costs and any potential damages covered by the source of its components if those components form the basis of an accusation of patent infringement. At a minimum, a warranty against infringement is generally included when tangible goods are sold by a merchant regularly dealing in goods of the kind, unless otherwise agreed.

In addition, before suit and prior to sourcing a particular part or component, a due diligence investigation can be conducted, and should be conducted by the source of the component. Such investigation should include a review of patents potentially covering the part and functionality as well as a review of pending and past lawsuits targeting the part or any function the component is capable of performing. This will allow the manufacturer to assess the risks involved with the purchase and use of the part, and may heighten the need for a strong indemnity provision from the component vendor. Companies should require their sources to do their due diligence.

Similarly, a freedom-to-operate opinion on a company innovation may also reveal patents that require further investigation, and it may be advisable for the company to receive a formal opinion from a patent attorney regarding the scope of these patents as well as infringement and invalidity issues regarding such patents. This is especially so should the part come from a foreign or potentially insolvent source, as indemnification may be elusive. The formal opinion is also extremely valuable in any subsequent litigation as a defense to willful infringement and inducement to infringe, which are commonly alleged against infringement defendants in this industry. A finding of willful infringement, for example, may expose a manufacturer to treble damages.

Hitting the Road

After being sued and investigating indemnity obligations, an auto manufacturer should consider joining or forming a joint defense group when multiple defendants are targeted by the same plaintiff regarding the same or similar patents. Collectively pooling the resources of many similarly situated defendants allows for the cost-effective preparation of prior art searching and analysis that can lead to strong invalidity defenses at an economy of scale. Moreover, noninfringement defenses may largely overlap between defendants, particularly when the same component is incorporated into different manufacturers’ vehicles.

Just as joint defendants may have economy of scale when sued in packs, however, so do NPEs by suing packs. To combat this, a procedural avenue that is now more readily available to a defendant is a motion to sever and transfer the case against a manufacturer to a more convenient jurisdiction, generally the manufacturer’s home forum. The new joinder provision of the America Invents Act, 35 U.S.C. §299, enacted in September 2011, precludes patent litigation defendants from being joined in a single action “based solely on allegations that they each have infringed the patent or patents in suit.” Thus, cases of late are typically filed against single defendants, leading to the situation where multiple cases are filed at the same time, as in the Beacon litigation.

Because of that, a defendant can file an individual motion to transfer its case to a more convenient forum without having the burden of convincing the court that the case should be severed from among a larger group of defendants. And plaintiffs can no longer anchor a multidefendant suit in a largely inconvenient forum based on the mere fact that one defendant out of many has significant operations in that district. See In re EMC Corp. ,2011-M100 (Fed. Cir. May 4, 2012), an order granting petition for writ of mandamus directing the Eastern District of Texas court to reconsider motions to sever and transfer under the correct standard.

Roadside Assistance

Several mechanisms are available at the United States Patent and Trademark Office to deal with asserted patents outside of federal court, and can be utilized by parties before or after an NPE files a suit. Currently, patent re-examination (in either ex parte or inter partes form) allows any person or company to petition the USPTO to re-examine an issued patent based on certain prior art and make a more informed determination as to whether the claimed invention is patentable. If the USPTO begins a re-examination proceeding on a patent — especially if the re-examination is instituted early during a pending litigation — courts will often stay the case involving that patent for the duration of the re-examination proceeding, which may lead to significant savings of litigation expenses for defendants. A party requesting an inter partes re-examination should be aware, however, that by requesting and participating in such a re-examination, it will be estopped from raising prior art defenses based on the prior art that it raised or could have raised in a litigation involving that patent.

On Sept. 16, two new avenues to contest patent validity will be available, known as the “post-grant review” and “inter partes review” procedures. The post-grant review mechanism is available during the first nine months after the issuance (or reissuance) of a patent, and allows any person to challenge the patentability of issued patent claims under any invalidity argument except best mode (e.g., prior art, patentable subject matter, written description, enablement, utility, prior public use or sale, even priority). The inter partes review essentially will replace the inter partes re-examination procedure discussed above, but unlike post-grant review, patentability challenges may only be made based on prior art consisting of patents and printed publications. As in the current inter partes re-examination procedure, participants in post-grant review and inter partes review procedures will be subject to limitations on their ability to challenge the at-issue patent later in court due to estoppel considerations.

As the above indicates, defendants in NPE patent litigations can and should — before and after the filing of the lawsuit — prepare effective and efficient defense strategies using the numerous strategic tools available to them. As NPE patent litigations continue to penetrate all industries, including the automotive industry, preparing for and managing litigations is critical to ensuring a smooth ride and to avoiding litigation sticker shock.

Claudia Schultze and Thatcher Rahmeier, associates at Connolly Bove Lodge & Hutz’s Wilmington, Del., office, also contributed to this article. •

Francis DiGiovani is a partner with Connolly Bove Lodge & Hutz in Wilmington, Del. He co-chairs the firm’s intellectual property litigation section and litigates patent disputes for clients in a number of diverse fields, including the automotive industry.