2014 was an exhilarating year for Intellectual Property Litigators. Patent case filings were clearly down in 2014 – I have not gone through and tabulated all of the filings of 2014 against 2013, but I would estimate that filings were down about 40%. In addition, my experience tells me that the patent buying frenzy has started to cool – multi-million dollar offers for unproven patent portfolios have pretty much disappeared.
On the other hand, trademark cases have absolutely exploded; filings are way up as major brands have continued a powerful push to fight Internet counterfeiters. Many of these counterfeiters are based in foreign countries or are small sellers that sell goods on Internet marketplaces like Amazon or eBay.
In a somewhat surprising development, BitTorrent lawsuits (“copyright troll cases”) are down substantially from 2013. In fact, the only District in Illinois which copyright holders have targeted for Torrent suits is the Northern District of Illinois. In addition, there are only two law firms that are actively filing cases at all – down from six in 2013.
Finally, trade secret cases were strong in 2014, and will likely continue to expand in the years ahead.
The Patent Bubble Starts to Burst
Back at the height of the patent boom, a consortium of companies paid $4.5 Billion for Nortel’s patents. Now, there is no doubt that Nortel had been a potent player in telecom, and that its patent portfolio had real value. However, the final purchase price was more than double what most experts thought the portfolio would go for. Recently, the consortium that purchased the Nortel portfolio bit the bullet and unloaded it for $900 Million; an 80% loss.
Smaller versions of this story have played out frequently this past year. It is not uncommon for portfolios that sold for $5M or more in 2010-2012 to have sold for less than $1M in 2014. Software has been especially hard hit – the Supreme Court’s decision in Alice v. CLS Bank has cast a dark cloud over software patents in general, and those patents that are selling are only getting pennies on the dollar.
With regards to software patents, I believe that the effect of Alice v. CLS Bank has been vastly overstated. It is true that the PTO is issuing 101 rejections at a far greater rate than it did prior to Alice, and numerous patents are falling to CBM and IPR petitions based on 101 challenges. However, the metes and bounds of what is patentable is rapidly clarifying – competent attorneys are overcoming the PTO’s 101 rejections, and it is becoming clear which issued software patents are still viable and which are not. If anything, for those in the know, now is likely a great time to purchase software portfolios at rock bottom prices. I expect that the patent market generally will stabilize in the next 6 months to a year. Whether it holds steady at a lower level, or enters another growth phase is an inquiry that I do not have any insight into.
Mass Copyright Suit Filings Down
Judge Wright’s sanctions order against Prenda might well have marked the high water mark for mass copyright filings. Since then, at least in Illinois, most of the attorneys that previously filed such cases have completely abandoned mass copyright filings.
As of now, there are only three active mass copyright plaintiffs active in Illinois that I am aware of. This is also way down. That said, the Dallas Buyers Club licensing campaign is still going strong, and may well be the most successful Torrent campaign ever launched in Illinois. The attorney behind the Dallas Buyers Club campaign in Illinois has been exceptionally careful to not repeat the mistakes that led to Prenda Law’s implosion. Given the success of this campaign, I would be surprised if similar cases are not filed in the future.
Counterfeiting Cases Explode
Internet counterfeiting is an enormous issue. Major brands lose hundreds of billions of dollars every year, and much of this is through difficult to stop Internet sales. Many of these Internet retailers setup sites that look genuine in every respect – however, the products that they sell are not at all genuine. For the most part, these sites are located off shore, and deal in credit card transactions and money transfers; i.e., through cash cards, Western Union, etc. Many also use PayPal accounts.
The major brands have seized on the PayPal accounts as one way to hold Internet counterfeiters responsible, and have filed an enormous number of suits against the foreign entities that control the Pay Pal accounts. The suits are filed by immediate motions for a temporary restraining order, with the primary thrust of the TRO being an effective seizure of the PayPal accounts. Service is then generally effected through email (as no one knows who the true entities are). Answers are almost never lodged, and default is then entered against the entities. The seizure of the PayPal accounts is made permanent, and the brands suddenly have an influx of cash.
Obviously, this tactic has been highly successful. However, these types of cases raise a lot of questions. First, service by email seems entirely insufficient when a PayPal account with hundreds of thousands or even millions of dollars is being seized. Email is simply not a reliable form of communication – every day emails are lost, end up in spam filters, are accidentally deleted, etc. Second, aside from the service issues, these cases raise enormous issues of jurisdiction. Finally, and most importantly, the incentive for the investigators retained by the brands is to seize the PayPal accounts – so much the better if the PayPal account actually belongs to a counterfeiter. However, there is nothing that incentivizes the investigators to avoid implicating a PayPal account that belongs to someone other than a counterfeiter. For example, an investigator making a trap purchase might initially demand a PayPal account as a means for payment. A counterfeiter who is wise to the vulnerability of PayPal will likely respond “no way.” The investigator, hoping to gather evidence to seize a PayPal account, might then respond “how about I pay 95% of your charge by Western Union, and 5% by PayPal.” The counterfeiter is then incentivized to present someone else’s PayPal as if it is their own – they still get 95% of what they were asking for, and they can simply name a legitimate seller’s PayPal. The investigator then makes payment (by Western Union and PayPal) and the counterfeiter ships the counterfeit goods. Voila! The investigator now has evidence that the named PayPal account (which has nothing to do with the counterfeiter and may well belong to a legitimate competitor) is the counterfeiter.
My firm has represented a few sellers that were caught up by tactics similar to what I set forth above. That said, I expect these types of counterfeiting cases to keep being filed until more sellers fight back.
Trade Secret Filings Up
Trade secret filings are difficult to track. Trade secret is still a creature of state law, and most cases are still filed in state court, although a substantial number are being filed in District Courts through the use of the CFAA or similar statutes. Accordingly, it is far more difficult to get a track on the number of trade secret cases that are filed nationwide or Illinois. Nonetheless, judging by my practice and my conversations with other IP litigators, it seems that filings are somewhat up.
More important to IP litigators, however, is that the general plaintiff’s bar is showing a bit more interest in trade secrets cases. In particular, eight figure awards in various cases are starting to draw in many firms that have never litigated a trade secret case before. This has led to the filing of at least a few questionable trade secret actions. One concern for IP litigators is whether trade secret law will turn into an all out treasure hunt by plaintiff’s firms, leading to a rash of low quality filings, and the subsequent reaction by the courts and Congress to punish frivolous filers that patent law has experienced. It is still way too early to see if such a development is in the making.
Probably the most important development in trade secrets, however, is that Congress is considering a Federal Trade Secrets law. This could significantly raise the importance of trade secret issues. While a competent litigator can usually get a trade secret case into Federal Court, in many cases the rationale is strained at best. A Federal law would allow all trade secret cases to be filed directly in Federal Court without relying on supplemental jurisdiction. If such a law passes, expect trade secrets to become even more important in the years to come.