Microsoft, SAP Ask Federal Circuit to Bless Anti-Troll Tactic
SAN FRANCISCO — While Congress and the Obama administration look to crack down on patent troll litigation, the U.S. Court of Appeals for the Federal Circuit heard two cases last week that could put a new tool in the hands of accused infringers.
The issue is whether Microsoft Corp. and SAP can bring declaratory judgment actions for non-infringement when 72 of their customers were sued over the use of the technology giants' software. Microsoft and SAP argue that patent assertion entity DataTern Inc. targeted their customers—but not them—because the customers would be more likely to pay nuisance-value settlements.
Reflecting the charged debate surrounding troll litigation and the pressure on the judiciary to devise solutions, the Nov. 4 arguments set off fireworks, with Chief Judge Randall Rader accusing DataTern of running a "lucrative patent milking business" and Judge Kimberly Ann Moore calling Microsoft and SAP's arguments "crazy."
If DataTern really is a troll that puts the squeeze on timid companies, "why would Microsoft think it has legally adverse interests?" Moore asked Microsoft and SAP's lawyer, Edward Reines. "You clearly are a litigate-to-the-death sort of company, so why would you be worried that DataTern was coming after you?"
Reines, a partner at Weil, Gotshal & Manges, argued that mass customer litigation by PAEs is shaking public confidence in the legal system. Because DataTern was suing customers indiscriminately, and some of them were demanding indemnification from Microsoft and SAP, the companies met the standard for the court to exercise declaratory judgment jurisdiction, he argued.
Chief Judge Rader sounded sympathetic. "As a matter of policy, don't we prefer a single suit against a supplier, rather than letting you sue dozens and dozens of customers, and avoid the person you're ultimately after?" he asked DataTern attorney Erik Belt, a McCarter & English partner.
The third member of the panel, Judge Sharon Prost, did not join the discussion on jurisdiction.
DataTern is a subsidiary of U.K. venture capital company Amphion Innovations that was created to monetize IP that originates with Amphion's partner companies. The company brought suit in the Eastern District of Texas against a host of Fortune 500 companies that use Microsoft and SAP software, asserting its own patents for "facilitating the interaction of object oriented software with relational databases." It's not the Microsoft and SAP products per se that infringe, DataTern contends, but the manner in which the customers configured them.
Microsoft and SAP say DataTern brought scattershot claims without investigating the individual configurations. The tech giants brought actions for declaratory relief in the Southern District of New York. Judge Katherine Forrest granted them summary judgment last year.
In the meantime, patent litigation has grown into a prominent political issue. The White House's June 2013 report "Patent Assertion and U.S. Innovation" specifically cites the problem of PAEs suing customers, rather than manufacturers, and House Judiciary Chairman Bob Goodlatte has identified such suits as "an abusive patent litigation tactic."Chief Judge Rader, who has said repeatedly that the courts are capable or reining in "troll" litigation on their own, sounded sensitive to the issue last week as the court heard DataTern v. Microsoft and DataTern v. SAP.
"We understand that if you can sue a hundred mom-and-pop shops, and threaten them with very expensive litigation, you're going to get a lot of settlements and find yourself in a lucrative patent milking business," Chief Judge Randall Rader said to DataTern attorney Belt. "Why don't you bring it right to the head and sue Microsoft right up front? Because they'll probably contest you—is that what's going on here?"
"That is not what's going on here," Belt insisted.
But Reines got a rougher ride from Judge Moore, who said Microsoft was simply trying to move the litigation "up north" to a more favorable venue. "This isn't a case about you getting in court," she said. "This is a case about you choosing the court you want to be in. You could have agreed to indemnify any one of those Texas customers and then stepped into their shoes in Texas."
DataTern didn't threaten Microsoft or drag it into the licensing negotiations, she said. "I don't see any basis upon which you ought to be shaking in your boots" at the prospect of being sued, she added.
"I don't think the standard can or should be shaking in your boots," Reines replied. Microsoft and SAP, he said, should not have to assume the liability of indemnifying customers to defend their products. "I think it's very important for this court to make clear that an indemnity threat is enough to warrant a manufacturer's [declaratory judgment]."
"That's crazy," Moore flatly replied. "Then you just manufacture an indemnity request in every case from one of your customers, or one of your customers goes out on a crazy lark and demands you indemnify them even when there's no ground for it. And you're saying that gives you an open court to walk into any court you want and file a DJ?
"Look, you may think they're a troll," Moore added, "but you're going to drag patentees—good, bad, you know, whatever—into court on just some action by a third-party customer of a supplier."
Reines said discovery could ferret out the kinds of scenarios Moore was describing, and his rule would generate more legitimate claims than courts are seeing now. "It's not healthy what's happening, and it's destroying the public trust," he urged.
McCarter's Lee Bromberg, who argued part of DataTern's claims, pushed back on Reines' characterization of his client. "A lot of negative terms have been thrown around by Mr. Reines and a lot of policy discussions, and I think they're not relevant," he said.
"I may have been responsible for most of those," Moore responded with a chuckle, "and I apologize for that."