US Supreme Court Ruling Worries Patent Experts

A recent US Supreme Court patent law decision surprised few observers – other than those steeped in patent law. The high court’s ruling in SCA Hygiene Prods. Aktiebolag v. First Quality Baby Prods stunned and dismayed many patent experts, because the decision will benefit patent trolls and other unscrupulous patent owners, at the expense of companies just trying to make and sell their products. On the positive side, however, the ruling brings US patent law more in line with Europe’s patent law.

The Supreme Court in SCA Hygiene overturned a century of precedents and held [pdf] that laches could not be used as a defense in patent infringement suits.

Developed by courts of equity, the doctrine of laches protects defendants against harm caused by plaintiffs’ unreasonable delay in bringing suit. Suppose, for instance, a patentee knew its patent was infringed by another firm’s new smartphone, but the patentee kept mum and didn’t file suit until a decade later, after the infringer had invested billions of dollars in developing and marketing its smartphone (resulting in millions of phones sold). Laches would prevent the patentee from obtaining any damages for infringements that occurred before the lawsuit was filed, according to Wes Overson, a partner in the law firm of Morrison & Foerster. The patentee could seek damages for only post-suit infringements, Overson added.

“Laches has been around a long time and is pled in almost every patent infringement case – because maybe the patent owner knew about the defendant’s alleged infringement long before the suit was filed,” said Overson.

The laches defense is usually brushed aside. “Laches is not a serious issue in most patent cases,” said Imron Aly, a partner in the Schiff Hardin law firm.

But when laches does apply, the effects on the lawsuit and the parties can be profound. “In one of my cases, it was huge. Laches eliminated hundreds of millions of dollars in damages,” said Overson.

The Reason Why

Laches has long been a defense to patent infringement actions, so why did the Supreme Court eliminate it now? The doctrine became vulnerable following of the high court’s 2014 decision in Petrella v. Metro-Goldwyn-Mayer [pdf].

Petrella rejected laches as a defense to copyright infringement, holding that the only time limit on such suits was set out in the Copyright Act’s statute of limitations. Section 507(b) of the Act states that no civil action for copyright infringement “shall be maintained … unless it is commenced within three years” of the alleged infringement.

The Supreme Court reasoned that, by providing a three-year statute of limitation, Congress had determined the amount of time needed for a copyright owner’s delay in filing suit to prejudice an alleged infringer. This statute of limitation – and the congressional policy behind it – would be undercut if laches could be used as a defense against suits brought within the three-year period. The judiciary does not have the power to so override the legislative branch, the Court declared. Thus, the Court found the doctrine of laches had no place in copyright suits.

The Patent Act, like the Copyright Act, contains a legislatively-mandated statute of limitation. Section 286 of the Patent Act states that “Except as otherwise provided by law, no recovery shall be had for any infringement committed more than six years prior to the filing of the [infringement] complaint or counterclaim….” The Supreme Court, explicitly applying the reasoning it had set forth in Petrella, ruled 7-1 that this six-year statute of limitation foreclosed any application of laches in patent infringement suits.

Patents are Different

Most observers expected this result, because it follows the Supreme Court’s recent patent jurisprudence. For over a decade, the high court repeatedly has rejected special rules for patents, in order to make patent infringement suits just like other civil suits. The Supreme Court also repeatedly has found that copyright law and patent law should have the same legal standards.

The latter is a big mistake, according to many patent experts. “I question the Supreme Court’s apparent tendency to equate patent and copyright law,” said Prof. Rochelle C. Dreyfuss of New York University School of Law. “The statutes are not the same substantively (in terms of the rights awarded and the conditions for protection); the bulk of the Patent Act was written in an era when Congress expected courts to fill the interstices, while the Copyright Act was drafted in a more code-like form; most important, the problems the industries face are different. Indeed, if the problems were the same, why would there be two different statutes? That the statutes are different all over the world and subject to different international obligations ought to warn the Justices that it’s a mistake to equate them.”

Justice Stephen G. Breyer’s dissent in SCA Hygiene highlights important distinctions between copyrights and patents, requiring different rules when it comes to laches. One of these distinctions is that a delay in suing affects copyright litigation differently than patent litigation.

In copyright litigation, delay can hurt the plaintiff as much as the alleged infringer. Because of deaths, fading memories, and lost documents, both sides will have a harder time proving the defendant had access to the allegedly copied work.

In patent litigation, by contrast, delay is particularly harmful to the alleged infringer. “[T]he passage of time may well harm patent defendants who wish to show a patent invalid by raising defenses of anticipation, obviousness, or insufficiency. These kinds of defenses can depend upon contemporaneous evidence that may be lost over time,” Justice Breyer wrote.

Patent owners, moreover, often can benefit from a delay in filing infringement suits. “Once a [defendant] business chooses to rely on a particular [infringing] technology, it can become expensive to switch, even if it would have been cheap to do so earlier,” Justice Breyer wrote. “As a result, a patentee has considerable incentive to delay suit until the costs of switching—and accordingly the settlement value of a claim—are high.”

Gaming the System

To understand the ramifications of SCA Hygiene, one first must understand what the Patent Act’s six-year statute of limitation does – and what it doesn’t do. It doesn’t stop a patentee from suing if the infringement began more than six years ago. It simply limits the damages that can be recovered for past infringements: The patentee can get damages only for past infringements that occurred up to six years before the suit was filed.

The Patent Act thus allows a patentee to wait a decade, until an infringing product is wildly successful, before finally suing. The patentee couldn’t then recover damages for the past 10 years of infringements; it would get just six years of pre-suit damages (plus post-suit damages).

As Justice Breyer noted, such a delay in bringing a lawsuit could harm the alleged infringer – through loss of exculpatory evidence and lock-in to the infringing technology. Laches is  used to protect alleged infringers in such circumstances: If the patentee’s delay in suing prejudiced the alleged infringer, the patentee could not recover damages for any pre-suit infringements.

SCA Hygiene has stripped this protection from alleged infringers. The decision “allows patent owners to game the system,” said Aly. “A patentee could wait for years to see who is using its patent and then sue only those companies who are using it successfully.” The ruling, he added, “will encourage patent owners to sit on their hands until an infringing product or service makes money.”

The decision is a significant loss for operating companies, who are no longer safe from infringement suits after their products have been on the market for six years. Conversely, the ruling provides a noteworthy boost to patent owners – particularly non-practicing entities, often called “patent trolls.”

“NPEs will benefit because they usually have older patents, and this ruling makes it easier to sue on older patents,” said Aly. He added, “By waiting to sue until a product is successful, NPEs will have more leverages in their suits.”

Alleged infringers in the US might find some solace in knowing that their plight is not unique. Alleged infringers in many other major industrialized nations are in a similar situation. EU member states, for instance, have statutes of limitation on patent infringement suits, but generally lack any doctrine equivalent to laches, according to Dr. Gareth Morgan, a partner in the Olswang LLP law firm.

Germany is an exception. It recognizes laches as a defense in patent suits, said Dr. Anette Gärtner, a partner in the law firm of Reed Smith.