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Hearing Summary Litigation as a Predatory Practice House Judiciary Committee; Subcommittee on IP, Competition, and the Internet February

17, 2012 Prepared transcript and remarks available at http://judiciary.house.gov/hearings/Hearings%202012/hear_02172012.html Background This hearing sought to address the strategic use of litigation for anticompetitive purposes, including the possibility that a larger company with greater resources may employ the litigation process to eliminate a smaller competitor unable to bear the heavy costs of litigation, and the difficulty of challenging such litigation under the antitrust laws. The apparent motivation for the hearing was from the experience of one of Chairman Goodlattes constituents, Christopher Saxman. Mr. Saxman is on the board of the International Bottled Water Association, and testified that one of the Associations small business members experienced predatory litigation at the hands of a large, multinational company.1 Also testifying were Doug Richards, a partner at Cohen Milstein, and Marina Lao, a professor at Seton Hall Law School. At the heart of the legal discussion was the extent to which the Noerr-Pennington doctrine provides immunity against claims of predatory litigation. All witnesses agreed that courts have applied Noerr immunity too broadly with respect to litigation. However, the witnesses and members of Congress in attendance could not agree on how best to modify the existing legal standards. Ideas Presented for Dealing With Predatory Litigation (1) Courts should roll back Noerr immunity for litigation; use objective, economic reasonableness of lawsuit This idea, advocated by Professor Lao, is one of the stronger proposed rules intended to check predatory litigation. To some extent, it was voiced in a concurring opinion in the Professional Real Estate Investors case, 2 a case that set the modern standard for sham litigation, but was viewed by the witnesses to be misguided or misapplied in later court decisions. The majority opinion in PRE favored an approach that looked to objective baselessness, specifically whether the legal claim was frivolous, before turning to the defendants motive. Justice Stevens, joined by Justice OConnor, disagreed in a concurring opinion, favoring a more economic inquiry into objective reasonableness; nonfrivolous, even valid, legal claims may not have a recovery worth the cost of a lawsuit. In such instances, the real value (and motive) behind the lawsuit may be its anticompetitive effect, e.g., raising rivals costs. Judge Posner spelled out this theory in an oft-cited earlier case.3 Professor Lao went further into the constitutional considerations, arguing that litigation is fundamentally different from traditional political petitioning of legislatures and executive

Though not stated on the record, Mr. Saxman likely was referring to Eureka Water Co. v. Nestle Waters North America, W.D. Okla. 07-cv-998, on appeal in the Tenth Circuit, 11-6104 & 11-6116. 2 Professional Real Estate Investors v. Columbia Pictures Industries, 508 U.S. 49 (1993). 3 Grip-Pak v. Illinois Tool Works, 694 F.3d 466 (7th Cir. 1982).

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agencies.4 Her position drew objections from Mr. Richards, the other attorney on the panel. First, Mr. Richards argued that the Noerr-Pennington immunity standard should be uniform across all branches of government, including the judiciary. Mr. Richards second objection to Professor Laos position was specifically addressed to patent litigation - he argued that the whole policy rationale in enforcing a patent is to exclude rivals. If the sham litigation test asked only whether it made economic sense to file the lawsuit in absence of the lawsuits anticompetitive effect, he argued, the test would include all patent suits. However, this latter line of reasoning may conflate the effect of the lawsuit itself with the effect of a hypothetical favorable judgment in the lawsuit. Professor Lao, like Justice Stevens or Judge Posner, favored a rule in which the cost and effect of the lawsuit itself is weighed against the reasonably possible recovery at the end of the lawsuit. The possible recovery in a nonfrivolous patent dispute will almost always be substantial and valuable; though anticompetitive, it is not the suit itself that is anticompetitive in such a case, but rather the enforcement of the legally valid patent rights. Finally, Professor Lao argued that legislation could affect the scope of Noerr in the litigation context. Several laws and court rules already regulate speech and petitioning in the context of the courtroom (e.g. Rule 11, perjury statutes). Further, Noerr immunity is understood not only in relation to the First Amendment, but also in relation to the state action (Parker) doctrine, itself an interpretation of the Sherman Act. So, to the extent that Congress could forbid anticompetitive actions of the state (but for the current understanding of Parker doctrine), so too could Congress forbid the use of instruments of the state to anticompetitive ends. (2) Courts should refine the use of Professional Real Estate Mr. Richards devoted most of his testimony to what he termed the fuzzy distinction between objective and subjective baselessness, as spelled out in the PRE case. He focused particularly on the patent context, and argued that the objective prong should include what the defendant actually knew, rather than focusing on some hypothetical objective litigant. He claimed that some courts have allowed defendants to get away with positions they knew were baseless because the courts refused to consider what the defendant actually knew in his view, actual knowledge is sometimes improperly classified as subjective.5 He also criticized the fact that the Federal Circuit has elevated the standard of proof for objective and subjective baselessness from the usual preponderance of evidence standard to the more difficult clear and convincing evidence standard.6 Conclusion In the end, the panel of legislators appeared to struggle in determining the proper legislative role would be in curtailing predatory litigation. Democratic Ranking Member Watt expressed great sympathy and concern for the problem, sharing anecdotes from his time in law practice. But he ultimately expressed concern

Professor Laos comments were based in part on her published article on the topic. See Marina Lao, Reforming the Noerr-Pennington Antitrust Immunity Doctrine, 55 RUTGERS L. REV. 965 (2003). 5 Mr. Richards cited the example of iLOR v. Google, 631 F.3d 1372 (Fed. Cir. 2011). 6 Wedgetail Ltd. v. Huddleston Deluxe, Inc. 576 F.3d 1302 (Fed. Cir. 2009).

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about the difficulty of coming up with a neutral rule that would not be just as hard or even harder on disadvantaged litigants. Chairman Goodlatte expressed support for the ideas discussed by all witnesses, but ultimately did not seem to see what he could practically propose to change the course of the case law discussed. Towards the end of the hearing he suggested a change to the Federal Rules of Civil Procedure, and perhaps there is room for a new, rules-based approach along the lines of Rule 11. But in the context discussed by the witnesses, legislation dealing with substantive antitrust law what may be considered anticompetitive conduct seems more appropriate. However, to the extent that courts have carved the current Noerr-Pennington approach from the First Amendment, this approach may face constitutional obstacles. However, the possibility for legislative change still exists. The government has a compelling interest in protecting the legitimacy of the judicial process and in preserving free market competition on the merits. And members of both parties on the subcommittee seemed to agree that abusive litigation was a problem. Although the hearing yielded no concrete solution, it may represent the beginning of a conversation on curtailing the anticompetitive use of the courts a conversation worth taking note of.

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