In a recent decision, the Supreme Court eliminated laches as a defense in patent litigation; as a result, defendants are more vulnerable to unexpected claims of patent infringement.[1]  Given this new layer of risk, it is even more important to conduct thorough and nuanced patent infringement diligence on an M&A target, and parties to M&A transactions should take this increased exposure to liability into account when negotiating the relevant representations and warranties and indemnities.

Background.  Section 286 of the Patent Act limits the damages that can be collected in patent infringement actions by barring recovery of damages for infringement committed more than six years prior to the plaintiff filing a complaint.[2]  While this is not a statute of limitations that precludes bringing a claim, it is a significant limitation to the power of patent owners to enforce their rights with respect to past infringement.  Until recently, it was assumed that patent owners were subject to another significant limitation, namely laches, a legal doctrine that serves as a defense to patent infringement by protecting defendants against unfair delays in plaintiffs commencing suit.  With laches, if plaintiffs unreasonably, inexcusably and prejudicially delayed filing suit, they could be barred from recovering damages for the period before suit was filed (including, prior to the SCA Hygiene case discussed below, for infringement that occurred during the statutory six-year period prior to filing), and their delay might impact whether they could obtain an injunction against future infringement.  In 2014, the Supreme Court addressed the nearly-identical defense available in copyright claims in Petrella v. Metro-Goldwyn-Mayer, Inc.,[3] deciding that “laches cannot defeat a damages claim brought within the [three-year] period prescribed by the Copyright Act’s statute of limitations.”[4]  After Petrella, it became doubtful whether laches could continue to bar patent claims brought within the statutory six-year period as previously thought.

The SCA Hygiene case.  In 2003, SCA Hygiene Products Aktiebolag contacted a market competitor, First Quality Baby Products, alleging patent infringement; yet only in 2010 did SCA Hygiene actually sue First Quality.[5]  The district court granted defendant’s motion for summary judgment based in part on laches and the Federal Circuit affirmed, finding that the plaintiff “unreasonably and inexcusably delayed” in filing suit, and such delay materially prejudiced the defendant.[6]  The Federal Circuit reheard plaintiff’s appeal en banc after the Petrella case was decided but ultimately upheld its decision, reasoning that Petrella should not be extended to the patent context.[7]  However, last month, the Supreme Court reversed, holding that the principles of Petrella apply equally to patent infringement litigation; accordingly, laches cannot be used to limit recovery of patent infringement damages for claims brought within a limitations period set by statute.  (For a more complete discussion of the SCA Hygiene decision, please refer to our prior alert memo).

A new anti-defendant trend in patent cases?  SCA Hygiene is the second recent plaintiff-friendly Supreme Court decision that increases uncertainty for defendants in patent litigation.  Last summer, in Halo (discussed in our prior blog post here), the Supreme Court broke with its previous pro-defendant stance by relaxing the standard for awarding enhanced damages for patent infringement, thus increasing the likelihood that a losing defendant will have to pay up to “three times the amount [of damages] found or assessed.”[8]  Here in SCA Hygiene, the Court refused to bar plaintiff’s ability to collect damages for infringement occurring within the six-year period prior to commencing suit, even if there was an unreasonable, inexcusable and prejudicial delay in commencing such suit.  Both cases expand potential defendants’ exposure to patent infringement damages, including enhanced damages.

While succeeding in a laches defense was always challenging, its availability may have deterred patent holders from tactically delaying suit.  Now patentees—and in particular, non-practicing entities (colloquially referred to as “trolls”)—can choose to “wait and see” while a defendant develops the market for an infringing product and engages in years of sales, thus maximizing their claimed damages.  It is worth noting that equitable estoppel, which can result in complete dismissal of an infringement suit, is still available as a defense against “unscrupulous patentees.”[9]  However, equitable estoppel requires a more demanding showing than the now-defunct laches defense:  a defendant must prove that the plaintiff communicated in a misleading way that led it to believe that the plaintiff would not sue it for infringement.

Implications for M&A transactions.  Without laches serving as a deterrent for plaintiffs or as a shield for defendants, parties can no longer assume that “no news is good news” in terms of patent infringement liability.  This has two important implications for M&A transactions.

First, during the diligence phase, purchasers in M&A deals should more thoroughly investigate any possibility of past infringement by a target.  Even before SCA Hygiene, the absence of allegations of infringement (whether through cease and desist letters, invitations to license or threats to sue), or the absence of an actual suit several years after such an allegation was made, could not prove that a target would never face a patent infringement suit.  Nevertheless, the fact that longstanding conduct went unchallenged, or that asserting entities never followed up after threatening to sue, did offer a measure of comfort since laches would be available as a defense to bar or limit damage claims and demands for injunctions in some cases.  Moreover, even with respect to complaints filed within the statutory six-year period, potential plaintiffs may have been disincentivized from delaying infringement actions, so a buyer might conclude that the absence of a court action suggested that the patent holder was unlikely to file suit at all.  Now that plaintiffs can collect damages for infringement occurring up to six years prior to filing suit despite their delay tactics during that period, M&A purchasers cannot assume that just because the target has not heard (or heard back) from a patent holder the risk of facing suit in the future is small.  Therefore, they should carefully diligence any risk of patent infringement within the preceding six years.

Additionally, parties should be mindful of this heightened threat of patent litigation when negotiating risk allocation in a purchase agreement.  In light of diligence findings and the general risk of patent litigation in a particular industry, a buyer should carefully consider how far the look-backs in reps should extend and how long they should survive so as to mitigate the risk of costly litigation.  Since the risk that a target could face unknown infringement claims has increased, parties should consider the appropriateness of knowledge qualifiers.  Finally, sellers in M&A transactions should account for their increased exposure to indemnity obligations arising from breach of such reps (associated with patent suits from long-dormant plaintiffs) and adjust their indemnity obligations accordingly.

[1] SCA Hygiene Prod. Aktiebolag v. First Quality Baby Prod., LLC, 137 S. Ct. 954 (2017).

[2] 35 U.S.C. §286.

[3] 134 S. Ct. 1962 (2014).

[4] SCA Hygiene, 137 S. Ct. at 960.

[5] Id. at 959.

[6] SCA Hygiene Prod. Aktiebolag v. First Quality Baby Prod., LLC, 767 F.3d 1339, 1343 (Fed. Cir. 2014).

[7] SCA Hygiene Prod. Aktiebolag v. First Quality Baby Prod., LLC, 807 F.3d 1311 (Fed. Cir. 2015).

[8] 35 U.S.C. §284.

[9] SCA Hygiene, 137 S. Ct. at 967.