District Court Dismisses Claims Based on a Non-Practicing Entity’s Allegedly Fraudulent Efforts to Enforce Its Patents: Court Grants NPE’s Motion to Dismiss RICO, Unfair Competition and Tort Claims After Finding Complaint Allegations Failed to Support Sham Exception to Noerr-Pennington Doctrine

Sullivan & Cromwell LLP - February 8, 2013

The effort to address IP litigation brought by non-practicing entities (“NPEs”) has markedly increased over the last several months. In addition to seminars held by U.S. regulatory authorities and discussions about the use of competition laws to address certain NPE practices (see more on this below), private litigants have responded to infringement allegations by asserting claims and counterclaims against NPEs based in tort, contract law and other theories. In the most recent judicial decision in the area, a district court rejected at the pleading stage claims that an NPE had fraudulently asserted its patents in violation of several laws. The district court held that a widespread notice letter campaign and subsequent litigation by the NPE was protected activity and fell within the right to petition the government. The court did suggest, however, how such tort and other claims could successfully be pleaded against the NPE providing there was a basis to plead the underlying requisite facts.

In Cisco Systems, Inc. et al v. Innovatio IP Ventures, LLC., manufacturers of IEEE standard-compliant Wi-Fi equipment filed actions against an NPE, Innovatio, alleging that Innovatio’s efforts to enforce its patents against the manufacturers’ customers, including 8,000 pre-suit demand letters, were fraudulent, based on material misrepresentations and omissions in the demand letters, and inconsistent with Innovatio’s contractual commitment to license its patents on reasonable and non-discriminatory (“RAND”) terms. The manufacturers asserted RICO (a U.S. statute addressing certain acts of “racketeering”), unfair competition, civil conspiracy, tortious interference and unclean hands claims (collectively, the “tort claims”), as well as claims for breach of contract and promissory estoppel (the “contract claims”).

In the first decision to consider such tort claims, the United States District Court for the Northern District of Illinois granted Innovatio’s motion to dismiss those claims. Applying the Noerr-Pennington doctrine protecting the right to petition the government (including through litigation) to bar the tort claims, the district court held that plaintiffs failed to provide allegations sufficient to support the sham exception to that doctrine. The court did not dismiss the contract claims, however, holding that plaintiffs sufficiently alleged that Innovatio had breached its RAND commitment. Those contract claims will now proceed to the discovery stage.