Joff Wild

It’s been tough going for patent owners in the US over recent years, with legislation, the courts and the Patent Trial and Appeal Board at the USPTO increasing uncertainty over validity and enforcement; this has reduced the incentives alleged infringers have to make deals, while also pushing down patent values. Now, though, things may be about to change. In this exclusive article for the IAM blog, Russell Binns, the CEO, of defensive patent aggregator AST explains why he believes that 2016 will be the year the pendulum starts to swing back – and how operating companies should react.

For the past couple of years, the US patent marketplace has effectively been in a “wait and see” mode, as it looks for clearer direction from the courts and from Congress that would help rights owners determine whether the patents they hold are valid. During this time, the balance has been largely in favour of patent defendants rather than patent owners with the courts and USPTO finding many patents invalid.  

The lack of certainty has been particularly challenging for those who simply don’t know whether the patents they hold are valid, and has even led to speculation as to whether our patent system still works. Are we returning to a period like the 1970s when courts found an unprecedented number of patents to be invalid? Is the current environment of uncertainty evidence of a weakened patent system and a signal of the inability of the United States to continue to compete globally in the 21st century? And, perhaps most importantly, how will this affect our economy?

I read the patent marketplace tea leaves more optimistically, and believe there are a number of signs that suggest that in 2016 we will see the pendulum swing back in favour of patent owners, providing them with more certainty about the validity of their patents and adding overall stability to the system.

Making sense of the current patent landscape

To understand the signs pointing forward, it’s important to consider how we arrived at the current inflection point and to understand what’s truly at stake for patent owners.

Over the past few years, developments have played out against a backdrop of two fairly seismic events that market participants are still trying to navigate. The first is the passage of the America Invents Act (AIA) by Congress in 2012. The AIA primarily harmonised the US patent system with the rest of the world by changing from a first-to-invent system to a first-to-file system. Along with that fundamental change, the AIA also added a number of third-party reforms, including post-grant challenges to patents. Post-grant challenges comprise inter partes review (IPR) as well as covered business method review (CBMs) and post-grant review (PGRs). These are all slightly different processes for a third-party to challenge the validity of issued patents.

The second big factor has been the US Supreme Court, which has made a number of important rulings in the last few years. Although they are all important, the one that has hurt patent owners the most is Alice Corp. Pty Ltd v CLS Bank Int’l, where the court found that claims directed to an abstract idea are ineligible for patent protection under 35 USC §101. The court refrained from making any broad, categorical exclusions of business methods and software from patent eligibility, but gave courts a large playing field to find patents invalid – which is exactly what has transpired. 

These developments have posed a problem for patent owners because the AIA legislation did not truly have any provisions that made it harder to invalidate a patent, and the courts did not provide a lot of guidance on how to determine validity of patents. There has been a lot of ensuing discussion and questions on how to implement the standards the Supreme Court has laid out without a clear consensus. 

A stronger patent marketplace and an uptick in NPE litigation

So why will 2016 be any different? There are several signs that the patent market is reaching a new equilibrium, which should help patent owners better determine which patents are valid and which are not.

Looking at NPEs, these entities tend not to operate as well in periods of uncertainty. This was the case in 2014, when there was little sense of where the courts or Congress were headed. So many NPEs stepped back and stayed on the sidelines, and some rejigged their portfolios to focus on patents that were less susceptible to challenges.

Following this period of reorganisation, in 2015 we saw litigation pick up again, with a very large increase in the last quarter of 2015 as NPEs began to assert patents on a more selective basis (see chart 1).

Another way of thinking about this is that for more substantial cases where large damages are being demanded, NPEs started to pursue higher quality litigation where there is less risk that a patent will be invalidated. Importantly, this trend does not change the fact that there are still many NPEs that will continue to assert weak, most-likely invalid patents against operating companies hoping to obtain nuisance settlements far below the cost for an operating company to invalidate the patents.

“Patent trolls” aside, I would still expect the trend towards more litigation to continue into 2016. There are hundreds of Alice challenges to patents pending in district courts across the country. Many courts with the lack of any good guidance from the Supreme Court or Federal Circuit are finding the challenged patents invalid. As these cases come up on appeal, we should see some of these patents found valid and the courts providing guidance on patentability. 

Another sign that patent owners should begin to see the market move in favour of patent validity is a decrease in the number of USPTO challenges filed and the Patent Trial and Appeals Board (PTAB) instituting fewer IPRs (see chart 2).

Another way of thinking about this is that the PTAB is rejecting an increasing number of patent challenges, signaling that the pendulum is moving in the direction of validity.

What 2016 might mean for operating companies

Against this backdrop, the 2016 outlook for operating companies is more nuanced. They are likely to face an increase in the quality of patent assertions from NPEs. They will also face a system that will be less likely to find those patents invalid. In other words, they will face a tougher litigation landscape – an increase in frequency as well as tougher challenges. But as patent owners, operating companies will also benefit from a patent marketplace that finds their patents valid. This is good news for them, because with more valid patents, companies are able to better monetise their portfolios by more easily licensing their rights and receiving more from selling them. In the end, a patent system that finds more patents valid, will help to stimulate the economy, as well as produce more transactions and for more money.

As for how operating companies should prepare to confront these changing market dynamics, they should consider more carefully how they build and protect their portfolios and how they manage the portfolios they have. Further, given the current patent environment, patent owners would be wise to focus on quality over quantity. They should invest the necessary time and money in preparing and prosecuting patents with greater clarity, so that 10 years from now there will be confidence that those patents will survive any challenges and be examples of high quality patents.

In summary, 2016 will hopefully help determine what is patentable and what is not. The good news is that in 2016 and beyond we should be able to take comfort in a stronger patent system that increases the validity and value of patents for patent owners.