Days of change
The US patent landscape is evolving at a rapid pace. A panel of leading lawyers discusses developments and predicts what might happen next
The pace of change in the US patent landscape continues to astound. Not only is the America Invents Act still bedding in, but new proposals for further significant reforms are currently being debated in Congress. On top of that, a string of potentially game-changing decisions has been handed down by the Supreme Court and the Court of Appeals for the Federal Circuit, while the US Patent and Trademark Office (USPTO) is embarking on a major patent quality initiative. No wonder that many IP owners, both in the United States and elsewhere, are struggling to keep up.
To make sense of all that is happening and explore what might come next, we assembled a group of leading practitioners from major US law firms: Michael Drapkin of Holland & Hart; Michael Lennon of Kenyon & Kenyon; Paul Parker and Jon James of Perkins Coie; and Salvador Bezos and Richard Coller of Sterne Kessler. Over the following pages, they debate the latest developments and analyse what they might mean.
Partner, Holland & Hart
Michael Drapkin is a partner in the IP group at Holland & Hart. Mr Drapkin’s practice focuses on strategic patent counselling. He coordinates the development and management of patent portfolios, with an emphasis on patent preparation and prosecution in the United States and abroad. His practice is concentrated in the electrical and computer-related arts, with particular expertise in complex communications systems and components. He conducts patent infringement and validity analysis, providing written opinions and counselling clients on product design. In addition, he advises his clients on pre-litigation strategies and key licensing negotiations.
How would you describe the current patent landscape in the United States?
Michael Drapkin (MD): The current landscape is not particularly friendly to patent owners. Much of the impetus for this rollback has been the rise of non-practising entities (NPEs) and their efforts to monetise patents. To address this issue, over the past 10 years some large computer and technology companies invested heavily in advocacy efforts aimed at rolling back existing patent protection tools. As a result of these efforts, and the recent patent decisions of the US Supreme Court, it is now more difficult for innovative companies to protect their inventions and enforce their patent rights. Patent litigation filings are down significantly in many forums. While the number of patent filings at the USPTO is relatively stable, this will likely trend down if the current environment continues.
Partner, Kenyon & Kenyon LLP
Michael Lennon is a patent litigator, strategic/transactional lawyer and partner of Kenyon & Kenyon LLP, a national US law firm specialising in intellectual property. Over his more than three decades as a Kenyon partner, Mr Lennon has represented and acted as a strategic adviser to numerous multinational technology companies in industries ranging from medical devices to wind power systems. His practice focuses on complex patent litigation, licensing and business transactions, as well as the development of IP strategies and the acquisition and monetisation of IP rights in technology.
Michael Lennon (ML): The landscape has shifted in significant ways towards the defendants’ side in recent years, and of course there is the continuing push by certain industry segments in that direction. Although historically, despite popular views to the contrary, both USPTO ex parte and inter partes re-examination proceedings resulted in a significant percentage of claim changes or cancellations, and ex parte re-examination continue to do so, one of the most significant changes in the landscape is the availability and unanticipated popularity of inter partes review proceedings, despite their significantly higher cost. The current perception of the Patent Trial and Appeal Board (PTAB) as challenger friendly, the first-instance review by the PTAB and the statutory one and a half year limit on the duration of proceedings have made the USPTO a very popular alternative forum in which to challenge the validity of patents. It remains to be seen whether that popularity will continue if the claim construction standard applied during those proceedings is changed to the same standard used by the district courts, as some current Washington legislation is now proposing.
Paul T Parker
Co-chair of IP practice, Perkins Coie
Paul Parker, firmwide co-chair of Perkins Coie’s 250-plus lawyer IP practice, has over 20 years of experience and focuses his practice on emerging medical device companies. He has represented investors and emerging companies from incubation through acquisition/initial public offering (IPO). In the past two years, he was involved in raising over $100 million in venture funding for emerging medical device companies and has been involved in over $1 billion in acquisitions/IPOs since 2010. Mr Parker also has extensive experience in portfolio development and patent strategies, freedom to operate analyses and other IP due diligence, patent licensing and technology transfer.
Paul Parker (PP): Extremely dynamic. The America Invents Act has changed filing strategies (eg, first to file) and litigation strategies (eg, post-grant procedures), and the recent decisions from the Supreme Court and the Federal Circuit have changed the direction of both prosecution and litigation. The USPTO’s rule changes and new initiatives, along with new business models for monetising patent assets, have also added to the rapid changes in the US patent system. Although the end result is yet to be determined, these changes have provided many opportunities for creating, enforcing and defending against patents.
Director, Sterne, Kessler, Goldstein & Fox
Salvador Bezos provides services in the preparation and prosecution of patent applications before the US Patent and Trademark Office. His technical background encompasses computer graphics, databases, networking and complex computer architecture, as well as financial software products. Mr Bezos is involved in the firm’s patent office litigation and re-examination practice. He has represented patent owners and petitioners in inter partes review and covered business method review proceedings at the Patent Trial and Appeal Board. He has also handled a number of inter partes and ex parte re-examinations for patent owners and third-party requesters.
Salvador Bezos (SB): The current patent landscape is volatile. In the market, volatility presents some of the greatest risks, but also the greatest opportunities. Volatility also comes with its fair share of doomsayers. The volatile patent landscape likewise has plenty of pitfalls for the unwary, with new risks emerging at a steady clip. From KSR to Alice to the America Invents Act, every case or statute that rewrote the book on patent practice has been immediate cause for consternation. Yet clever applicants (and their clever counsel) can usually find a way to protect inventions without falling foul of what, at first, may appear to be disastrous changes in the law for applicants. The message from Congress, the courts and the USPTO is that applicants need to go back to basics and draft applications that are clear, precise and focused. This does not mean unduly narrow claims, if done correctly. Applicants that engage in volume filing should also take a moment to decide whether fewer, more robust patent filings would be beneficial. Until the USPTO’s patent quality efforts bear fruit, applicants should take the initiative of seeking enforceable patents, not merely granted patents.
How would you rate the USPTO’s ongoing efforts to improve patent quality?
ML: Based on post-grant re-examination and inter partes review proceedings, I see a significant improvement in the quality of the USPTO decisions relating to patent claim validity. The greater challenge would seem to be the first-instance examiner review of pending applications, where the USPTO, I believe, lacks the input and resources typically associated with post-grant proceedings challenging patents in response to litigation. That said, I think progress is being made and will continue to be made at the examiner level when reviewing applications for patents before grant.
PP: The USPTO is taking appropriate steps to develop and implement initiatives to improve patent quality. The Track 1 and After Final Consideration Pilot programmes have been used widely and produced immediate results. The additional training of patent examiners and the Cooperative Patent Classification (CPC) system will further enhance the quality of patents. We have found in-person examiner interviews very valuable for patent quality, but this is becoming more challenging because so many examiners work remotely. This is one area that the USPTO should address to further improve the access to examiners.
SB: Even before the recently held Patent Quality Summit, the USPTO has been focusing on the benefits of a clear prosecution record. Applicants have been largely allergic to any record beyond the bare minimum, understandably, because of the possibility that any statements may be found limiting when the patent is asserted. But by continuing to encourage compact prosecution with open dialogue between examiners and applicants, the USPTO has been helping applicants gradually to realise that by clarifying the record, patent claims may become even stronger, without forfeiting any scope to which the applicant is entitled. Building clearer records has been a slow process for the USPTO, mainly because it is not something that can be neatly implemented in a single policy and required of all applicants without significant pushback. But by continuing to educate applicants of the benefits, in prosecution and beyond, of working with the examiner to build a clear record, the USPTO will likely manage to implement its policies without any formal requirements.
MD: I have been impressed by the USPTO’s initiatives and the new director, Michelle Lee. The USPTO is on the right track with its renewed focus on quality and scope in patentability determinations. The overarching goal should be avoiding vague, unclear patents that cause uncertainty, along with unnecessary challenges and costs.
PP: Definitely. Several of the proposals should increase the opportunities for applicants to establish a positive dialogue with examiners and the prosecution process should be enhanced by the additional searching, CPC and training set forth in the Enhanced Patent Quality Initiative.
SB: The appointment of Ms Martin-Wallace to the newly created role of deputy commissioner for patent quality is an encouraging move to ensure that the USPTO is issuing patents that can survive scrutiny not only at the courts, but in its own America Invents Act trial proceedings. To the extent that the high rate of final written decisions of invalidity in America Invents Act trials is indicative of poor patents being issued, it is important that we turn our attention to the source of any quality issues. The request for comments on enhancing patent quality, and the summit held in March, focused on issues that are critical to patent applicants which recognise that high-quality applications are important to their own bottom line. Patentees recognise the need for some measure of comfort that their patent is likely to stand up to scrutiny, and that the examination process they went through was more than just a rubber-stamp registration.
MD: The Enhanced Patent Quality Initiative appropriately arms patent examiners with new guidance and improved technology tools to better allow them to make clear, complete determinations and communicate any issues to applicants upfront. The recent Patent Quality Summit and the USPTO’s willingness to engage stakeholders in discussions about ways to enhance clarity are refreshing. My only concern is that we don’t overly focus on the number of patents filed or granted. Some constituencies may advocate the benefits of approving fewer patents under the guise of quality improvement. But an overemphasis on allowance rates hurts innovators. Tracking numbers for data purposes may be necessary, but the approval process should be about efficiency, quality and clarity.
ML: It is a significant step and sets the correct tone, but I don’t believe that alone is enough to significantly enhance patent quality. In my view, the better approach would be to devote significantly more time and resources to the review of pending applications at the examiner level, before patents are granted.
The post-America Invents Act review procedures – particularly inter partes review – have given companies a new way of challenging the validity of patent claims. How is their popularity changing the patent market?
Director, Sterne, Kessler, Goldstein & Fox
Richard Coller represents innovators in complex contested proceedings before the US Patent and Trademark Office. To his legal practice, he brings significant knowledge of the medical device and consumer product industries, including experience as a biomedical engineering research assistant. He regularly relies on this foundation to manage cases involving surgical implants, telemetry systems and automotive components. In addition, Mr Coller counsels companies as they develop and bring to market new technologies, providing IP portfolio analysis, negotiating IP agreements and providing opinions regarding product clearance, patent validity and infringement.
Richard Coller (RC):Inter partes review and covered business method review proceedings have been true game changers. And the eventual ramp-up of post-grant review proceedings will only further disrupt the status quo. In short, these proceedings have given patent challengers a faster, cheaper, powerful alternative to district courts and the International Trade Commission (ITC) for contesting the validity of a patent. The overall effect, in combination with recent Supreme Court decisions, is that patent value is perceived to have been reduced across the board. The reality is that the value of low-quality patents – particularly overbroad, vague software and business method patents – has been severely reduced. In contrast, high-quality patents capable of withstanding PTAB validity challenges are still valuable assets. Accordingly, operating companies and NPEs which grew accustomed to wielding low-quality patents to their advantage during the previous decade have had to re-evaluate their business models. Patent owners looking to stay in the game should focus on prosecuting or acquiring high-quality, PTAB-proof patents. And in view of the high rates of proceeding institution and ultimate claim cancellation, accused infringers should seriously consider pursuing a PTAB validity challenge whenever a patent threat arises.
MD: The speed at which inter partes reviews have taken off is really remarkable. In the past, new USPTO procedures took some time to gain wider acceptance and take hold. The rapid pace of adoption demonstrates that there was a real need for this option, and that the America Invents Act framework was well founded. It is highly likely that the use of inter partes review will continue to grow and that they will become a primary method for parties to test patent validity. It is certainly one of the factors that is transforming patent enforcement and causing a drop in litigation. Firms and patent litigators are widely turning their attention to inter partes reviews.
ML: So far, I believe that the post-grant opportunities for challenging patent validity created by the America Invents Act have resulted in at least some diminution of the value of patents. The strength of adversarial parties in litigation has changed, moving more to the centre, and has made enforcement costlier and riskier. Given that a prevailing patent holder’s right to injunctive relief has for some time now been uncertain, the enhanced USPTO opportunities for validity challenges make the value of any particular patent, and even portfolios, more difficult to evaluate.
PP:Inter partes reviews have changed the way that both plaintiffs and defendants approach litigation. Defendants have enjoyed high success rates that have killed claims quickly and for less money than court-based invalidity proceedings. For plaintiffs, inter partes reviews have not only negated a large number of claims, but also increased the financial risks of litigation because more costs are frontloaded early in a case to defend the patents through an inter partes review proceeding. This, along with several decisions from the Supreme Court and the Federal Circuit, has led to a significant reduction in new patent litigation cases. On the prosecution side, inter partes reviews have highlighted the importance of addressing the best prior art with the examiner and having good back-up positions in dependent claims.
Have recent court cases, particularly the Supreme Court’s decision in AliceCorp v CLS Bank, brought greater clarity to Section 101 of the US patent statute or muddied the waters around patent-eligible subject matter?
MD: Last year was unusual because the US Supreme Court handled so many important patent cases. While cert is often granted to address inconsistencies and create clarity, the landscape that resulted from these decisions was very different. The overall impact of these cases, particularly Alice, served primarily to muddy the waters and create a climate of uncertainty – which is problematic for the business community and patent market.
In this series of recent decisions, the US Supreme Court regularly overturned decisions of the US Court of Appeals for the Federal Circuit. While the Supreme Court criticised the framework established by the Federal Circuit for subject-matter eligibility and definiteness, it did not provide clear guidance or solutions for practitioners going forward. By only articulating what cannot be done rather than offering direction, the US Supreme Court created an unpredictable landscape for innovators.
ML: This ruling in particular has created significant uncertainty as to how eligibility is to be determined. And as one might predict, it has permitted a broad range of patent validity challenges that previously were unlikely to succeed, since the standard by which ‘abstractness’ is to be evaluated is itself abstract. As an active litigator, I think many district court judges find it difficult to assess the precise scope of the Supreme Court’s decision – in other words, precisely what standard a district court is required to apply when deciding Section 101 issues. As a result, there are many more invalidity rulings at the district court level based on a finding of ineligible subject matter than there were pre-Alice.
Jonathan M James
Co-chair of IP practice, Perkins Coie
Jonathan James, firmwide co-chair of Perkin Coie’s 250-plus lawyer IP practice, has over 25 years of experience representing established and emerging technology companies throughout the United States and Asia in IP litigation, counselling and licensing matters. He regularly represents clients in patent litigation in district courts across the country and before the International Trade Commission. He frequently counsels clients about patent enforcement and licensing issues. Mr James also frequently advises clients about patent law and policy issues. In addition, he has litigated a number of cases involving IP-related antitrust issues and regularly advises clients about such issues.
Jon James (JJ):Alice has certainly created near-term uncertainty about subject-matter eligibility and I expect that for a while longer we will continue to see lots of Alice-based examiner rejections of claims in patent applications, Alice-based inter partes review/covered business method challenges and Alice-based invalidity motions. But I think this uncertainty will decline over time as the USPTO and the courts will develop lines that patent applicants, litigants and courts will be able to understand and apply. That’s not to say that Alice will not have a significant long-term impact on what kinds of things can be protected by patents – indeed, I think it will have a significant long-term impact. But ‘change’ is not the same thing as ‘uncertainty’, and I think that, over time, the uncertainty over the changes brought about by Alice will abate.
SB: The Alice decision did not bring clarity in any sense to Section 101, but rather fundamentally changed its parameters. With the Alice decision, the pendulum swung suddenly and wildly against software and business method patents. But in the time that followed, the Federal Circuit, district courts, USPTO and patent bar have sought clarity in the new regime, with some success. While a bright-line test is absent, and may remain so, there is now sufficient information to allow practitioners to advise clients on best practices for drafting claims to software and business methods. Where the waters remain muddiest is within the examining corps. The December 2014 interim guidelines seem to provide measured guidance for identifying statutory subject matter, but somehow fall short of empowering examiners to make a determination of patentability without concern for being second guessed. For certain categories of invention that fit the mould of DDR Holdings, identifying the right technological hook and working it into the claim can move an application to allowance. But pure business methods face an often insurmountable challenge at the USPTO, despite the fact that business methods remain statutory, and unconventional steps confining the claim to a particular useful application can provide the ‘something more’.
Overall, how would you assess the impact that recent Supreme Court decisions have had on the patent market?
ML: In my view, the impact has been similar to that of the America Invents Act, although as a practical matter in my view, other than Alice and the Nautilus decision on the standard for indefiniteness, the court’s decisions did not substantially change pre-existing law. However, the Supreme Court rulings have given more comfort to district court judges inclined to rule in favour of defendants, particularly in districts that historically have been less patent friendly. In my practice, not only has the number of opportunities presented to challenge asserted patents early in a lawsuit based on eligibility and indefiniteness increased significantly, but so too have the chances of a successful challenge.
JJ: I don’t think that you can look at recent Supreme Court decisions in isolation from the recent Federal Circuit decisions, the invalidation rates in post-grant proceedings and the pending legislative proposals; but, that said, I think it’s pretty clear that the Supreme Court’s Alice decision – and, more importantly, the number of district court decisions invalidating patents based on Alice – has effectively killed the market for buying and enforcing dubious business method patents and simple ‘computerise this’ software patents. It has also created broader uncertainty in the market, especially as to patents on more sophisticated software and methods of medical treatment, but that will likely diminish over time as we get a clearer picture of the line between patents that are dead and those that survive. In addition, the Octane Fitness decision regarding attorneys’ fees will further dissuade the assertion of dubious patents and the assertion of overbroad infringement reads on legitimate patents. It remains to be seen, however, whether and how district courts will rely on Octane Fitness to award fees more frequently than in the past.
RC: The Supreme Court issued several opinions in its last term that generally favoured patent challengers, which has contributed to a general perception that patents are becoming devalued. The impact of the Alice decision has been swift and severe. But aside from Alice, the full impact of other recent decisions will ultimately depend on how they are interpreted by the courts and the USPTO. First, the court’s decisions in Octane and Highmark theoretically made it easier for a prevailing party in patent litigation to obtain attorneys’ fees in ‘exceptional’ cases. Second, in Nautilus, the court lowered the bar for a patent challenger to bring an indefiniteness challenge by requiring a showing that the challenged claims merely lack ‘reasonable certainty’ rather than being ‘insolubly ambiguous’. Finally, the court’s holding in Limelight that induced infringement requires the identification of a single direct infringer will weaken patents with method claims that require different entities to perform different steps. While each of these decisions poses potential challenges to patent owners, it remains to be seen how the lower courts will apply them. Low-quality patents baselessly asserted by bad actors are most at risk. But I have not witnessed a drastic impact to date.
MD: The additional uncertainty resulting from these cases is likely to have a chilling effect on innovation. The cumulative impact of these recent cases sends a message to the marketplace that it will be more difficult to protect innovation and enforce patents. Technology companies that spend billions of dollars on R&D and hire thousands of employees may begin to change their business approach. The United States relies on innovation to fuel its economy and the patent system is designed to incentivise investment in innovation. These decisions could have profound negative implications for the engine of the US economy.
Away from the Supreme Court, which recent patent cases do you consider to be the most significant?
JJ: The Federal Circuit’s decision from last September in VirtnetX v Cisco was very important because it resolved the split among district courts on how to calculate reasonable royalty damages in cases in which the accused product (eg, a phone) is both the smallest saleable unit containing the patented feature and a multi-component/functionality device. The Federal Circuit held that in this kind of situation, the patent owner must exclude from the royalty base the value of the unpatented features in the product. This decision should result in lower damages awards generally and help to prevent future instances of massive damages awards on patents relating to only a small portion of a system-level product.
SB: Much to the relief of applicants and practitioners in the software space, DDR Holdings provided a needed bookend to the post-Alice bloodbath. And the timing fortunately worked out such that the decision could be cited in the December 2014 interim guidelines on 101 subject-matter eligibility. DDR Holdings serves as the current best exemplar against which to draft statutory software claims and as leverage to overcome statutory subject-matter rejections during examination. The Federal Circuit will have an opportunity to further clarify the state of 101 subject-matter eligibility for software in Planet Blue, currently on appeal and another case to watch. As another point, the Cuozzo decision – in which the Federal Circuit declined to review an inter partes review institution decision and signed off on the application of the broadest reasonable interpretation standard in those proceedings – is remarkable in no small part because the case left the existing USPTO trial groundwork intact. Judge Newman’s dissent voices the frustration shared by patent owners involved in these proceedings; but absent some unexpected action by the USPTO, it will likely take congressional action on this point to rework the trial process.
ML: The US Supreme Court rulings have had a unique impact that dwarfs the potential impact of recent Federal Circuit decisions. However, the Federal Circuit’s rulings on damages issues and expert testimony have had a considerable impact on the remedies available to patent holders in patent litigation. Similarly, the district court rulings in the wake of Alice and Nautilus have significantly changed the patent infringement litigation landscape in multiple ways for both sides.
RC: Earlier this year when the new Congress was sworn in, passage of a second round of reforms seemed highly possible, if not likely. A bill introduced by Representative Goodlatte in January largely mirrored a bill floated in 2013 and spirited lobbying campaigns were launched in its support. While the Goodlatte bill has been touted as a potential curb to abusive patent litigation, in my view it may go too far and could unduly weaken the patent system to the particular detriment of universities, start-ups and other small and mid-sized businesses. A countermeasure introduced by Senator Coons in March was perceived by many as a considerably more pro-patent bill. More recently, Senator Grassley introduced yet another bill couched as a compromise, but that largely tracks the Goodlatte bill. In view of the significant recent changes in the patent ecosystem – the rise of the PTAB, the impact of Alice and a noticeable drop in new infringement suits – one must question whether the system has already begun to correct course. Perhaps the impact of these changes should be allowed to play out before engaging in another round of reform. Of the specific proposals, the various measures in the Goodlatte bill that attempt to dictate the outcome of Judicial Conference deliberations relative to the rules of civil procedure should be viewed with scepticism.
MD: I am not encouraged, because there isn’t much debate going on. The charge is typically being led by anti-patent forces which, in my view, are the primary voices being heard; and they are leading us in the wrong direction. I remain concerned about many so-called ‘reforms’, because – rather than efforts aimed at improving the system – many are really designed to make the system less robust.
ML: I believe that the debate has been a major influence behind the introduction of the recently proposed STRONG legislation – a more balanced approach, in my opinion, to address the patent reform issues being discussed in Washington. As a patent litigator, however, I believe that the courts already have the tools to adequately address the problems that may persist. The other legislative proposals are likely to have the cumulative effect of increasing the cost as well as the risk of enforcing patents for all patent holders, including operating companies. And the unintended consequence will likely be to significantly weaken the patent system – a process that seems to have already started.
JJ: I’m a lawyer, not a politician or lobbyist, but the patent reform debate has been going on for a long time and there are powerful interests on each side. So we’ll just have to wait and see what happens.
Much of the reform debate has focused on NPEs; how much of a challenge do they still pose to operating companies?
MD: In the wake of the recent US Supreme Court cases, issues concerning NPEs are likely to decrease over time. In the last nine months, litigation has decreased because many of the incentives for trolls to bring actions have been removed. eBay effectively changed the landscape by appropriately limiting the availability of injunctions. The new proportionality standards for assessing patent damages will also curb the volume of actions launched by NPEs. Alice and Nautilus will cause NPEs to think twice before litigating patents that have overly broad subject-matter scope and less likelihood of being enforceable.
I believe that these court cases have taken effective steps to address excessive troll litigation and, overall, the playing field has been levelled. In fact, it may have slightly tipped in favour of operating companies. While trolls will continue to pose challenges if they devise new strategies, I believe that we need to employ a ‘wait and see’ approach before taking further action so that we don’t overreach.
ML: The reform debate appears to be focused on a very small segment of those companies whose business model is based on patent licensing. That focus has been leveraged to encompass virtually the entire patent licensing community, including major operating companies with significant patent portfolios, and universities. My observation is that NPEs have already adapted to the challenges being posed by the proposed reforms. Their enforcement strategies are becoming more sophisticated, and it appears to me that licensing companies will remain as a force to be dealt with by operating companies in infringement litigation. In an innovation-based economy, patents are valuable assets and, in my opinion, will remain so. And as long as they remain so, I expect that the patent licensing business model will remain financially viable.
JJ: NPEs are still a significant problem for operating companies and likely will continue to be a problem regardless of what, if any, legislation is enacted. Although the risks of injunctions and massive damages awards have decreased, enforcing and licensing patents continues to be a profitable business. It used to be an easy and profitable business, but it has become (and could get) more difficult. That said, just because it’s not ‘easy money’ any more doesn’t mean it’s not still ‘good money’. If you are asserting good patents – and there are still plenty of good patents out there – money can and will be made. So I think that the technology companies that have historically been sued a lot by NPEs will continue to be sued, albeit maybe not as often. Also, with the development of the Internet of Things, more and more products will have the kinds of processors, wireless capability and software that computers and smartphones have. This will open up a whole new set of targets for NPEs.
SB: Many companies with active product and service development engage in NPE-like behaviour, such as transferring intellectual property to holding companies. It is not expected that these companies explicitly practise their claimed inventions in order to preserve the right later to sue on their patents. The concerns in the reform debate have had little to do with the non-practising status of NPEs and more to do with behaviours by fringe bad actors seeking to assert dubious patents under questionable infringement theories. This behaviour is certainly not the exclusive domain of NPEs; nor must NPEs operate in this manner. That said, a significant number of hurdles already exist to significantly disincentivise this activity by either practising or non-practising entities. Between the Supreme Court’s recent decisions in Octane and Highmark, and the continuing successes by petitioners in America Invents Act review trials, patent monetisation strategies require careful consideration of the substantial costs and potential liabilities. To the extent that a challenge to operating companies remains, it is likely to be sufficiently attenuated at this point. Further constraints place too many barricades in the way of small practising entities that need to assert patents, in good faith, against established competitors.
The smartphone litigation wars look like they are coming to an end – what, if anything, has the patent market learned from those cases?
ML: Those disputes are just one set of many that date back decades and are a manifestation of intense competition in technology-based industries – semiconductors, medical stents and more – and the use of IP rights to protect market share. Although in some ways they are a phenomenon, I don’t see the phenomenon abating in the future. As for lessons learned, I think that the message continues to be that patents are a valuable business asset.
JJ: I think the most important takeaway from the smartphone wars is that it is very difficult for an operating company to use patent litigation to inflict market damage on its competitors. Think about the multiple lawsuits that Apple filed in district court, the ITC and courts around the world against the Android handset makers. In none of those cases was Apple able to obtain an injunction that materially limited the defendant’s ability to ship its products or compete against Apple. And the same can be said for the suits filed by Ericsson, Interdigital and Nokia against smartphone makers. The net of this is that smartphone companies, while still taking patent assertions very seriously, have learned that they can deal with patent cases – including ITC cases – as a regular part of doing business. The broader takeaway for companies (other than those in the pharma and perhaps medical device industries) is that, absent compelling circumstances, it will be very difficult to obtain an injunction that prevents a competitor from continuing to sell its products.
We’ll have to see what happens with the Unified Patent Court, but I think that the United States will continue to be the primary forum for patent litigation
RC: I’m not so sure that the smartphone wars are coming to an end. It’s true that most of the major competitors in the smartphone industry appear to have settled or are winding down their patent suits against each other, and have presumably agreed to cross-licences. But if Chinese companies such as Xiaomi, Lenovo and Huawei look to significantly expand their smartphone businesses in the United States and beyond, these battles could reignite with new combatants. In addition, many of the communications protocols, operating systems, semiconductor devices, software applications and other heavily patented technologies that formed the basis of the smartphone wars are likely to be critical to the next generation of consumer electronics products – Internet of Things devices and wearable technologies. Existing and emerging companies alike will compete for market share in these spaces, and may end up essentially refighting these ‘smartphone’ technology battles under the banner of tomorrow’s hot gadget. Patents will continue to play a key role in these fights for market share.
As the litigation climate changes in the United States, have you seen patent owners change their focus to other jurisdictions, such as Germany?
JJ: I would not go so far as to say that patent owners have shifted their focus to other jurisdictions, but I would say that they have recognised the importance in a licensing and litigation programme of having patent coverage in the major world markets. In particular, because Germany is the largest market in the European Union and its courts are more likely to grant injunctions, suits there may give patent owners leverage that they cannot obtain in US courts other than in the ITC. But I think that Germany’s is the only non-US court system that is being regularly used by patent owners – be they operating companies or NPEs – to sue multinational companies and, even then, there is almost always a case brought in the United States as well. We’ll have to see what happens with the Unified Patent Court, but I think that the United States will continue to be the primary forum for patent litigation.
RC: Talk of a potential shift in focus for patent owners from US courts to German courts has floated around for some time, but I haven’t seen it materialise. To be sure, German courts arguably offer patent owners certain advantages. Discovery is more limited, injunctions are typically easier to obtain and cases typically conclude faster. Partially as a result of the above, costs to litigate a patent dispute in Germany are usually lower than in the United States. That said – even in spite of the recent seismic systemic changes – US courts retain advantages of their own. Patentable subject matter, written description and non-obviousness hurdles are still lower in the United States than in Germany (though Alice has significantly raised the subject-matter bar). Substantial discovery is more readily available in the United States, which many patent owners use to refine their contentions over the course of a proceeding. Trial by jury in the United States is also appealing to many patent owners and these juries often award damages that are significantly higher than those awarded by German judges. Finally, the US market itself remains several times larger than the German market for most patented products and is the home court for more innovative companies.
MD: Despite recent impacts of case law making the patent application process more difficult, the United States remains the best place to protect and enforce patents. There has not been a big shift overseas and I don’t see that happening going forward.
ML: Germany has long been recognised as a cost-effective, owner-friendly forum for patent litigation – particularly so given the availability of injunctive relief to patent holders, contrary to the US climate since the US Supreme Court’s eBay decision. I’ve heard some patent owners express the view that they have changed, or will change, their enforcement focus to Europe and particularly Germany, given the perceived anti-patent legislative climate in the United States. I think that the Unified Patent Court will strengthen that focus when the system is introduced.
RC: I predict that patent reform legislation will be either significantly dialled back in scope or stalled. The reasons will be a broader recognition that bad actors baselessly asserting low-quality patents have already been sufficiently disincentivised by recent systemic changes to the patent system; and that further reforms could jeopardise a patent system that is necessary to stimulate the economy, drive investment in R&D and provide capital to innovative start-ups. I also predict that the PTAB will continue to grow in prominence. Presently declining district court case filings still probably have further to fall and PTAB filings are likely to increase and then plateau as more post-America Invents Act patents become eligible for post-grant review proceedings. Changes to these PTAB validity challenges, some of which have already been announced by the USPTO, will make these proceedings more balanced towards patent owners; but not to a degree that will discourage new petition filings by patent challengers. Finally, I predict (or at least hope) that the Supreme Court, Federal Circuit and USPTO will clarify the subject-matter eligibility analysis morass of Alice.
MD: For several of the reasons I have outlined previously – particularly the increased use of inter partes reviews and the chilling effect of recent US Supreme Court decisions – I predict that patent litigation will continue to decline. The extent to which there may be a steeper drop in cases versus a relative flattening in litigation will depend on whether the courts continue to limit the scope of what can be protected by patents. If there is some balancing out of the current anti-patent attitude in future Federal Circuit and Supreme Court cases, then litigation may remain flat. In any event, I don’t foresee a scenario in which patent litigation will increase.
ML: I believe that infringement litigation in the United States is likely to continue at its current pace despite the decline over the past two years resulting from passage of the America Invents Act and the new legislation now being proposed seeking to limit the ability of patent holders to enforce their patents. Infringement litigation will be more challenging for both patent holders and those accused of infringement, but the landscape is likely to be more even-handed than the current climate. On the plaintiff’s side, for example, a change in the inter partes review claim construction standard to the standard used by the district courts is likely to strengthen patent holders’ position both in the USPTO and in infringement litigation. Likewise, the fee-shifting provisions being proposed, if enacted, may result in awards against losing defendants. In US infringement lawsuits we are already seeing enforcement complaints based on multiple patents as a strategic countermeasure against the proliferation of defendant petitions for inter partes review filed in response to litigation.
JJ: In light of Alice and the various post-grant procedures now available, it seems pretty clear that the days of NPEs asserting dubious business method patents and simple, computerisation-oriented software patents against dozens of companies are gone. And that is a good thing. As those kinds of cases have comprised a material percentage of the patent cases filed over the past several years, we may never see the total number of cases match the peak years of 2012 and 2013. But there will still be plenty of litigation. Pharma litigation should continue apace and medical device litigation will likely increase. Moreover, there will continue to be a lot of litigation in the tech sector, but it will be focused more on hardware and systems-level patents. Also, the kinds of patents that have been asserted against computers and mobile devices will also likely be asserted against Internet of Things devices.