A new world order

The United States is the undisputed cradle of the patent market. As the US economy grew to become the world’s largest, kindled by the spirit of innovation that suffused its burgeoning industries, so the value of US patents rose and owners realised there was money to be made from licensing their inventions to others.

This was in large part thanks to a patent system designed to reward inventors for their enterprise and ingenuity – whether they went on to turn those patents into products or not. The system quickly became the gold standard by which others were judged and the US patent evolved into the reserve currency for intellectual property throughout the world.

But to what extent does this remain the case today? The twin forces of globalisation and seismic changes to the US patent system suggest the dawn of a new era. As patent protection weakens Stateside, a multi-polar world is emerging further east – in Europe and beyond to Asia – which is challenging America’s primacy.

With injunctive relief no longer so readily available in the United States, patent owners are increasingly opting to file infringement suits in Germany and other continental jurisdictions instead. The launch of the Unified Patent Court (UPC) and unitary patent, expected in 2017, is further fuelling interest in European forums. In Asia, meanwhile, China’s efforts to transition to an innovation economy and the emergence of domestic champions such as tech giants ZTE, Huawei and Xiaomi have strengthened patent rights in the world’s second-largest economy. And with the Indian government starting to overhaul the national IP regime, foreign companies have been chalking up some notable victories in the country’s courts.

For all the progress in other markets and the problems in the United States, however, it is worth remembering that the US patent system still offers significant advantages. The country has a lengthy track record of fostering a secondary market and a history of valuing high-quality rights. Investors are far more experienced in allocating capital to alternative assets, giving patent owners increased access to financing. While a licensing executive right now might fail to appreciate the benefits of the US market, there is a good reason why most of the world’s publicly quoted non-practising entities (NPEs) are American.

Laurie Self

Counsel of government affairs, Qualcomm

“It’s far too premature to conclude that we’ve done permanent damage to the US patent system”

“What we’re seeing today is part of the evolution of the patent system,” suggests Laurie Self, counsel for government affairs at Qualcomm. “The pendulum swings back and forth and it’s far too premature to conclude that we’ve done permanent damage to the US patent system.” That may be so; but however things play out, it seems certain that the United States will no longer dominate in the way it has for more than a century.

Decline and fall?

There is no doubt that over the last decade, patent owners in the United States have seen their rights slowly but inexorably chipped away. Your position on the precise cause of this may depend on where you sit in the market; you may even feel that some sort of correction was needed. For those in the business of monetising patents, however, the rot started to set in with the US Supreme Court’s 2006 decision in eBay v MercExchange, LLC, which held that injunctions should not be automatically issued following a finding of infringement, especially if the plaintiff did not practise on the relevant patents. Since then, the availability of injunctive relief in the United States has steadily declined.

At a stroke, the nine Supreme Court justices seriously eroded one of the key levers for patent owners in licensing negotiations. The ability to obtain an injunction was not the sole attraction of litigating in the United States – deep discovery, high damages awards and the absence of fee-shifting provisions further enhanced the appeal for plaintiffs – but when a belligerent defendant had to be forced to the negotiating table, the threat of exclusion from this crucial market proved a potent force.

Thanks to eBay, for some infringers the cost of stealing a competitor’s idea now essentially boils down to a potentially unfavourable damages award and legal fees. This bill could still stretch into the hundreds of millions of dollars in certain sectors; but in today’s global tech product market, that pales in comparison to the spoils to be won from market-leading devices.

The high-profile patent wars between Samsung and Apple are a case in point. Following a series of protracted courtroom battles, the Korean tech giant was left on the hook for over $500 million. That would count as significant in most people’s books, but it is just a fraction of the billions that Samsung has earned as the world’s largest smartphone maker. There is perhaps no better example of what has been called ‘efficient infringement’.

But it is not all about eBay; since then, a string of decisions from the Supreme Court down have progressively weakened the rights of patent owners. “No one is arguing with a straight face that the US is a better place to bring an infringement suit than, say, the UK,” insists IPNav founder and current head of nXn Partners Erich Spangenberg. “And the UK used to be a horrible place to bring a case.”

In fact, for most of corporate America, the uncertainty that has developed over exactly what constitutes patent-eligible subject matter under Section 101 of the US patent statute has arguably been far more troubling than the decline in the availability of injunctive relief.

Bilski v Kappos, Association for Molecular Pathology v Myriad Genetics, Mayo Collaborative Services v Prometheus Labs and, most recently, Alice Corp v CLS Bank all brought the issue of patent eligibility to the fore, but for the most part left patent owners none the wiser as to what qualifies for patent protection. The Supreme Court has avoided issuing bright-line rules, leaving lower courts uncertain as to exactly how they should interpret its opinions and put them into practice.

Figure 1. Global patent filings

Note: The IP office of the Soviet Union, not represented in this figure, was the leading office in the world in terms of filings from 1964 to 1969. Like the JPO and the USPTO, it saw stable application numbers until the early 1960s, after which it recorded rapid growth in applications filed.

Source: WIPO

Even USPTO Director Michelle Lee admitted at an event in Washington DC in July 2015 that there is still “quite a bit of ambiguity” surrounding patent-eligible subject matter, and that “we all hope for greater clarity on an issue that’s very complicated”. When the head of the government agency charged with issuing patents admits that it is unclear exactly what should enjoy protection, the uncertainty pervading the US system is thrown into stark relief.

David Kappos

Partner, Cravath Swaine & Moore

“I don’t see a serious risk of things spiralling out of control in the EU”

Most alarmingly for the US tech community, the 2014 Alice case – which focused on a computer system for settling complex trading deals – has caused some to fear for the patentability of software. In September last year, in a paper published exclusively on the IAM blog, former USPTO Director David Kappos and Aaron Cooper, the former IP counsel to the Senate Judiciary Committee, made the case for “why software implemented inventions are – and must remain – patent eligible”. That they should feel compelled to make such exhortations illustrates the existential crisis that is gripping IP practitioners in the software industry. Now, adds Kappos, “The courts have sent a message that they don’t think software innovation is worth patent protection.”

Manny Schecter

Chief patent counsel, IBM

“Right now, there’s no bigger issue than patent-eligible subject matter”

Some would caution this is a perennial problem; Manny Schecter, IBM’s chief patent counsel, points out that the debate over patentability has waxed and waned throughout his career. Even he would concede, however, that “right now there’s no bigger issue”. Clarity is needed, and while he falls short of calling outright for US legislators to step in, he would like “Congress to consider acting”. “The time has come to acknowledge that we really don’t know how to do what the Supreme Court has told us to do,” he adds.

Over the Hill

Unfortunately, all the evidence would suggest that Congress will at best take many years to clear up the uncertainty, and at worst may set in train a string of unintended consequences by meddling with the law. The passage of the 2011 America Invents Act is a case in point.

The first major patent statute in the United States in over 50 years, the America Invents Act changed the system from first to invent to first to file, bringing it into line with most other regimes. More controversially, however, it also overhauled the review procedures at the USPTO, presenting defendants with a quicker, cheaper way of challenging patent validity than going through the courts.

The new procedures – covered business method reviews and inter partes reviews in particular – have proved wildly popular with defendants seeking to contest the validity of patents asserted against them. Monthly inter partes review filings have hovered around the 150 mark – far in excess of the 50 cases per month predicted when the America Invents Act was passed.

And for the most part, the new reviews have been a real boon for defendants. According to law firm Harness Dickey, which has analysed three years of data, just 37% of those claims that were challenged and reached a final written decision survived an inter partes review. Although this percentage has improved somewhat since, there is no doubt that inter partes reviews have added to the general climate of uncertainty in the United States.

Figure 2. China’s IP courts: Year One

NB: Figures quoted herein reported by China Daily in October 2015; most recent update to Beijing IP Court statistics reported by Xinhua in November 2015

Compounding this is the prospect of new reforms which could further deter patent owners from bringing infringement suits. For instance, the Innovation Act – a bill which was approved by the House Judiciary Committee in 2015, but was ultimately pulled from a vote in the House of Representatives in July – includes a controversial presumptive fee-shifting provision. While this would not move the US system close to, say, that of the United Kingdom – where the losing party is hit with costs in the vast majority of cases – it would nonetheless represent a significant departure from the status quo for litigants.

This has all made for what many regard as a unique confluence of issues. “What is happening in the US is a perfect storm of activity in the courts, with the Supreme Court hearing cases at a rate that we haven’t seen in more than 100 years, increased interest by antitrust agencies in licensing practices and ongoing debates in Congress about the next round of reform,” states Professor Adam Mossoff of George Mason University.

Others would contend that the current situation is the inevitable result of patent monetisation. “As the emphasis shifted to looking at IP assets as monetisable, we started down a path that exposed some of the weaknesses in the US system because people started asserting patents that they wouldn’t have done before,” says Garrard Beeney, co-head of the IP and technology group at Sullivan & Cromwell. This, he suggests, has led to a backlash in the US courts and Congress; it has also forced more patent owners and monetisers to look beyond the United States in their patent assertion strategies.

Europe’s answer

That Germany is an efficient and relatively cheap venue in which to bring patent suits is no great secret. “Germany has a very competent court system which has been popular for many, many years,” affirms Gustav Brismark, vice president of patent strategies and portfolio management at Ericsson. However, its popularity has grown significantly over the last decade as the US climate has become tougher for patent owners. With specialist judges hearing cases, tight cost controls and the possibility of securing an injunction in Europe’s largest economy, the appeal is obvious, even if damages awards remain far below US levels.

As a result, US-based NPEs are increasingly bringing infringement cases in the German courts: the likes of Marathon, Acacia, Intellectual Ventures, Vringo and Unwired Planet have all filed suit in the jurisdiction. Germany also proved a popular forum at the height of the smartphone wars, with Apple and Samsung launching actions and Motorola winning an injunction against Microsoft. The risk of exclusion from the market even prompted the Windows giant to move its distribution centre from Germany to the Netherlands.

But many people who have litigated in Europe or are familiar with the different legal systems warn that Germany is not about to become the continent’s answer to the Eastern District of Texas ‘rocket docket’ – the go-to US venue for patent owners.

For one thing, local lawyers are chary of frivolous cases. “German lawyers will not take a case unless it has merit,” explains Yann Dietrich, senior vice president licensing of sovereign patent fund France Brevets. “For a lead lawyer, the most important thing is their relationship with the judge.” He goes on to point out that, for all the appeal of injunctive relief, actually enforcing a German injunction is easier said than done – not least due to the multimillion-euro bond that must be provided at the start of the enforcement process.

While much of the attention on Europe remains concentrated on Germany, this may change with the advent of the unitary patent and Unified Patent Court (UPC). Expected to launch at the end of this year or early in 2017, the new regime will establish a pan-EU enforcement system with a central court in Paris, specialist courts in Munich (for mechanical engineering cases) and London (for chemistry cases, including pharmaceuticals), and an as-yet unspecified number of local divisions, as well as a court of appeals in Luxembourg and arbitration and mediation centres in Lisbon and Ljubljana.

As with the German courts, the attraction of the UPC is that cases will be heard by specialist judges and litigation will be cheaper than in the United States, where the cost can easily hit $3 million. In addition, patent owners will be able to secure EU-wide decisions, making the threat of a damages award or an injunction much more potent than a positive result that applies in only one country.

Concerns over the new system focus mainly on the extent to which the worst aspects of the US regime – particularly forum shopping – may be exported to Europe. Could, say, Romania or Malta become the continent’s answer to East Texas? But some would suggest that the sceptics are missing the bigger picture.

“Disputes follow important economic activity,” insists David Kappos, former head of the USPTO and now a partner at Cravath, Swaine & Moore. “I don’t see a serious risk of things spiralling out of control in the EU. I do believe that the unitary patent and the UPC will lead to an increase in patent activity, in funding innovation and in activity around monetisation such as licensing and joint ventures. Yes, there might be an increase in litigation; but that’s all part of improving the region’s ability to transfer great ideas to economic outcomes in the marketplace.”

What is more, the European Patent Office (EPO) has lately been winning plaudits for the quality of the patents that it issues. In the most recent IAM benchmarking survey published last summer, 60% of corporate respondents rated EPO-granted patents as either “excellent” or “very good” – by far the best rate of the IP5 (which also comprises the patent offices of Japan, Korea, China and the United States). That gives Europe a much better hedge against the frivolous lawsuits based on poor-quality patents which have been brought in the United States.

This emphasis on patent quality is further highlighted by the fact that some major US tech companies, such as Microsoft, have adopted the European Technical Standard as a template for their worldwide filings. This helps to ensure that the quality of granted patents remains high and protects against invalidity challenges on the kinds of grounds raised in Alice.

Eastern promise

But it is not just developments in Europe that are making the US patent system increasingly unattractive for patent owners. In China, an overhaul of the IP regime and a continued emphasis on transitioning to an innovation economy have prompted overseas entities to consider the world’s most populous country as a potential venue for litigation. While a considerable degree of cynicism undeniably remains among western companies over the strength of the rule of law and local protectionism, attitudes are now starting to shift.

According to Erick Robinson, formerly director of patents in Asia for Qualcomm and now with Rouse, intellectual property in China was regarded as “a joke” as recently as 2010; but the last five years have seen a sea change in the government’s approach, as Beijing has started to advocate robust patent protection as the best way to promote home-grown innovation. “At some point you have domestic industry players, and so you have something you want to protect,” he says.

In late 2014 a specialist IP court opened in Beijing, followed by dedicated institutions in Shanghai and Guangzhou. They have quickly become a runaway success, with close to 8,000 cases filed in the first year in the capital alone. Perhaps most remarkably, almost 40% of those cases involved a foreign party.

As in Europe, litigants are attracted by the availability of injunctive relief, the promise of a relatively rapid decision (generally within six to 12 months, according to Robinson) and a judiciary that is generally considered friendly towards patent owners. According to Spangenberg, the shift in China has been such that he is now close to filing his first infringement lawsuit in the country.

The newfound importance of intellectual property in China is further borne out by the increase in patent filings. In 2014 the Chinese patent office received just over 900,000 applications – more filings than the United States and Japan combined. Some observers suggest that many of these may still be of questionable quality; but as Chinese enterprises increasingly compete on the global stage, it seems inevitable that the quality of their portfolios will only improve.

Indeed, the meteoric ascent of major domestic outfits – particularly in the tech sector – has done much to transform attitudes to intellectual property in emerging markets such as China. And it has also changed the licensing dynamic for western multinationals. “In licensing our portfolios, it was sufficient in the past to focus just on the US and Europe, because we would capture all the main industry players,” Ericsson’s Brismark says. “Now you have countries with local champions and so you need to assert patents in new markets.”

India, for instance, has become a happy hunting ground for the Swedish company, as it has notched up a number of favourable court decisions. In September 2015 a Delhi court hit local player iBall with an import ban after Ericsson filed suit against it. That quickly forced it to the negotiating table, where it ultimately acquired a worldwide licence to Ericsson’s portfolio.

As in China, attitudes to intellectual property also appear to be changing in India. The government is considering legislation which would establish a specialist IP court and help accelerate the patent prosecution process, in part to cut down on a mounting backlog of applications. Those initiatives are largely a response to demands from the pharmaceutical industry, which has long criticised the lack of IP protection in the country. But as Ericsson’s recent successes confirm, foreign companies in all IP-rich sectors stand to benefit.

For all the progress being made in India and China, however, many foreign businesses still approach these new markets with considerable caution – perhaps not without cause. In China, for example, at the same time as the government has been trumpeting its commitment to an innovation economy, the antitrust agencies have been scrutinising the licensing practices of several western companies with a hawkish eye.

In February 2015 Qualcomm revealed that it had accepted a $975 million fine and agreed to revise its licensing policy in China following an investigation by the National Development and Reform Commission (NDRC). InterDigital also agreed to change its licensing practices in the country after the NDRC began an investigation.

This looks like a concerted attempt by the Chinese authorities to safeguard local companies from excessive licensing fees. But it is not just in China that antitrust authorities are on the lookout for possibly abusive licensing behaviour. Qualcomm, for instance, also faces investigations in Korea, the European Union and the United States as the licensing of standard-essential patents, in particular, has come under the microscope.

As well as antitrust concerns, many still question China’s commitment to the rule of law.

While an NPE might be willing to take a chance on litigating in the country’s courts – in part to test how plaintiff friendly they are – for an operating company, the equation is very different. It raises the prospect of a countersuit and could potentially drag key Chinese suppliers into protracted proceedings. Moreover, there is still considerable scepticism as to whether foreign companies can prevail against large domestic companies that are clearly viewed as national champions. “I think we’re a generation away from people having complete confidence in the system,” acknowledges Sullivan & Cromwell’s Nader Mousavi.

In part because of those concerns, we may also still be many years from a robust secondary market for patent assets of the kind that has developed in the United States. “If you said to a money manager in New York, ‘Invest in an IP monetisation campaign in China,’ they would say, ‘You must be joking,’” asserts Kappos. For that to change, he continues, “you need companies – both foreign and domestic – to win when they should and lose when they should lose, based on the facts and law and not any other factors”.

Follow the money

Murali Dharan

CEO, IPValue

“The patent world may come to be dominated by a basket of filings from several jurisdictions”

One way to put the shifting dynamics in China and other patent markets into context, claims IPValue CEO Murali Dharan, is to look at the evolution of the modern financial system. While much securities law and practice might have developed in the United States, there is no doubt that the financial world is now split between major centres in New York, London and Hong Kong, with secondary hubs in the likes of Frankfurt and Singapore. New York might still be seen as the world’s financial capital, but today it is more a case of “first among equals”.

Dharan extends the analogy to the money markets, suggesting that just as the world is dominated by a collection of reserve currencies – including the dollar, the euro, the pound, the yen and the yuan – so the global patent system, and licensing in particular, might come to be based around patent filings from several jurisdictions. “I think you need to view the IP world as a basket of currencies rather than a monolithic market dominated by the US,” he concludes.

The evolution of the present-day licensing system can be traced back to the 1980s and the development of the modern tech industry. Much of that industry was initially dominated by the United States; as players such as IBM begun to monetise their portfolios, so US-issued patents came to dominate the market. That system was in turn supported by the US courts – particularly the Court of Appeals for the Federal Circuit – which became strong supporters of patent rights.

That the primacy of the US market is no longer assured thus reflects not just the decline in patent rights in the world’s largest economy, but also the globalisation of the tech industry. The emergence of major players such as Samsung, Lenovo and Huawei has prompted a shift in how patent rights are viewed in some key emerging economies.

For large multinationals looking to monetise their portfolios, the development of a multi-polar patent world should largely be welcomed. It means that they must now file on a worldwide basis to cover key markets – a development that has become one of the dominant trends in patent prosecution over the last decade – which drives up filing and maintenance fees. But strengthened IP rights and specialised new judicial forums have improved their chances of successfully defending and asserting their patents, and have gone some way towards mitigating against the increasingly inclement environment in the United States.

That should also help to enhance the values of patent portfolios, which have taken a battering as sentiment in the United States turns against patent owners. “If we have greater stability in the patent systems of countries like China and other emerging economies, and if Europe is seen as a venue with strong support for patents, I’d say that that’s a good thing,” concludes Qualcomm’s Self. “It means that it’s not just the US that’s providing a stable base for patent investment.”

All that said, however, no one should write off the United States just yet. For one thing, the sheer volume of patent assets in the jurisdiction remains unmatched. “The quality of European patents is very good, but there’s not the same number of available assets as in the US,” says Lillian Shaked, an Israeli-based lawyer at Shaked & Co who has advised clients on deals in the United States, Europe and Asia.

“For many parts of our business, we would still consider the US system to be the most valuable; but a handful of jurisdictions are much closer to parity than in past years,” adds IBM’s Schecter.

While the pendulum in the United States may have swung away from strong patent rights for now, there is no doubt that it could just as easily swing back. If, for example, the Federal Circuit and, possibly, the Supreme Court were to change the jurisprudence around injunctive relief or bring clarity to the issue of patent-eligible subject matter, much of the uncertainty in the United States could disappear overnight. Those might be big ‘ifs’; but the prevailing truth is that few, if any, markets can match the dynamism of the US system.

It seems increasingly clear that we have entered an era of unprecedented change in the global patent market, which will likely take many years to play out. The United States may remain at its centre, but its dominance appears to be coming to an end. A new world patent order is emerging.