No longer just for defendants
Invalidity studies have emerged as a valuable resource for patent monetisation, management and investment, and are increasingly being used by rights holders and even potential buyers
Invalidity analysis is becoming an increasingly important factor in IP strategy and management, not only for defendants in patent infringement suits, but also for patent owners fine-tuning their strategy or monetising parts of their portfolio, and for buyers wishing to identify reliable and appropriately undervalued assets.
Why patent validity is more important today has a great deal to do with the evolution of IP management in the face of recent court decisions and the enactment of new legislation. With the recent surge in patent validity challenges resulting from provisions of the America Invents Act, as well as the increasing number of non-practising entity assertions, invalidity analysis allows parties on both sides to handicap their risk and set the tone for litigation and negotiation. It provides the basis for meaningful discussion based on the strength or weakness of patent claims, and not just what the claims may read on.
For patent owners, if there are pre-existing concerns or anecdotal evidence regarding the validity of a patent, an invalidity analysis can be an invaluable tool for strengthening patent claims during a post-grant proceeding. The ultimate goal for patent owners is to confidently assert their strongest and most viable patent claims and avoid a situation where vulnerable patent claims are faced with a problematic invalidity challenge.
Similarly, for patent buyers, an invalidity analysis can provide a risk profile that complements a cost/benefit analysis, as it can help to identify those assets that are best suited for potential monetisation. An invalidity analysis should be an essential part of any investment due diligence, given today’s litigious climate and the fact that there are so many avenues for third parties to challenge patents. By identifying low-hanging prior art, patent investors can make informed decisions on the strength and future revenue potential of prospective investments. By digging deeper, an invalidity analysis can raise important questions about a potential patent purchase.
Anatomy of an invalidity assessment
An invalidity analysis is a post-grant examination of a patent or patents conducted by specialised researchers to determine whether, upon more extensive review, the patents are in fact warranted. In some ways this research provides what the patent office should have initially conducted itself. Invalidity analysis has traditionally been utilised during district court litigation and, typically, has been commissioned by parties on the receiving end of a patent infringement complaint.
However, with the enactment of the America Invents Act, parties have rushed to file invalidity challenges before the Patent Trial and Appeal Board (PTAB), often without the existence of concurrent pending litigation. The PTAB offers a relatively quick disposition since, by statute, an inter partes review must be completed within 12 months of commencement. Also, unlike in district court, once the inter partes review has been instituted, there is no presumption of a patent’s validity and the broadest reasonable standard applies during claim construction.
The scope of an invalidity analysis is largely driven by the client seeking to challenge a patent. Ideally, for a litigation-ready invalidity assessment, an exhaustive search of both potential 35 USC §102 and §103 should be conducted, utilising domestic and worldwide patent databases, as well as an expansive pool of non-patent literature sources. However, the scope can be as narrow as focusing on a specific inventor, author or assignee, and can be limited to certain jurisdictions (eg, Japan, China or Germany) and prior art types (eg, patents, journal articles, white papers or evidence of commercial sales).
Figure 1. Invalidity analysis: a roadmap
© 2015 Envision IP LLC
Invalidity analysis versus prior art search
An invalidity analysis differs from a standard prior art search in that a general concept or invention is not being searched. An invalidity assessment focuses specifically on claim language. As such, it is critical that previous litigation and post-grant related claim construction, in addition to the prosecution history, be reviewed so that claim elements are searched in the context of their likely interpretation and scope. In addition, careful attention must be paid to the patent’s effective filing date or earliest priority date, so that art is not later disqualified based on faulty priority alone.
Regarding privilege or the privacy of information, businesses – especially those that own or invest in patents – must be cautious when commissioning invalidity analyses. When the purpose of the search is not in the context of a specific litigation, but rather in the context of a potential investment or acquisition, a validity opinion obtained from patent counsel may preserve the content of the analysis. Courts have been inconsistent when it comes to applying the privilege to prior art searches conducted during patent prosecution. The Federal Circuit in In re Spalding Sports Worldwide, Inc (2000) applied the privilege to an invention record that contained prior art search results, but did not dissect the invention record to state specifically that prior art searches fall under the privilege. As such, patent owners and buyers should consider retaining a patent attorney to provide an invalidity analysis, rather than a search firm whose work is likely subject to discovery. While the legal opinion regarding validity may be privileged, the underlying prior art may still be subject to discovery.
District court litigation and post-grant proceedings
For defendants and petitioners alike, the ability to present invalidating prior art before the court and PTAB is more essential than ever. While the PTAB has been referred to by some as a ‘patent death squad’, invalidity for the patents that it reviews is not guaranteed simply by filing a petition. Inter partes review petition institution rates have been steadily declining, with institution rates currently at 70% as of January 2015 (source: LegalMetric, Inc). This is down from approximately 84% through the first half of 2014, according to an October 2014 study by Brian Love and Shawn Ambwani (see “Inter Partes Review: An Early Look at the Numbers”, University of Chicago Law Review Dialogue, Vol 81, p 93, 2014). These figures, while relatively high, are much lower than the historical acceptance rate of 93% for inter partes re-examination.
Inter partes review proceedings are front-loaded and the PTAB must be convinced that an invalidity challenge has merits before a petition is granted. Such a showing requires a thorough, well-executed invalidity analysis that sheds light on true prior art reading on the challenged claims. As there is uncertainty surrounding cumulative art rejections by the PTAB, petitioners are advised to identify the strongest prior art references which weigh in their favour at the outset of the proceedings. In addition, PTAB judges typically have technology backgrounds and have more experience with patent issues than their corresponding district court or US International Trade Commission (ITC) counterparts, and certainly more than the lay juries used in district court proceedings. Thus, providing relevant prior art with pinpoint citations mapped to each claim element at issue is essential for successful institution of an inter partes review petition.
Since the inception of inter partes reviews in September 2012, patent invalidity findings from review petitions have been significantly higher than findings from the previous inter partes re-examination procedure, according to Love and Ambwani, and higher than traditional district court validity challenges. The data presented in Figure 2 is based solely on prior art-based invalidity findings, and not invalidity findings under §101 (patentable subject matter) and §112(b) (indefiniteness).
As Figure 2 illustrates, inter partes reviews can be highly effective for invalidating patent claims (sources: Love et al at 102; Allison et al, “Understanding the Realities of Modern Patent Litigation”, Texas Law Review, Vol 92, p 1769, 2014).
Figure 2. Percentage of patent claims invalidated, by venue
© 2015 Envision IP LLC
However, the percentage of inter partes review petitions being instituted by the PTAB has been falling, with FY15 institution rates at 72%, compared to 74% in FY14 (source: AIA Trial Statistics, USPTO, February 5 2015). Victory at the PTAB is not guaranteed and petitions must be well crafted and have persuasive grounds for prior art invalidity. Further, in the event that an inter partes review is unsuccessful, the rights holder has the option to amend the claims and potentially focus the patent’s scope.
In addition, petitioners should be mindful that inter partes reviews come with certain prior art estoppel issues, which effectively attempt to limit a challenger to one bite of the apple when presenting a case for prior art invalidity. A petitioner (as well as a real party of interest and privies of the petitioner) may be estopped from subsequently bringing a prior art invalidity challenge before the US Patent and Trademark Office (USPTO), the district courts/Federal Circuit or the ITC if the petitioner raised or “reasonably could have raised” the challenge during the inter partes review proceeding (see 35 USC §315(e)).
The district court interpretation of “reasonably could have raised” remains unclear. However, the legislative record appears to have broadly interpreted the scope of estoppels. During debate on the America Invents Act, Senator Jon Kyl stated: “The present bill also softens the could-have-raised estoppel that is applied by inter partes review against subsequent civil litigation by adding the modifier ‘reasonably’… Adding the modifier ‘reasonably’ ensures that could-have-raised estoppel extends only to that prior art which a skilled searcher conducting a diligent search reasonably could have been expected to discover” (157 Cong Rec S1375 (daily ed, March 8 2011)).
Jitty Malik, a partner in Alston & Bird LLP’s IP litigation group, emphasises the importance of a well-executed invalidity analysis for inter partes review petitioners: “Given prior art estoppel that comes with an IPR, petitioners should conduct a comprehensive search covering numerous jurisdictions.” However, Dr Malik noted that submitting a large number of potential prior art references in an inter partes review petition is not the goal, as “identifying the most relevant handful of references that provide strong §102 and §103 evidence and fully developing the positions during any ensuing petition is critical”.
One strategy to deal with the short and concise nature of inter partes reviews which would force petitioners to make their invalidity contentions within a strict page limit is to select specific claims to challenge during the review, while leaving other claims to be challenged in concurrent district court litigation. This would allow a petitioner/defendant to bring forth invalidity contentions on different claims and in different venues.
Further, the PTAB has concluded that a party must actively participate in a post-grant challenge to become a real party in interest to the proceedings. Thus, in a joint defence situation, one co-defendant may bring forth an inter partes review to challenge the patent claims at issue. Meanwhile, another co-defendant can remain uninvolved in the review, thereby preserving its ability to potentially challenge patent validity on prior art grounds in district court.
In addition to inter partes review and litigation invalidity challenges, the America Invents Act allows third parties to submit pre-issuance prior art submissions against pending patent applications. This procedure can be beneficial to patent challengers, as it is a cost-effective way to provide prior art before a patent even issues. To date, over 2,100 pre-issuance submissions have been made, according to the USPTO.
A detailed look at these prior art submissions indicates that over 30% of pre-issuance submissions are non-patent literature (NPL) – more than the 28% which are US patents (see Figure 3). In addition, approximately 18% of submissions are foreign references (Preissuance Submission Statistics, USPTO, September 26 2014). As such, a comprehensive invalidity study must encompass both US and worldwide patent databases, with a search of foreign language references via either machine or human translation. In addition, the research should incorporate various NPL sources, including subscription-based technical journal databases such as IEEE Xplore, university research repositories and defensive publication databases (eg, the IBM Technical Disclosure Bulletin).
Figure 3. Types of prior art used for America Invents Act pre-issuance submissions
© 2015 Envision IP LLC
Invalidity analysis and patent transactions
For patent owners and buyers, invalidity analysis plays a critical role in mitigating risk surrounding patent monetisation, acquisition and portfolio management decisions. An assessment of patent validity can aid not only in selecting appropriate patents to assert, but also in selecting specific claims which may stand a higher chance of success in the face of an invalidity challenge.
In the context of patent transactions, both buy and sell-side parties should conduct an invalidity assessment as part of their due diligence. Based on the results and perceived risk of invalidity, parties can determine appropriate price guidance and determine an accurate patent/portfolio valuation. The Eastman Kodak Company bankruptcy is a recent example of how patent validity can dramatically affect a patent portfolio’s value. Kodak’s US Patent 6,292,218 was deemed invalid by the ITC while Kodak was seeking buyers of a certain portion of its patents during a court-ordered sale. Before the ITC ruling, Kodak had pegged the value of its digital capture and Kodak imaging systems and services patents at between $2.21 billion and $2.57 billion. After the ITC ruling, many third parties drastically reduced their valuations of the portfolio, with the sale ultimately netting only $525 million (see Figure 4).
Figure 4. Valuation of Kodak’s digital capture and imaging systems and services patent portfolios
© 2015 Envision IP LLC
In addition, potential buyers and licensees should consider an invalidity analysis before buying or licensing certain patents. Kodak claimed to have generated over $900 million in patent settlements from Samsung and LG. This is a key example where subsequent potential licensees would have been well advised to question the validity of the ‘218 patent, even though it had already been licensed to other parties. In the event that the patents at issue are likely invalid in the face of prior art, a licence or purchase may not be required to use the claimed technology. If a deal is still desired, the prior art evidence may be used as leverage for favourable terms by the potential buyer or licensee.
Using invalidity analysis in patent prosecution
For patent owners, understanding the prior art surrounding a patent family is useful when patent claims are being narrowed or amended – for example, in a reissue proceeding before the USPTO or during prosecution of pending patent applications. During a reissue proceeding, a patent owner can narrow the claim scope to focus on embodiments supported by the patent specification.
Patent owners can strategically take advantage of the reissue proceedings by commissioning an invalidity analysis to ensure that all potential problematic art can be addressed. Validating the proposed claim language against known prior art allows the patent owner to strategically craft claims around any potential problematic prior art, thereby including that known art in the file history. This virtually eliminates the value of the known prior art for subsequent validity challenges and reduces the available pool of prior art for a future challenger, as the art known by the applicant is added to the patent’s file history.
Timing an invalidity analysis for maximum return on investment
For operating companies, commissioning an invalidity analysis before litigation is commenced may give a party leverage in the event that it is served with a complaint or a cease and desist notice. Having knowledge of anticipatory prior art, and ideally possessing a well-documented invalidity chart, allows a party to understand its bargaining position very early into any potential settlement/negotiation with the asserting patent owner.
In many instances, a prior art search is not commissioned until the threat of litigation becomes real – after a complaint has been filed and litigation has commenced. At this point, the party will likely incur costs of filing initial pleadings and motions, while deciding the strength of its invalidity assertions and settlement positions. In order to mitigate the risk of a prolonged and costly trial, commissioning an invalidity analysis upon an initial threat by a patent owner – or even proactively before an actual threat – could provide a defensive weapon that can be used in the early stages of litigation or pre-litigation licensing negotiations.
For patent owners seeking to license and/or sell their patents, understanding the prior art landscape and determining the risks of invalidity can be a useful bargaining tool. By anticipating and analysing the merits of possible prior art challenges, patent owners can be prepared to quickly address any prior art that is brought to light by defendants and potential buyers and licensees, with the goal of moving deal discussions forward rather than focusing on the validity of their patents.
For patent buyers (ie, investors), understanding the validity of a patent is just as critical as determining the scope of its claims. By commissioning an invalidity study before entering into acquisition talks, time and resources for both the potential buyer and seller can be saved if significant prior art issues are discovered. At the very least, as part of their acquisition due diligence, patent buyers should understand the prior art landscape at a high level before closing any patent-based deal. It is common practice for patent owners and buyers to conduct evidence of use analysis before making patent-driven decisions. However, regardless of the likelihood of potential infringement, the prior art landscape relevant to a patent’s claims could minimise or virtually eliminate the value of promising evidence of use.
In addition, for operating companies that are constantly faced with patent assertions, the America Invents Act’s pre-issuance submission programme can be a powerful tool for avoiding costly litigation and settlements. Companies can strategically monitor the litigation activity of patent owners that pose an actual or potential threat, as well as the status of pending, published applications related to patents being asserted by those patent owners. By challenging the validity of a patent owner’s pending applications, in addition to the ability to file an inter partes review before federal litigation is commenced, operating companies can leverage multiple fronts in combating patent assertions.
Identifying the right firm to conduct your invalidity analysis
There are a myriad of patent search providers, both domestically and abroad. That said, locating the right firm which can achieve your goals and provide the protection required for sensitive invalidity matters can be daunting.
A litigation-ready invalidity analysis that is comprehensive and precise, and exhausts both worldwide patent databases and relevant non-patent literature resources, can cost from $6,000 to $10,000, depending on the complexity of the technology and the number of claims and claim elements being searched. Generally, an invalidity analysis will include a reference chart that constructs and interprets each claim element of interest. Pinpoint prior art citations should then be cross-referenced with each claim element to show that the claim may not be valid because it is anticipated or obvious. Users of invalidity analyses should be careful about providers promoting bargain rates, deep discounts or a free initial study. Given the legal and technical analysis, resources, experience and time required to conduct reliable research of this type, it should be the last place that parties should seek a bargain for any high-stakes business matter.
Discovery of deliverables
With regard to overseas firms that provide outsourced patent research services, courts may find that attorney-client privilege does not protect communications with foreign workers engaged in offshoring, even in circumstances where the foreign work took place under the supervision of a US patent attorney. Patent owners should take care before commissioning invalidity analysis from overseas search firms as most, if not all, of the deliverables may be discoverable. This can be especially damaging if problematic prior art is identified. By utilising a US patent attorney to conduct a search and provide an opinion, the opinion may at least be subject to attorney-client and work-product privilege.
Another issue that many US patent attorneys have faced with using overseas companies for patent-related services is the language barrier. Invalidity analysis requires a firm grasp of technical and scientific written English and an understanding of the nuances and complexities involved in patent claims and how they are written. If claims are not fully comprehended in the context of the prosecution history and potential claim construction, or if they are misconstrued by the foreign searcher’s translation, the search scope may not yield accurate or useable results.
The notion of crowd-sourcing prior art searches has become increasingly popular in recent years, with companies such as Article One Partners and Patexia offering bounties for potential invalidating art. While this approach can be effective, commissioning a crowd-sourced invalidity study can cause the patents and claims being investigated to become publicly known. It may not be prudent for patent owners and potential buyers to use this model, as using a disparate group of individuals – the majority of whom would presumably be non-attorneys – would provide no privilege in the matter. In addition, it might attract unwanted public awareness and attention, making security more difficult, if not impossible, to maintain. Given the nature of crowd-sourcing, clients may be inundated with an influx of prior art references, possibly with no pinpoint citations or explanation as to their relevance. This may lead to a potentially good prior art reference being buried in a large pool of submissions and being overlooked or discarded.
Ideally, utilising a firm employing former USPTO patent examiners, patent agents or patent attorneys who are familiar with how claim language is drafted and construed may yield more positive and accurate results.
Invalidity studies are no longer the exclusive focus of defendants preparing a defence at trial. With the resources now available to sophisticated search firms and the lower costs of good research, it would be foolish not to use invalidity studies more proactively. Opportunities to apply invalidity analyses for patent buyers and patent investment companies include patent planning, strategy, pre-emptive defence, licensing and purchases. Patent owners can use this analysis to determine the strengths and weaknesses of their portfolio (and those of others) under the protection of privilege; while those enforcing patents can calculate the risk and evaluate the likelihood of success sooner rather than later.
Accurate knowledge of a patent’s true validity and strength, rather than a notion of it based on a claims chart, is critical for achieving strategic goals for patent owners, investors and defendants alike. The ideal timing for conducting an invalidity analysis would be as early as possible in a potential deal or assertion situation, in order to address prior art issues upfront before spending time and effort on other legal aspects, such as determining non-infringement for operating companies or conducting evidence of use analysis for patent owners and investors.
For patent owners, this would be:
- before an enforcement and/or licensing campaign; or
- as part of the due diligence for sale and patent-backed financing purposes.
For patent investors and acquirers, this would be:
- during the exploratory stages of a patent acquisition; or
- as part of buy-side due diligence during deal negotiations
For patent defendants and potential licensees, this would be:
- before receiving an actual patent infringement threat;
- after receiving a notice or a cease and desist letter;
- before entering into licensing and/or settlement discussions; or
- after receiving notice or being served with a patent infringement complaint
Law firms should consider the following courses of action:
- using a domestic firm to lower the risk of inadvertent or court-mandated disclosure;
- performing multiple searches in parallel to ensure diversity of search methodologies and strategies;
- taking account of non-patent literature and foreign language references, which carry the same weight as patents for prior art purposes; and
- advising clients to assess patent validity early in patent enforcement, defence and transactional matters, in order to understand risk and/or gain bargaining leverage.