The PTAB at five: reduced leverage for NPEs
The Patent Trial and Appeal Board celebrated its fifth birthday in September and continues to provide an efficient and cost-effective way to challenge questionable patents. It has its critics – most notably, those who enriched themselves under the old system
“I recommend... that further restraints be imposed on the issue of patents to wrongful claimants, and further guards provided against fraudulent exactions of fees by persons possessed of patents” – Letter from James Madison to Congress, April 11 1816
The America Invents Act – the most significant change to the US patent system in more than 50 years – turns six this September.
To many, the act provides a welcome, efficient means of challenging the validity of dubious patents, with some public servants maintaining that it supports the public interest in limiting unnecessary monopolies – indeed, data suggests that it has lowered the cost of defence for every category of patent litigation. Others, particularly those heavily invested in patent monetisation, argue that it revokes granted patent rights too easily. All can agree that the act’s impact has been dramatic.
The America Invents Act authorised anyone who is not the patent owner to seek the cancellation of patent claims through its post-grant proceedings – inter partes review, post-grant review and covered business method post-grant review, among others. The rechristened Patent Trial and Appeal Board (PTAB) has now been handling these and other proceedings for five years.
Of the post-issuance proceedings established by the act, inter partes reviews have been by far the most popular with companies. A third-party-initiated administrative challenge resolving patentability disputes, inter partes reviews task three or more technically trained administrative judges to determine issues of novelty and obviousness based on patents and printed publications without the high cost and lengthy duration of district court litigation. District court judges may stay infringement proceedings to await the outcome of a ruling on patentability.
Annual, anonymous data provided by litigation and inter partes reviews counsel to the American Intellectual Property Law Association (AIPLA) suggests that inter partes reviews reduce the likelihood and frequency of nuisance settlements based on the rational economic behaviour of avoiding the transaction costs involved with litigation, regardless of validity. Indeed, every category of mean litigation cost is down across the PTAB from its general peak in 2013, according to the AIPLA’s economic survey of 2017.
As we will see, the America Invents Act has reduced – although clearly not eliminated – the economic imbalance inherent in patent infringement litigation. Further, it has reduced the financial effectiveness, but not the frequency or prevalence, of the non-practising entity (NPE) business model of buying patents and extracting nuisance settlements. (In fact, while some high-profile publicly traded entities have suffered under reduced expectations, such as Marathon Patent Group and Inventergy Global, many private entities have flourished, at least in terms of suits brought – for instance, IP Edge, Sportbrain and entities related to prolific assertors such as Leigh Rothschild, Brian Yates and Nicholas Labbit). At most, it has reduced the amount of money purely rational actors will settle for; a huge plus, but certainly not a solution, and certainly not a rout of patent rights. Litigation continues apace. Settlements solider on. And they stand set to rise in volume, particularly in the age of the modern US Patent and Trademark Office’s (USPTO) ballooning grant rate, which looks set to hit another record high of more than 320,000 patent grants this year (up from 100,000 just a few years ago).
Inter partes reviews
Inter partes reviews are broken up into two major phases: the pre-institution phase and the post-institution trial.
The petition must include:
- grounds for standing;
- an identification of the challenge, including the claim(s) challenges;
- the “specific statutory grounds under 35 USC 102 or 103 on which the challenge to the claim is based and the patents or printed publications relied upon for each ground”; and
- the supporting evidence relied on (and filed with the PTAB).
Petitioners should file exhibits – such as prior art, background references and declaratory evidence – at the time of filing the petition. Strict word limits, filing fees of more than $23,000, statutory time bars and other discretionary measures all serve to limit the ability of parties to challenge patents and myriad claims.
Patent owners can file a preliminary response and can choose to include their own declaratory evidence. However, any disputes of material fact raised by such evidence will be resolved in favour of the petitioner for the purposes of institution. In their preliminary response, patent owners generally argue against institution, seeking denial on, among other things, procedural grounds or failure of proof. The decision to institute is issued within three months from the waiver or filing of the preliminary response, and is a written opinion issued by a panel of least three administrative law judges; it is not appealable by statute (35 USC §314(d)).
Claims in an unexpired patent are given the broadest reasonable construction considering the specification of the patent in which they appear. An instituted inter partes review may take up to one year to complete, by statute. However, this time can be extended by six months for good cause or indefinitely, as in the case of joinder.
Once a trial has been instituted, briefing follows a relatively fixed schedule. Where there is no motion to amend, the patent owner can depose any testimonial witnesses. It can then file a patent owner response, which may include declaratory evidence and generally seeks to rebut the petitioner’s case-in-chief as framed by the panel’s institution decision. The petitioner is given a reply. There is then a period during which the patent owner can submit observations, although the trend seems to be that if patent owners request an additional response, the PTAB will grant this one out of a sense of fairness and, one would suppose, to give them the last word. If either party requests it, an oral hearing is held before a panel of administrative law judges.
Since inception, more than 6,577 inter partes review petitions have been filed and more than 7,168 petitions total have been lodged, including covered business method and post-grant review petitions. The number of cases before the PTAB increased in 2017, while litigation has remained relatively stable since last year, as shown in Figure 2.
Taking account of multiple petitions filed against a patent (whether directed to different or the same claims), more than 4,000 unique patent claim sets have been challenged. To date, some 1,300 petitions have resulted in cancelled claims; most challenged only a subset of the claims in the patents at issue. Taking account of unique claim sets cancelled, some 1,000 claim sets have been successfully cancelled over five years, or roughly 200 a year.
To compare, over that same five-year period from 2012 to 2016, 305,840, 334,560, 346,909, 353,700 and 363,022 patents issued, in each year, respectively (up from 93,347 in 2002). Thus, while the first five years of PTAB proceedings, even under a conservative estimate, have resulted in the cancelling of some 1,000 sets of claims (not counting reversals), in that same period, some 1.4 million patents issued.
While interested parties have tried to paint inter partes reviews as slanted against patent owners, the institution rate and the cancellation rate have been both reasonable and falling from the start. A falling institution rate has hit 61% at recent calculation (shown here at 63% at the end of June 2017, courtesy of the USPTO).
That means that of all the challenged claims, just more than half are instituted (indeed, 17 petitions were denied in a single day recently). Of those that are instituted as reasonably likely to prevail, some 74% of claims are cancelled and some 26% remain patentable, meaning that parties paying the high cost and attorney’s fees of inter partes reviews are successful only 45% of the time, assuming that the institution rate does not continue its downward trend. That number continues to fall, as litigants get smart to the type of quality claims they must assert in the post-America Invents Act era. It is now standard to file litigations on three to seven patents rather than the one to three that were common a decade ago.
It is clear that there is no shortage of patents to buy, sell, license or assert; what is less clear is what monetising those patents looks like today.
NPE litigation – legal costs falling
“[T]he average cost of patent litigation, including the costs of discovery, ranges between $500,000 and $3,995,000 per party, depending on the amount at risk… Until the litigation has been concluded, there is uncertainty in the marketplace and uncertainty in the technology as to the scope of the patent right” – Patent quality improvement: post-grant opposition. Hearing before the Subcommittee on Courts, the Internet and Intellectual Property of the House Committee on the Judiciary, 108th Congress 29 (2004) (statement of Michael Kirk, executive director, AIPLA)
According to the AIPLA’s annual survey of litigation costs, in 2013, the median cost of defending a case was:
- $700,000 through trial ($350,000 through end of discovery), where the amount at risk was less than $1 million;
- $2 million ($1 million through end of discovery), where between $1 million and $10 million was at risk;
- $3.25 million ($2 million through end of discovery) where more than $10 million to $25 million was at risk;
- $5.5 million ($3 million through the end of discovery), where more than $25 million was at risk.
In 2015, these medians generally fell. By 2017, they fell further to:
- $500,000 through trial ($250,000 through the end of discovery), where less than $1 million was at risk;
- $1 million ($550,000 through the end of discovery), where between $1 million and $10 million was at risk;
- $2 million ($1 million through the end of discovery), where between $10 million and $25 million was at risk; and
- $3 million ($1.7 million through the end of discovery), where more than $25 million was at risk.
But the median cost of patent defence, even for patents of little risk or merit, remains at around $250,000 – which means that even the most improvidently granted patent has a substantial baked-in litigation value. Before the America Invents Act – as the AIPLA data shows – the cost of defending against even an improvidently granted, unlikely-to-be-infringed patent before the district courts was somewhere between $350,000 and $700,000 in legal fees, which unsurprisingly was just above the general range at which many litigation NPEs offered to license and settle ongoing suits ($300,000 is often cited as a favoured settlement value from the pre-America Invents Act era.) Counsel working on contingency further imbalances this equation, placing an upfront cost on defendants not equally felt by assertors.
Yet the key figure demonstrating the value of inter partes reviews is the cost – they effectively lowered the cost of challenging a questionable patent, in some instances to between $100,000 and $150,000 (ie, the general cost of adequately preparing an inter partes review petition, paying the $23,000-plus filing fee, paying an expert’s fees, if any, and reaching institution.
The procedure did not eliminate an assertor’s baked-in leverage; it only reduced it by roughly one-third. It did nothing to address a defendant’s ability to file an unlimited number of district court complaints for a fee of $400 each. Indeed, either the America Invents Act or the proliferation of available patents has encouraged a few entities to take a spray-and-pray approach – firing off dozens or even hundreds of lawsuits without even approaching potential infringers first, sending blanket demand letters seeking settlements from $75,000 to as little as $5,000, settling some of the cases for nothing, dismissing with prejudice when the parties fight or voluntarily dismissing cases to avoid sanctions or costs being awarded against them.
Further, because patent assignments need not be recorded and there is no mandatory recordation of transfer or sale, nor any type of requirement at the board, district court or Federal Circuit to reveal ultimate corporate parents, licensees and beneficiaries, it is easy to hide corporate ownership and the nature of the suit, or even who you would be paying.
Take some of the following entities, a handful of which are responsible for as much as 10% of new litigations filed in district courts last year.
According to its website, IP Edge (www.ip-edge.com/) is responsible for more than $60 million in revenue (though it is unclear how up-to-date this figure is) and is run by Lillian Woung, Gautham Bodepudi and Sanjay Pant. As is publicly known, IP Edge is the most prolific filer of NPE suits, with more than 73 known subsidiaries and almost 2,000 district court filings since 2014. The asserted patents range from banking and encryption to biomedical research and wireless trackers. Just some of its known entities include Anuwave LLC, Autoloxer LLC, Banertek LLC, Bartonfalls LLC, Carnition LLC, Drogo IP LLC, eDekka LLC, Finnavations LLC, HelioStar LLC, Kevique Technology, LLC, Kobace LLC, Long Corner Consumer Electronics LLC, Loramax LLC, MagnaCross LLC, Mod Stack LLC, Mozly Tech LLC, NovelPoint Security LLC, Oberalis LLC, Opal Run LLC, Olivistar LLC, Orostream LLC, Peppermint Hills LLC, Reef Mountain LLC, Ruby Sands LLC, Serenitiva LLC, Somaltus LLC, Vaultet LLC, Venus Locations LLC and Wetro LAN LLC, according to available resources. The list of asserted patents includes patents that have been cancelled by the district courts and the USPTO under Sections 101, 112, 102, 103 of the US patent statute, and for having issued with lack of any available patent term.
What makes IP Edge interesting is that most of its monetisation efforts have come after Alice v CLS Bank and the advent of America Invents Act trials. Indeed, IP Edge appears to have settled in bulk in some cases (with many defendants moving to dismiss on the same day). Certainly, it settles most of its cases. IP Edge is proof-positive that certain types of NPEs not only continue to survive after the creation of inter partes review, post-grant review and covered business method, but that some thrive.
Or consider Leigh Rothschild. Mr Rothschild controls dozens of LLC entities (many of which, helpfully, have his name in the title) including Battery Conservation Innovations, LLC, Rothschild Automotive Technologies, LLC, Texas Patent Imaging LLC, Rothschild Patent Imaging LLC, Coding Technologies, LLC, Rothschild Audio Innovations LLC, Rothschild Digital Confirmation, LLC, Rothschild Scanning Technologies, LLC, Rothschild Vehicle Technologies, LLC, Scanning Technologies Innovations, LLC, Rothschild GPS Sharing Innovations, LLC and Rothschild Location Technologies, according to available resources. He is a frequent litigator and has had patents of his named Electronic Frontier Foundation’s Stupid Patent of the Month repeatedly.
Or look at Sportbrain Holdings LLC. There, one patent has generated more than 115 litigation complaints being filed in a few short years – none of which have proceeded to the merits and most of which appear to never have been served. (Indeed, some writers have noted statistically that Illinois has seen a spike in cases, without noticing that it has been due almost entirely to this campaign.) Of the 118 cases filed in Illinois, most are assigned to different district court judges, few of whom have any technical training or experience with patent cases. This has meant that, to the extent that the complaints have eventually been served (say, where a judge has finally denied multiple extensions of time in which to serve), some, but not all, of the cases have then been stayed at the request of Sportbrain (see Sportbrain Holdings LLC v Walkingspree USA Ltd, No 1-16-cv-07507 (D Ill, March 8 2017)), while others malinger, and still others have been filed and maintained since Sportbrain has itself requested and received stays on the same patent before different judges. (In full disclosure, Unified has filed and was instituted on a petition challenging patentability.)
As another example at the extreme low end of the monetary scale, a Florida-based entity named JBSHBM, LLC (incorporated on May 18 2017, www.jbshbm.com/), recently sent a flurry of letters to hotel owners and operators demanding a covenant not to sue for a patent portfolio related to, among other things, converting hotel loyalty points to other types of loyalty points. In it, JBSHBM writes: “We are offering the enclosed Covenant Not To Sue your business. For an initial fee of $5,000, JBSHBM will agree to not assert out patent rights against your hotel location. We also ask that you encourage your customers in the future to use authorized and licensed tools when converting points.”
Copies of the letter have been posted online and circulated publicly among retailers. Some have publicly posted that they will not be paying – although according to JBSHBM’s website, at least some companies have accepted licences.
After TC Heartland
Since the Supreme Court’s venue decision in TC Heartland, parties are, as expected, largely shifting away from filing in the Eastern District of Texas, though there are outliers, like the many cases filed by Uniloc USA, Inc, which have been filed seemingly with the intent of testing the limits of venue for large entities. As predicted, litigation has moved to Delaware, as well as to the Northern District of California.
The percentage of new cases filed in the Eastern District of Texas in 2017 fell from 34%, (542/1582 cases filed in the Eastern District of Texas pre-TC Heartland) to 17% (55/326 filed post-TC Heartland) on an admittedly limited sample size. The pending appeal in Raytheon v Cray, a Judge Gilstrap decision seen as favourable to those trying to establish venue, may affect or prevent any further rebalancing of filing.
While America Invents Act trials have lowered litigation defence and licensing costs, they mostly have failed to drive down the number of suits to which parties are subjected. And there is still plenty of money changing hands, as the $2 billion settlement between Nokia and Apple demonstrates.
While these proceedings offer a relatively cheap and efficient means to challenge patentability over Section 102 and 103 grounds on patents and printed publications, their cost (still more than between $100,000 and $500,000 in most cases) dwarfs other types of non-patent legal proceedings and still afford fixed leverage under which NPEs can operate quite profitably. (To be sure, it would be difficult, if not Sisyphean, to reduce the legal waste of nuisance licences to zero. Copyright NPEs are a good example – often seeking $1,000 or less per licence, but still in business).
Likewise, TC Heartland has shifted, but not reduced, the number of cases filed and will change the flavour – but not necessarily the cost – of infringement proceedings. As noted, new entities continue to spring up, old, failing companies are seeing their assets transferred (eg, Marathon Patent Group or Inventergy) and patents are being marshalled, with plenty of patent assets being issued. Sheer volume is more than making up for the once-lopsided monetisation enforceability of yore.
Companies can still reduce transaction costs for challenging and deterring NPE assertions through other means. Parties can make use of banded-together deterrence entities which spread costs and reduce NPE leverage. They can retain quality, affordable counsel and vigorously defend those suits which believe to be unpatentable – up to a point. They can also petition the PTAB to lower filing fees for inter partes reviews and the more proactive and riskier post-grant reviews. And they can ask judges to aggressively penalise nuisance suit filers.
In short, litigation leverage still skews toward patent owners, but the system has taken great strides in reducing transaction costs; companies can further reduce that imbalance by making use of the tools provided by the America Invents Act and addressing nuisance suits in an efficient, exemplary way.
While the post-grant proceedings at the Patent Trial and Appeal Board have provided an effective of challenge to questionable patents, regulatory and legislative improvements can still be made to benefit both petitioners and patent owners.
- grant patent owners a sur-response as of right;
- lower filing fees for post-grant reviews, including inter partes reviews;
- aggressively penalise nuisance suit filers and those who hide ownership;
- use inter partes reviews and third-party filers as an effective deterrence tool; and
- limit payment of nuisance settlements.