24 Sep
2018

Succeeding in today’s patent monetisation environment

Patinformatics LLC

The downturn in the secondary patent market has been well documented. Beginning in 2006 with eBay v MercExchange, legislative and judicial patent reforms weakened the asset class and disrupted the burgeoning patent monetisation ecosystem that had flourished in the early 2000s. Now that the impact of decisions like Alice and legislative creations such as inter partes review has been digested by the industry, a roadmap for success in today’s secondary patent market has materialised.

As the dust from the radical shift in the monetisation landscape settles, two critical anomalies have emerged:

  • A large, undervalued and underutilised supply of quality patents is sitting dormant; and

  • A much stronger and more sophisticated litigation funding industry is primed to seize the opportunity to build targeted, resilient portfolios with knowledgeable partners.

The convergence of these two phenomena creates a unique patent monetisation opportunity, if coupled with a disciplined approach. This chapter focuses on the overlapping and interdependent steps required to succeed in today’s environment:

  • effective patent mining;

  • litigation diligence;

  • financing; and

  • a global view of licensing and enforcement.

To implement these steps most effectively, it is necessary to work backwards and start with the ultimate audience. For most programmes, this will be either a jury or a judge. Then, intermediate steps should be considered (eg, financing, anticipation of <span class="CharOverride-1">inter partes</span> review and subject-matter eligibility challenges). Doing this requires an integrated approach throughout each planning stage, taking care not to undertake any step in isolation. For example, while the purpose of the patent mining step is to find the strongest, most valuable assets, one must also consider the inventor’s story, because it will feature prominently in the final presentation. The litigation diligence step must then build on the mining team’s foundation, including a full understanding of how and why a particular patent was chosen. Since each step relies on the others for success, the ability to process them under one roof – or as few roofs as possible – is key to ensuring tight integration, and ultimately a prosperous patent-monetisation programme.

Effective patent mining

The fast-paced patent market of the early 2000s led to the aggregation of thousands of patents, covering diverse technologies. With the downturn, many of these patents were never deployed in a monetisation programme. These patents were often developed by legal, business and technical experts who have long since left the patent monetisation industry, taking with them the expertise required to unlock the true value of the acquired patents. This left many companies with diminished financial and technical resources with which to monetise a portfolio covering myriad technologies. Having adapted to the post-Alice inter partes review landscape, full-service law firms with a patent litigation practice can help to fill the void by onboarding patent-mining functions not traditionally associated with law firms. Specifically, firms able to shepherd a portfolio through all stages of development, from mining to jury verdict, are uniquely situated to identify valuable patents with a jury story and financier presentation in mind. Because the litigation and licensing experience of such firms requires them to develop a contact list of technical subject-matter experts, this list can be quickly and efficiently tapped to work through infringement reads in highly technical areas that were never even considered by the patent owner’s previous experts.

This turnover of the experts that originally developed or identified highly valuable patents has resulted in high-quality patents languishing inside large portfolios that were developed or acquired before today’s due diligence considerations became a factor. The marriage of traditional big firm patent infringement, validity and damages analysis with analysis techniques imported from patent-mining experts can cost-effectively identify patents that can navigate the results of the last 12 years of patent reform.

The resulting expanded patent litigation diligence team must prioritise combinations of factors rarely previously considered, as follows.

Patents that can be mapped against accused products in detail

The ability to identify patents with strong, detailed infringement reads gives the litigation team the flexibility to craft pleadings with the technical specificity necessary to overcome the obstacles presented in early motion practice and inter partes reviews. It also allows for an effective presentation to be made early in the life of the monetisation programme to new, critical audiences (eg, litigation funders). As funders have their own experts looking at these materials, specific yet digestible infringement mapping at an early stage is critical to a programme’s success. This requires a multi-layered mining strategy that must include tight integration between the mining and litigation teams. Previously, ‘efficient’ mining often resulted in broad infringement reads lacking technical detail, because infringement details were expected to be fleshed out during litigation. With the recent legislative and judicial changes, such practices are risky. Patent owners that do not adapt will see their patents invalidated in the early stages of litigation or by the Patent Trial and Appeal Board; moreover, they will be turned away by any sophisticated litigation funder.

Jury story

Patent cases that never used to go to trial now often do, because defence counsel have become adept at characterising many plaintiffs – even those asserting infringed, valid and valuable patents – as ‘patent trolls’. Combating this strategy requires in-depth, early-stage consideration of how a patent will be received by a jury. Two filters should be applied at this point.

Can a layperson understand the technology? Attorneys have long been taught to try their opening arguments out on someone that they meet on the subway. This filter is similar. The team must find patents that can be explained to a layperson. If a layperson can grasp the inventive aspect of the technology and see its usefulness in the real world, the team will succeed. If this test is unsuccessful, it means that although the patent has a terrific technical read, it will ultimately fail to gain traction with a jury.

Who can be the face of the patent?

Previously, patent owners could typically rely on painting their adversaries as large, soulless companies using the inventions of others for profit without compensating the meritorious inventor, and they could do so without much thought as to the provenance and backstory of the asserted patents. However, defendants have become very successful in presenting a narrative of the patent owner as someone looking to enrich themselves from the hard work of the ‘innovating’ defendant. To win this battle of narratives, patent mining should include consideration of who – whether inventor or company – is to be the face of the invention. As always, a compelling jury story can be drawn from an accomplished or famous inventor. This instantly lends credibility to the innovation at issue, enabling the jury to relate to the technology on a personal level. The same advantages can also be gained by telling the story of a company. Much of the intellectual property available for mining comes from companies that had great ideas, but ultimately failed for other business reasons. These companies often had employees who later moved on to other commercially successful ventures, or who later received accolades for their patented technologies. Such evidence elevates the patents in the minds of the jurors and is essential to a successful portfolio – but it must first be identified, preferably early in the patent mining process.

Focusing on these two criteria, in addition to the traditional vetting process, will put a patent portfolio in the best position for litigation preparation and presentation to funding sources.

New considerations for post-mining litigation diligence

The next phase prepares the portfolio for presentation to financiers, as is often required in today’s patent enforcement environment. Litigation diligence should still centre on the familiar fundamental building blocks (eg, claim construction, claim charts, validity analysis, venue considerations, litigation history and a damages analysis). However, the current patent landscape mandates a more refined analysis of these building blocks. In general, many issues that were previously considered secondary, or ignored, must now be fully fleshed out.

For example, effective litigation diligence increasingly depends on the specific technical reads generated by the mining phase. Specifically, the complaint must be able to stake out narrow and definitive reads on the accused products; otherwise it risks facing an early barrage of motion practice attacks, if not death.

One reason for this approach is the jurisprudence that followed the Alice decision on subject-matter eligibility under Section 101. The Federal Circuit and district courts struggled with the lack of clarity provided by the Alice test, leading to unclear, often contradictory decisions and a lack of predictability regarding subject-matter eligibility attacks. Such attacks enable accused infringers to invalidate patents at the pleading stage through a motion to dismiss, incentivising defendants to wait for a decision on their motion to dismiss before entering serious licensing discussions. Fortunately, recent case law provides patent owners with means to mitigate this risk. On 31 May 2018 the Federal Circuit denied en banc review of the Berkheimer and Aatrix cases, decided earlier that year. Those cases determined that the second prong of the  Alice inquiry contained a question of fact – specifically, whether a claim element or combination of elements is well understood, routine and conventional to one of skill in the art. This development makes it harder for a defendant to win an early motion to dismiss on Section 101 grounds if the complaint has been properly drafted to include such a question of fact.

The obvious takeaway is that patent owners should include specific allegations in their complaints that track this case law. To accomplish this properly, the tight read from the patent mining phase is essential. This way, the patent owner can be highly specific in reciting the inventive aspects of the asserted claims and the technical means for achieving them, in addition to explaining how specific elements were not well understood, routine and conventional to one of skill in the art at the time of invention. Patent owners can thus force accused infringers to handicap their chances of winning early on with little capital expenditure, thus improving their licensing position.

Another new impediment to early case resolution is the ability of accused infringers to stay district court litigation pending inter partes review determinations. Like subject-matter eligibility motions, defendants often refrain from engaging in early and serious licensing conversations while an inter partes review petition is pending, at least until an institution decision from the Patent Trial and Appeal Board. By converting tight infringement reads based on careful intrinsic record review by the mining team into specific infringement allegations in the complaint, patent owners can display to potential licensees that the patents and products have been properly vetted, disabusing them from believing that the allegations can be quickly dismissed. 

At this stage, two other traditional – yet greatly changed – issues are worth discussing, as they are important to financiers and necessary for litigation preparation. The first is damages modelling. The diligence team must be well versed in damages case law in order to track models that have been approved by the Federal Circuit and district courts. A complete understanding of the licensing history for the patents in the portfolio is necessary for – and often the straightest line to – generating a damages model that will pass funding muster and the inevitable Daubert motion. Second, the Supreme Court’s TC Heartland decision has made venue considerations more complex. A successful litigation diligence process must consider all proper venue options in order to select the most advantageous forum that can also withstand a motion to transfer based on forum non conveniens. The shift in law introduced by TC Heartland often removes the plaintiff’s first choice as an option, so it requires careful consideration. 

Litigation financing

The new venue rules in US patent litigation require the ability to prevail in a prolonged litigation battle staged across varying venues, often on parallel tracks. Fortunately, this new high-cost reality dovetails with the growth of the litigation finance business. By nature, many owners of large patent portfolios may not have the resources for litigating in the current environment, or the will to do so. Law firms have the same issues. At the same time, many firms have multiple clients that are being represented under alternative fee arrangements. However, such arrangements often delay full payment being received by the law firms until licensing revenue is generated or until final judgment is rendered, amplifying the need for litigation funding. Both of these trends have created an opening for patent litigation funders and law firms that represent a diversity of patent plaintiffs. This arrangement reduces negative return risk for the funder while lowering the cost of capital for the law firm.

Importantly, such funding arrangements trigger considerations relating to law firm versus patent owner financing. Additionally, a firm and its clients must weigh the available types of financing. Often, patent owners or law firms will seek to finance capital expenditures for acquiring rights in patents that are to be litigated, as well as operating expenditures (eg, attorney fees and expert retention fees). Although many choose to fund the capital expenses as equity and the operating expenses as debt, other arrangements are possible.

One fortuitous result of the convergence of the downturn in the patent market and the growth in litigation financing is that many firms now have funds to deploy in patent programmes. This should not be mistaken for money flowing freely. Increasingly, litigation funders are staffed with patent experts and often layer that expertise with further diligence by outside counsel. The diligence described above is a prerequisite to advancing conversations with litigation funders. For example, predictability and gauging risk are prominent features that litigation funders look for when deploying capital, just like other investors. An issue like subject-matter eligibility under the Alice regime has been wildly unpredictable. But by starting diligence on this issue in the mining phase and refining it during litigation diligence, funders can better gauge the likelihood of success, which in turn increases the likelihood of securing funding.

Think globally

A properly mined portfolio that receives adequate funding is not only ready to litigate in the US courts, but will also allow the programme to be taken abroad. With the roadblocks established by patent reform in the United States, it has become increasingly common to litigate in EU venues, such as Germany. The German courts afford relatively fast and efficient proceedings for certain types of patent portfolio, resulting in injunctions that can lead to quicker (and more favourable) outcomes for patent owners. Patent owners have recently been looking to China, where the courts have also shown a willingness to grant injunctions and are becoming easier to navigate. The potential global reach of a well-constructed programme means that patent owners must carefully consider which venues to use when engaging with a given potential licensee. This again underscores the importance of thorough diligence and choosing the right funding partner.

Conclusion

More than 12 years into the reshaping of the patent landscape, new pathways to successful patent monetisation outcomes have emerged. Careful integration of previously siloed patent mining and financing functions into a patent litigation practice, as outlined here, creates teams of professionals that can better identify these pathways.

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