Feature

Technology Sectors at Risk from the Perfect Patent Storm

David Newman

©2016. Published in Landslide, Vol. 8, No. 5, May/June 2016, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

Innovation in the United States could be at risk due to a perfect storm of patent rulings, as well as recently enacted and pending legislation—each having a detrimental effect on patent enforcement efforts. The following three measures that disfavor patent owners could combine with the destructive power of the Greek storm giant Typhoeus: (1) the 2013 America Invents Act (AIA) broadest reasonable interpretation (BRI) rule, which has led to more frequent post-grant invalidation of patents; (2) the Supreme Court’s Alice v. CLS Bank decision, which has led to the invalidation of a multitude of software and business method patents in the information and communications technology (ICT) sector; and (3) pending fee-shifting legislation, which may chill enforcement efforts (collectively, “pro-infringer measures”).

Such rules, precedent, and policies weaken patents, can be used by accused infringers to avoid U.S. intellectual property (IP) rights, and may damage U.S. technology sectors. For example, the pro-infringer measures could open the door for more rapid entry into the U.S. technology sectors by offshore companies that may escape patent infringement actions more easily. Certain trends in the IP world “left unchecked will erode U.S. competitiveness.”1 The combination of the pro-infringer measures may cause a barometric shift in U.S. patent enforcement efforts and sink technology investment, especially in the ICT sector.

AIA Post-Grant Petitions Process Disfavors Patentees and Is Shifting U.S. Patent Enforcement Away from District Courts

The AIA post-grant petitions procedures, including inter partes reviews (IPRs) and covered business method reviews (CBMs) (collectively, “AIA petitions”), are reputed to favor petitioners (e.g., accused infringers) and may be causing a shift with respect to the venue where patent enforcement battles begin in the United States. The tidal wave of AIA petitions hitting the U.S. Patent and Trademark Office (USPTO) evinces a shift away from district court patent enforcement (see figure 1). Also as a result of the pro-infringer nature of the AIA petitions, it appears that a barrier to entry to U.S. technology sectors has been lowered.

Figure 1

The BRI rule enacted under the AIA requires claim terms to be construed in the broadest possible manner. “Our findings suggest that the PTAB [Patent Trial and Appeal Board] should conduct its post issuance review procedures under a claim construction standard that mirrors that of the federal courts, as opposed to the [BRI] standard.”2 The BRI rule implementation results in broad claims that can “read-on” additional prior art references (leading to invalidity). By analogy, if the diameter of a bullseye is expanded, there is an increase in the number of darts thrown at the dartboard that will hit the bullseye. Likewise, expansion of the scope of a claim term using the BRI rule increases the number of prior art publications that will hit the mark—resulting in a higher percentage of claims being invalidated in the AIA petition process. In the first two years of AIA petitions, 73 percent of patents taken through an IPR trial were invalidated.3 In contrast, only 27.1 percent of patents were found invalid by district courts in 2015.4

An unintended consequence of the AIA petitions process—due in a large part to the BRI rule—allows a petitioner to more easily drown a patent. Many district court judges have been staying their patent proceedings in order to await the outcome of the AIA petition trial. As a result, some of the advantages patent owners have had in district court are eliminated during AIA post-grant proceedings. For example, a patent owner’s infringement claims can rain on a defendant’s invalidation efforts during district court litigation. Yet an accused infringer can wash away such infringement allegations by filing an AIA petition (and obtaining a stay of the district court proceeding). During the AIA petition trial, the validity of the patent is the sole issue to be adjudicated. Such a tactical advantage, combined with the high percentage of patents being held invalid by the PTAB, is likely encouraging more AIA petition filings.

The pro-infringer skew of the BRI rule was upheld by the Court of Appeals for the Federal Circuit and continues to cause many patent enforcement actions to blow toward the PTAB and away from district courts. In affirming the PTAB’s use of the BRI rule, the Federal Circuit in July 2015 held that “Congress conveyed rulemaking authority to the [US]PTO to prescribe regulations . . . . If the [BRI] standard is to be changed, that is a matter for Congress. There are pending bills which would do just that.”5 In fact, some of the proposed bills have eliminated BRI rule changes. In view of the Federal Circuit’s laissez-faire attitude and the lack of any BRI changes from bills most recently being considered by Congress, dark clouds will likely continue to hang over patent owners in the United States due to biased PTAB rules.

Figure 1 depicts the increasing number of IPR and CBM petitions being filed at the PTAB. About 20 petitions were filed in September 2012.7 We now see more than 125 petitions filed per month. The chart also emphasizes that most petitions are filed against patents covering communications and semiconductor technologies. The dramatic increase in AIA petitions is likely a result of litigants seeking a less expensive venue to settle IP conflicts and the appearance that an accused infringer will receive favorable treatment by filing a petition at the PTAB to challenge the asserted patent(s).

As a result of the advantage that an AIA petition (and the BRI rule) provides to petitioners, it appears that foreign companies are attempting to enter U.S. technology sectors by aggressively attacking U.S. patents via AIA petitions. In fact, the most prevalent AIA petitioners in the aggregate are foreign-based firms. In figure 2, the dominant nature of foreign companies is apparent with respect to the petitioners with the highest number of filings at the USPTO. In 2014, 18 out of the top 25 petitioners were foreign (mostly Asian) companies or their U.S. affiliates.

Figure 2

Putting aside the top petitioner (Apple Inc.: 89 petitions), the foreign petitioners would be responsible for 77 percent of the IPR and CBM filings out of the top 24 petitioners. These foreign petitioners are attacking technology at the heart of the U.S. telecom and electronics industry. Lured by the high rate of patents being invalidated via AIA petitions and the PTAB BRI rule, a concentrated group of foreign companies may be attempting to impair U.S. IP rights and eliminate barriers to entry to the U.S. electronics, telecom, and ICT markets. Former USPTO commissioner David Kappos and former chief IP counsel to the Senate Judiciary Committee Aaron Cooper have explained that foreign companies “view weaker protection as a way to obtain and use U.S. technology without having to compensate U.S. inventors.”8

Alice v. CLS Bank Destroying Software and Business Method Patents

The Alice Corp. Pty. Ltd. v. CLS Bank International decision10 has led to the invalidation of hundreds of software and business method patents for lack of patentable subject matter under 35 U.S.C. § 101. The typhoon-like effect of Alice has raised the bar on patentable subject matter standards—vastly expanding the definition of ineligible abstract ideas. “Some pathways to protect incremental innovation are being blocked [by] [h]eightened utility standards for patents . . . [and] dual patent examination.”11

Many defendants have effectively relied on the dicta from the Alice decision to invalidate hundreds of software and business method patents. Significantly, from 2014 to 2015, a motion for summary judgment based on § 101 lack of patentable subject matter had a 67 percent success rate.12 Before the Alice decision, such motions from 2008 to 2011 had a success rate of 28.6 percent. This stark up-tick in summary judgments of invalidity due to ineligible subject matter demonstrates the tidal wave effect that Alice is having on the technology sector’s ability to protect its valuable IP assets. Further, claim challenges under § 101 at the PTAB have had a 68.9 percent success rate since the AIA was enacted.13

A recent 30 percent drop in patent infringement suit filings in California in 2014 has been attributed to the Alice ruling. “I think the drop in filings was particularly acute among software and business method cases, and more of those may be filed in California because the technology is so prevalent here,” said Professor Mark Lemley of Durie Tangri LLP.14 Professor Lemley continued: “It is also worth noting that California courts have been more willing than Texas courts to invalidate patents under the Supreme Court’s Alice decision.”15 These findings underscore the disadvantages patent owners now face and the potential for a Greek tragedy when enforcing patents currently in the United States.

Without proper means of protection, technology sector firms, and ICT firms in particular, are likely to reduce the level of investment being made to develop new technology. Kappos and Cooper have raised strong concern that the software and ICT sectors are under threat due to the Alice decision and have stated that software inventions must remain patent eligible. According to them, maintaining strong patents and patent enforcement mechanisms are the primary means of enabling “return on investment demanded by venture capitalists, early stage investors and billion dollar corporate R&D budgets.”16

Fee Shifting Legislation Focused against Patent Owners

Pending legislation from the Innovation Act17 to the PATENT Act18 include provisions for shifting attorneys’ fee awards to the winning party in patent litigation. For example, the Innovation Act states: “The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party . . . unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact.”19 Because it is the patentee that typically files an infringement action, many patentees considering whether to enforce their patents may buckle under the additional waves of risk due to such fee shifting—allowing infringing competitors into the patentee’s market.

Gloomy forecasts have been predicted by universities with respect to fee-shifting legislation. As many as 145 university presidents have signed a petition voicing disagreement with the fee-shifting legislation. Universities commonly license their patented inventions to private enterprise, which in turn distributes benefits throughout society. Universities were granted the ability to patent and license inventions under the Bayh-Dole Act of 1980, which enables them to fund further research by licensing their patents for commercial use. As a result of the increased risk for patent owners to enforce their patents due to the potential for fee shifting, investment in research and development by many universities and other patent owners may submerge, because asserting patents and obtaining royalties from such innovation will be much more difficult.

[The Innovation Act may] seriously weaken and put at risk the university technology transfer process, so necessary to America’s innovative and entrepreneurial way of life. . . . [I]t would require courts to award attorney fees and costs to winning parties. Of course, in any such cases, the advantage goes to well-financed corporate legal teams, not inventors and budget-constrained universities. [T]he fee-shifting measure [] amounts to a colossal deterrence to investors in your patents as well as to prospective licensees.20

Conclusion

While the pro-infringer measures may be viewed in a positive light by many companies because such measures may deter patent trolls, these efforts may also result in “throwing the baby out with the bathwater.” Patent trolls may be a detriment to some segments of the U.S. technology sector. But IP practitioners should consider the damage that may be caused by overreaching antitroll remedies, such as the three pro-infringer measures that may form the perfect patent storm converging on the U.S. technology sector. In the current antipatent atmosphere that is sweeping the globe like El Niño, many companies’ most valuable assets are being destroyed. For example, a June 2014 study from TAEUS Inc. concludes that as a result of the Alice decision, more than 570,000 issued U.S. patents covering mainly software and Internet technologies have been blown away.

“Our economic future relies on robust IP systems that sustain innovation.”21 Should judges, legislators, and the USPTO fail to closely control the effect of the pro-infringer measures and other actions that might deter innovation, the strength of the U.S. technology economy could be sunk. Senator Dick Durbin, upon introduction of the STRONG Patents Act of 2015, stated, “[W]e should instead seek to narrowly target and deter abusive troll behavior while preserving the ability of legitimate patent holders to protect their innovations.”22 Will the current collision course of the three pro-infringer measures create a typhoon that destroys a multitude of patents in its path? Kappos and Cooper have warned, “Make no mistake: if America denies robust protection to software-implemented inventions, decreased investment will inevitably follow—eroding a competitive advantage in a sector that has proven vital to the United States economy.”23

Before it is too late to find a safe harbor for U.S. patent enforcement, legislators, judges, and patent professionals should carefully contemplate the long-term effect of implementing pro-infringer measures. By charting a course away from Typhoeus and toward calm pro-patent waters, ICT and other technology stakeholders may confidently navigate the launch of new technology businesses protected by strong patents.

Endnotes

1. Hearing Before the Special 301 Subcomm. of the Trade Policy Staff Comm. Office of the U.S. Trade Representative (Feb. 24, 2015) (statement of Herb Wamsley, Executive Dir., Intellectual Prop. Owners Ass’n) [hereinafter USTR Testimony], available at http://www.ipo.org/wp-content/uploads/2015/02/IPO-Special-301-Hearing-Statement-2015-FInal.pdf.

2. Saurabh Vishnubhakat, Arti K. Rai & Jay P. Kesan, Strategic Decision Making in Dual PTAB and District Court Proceedings, 31 Berkeley Tech. L.J. (forthcoming 2016).

3. Patrick Driscoll & Michael McNamara, Inter Partes Review Initial Filings of Paramount Importance: What Is Clear after Two Years of Inter Partes Review under the AIA, Mintz Levin (Oct. 21, 2014), https://www.mintz.com/newsletter/2014/Advisories/4363-1014-NAT-IP/.

4. Docket Navigator, Year in Review 2015, at 32 (2016).

5. In re Cuozzo Speed Techs., LLC, 793 F.3d 1297, 1299 (Fed. Cir. 2015), cert. granted, 136 S. Ct. 890 (2016).

6. Docket Navigator, supra note 4.

7. Id.

8. David J. Kappos & Aaron Cooper, At the Core of America’s Competitive Edge—Why Software-Implemented Inventions Are and Must Remain Patent Eligible 4 (2015), available at http://partnershipforamericaninnovation.org/wp-content/uploads/2015/09/Software-White-Paper-Sept-4-2015-FINAL.pdf.

9. Docket Navigator, supra note 4.

10. 134 S. Ct. 2347 (2014).

11. USTR Testimony, supra note 1.

12. Docket Navigator, supra note 4.

13. Id.

14. Erin Coe, Patent Cases Plummet in Calif. as Courts Embrace Alice, Law360 (Mar. 3, 2015), http://www.law360.com/articles/627294/patent-cases-plummet-in-calif-as-courts-embrace-alice.

15. Id.

16. Kappos & Cooper, supra note 8, at 2.

17. H.R. 9, 114th Cong. (2015).

18. S. 1137, 114th Cong. (2015).

19. H.R. 9 § 3(b) (amending 35 U.S.C. § 285).

20. Congressman Dana Rohrabacher, Patent Integrity: An Appeal to College Presidents, IPWatchdog (Apr. 27, 2015),​ http://www.ipwatchdog.com/2015/04/27/patent-integrity-an-​appeal-to-college-presidents/id=57219/.

21. USTR Testimony, supra note 1.

22. Gene Quinn, Pro-Patentee Patent Reform, the STRONG Patents Act Introduced in Senate, IPWatchdog (Mar. 3, 2015),​ http://www.ipwatchdog.com/2015/03/03/strong-patents-act-introduced-in-senate/id=55384/.

23. Kappos & Cooper, supra note 8, at 13.

David Newman

David Newman leads Gould & Ratner’s intellectual property group, where he focuses his practice in the areas of patents, trademarks, copyrights, and trade secrets. His experience includes intellectual property litigation and the preparation and prosecution of applications for obtaining patents and trademarks, as well as opinion work involving business methods, computers, consumer goods, electronics, mechanical devices, medical devices, and telecommunications.