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Impact of an Inter Partes Review Petition Denial on Willfulness

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WARF v. Apple (W.D. Wisconsin 2015)

Following a jury verdict on infringement and validity (October 10) and another verdict on damages awarding $230 million in reasonable royalty (October 19), Judge Conley (W.D.Wisc.) has now quickly disposed of the case by entering judgment in favor of the patentee (WARF) the amount awarded and denying Apple’s motion for judgment as a matter of law.  The case is now set for appeal to the Federal Circuit.

During trial the Judge rejected WARF’s willfulness claim – finding that Apple had a pretty good – thought ultimately losing – obviousness argument:

Apple demonstrated at trial that the elements of the asserted claims of the ‘752 patent were all known in the prior art, and many were well-known for those skilled in the art. Indeed, WARF did not meaningfully dispute this. As a result, the only factual dispute as to Apple’s obviousness defense was whether a person of ordinary skill in the art would have combined those elements and had a reasonable chance of doing so successfully.

Under the current requirement of both objectively and subjectively willful behavior, the court found that WARF could not prove with clear and convincing evidence that Apple acted “despite an objectively high likelihood that its actions constituted infringement of a valid patent.”

It turns out that Apple had also presented its obviousness argument to the PTAB in an inter partes review challenge. In that case, the Board refused to grant the IPR petition – finding that Apple “has not shown, under 35 U.S.C. § 314(a), that there is a reasonable likelihood that it will prevail with respect to at least one of the challenged claims.” Back in the lawsuit, Judge Conley rejected WARF’s argument that the PTAB’s denial is relevant.  Unfortunately, it appears that the Judge’s ruling is based upon a misunderstanding of PTAB procedure and burdens. In particular, the judge rested his decision upon the incorrect notions that IPR cancellation requires “clear and convincing evidence” and that granting an IPR petition requires proof that the challenger is “likely to prevail” on the merits. The Judge writes:

All PTAB found was that Apple was not likely to prevail on its defense by proving obviousness by clear and convincing evidence. PTAB did not consider whether this defense was objectively reasonable or raised a substantial question. As such, the PTAB finding — like the jury’s finding rejecting the invalidity challenge — does not settle the issue of whether Apple’s defense was objectively reckless.

Of course, the PTAB cancellation is based upon a substantially lower standard – a preponderance of the evidence – not clear and convincing evidence. In addition, the PTAB decision at the petition stage looks only for a “reasonable likelihood” of prevailing rather than simply being “likely” to prevail. (In most cases, the ‘reasonable’ modifier makes it easier to prove a conjecture: compare “certainty” with “reasonable certainty.”)

Although the PTAB decision is not identically written to the willfulness test, it is not clear to me which standard is higher. And, I think that the statistics would play out here to easily show that it is a rare case where a well-pled obviousness argument was rejected by the PTAB at the petition stage and then relied upon by a jury to invalidate a patent.

The comparison:

  • In the Inter Partes Review, the Patent Office determined that Apple’s obviousness argument lacked a reasonable likelihood of winning on validity, keeping in mind that the patent is not presumed valid and that obviousness must be proven by only a preponderance of the evidence.
  • For willfulness, the patentee must show that an objective observer would perceive a high likelihood that the patent would be found valid (really, not invalid). Since validity is presumed in court challenges, what happens here is that the willfulness burden shifts to the defense to present a obviousness argument strong enough to convince an objective observer that the patentee had less than a high likelihood of winning on validity, keeping in mind the presumption of validity and requirement of clear-and-convincing evidence of obviousness.

I will pause here to apologize for the complexity of the comparison. You can thank the Federal Circuit for creating these tricky rules to replace what has traditionally (and by statute) been a much more open doctrine. The Supreme Court is addressing these issues in Halo and Stryker.

The point here for me is that Apple was unable to pass the petition stage of an IPR – i.e., they did not have a reasonable chance of winning on the lowered standard for invalidity. At least we can say that they had even less of a shot of winning with the same challenge presented in court with the higher burden. In context, this seems to me that the PTAB decision is quite relevant to the question presented here.

[WARFAppleWillfulness]

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I’ll note here that the district court briefing on the issue was all filed under seal and not available.  In addition, the district court has just agreed to seal a large set of trial evidence and demonstrative exhibits.  It appears that WARF offered no objection – why would they?  Here, at the least the court should order a redaction rather than complete sealing to support the strong public interest in patent cases and in an open court system.  See also, Secret Patent Trials are OK; Access to Courts; A Call for Restraint in Sealing Court Records.

Stay Pending Petition Consideration.

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Interesting set of motions in an E.D. Texas case that I’ve been following where one of my former students – Adam Baumli – is representing NexusCard who is asserting United States Patent No. 5,924,080 against a set of retailers.

Retailer defendants petitioned the PTO for Covered-Business-Method-Review and then immediately petitioned for a stay of the district court proceeding under AIA Section 18(b).  Although judges generally have the power to stay civil cases, Section 18(b) makes it easier to obtain a when a CBM (“transitional proceeding”) is pending.  The big problem for the defendants here is the Federal Circuit’s clear holding that the proceeding is not pending (and Section 18(b)) doesn’t apply until the PTO grants the petition.  See Intellectual Ventures v. JPMorgan (Fed. Cir. 2015).

Docs: Kroger’s Motion to Stay, Nexuscard Opposition

The CBM petition challenges the patent claims under 35 U.S.C. 101 — arguing that they lack subject matter eligibility under Alice Corp and that the patent qualifies for CBM review because it claim a method for using a financial product and is not a technological invention. KrogerCBMPetition.

Claim 1 itself is a long one with parts (a) through (q) — all relating to a method of member coupon processing:

1. The method of processing and applying merchandise discounts to a consumer’s purchases by providing a computerized membership system, said membership including a plurality of consumer members, a plurality of point of purchase merchant members, a plurality of manufacturer members, and a centralized system provider, said membership system having:

a point of purchase merchant member computer terminal and computer and a centralized provider’s computer, said provider’s computer having a database for the storage and retrieval of information, said database storing information regarding point of purchase merchant members, manufacturer members, and consumer members, in predetermined files, at least some of said information being entered into the system at the time of a member establishing membership in said system and
communication means, said communications means providing real time communication between said member merchants’ computer terminal and said provider’s computer,

comprising the steps of:

a. providing consumer members with individual identification codes, said identification codes accessing said databases;
b. storing said consumer member identification codes on said provider’s computer in a consumer database;
c. providing each consumer member with a membership ID, said membership ID having memory storage means, said memory storage means containing at least said consumer identification code;
d. storing merchandise information provided by said manufacturer members in a manufacturer member database in said provider’s computer, said merchandise information including at least a merchandise identification code and the discount on predetermined merchandise,
e. displaying to consumers indicia, said indicia identifying point of purchase merchandise subject to a price discount,
f. transporting, by said consumer, consumer selected discounted and non-discounted point of purchase merchandise to a purchase location at said merchant member to form a collection of transported merchandise, each of said transported merchandise having a merchandise identification code,
g. scanning merchandise identification codes of each of said transported merchandise, at said communication means,
h. scanning said consumer ID,
i. uploading said scanned consumer identification code, from said merchant member, through said communication means to said provider’s computer,
j. comparing said consumer identification code with consumer identification codes stored in said provider’s computer and verifying said consumer’s membership,
k. uploading said merchandise identification code for each of said scanned merchandise from said merchant member’s computer, through said communication means to said provider’s computer,
l. comparing said uploaded merchandise identification codes with the identification codes of merchandise subject to a price discount,
m. computing the discounts on said merchandise subject to a price discount,
n. downloading to said merchant’s computer through said merchant communication means, the discounts on said merchandise subject to a price discount,
o. printing a sales slip for said member consumer including the discounts for said merchandise subject to a price discount,
p. sorting and storing in said provider’s databases said uploaded data on said consumer and said merchandise purchased by said consumer,
q. storing merchant member sales data on said merchant member computer,
wherein said provider maintains and processes, in real time, discounts provided by manufacturer members to member consumers without said member merchant being required to process said discounts or member consumers being required to present coupons or file rebates to obtain said discounts.

Patentlyo Bits and Bytes by Anthony McCain

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Bits and Bytes on IP Law

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  • Video Contest: IPO is again hosting its IP Video Contest – for entertainment value I like the LOTR and Cavemen skits. [http://www.ipvideocontest.com/?page_id=410]
  • Lighting Ballast: The Federal Circuit has denied a motion for another en banc rehearing in the longstanding lighting ballast case. Thus, the latest panel decision should stand that affirms the district court holding that the claimed “voltage source means” is not a means-plus-function case.  That outcome is largely based upon the appellate court giving deference to the lower court’s factual findings that were derived from expert testimony discussing the level of skill in the art.
  • Patent Reform: Senator Grassley’s PATENT ACT of 2015 (S.1137) has been placed on the Senate Calendar queue after having been reported out of committee in June.  The bill also includes a number of substantive amendments.
  • ShowerThoughts: Our objective system of judging obviousness almost always gathers more prior art than was actually known to the inventor at the time of the invention.  This means that (for valid patents) the inventor’s actual inventive-step (based upon what the inventor knows) is typically greater than what is required by law – perhaps significantly so.

Federal Circuit Backtracks (A bit) on Prior Art Status of Provisional Applications and Gives us a Disturbing Result

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by Dennis Crouch

Dynamic Drinkware v. National Graphics (Fed. Cir. 2015)

The underlying issue in this IPR-appeal is the effective date of prior art: How do we treat prior art patents and published applications that claim priority to provisional applications?

The patent being reviewed – National’s Patent No. 6,635,196 – was applied for on November 22, 2000 but claims priority to a provisional application filed in June of 2000.  National was also able to show that by March 2000 the inventor had completed the invention and reduced-to-practice (RTP) the claimed lenticular lens insert.

The alleged prior art is U.S. Patent 7,153,555 (“Raymond”) was filed in May 2000 and but claims priority back to a February 2000 provisional application filing.  The Raymond provisional is somewhat different from the later-filed non-provisional and so the question is whether the effective prior-art date stretches back to the provisional filing.

On its own, a provisional patent application does not qualify as “prior art” under 25 USC 102 (old or new) and the tens-of-thousands of provisional applications abandoned each year without any further patenting-action are not prior art. However, the Federal Circuit has indicated that (under pre-AIA 35 USC 102(e)) a later-filed non-provisional application will be given the prior-art date of the provisional filing (once the non-provisional is published or patented).  Giacomini.

The somewhat convoluted 102(e) indicates that a US patent application becomes prior art once it is either published or issues as a patent. And, at that point, the reference is back-dated to the application’s filing date.  Section 119(e) describes how an application having a priority claim back to a provisional patent application “shall have the same effect, as to such invention, as though filed on the date of the provisional application” so long as the provisional application sufficiently discloses the claimed invention under Section 112(a).   Weaving these together in Giacomini, the court ruled that an issued patent will be considered prior art as of its provisional filing date – so long as the provisional provides written description support for the invention claimed in that issued patent. In considering the prior art status of Raymond, the PTAB examined the patent claims and compared them to the provisional disclosure — finding that the provisional did not provide adequate support for the claims.

Anyone who works with prior art knows that this setup is an oddball way to address the situation.  A patent’s disclosure for prior art purposes should not depend upon what was claimed or not claimed but instead should focus on what was disclosed.  My belief is that, once publicly available, all provisional applications should be considered prior art as of their filing dates.

The Federal Circuit merits discussion began by stepping through the process of challenging the prior art’s provenance:

  • First the patent challenger raises the prior art and explains its priority claim (here, done in the IPR petition).  Without further challenge, the patent would be deemed prior art as of its provisional filing date.
  • Then the patentee can raise the argument that the provisional priority claim does not satisfy the Written Description. By satisfying this burden of presentation, the burden shifts back to the challenger.
  • Finally, the patent challenger must prove that the provisional provides proper support.

Thus, once the issue is raised the court will (rebuttably) presume that the provisional does not provide adequate support. “[B]ecause the PTO does not examine priority claims unless necessary, the Board has no basis to presume that a reference patent is necessarily entitled to the filing date of its provisional application.”  In Giacomini, Federal Circuit seemed to have implicitly come out the other way – counting the provisional as prior art without proof of WD satisfaction.  Here, the court distinguished that situation by noting that Giacomini had waived that argument by failing to challenge the written description support.

As noted above, the rule here is that the prior art date of a patent (or patent application) stretches back to the provisional filing date if the provisional provides written description (and enabling?) support of the claims of that patent (or application).  Confusing that rule, the patent challenger here focused on the particular disclosure-of-concern for its invalidity argument and showed that the disclosure was found in the provisional.  Unfortunately, according to this odd rule, the challenger’s explanation is insufficient.

Nowhere, however, does Dynamic demonstrate support in the Raymond provisional application for the claims of the Raymond patent. That was Dynamic’s burden. A provisional application’s effectiveness as prior art depends on its written description support for the claims of the issued patent of which it was a provisional. Dynamic did not make that showing.

With the provisional filing date knocked-out for the Raymond prior art, the unpatentability case crumbled and thus, the Federal Circuit here confirmed patentability of the challenged claims.

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  • The result here is silly – and somewhat disturbing – that under the first-to-invent rule the second inventor gets a patent.  Raymond came up with idea at issue first and disclosed it in a provisional patent application that eventually resulted in an issued patent.  But, since Raymond’s non-provisional application included additional subject matter, the provisional disclosure no longer counts as effective prior art.
  • The AIA rewrote Section 102 and re-codified the old 102(e) into 102(a)(2) and 102(d).  The new rule is also a bit unclear — indicating that the disclosure found in a patent or published application will be given a prior art date of a priority filing document if the patent or application is entitled to so claim priority and the priority filing “describes the subject matter” being relied upon as prior art.
  • One element that is unclear from this is whether being “entitled” to claim priority/benefit requires 112(a) support of the claims. The court explains in a footnote: “Because we refer to the pre-AIA version of § 102, we do not interpret here the AIA’s impact on Wertheim in newly designated § 102(d).”
  • Post-AIA: Of course, regardless of the Wertheim issue above,  the outcome of this case flips post-AIA because the prior art cannot be avoided simply by showing an earlier date of invention or reduction to practice. Thus, the patentee would lose here because its priority filing date is subsequent to the prior art’s effective date.
  • My take is that, once the provisional becomes public that the law should regard a provisional application’s prior-art status as of its filing date.  The PTO should also be creating a public database of provisional application filings that can be searched and relied upon as a prior art tool.  For American companies, the failure to make this change means that many of their provisional application disclosures often will not prevent third-parties (half of which are non-US companies) from obtaining patents on identical innovations.

 

Patentlyo Bits and Bytes by Anthony McCain

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Intellectual Ventures Software Patents Too Generic (i.e., Abstract)

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by Dennis Crouch

On appeal, the Federal Circuit has affirmed that Intellectual Ventures’ asserted patent claims are invalid for lacking eligible subject matter. Intellectual Ventures v. Capital One (Fed. Cir. 2015) (Patent Nos. 8,083,137, 7,603,382, and 7,260,587).

The basic idea behind the patent ‘137 patent is to help users budget and then stick to their budget. Incredibly important task that many of us find quite challenging.  The court identified Claim 5 as representative.  That claim includes two steps: (1) storing a user profile with a set of categories – each with a pre-set budget limit; an (2) transmitting a summary of transactions for a category along with the pre-set budget limit.  Claim text:

5. A method comprising:

storing, in a database, a [user] profile … containing one or more user-selected categories to track transactions associated with said user identity, wherein individual user-selected categories include a user pre-set limit; and

causing communication, over a communication medium and to a receiving device, of transaction summary data in the database for at least one of the one or more user-selected categories, said transaction summary data containing said at least one user-selected category’s user pre-set limit.

In reading this claim in the context of Alice Corp., the Federal Circuit first found it directed to the abstract idea of “tracking financial transactions to determine whether they exceed a pre-set spending limit (i.e., budgeting).”  In Alice Corp. step two, the court found no inventive concept: “it is clear that the claims contain no inventive concept. . . . Instructing one to ‘apply’ an abstract idea and reciting no more than generic computer elements performing generic computer tasks does not make an abstract idea patent eligible.”

The court similarly agreed that the claims of the ‘382 patent are also ineligible. Claim 1 provides:

A system for providing web pages accessed from a web site in a manner which presents the web pages tailored to an individual user, comprising:

an interactive interface configured to provide dynamic web site navigation data to the user, the interactive interface comprising:

a display depicting portions of the web site visited by the user as a function of the web site navigation data; and

a display depicting portions of the web site visited by the user as a function of the user’s personal characteristics.

Thus, the claim relates generally to a system for customizing information based upon information known about a user and also web-site navigation data (such a the time-of-day a site is being visited). With Alice Corp. step 1, the court agreed that the aforementioned gist is in fact an abstract idea because such information tailoring is “a fundamental . . . practice long prevalent in our system . . . .” Quoting Alice Corp. Regarding Alice Corp step 2, the court found no inventive concept.  Intellectual ventures had argued that its approach provided a dynamic and real-time application of the concepts — however, the court rejected that argument on its facts — finding that “the claims are not so limited.”

Of special concern for the patentees here is the claimed “interactive interface” configured to implement the method.  Intellectual Ventures argued that device provided an inventive application of the broader idea.  The Federal Circuit disagreed – finding that “nowhere does Intellectual Ventures assert that it invented an interactive interface …. Rather, the interactive interface limitation is a generic computer element.”

Intellectual Ventures third patent included claims with more substance, including a process of sorting, scanning, and organizing images obtained from hard copy prints.  However, those asserted claims were found not-infringed.

Supreme Court Slows its Patent Law Jurisprudence?

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The Supreme Court had denied petitions for certiorari in three IP cases out of the Federal Circuit:

  • Google v. Oracle (Federal Circuit held that the Java API naming scheme was copyrightable and not an ineligible “system or method of operation”).
  • Google v. Vederi (Federal Circuit held that an amendment during prosecution to overcome a rejection need not be “strictly construed against the applicant”).
  • Ultramercial v. WildTangent (Federal Circuit held the patented method of distributing media content with advertising to be a patent ineligible abstract idea).

Apart from leaving-stand the particular holdings, these outcomes may collectively signal a time of out-breath for Supreme Court patent law jurisprudence.  By my count, there are no patent decisions pending before the Court (with certiorari granted) and none of the petitions on file carry a substantial chance of being granted.

Guest Post: America Invents Act Cost the US Economy over $1 Trillion

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By Richard Baker, President of New England Intellectual Property, LLC

The American Invents Act, passed into law in 2011, is one of the biggest changes to US patent laws in the past fifty years.  Its sweeping reforms changed our system from the “First to Invent” to a “First to File” system, and created a new method for infringers to invalidate patents.  While many aspects of this legislation had impacts on inventors, the most striking impact has been the devastating financial impact of the post grant review process.  The post grant review process, or more specifically, the inter partes review (“IPR”) procedure allows any entity to request that the US Patent Office initiate a review of a valid, issued US Patent.  In the two and a half years since the first IPR was filed, 77% of all patent claims reviewed have been invalidated[1].

To obtain a patent in the United States, an inventor must submit his invention to an examination process before a patent examiner.  This process involves several years and often many vigorous debates between the examiner and the inventor in papers that are exchanged.  If the examiner is convinced at the end of this proceeding that a patent is warranted, the US Patent Office issues a patent to the inventor.  By the time a patent issues, there typically is a significant examination of the merits of the patent claims.

In essence, the IPR procedure is a request for the Patent Office to admit that they made a mistake and reverse themselves on the validity of the patent.  The problem with this reversal is that the inventor has relied on the patent to build a business or to initiate licensing discussions based on his faith in the original decision of the Patent Office.  This is similar to a property owner building a house based on the issuance of a deed to the property.  A reversal of the patent, or of the deed, after the fact impacts the investments made in the invention.

Some have argued that the IPR procedure is weeding out the weakest patents in the United States, but experience has shown that the opposite is true.  The IPR procedure is only being used against the best United States patents.  This is because of pure economics.  The cost for a company to file and prosecute an IPR to a decision by the Patent Trial and Appeal Board (“PTAB) is between $200,000 and $500,000.  No corporation can afford to file an IPR unless the patent in question is a significant threat.  In fact, a review of the IPRs filed in the past month or two shows that almost every patent that is IPR’ed is involved in litigation (the few that are not in litigation are in the pharmaceutical arts).  Only a small percentage of all patents are used in litigation or licensing; these patents are considered the top tier of all patents.  It is these patents that are the subject of IPRs.  Given the high rate of invalidation at the PTAB, most all patent litigation defenses now involve an IPR of the patents in suit.

To quantify the financial impact of the IPR proceedings in the AIA bill, we need to first assess the impact on the price of an average US patent.  The lore of the US patent brokers, individuals who help inventors and companies to sell their patents, is that the price of an average US patent has dropped about 66% since the institution of the AIA IPR procedure.   According to Scott Bechtel of AmiCOUR IP Group, an experienced patent broker, “US Patents have lost 2/3rds of their value since the AIA was passed in 2011.”

A bigger sampling of deal values can be found in IPOfferring’s Patent Value Quotient Annual Report of patent sales[2].  This report has been issued from 2012 through 2014, giving us three years of sales data to analyze.  The deals listed in these reports may not represent all patent sales, as this list consist of deals large enough to be material and thus publicly reported as well as deals that brokers chose to report to IPOfferrings.  Furthermore, there is no readily available data from before 2012 to see deal values before the AIA was passed.  However, these reports show the dramatic drop in patent values over 13,564 patent sales in 93 deals over a three year period.

IPOfferings Patent Value
Year Dollar Sales Patents Sold Average Price
2012 $2,949,666,000 6,985 $422,286
2103 $1,007,902,750 3,731 $270,143
2014 $467,731,502 2,848 $164,232
2012-2013 -66% -47% -36%
2013-2014 -54% -24% -39%
2012-2014 -84% -59% -61%

This chart shows a dramatic drop in the average price per patent over the three year period, with values dropping 61% from $422,286 per patent to $164,232.  In that timeframe, the number of patents sold dropped from just under 7000 to 2800, showing a decrease in liquidity in the patent market.  The overall sales dropped from $3 Billion to well under one half billion in patent sales per year, or by 84%.

But this decrease in value of US Patents should be expected given the invalidation rate of the Patent Office’s IPR proceedings.  If 77% of all valid patents are canceled through this new proceeding, then the risk adjustments on patent values should also decrease by roughly the same amount.  While our empirical data is showing a 60-70% drop in values, the theoretical impact should be 77%.  Perhaps this is reflecting an inefficiency in the market, suggesting that patent values will drop another 10-15% in the next year or two.  Or it could indicate that our samplings are not fully reflecting the actual decrease in values.

One could suggest that the Alice v CLS Bank Supreme Court decision also had an impact.  However, the Alice decision only impacts software patents, and the IPOfferrings numbers come from all fields.  The IPOfferrings numbers can be seen across three years since the AIA was implemented; Alice was decided less than a year ago and at first was not seen as a big change in patent law.  Only in the past 4-5 months has Alice been expanded by the lower courts to impact a wide set of software patents, thus possibly impacting the value of software patents.  Experienced brokers are seeing that software patents with Alice issues are simply not being sold, with buyers afraid to spend anything on these patents and sellers holding until the law settles in this area.  Thus we believe the IPOfferrings numbers are primarily showing the impact of the AIA IPR procedure with only a minor impact from the Supreme Court’s Alice decision.

The decrease in value of patents means that the valuations of companies with US patent assets are also devalued accordingly.  If a hypothetical company has patent assets on the books (much of which may be in Good Will if the company purchased the patents from others) at $1 Billion from a pre-2011 acquisition, these assets should be written down to about $390 Million based on the impact of the AIA[3].

This raises many questions on the overall impact of the AIA’s IPR procedure on the United States economy.  Using one methodology to evaluate the impact, we look at the US economy and approximate the impact from top down.  Intellectual capital (patents, copyrights, and other forms of economic ideas are worth about $9 Trillion in the United States[4].  So a 61% markdown of patents (and their resulting goodwill when small companies are bought) corresponds to a 61% markdown of a portion of the $9.2 Trillion.  Say patents are worth about 25% of the overall value of intellectual capital[5], or about $2.3 Trillion, then a 61% loss in value is $1.37 Trillion decrease in the value of the US economy based on the impact of the AIA bill.  The American Invents Act bill cost the economy about $1.37 Trillion, or an amount equal to about 7% of the US GDP.

Another way to look at the impact of the AIA starts with the count of the number of US Patents in force, about 2.1 Million according to Professor Dennis Crouch of the University of Missouri School of Law[6].  Given our 2012 IPOfferings value of $422,000 per patent, the value of patents to the US economy was $886 Billion.  The AIA dropped the value to one third, leaving $344 Billion in value.  This one act of Congress, the IPR proceeding of the AIA bill, destroyed $546 Billion of the US economy using this methodology.

While additional study is required to refine the macroeconomic impact of the AIA IPR procedure, it is clear that this bill has wiped out about $1 Trillion of value in the US economy.

But this number is probably greatly underestimated, as it only incorporates the first order loss in value.  It does not include lost opportunities, disincentives to innovation, the inability to raise money due to the decrease in collateral, and the loss of jobs without those investments.  We leave this analysis to economists in future studies.

Given the huge impact of the AIA and its IPR proceedings on the US economy, on corporate valuations, and on the value provided to individual inventors, it is time for Congress to reevaluate this procedure to assure that a much greater percentage of patents survive the IPR process.

=====

[1] US Patent and Trademark Office, “Inter Partes Review Petitions Terminated to Date (as of 1/15/2015)”, downloaded from http://www.uspto.gov/sites/default/files/documents/inter_partes_review_petitions_terminated_to_date%2001%2015%202015.pdf  on 6 May 2015.  In the proceeding where the USPTO decided the merits of the Inter Partes Review petitions, 643 claims were found patentable and 2176 claims were found unpatentable, or 77%.

[2] IPOfferring’s Patent Value Quotient Annual Report is available at http://www.ipofferings.com/patent-value-quotient.html.

[3] Patents generated internally in a company are not valued on a corporation’s balance sheets, according the US accounting rules.  Only patents acquired in a purchase or a merger are included on a balance sheet.

[4] See Kevin A. Hassett & Robert Shapiro, What Ideas Are Worth: The Value of Intellectual Capital And Intangible Assets in the American Economy, Sonecon (Sept. 2011), available at www.sonecon.com/docs/studies/Value_of_Intellectual_Capital_in_American_Economy.pdf.

[5] Robert Shapiro estimates in a private email that patents make up 25-30% of intellectual capital, but states that it varies per industry and per company.  Additional research is needed to calculate this percentage more precisely.

[6] Crouch, Dennis, “How many US patents are in-force”, May 4, 2012, found at https://patentlyo.com/patent/2012/05/how-many-us-patents-are-in-force.html.

At Stanford: PTO and the Courts

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I’m looking forward to participating in this week’s Stanford Law School conference focusing on the interplay between the USPTO and the Courts. [Event Website]. On April 17 (Friday), I will be introducing the topic with a discussion of the rise of administrative review proceedings under the America Invents Act of 2011. On the 18th (Saturday), I will be discussing my proposals for claim construction within the USPTO as part of Director Lee’s quality initiative.

In general, the 17th is designed as a practical-focused day with a number of practitioners and judges speaking along with a handful of academics and Judge Moore as the Keynote Speaker.  The 18th is the “academic day” and will include presentations from many of the leading patent scholars in the country.

See you there!

Guest Post by Prof. Ghosh – Kimble v. Marvel: Exorcising the Spirit of Justice Douglas

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Shubha Ghosh is the Vilas Research Fellow & George Young Bascom Professor in Business Law at the University of Wisconsin Law School.  He is currently serving as the inaugural AAAS Science, Technology, and Policy Fellow at the Federal Judicial Center in Washington, D.C.

I attended the oral arguments on March 31 in the Kimble v Marvel case, in which the Court considers whether to overrule Brulotte v. Thys. A 1964 precedent authored by Justice Douglas, the Brulotte decision employs an amalgam of preemption and patent misuse analysis to hold that post-expiration royalty payments for patent licensing are invalid.

Judging from the oral arguments, the Court is grappling with two issues. The first is that of stare decisis. The second is what standard should replace the per se rule articulated in Brulotte if it is overruled.

Stare Decisis and Living Economists

The divisions on the Court parallel that of Leegin v Creative Products, a 2007 decision in which the Court overruled the 95 year old per se rule against minimum resale price maintenance. The Court was split five to four with Justices Kennedy writing for Justices Roberts, Thomas, Scalia, and Alito. Justice Breyer wrote in dissent with Justices Ginsburg, Souter, and Stevens signing onto his defense of precedent.

During the Kimble oral arguments, Justice Breyer defended Brulotte with an elaborate hypo involving a patent owner that locks in all potential licensees with obligations for royalty payments going beyond the term of the patent. His point: contracts can extend the exclusivity of a patent beyond its limited time. Questioning from Justices Sotomayor and Kagan suggested that they may follow the reasoning of their predecessors Justices Souter and Stevens from the Leegin decision. Justice Sotomayor wondered why changes in the viewpoint of economists should guide precedent. “What if fifty years from now economists agree that Brulotte was correct?,” she asked. Justice Kagan adopted a similar tack by asking petitioners what problems Brulotte caused that would require overruling. Even if a bad rule, she implied, knowledgeable parties can readily contract around it.

My prediction is that the final vote will parallel that in Leegin for an overruling of Brulotte. Whatever one thinks of the result, the opinion itself is not clearly reasoned with a mix of preemption and patent misuse analysis. The problem with Brulotte is that the 1979 Aronson v. Quick Point decision tempers its reasoning by allowing parties flexibility in contracting over patentable subject matter.

While there has been much criticism from economists about the rationality of the Brulotte per se rule, from a transactional perspective the real problem is that the rule provides a trap for the unwary. Justice Scalia pointed out that the beneficiaries of the rule are licensees who knowingly enter into licenses with post-expiration payment obligations hoping that the licensor does not know of Brulotte. Such seemed to be the case in the Kimble case. Such opportunistic licensees can obtain lower royalty payments knowing that any post expiration obligation would be invalid. The Brulotte rule can be transacted around or used opportunistically. In order to avoid the latter possibility, the decision should be overruled.

 

After Brulotte: A Reasonable Rule or a Rule of Reason?

Harder to predict is how the Justices will overrule Brulotte. The Court had an easier choice in Leegin which was a pure antitrust case. Once the Court rejects a per se rule, it is replaced with the rule of reason in antitrust cases. Petitioners were advocating a rule of reason approach as has been adopted in patent misuse cases. Justice Sotomayor questioned why antitrust principles should be introduced into patent law. If there is an antitrust problem, the licensee can just bring an antitrust claim, she suggested. Justice Breyer raised the specter of administration costs that a rule of reason approach would imply. Other justices were less vocal about what could replace Brulotte.

It is true that Brulotte is not an antitrust case. But patent misuse tracks antitrust law (for example, see the treatment of tying as misuse under 35 USC 271(d)). So the petititoners’ advocating for a rule of reason approach is appropriate and perfectly consistent with any accompanying antitrust claims to a defense of patent infringement.

What is interesting to me is how the Court might address issues of preemption. The Court has not considered an intellectual property preemption cases since 1989 even though the issue has been percolating in the lower courts in the context of licensing and contract. Part of me hopes that the Court resolves the lower court’s treatment of preemption. Realistically, neither the briefs nor the argument address the preemption issue head on. The issue should await more careful consideration of the relationship between patents and contracts.

However, if the Court does address the preemption issue, then the 1979 Aronson issue should be its guide. In that case, the Court addressed the validity of an escalator clause which created two tiers of royalties based on whether a patent was granted on an invention. When the licensee ended up paying royalties for an invention which was found to be unpatentable, it raised preemption of the escalator clause under Brulotte. The reasoning was straightforward: if royalties after patent invalidity are preempted because of conflict with the limited terms of patents, then royalties on an invention for which a patent was denied should also be in conflict. The licensee reasoned that if such contracts were upheld, an inventor would not need to seek a patent since contract could provide equivalent protection.

The Court correctly rejected the reasoning. Patents offer benefits beyond contract. Furthermore, contracting supplements patenting and does not interfere with it. So the escalator clause was upheld. But Justice Blackmun in concurrence wondered about the conflict with Brulotte. As he wrote in 1979:

[As in Brulotte], Mrs. Aronson has used the leverage of her patent application to negotiate a royalty contract which continues to be binding even though the patent application was long ago denied. The Court… asserts that her leverage played “no part” with respect to the contingent  agreement to pay a reduced royalty if no patent issued within five years. Yet it may well be that Quick Point agreed to that contingency in order to obtain its other rights that depended on the  success of the patent application. The parties did not apportion consideration in the neat fashion the Court adopts.

Justice Blackmun reconciles the two cases by saying that Brulotte is solely about leveraging that allows the patent owner to extend the patent term through contract. Perhaps a better reconciliation would have been to temper the leveraging analysis, grounded in patent misuse, through application of a rule of reason analysis. That course should be the one the Court adopts in Kimble after it overrules the pre se rule of Brulotte.

Measuring Innovation

Patent

A new business article on “measuring innovation” notes that 50% of firms investing in R&D are not patenting the results of their research. The main thrust of the article is that, because so many firms are avoiding the patent system, that patents do not make sense as a broad measure of innovation. Their solution is to use the Research Quotient (Prof Knott’s measure of optimal research output based upon various financial outputs) as a better measure.  See Cooper, Knott, and Yang, Measuring Innovation (March 2, 2015). Available at SSRN: http://ssrn.com/abstract=2572815 or http://dx.doi.org/10.2139/ssrn.2572815.

Who is to Blame for High Litigation Costs: Plaintiffs for filing the lawsuits or Defendants for refusing to deal and instead fighting?

Patent

The recent WSJ op-ed by John Chambers (CEO Cisco) and Myron Ullman (CEO JCPenny) is interesting, but largely not compelling. What the article does do is indicate (1) that patent litigation is the monetization avenue being used by non-practicing patent holders and (2) that it is pretty clear that manufacturers and retailers would be better off (at least in the short term) without being charged with patent infringement.

The core of their argument is here:

A 2012 study by Boston University researchers estimated that companies spent upward of $29 billion a year defending patent lawsuits, and the problem has not let up. According to RPX Corp., more than 3,600 companies and named defendants were sued by so-called patent-assertion entities in 2014, triple the number in 2006. Patent-assertion entities—aka nonpracticing entities, or as some would call them, trolls—that own patents but do not make products or sell services based on them file more than 60% of patent litigation in the U.S.

A civil lawsuit generally comes about based upon a failure of the parties to negotiate a just solution.  Of course, for any given lawsuit, we don’t know beforehand whether it is the plaintiff or the defendant who is being more unreasonable.

The op-ed suggests that the plaintiffs are to blame for filing the lawsuits, but there is also a strongly compelling case for arguing that the defendants are to blame for refusing to deal and instead fighting every lawsuit tooth-and-nail. When reach a point where out-of-litigation resolutions are rare, we should recognize that it is a systemic problem.  And, at this point – where the primary complaint is high litigation costs – the solution is not to favor one side or the other, but instead to look for systemic changes that substantially decrease the cost of resolution.

Gene Quinn provides his take on the op-ed at IP Watchdog.

In re Papst Licensing: Federal Circuit Speaks on Claim Construction

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By Jason Rantanen

In re Papst Licensing Digital Camera Patent Litigation (Fed. Cir. 2015) (Download In re Papst)
Panel: Taranto (author), Schall, Chen

In its first precedential opinion addressing claim construction after Teva v. Sandoz, a panel of Judges Taranto, Schall and Chen take the approach that it is business at usual for the court—at least, as long as only intrinsic evidence is involved.

The most significant aspect of this opinion is the relationship between this appeal and Teva.  Here, the district court heard from the parties’ experts on the technical background, but “declined to admit expert testimony or to rely on an expert declaration from Papst, stating that ‘the intrinsic evidence—the claims, the specification, and the prosecution history—provide the full record necessary for claims construction.”  Slip Op. at 7.  Given this posture, the Federal Circuit comfortably applied a de novo standard of review.  From the opinion:

We review the grant of summary judgment of noninfringement de novo, applying the same standard used by the district court. See Bender v. Dudas, 490 F.3d 1361, 1366 (Fed. Cir. 2007). The infringement inquiry, which asks if an accused device contains every claim limitation or its equivalent, Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17, 29 (1997), depends on the proper construction of the claims. See Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448, 1454 (Fed. Cir. 1998) (en banc). In this case, we review the district court’s claim constructions de novo, because intrinsic evidence fully determines the proper constructions. See Teva Pharm. U.S.A. Inc. v. Sandoz, Inc., 135 S. Ct. 831, 840–42 (2015). As we have noted, the district court relied only on the intrinsic record, not on any testimony about skilled artisans’ understandings of claim terms in the relevant field, and neither party challenges that approach.

Slip Op. at 8.  Operating within this framework, the court drew upon its “familiar approach to claim construction”:

“We generally give words of a claim their ordinary meaning in the context of the claim and the whole patent document; the specification particularly, but also the prosecution history, informs the determination of claim meaning in context, including by resolving ambiguities; and even if the meaning is plain on the face of the claim language, the patentee can, by acting with sufficient clarity, disclaim such a plain meaning or prescribe a special definition.”…We apply, in particular, the principle that “[t]he construction that stays true to the claim language and most naturally aligns with the patent’s description of the invention will be, in the end, the correct construction.”

Slip Op. at 9-10 (internal citations omitted).  Using that approach, the Federal Circuit reversed all of the district court’s claim constructions at issue.

While this appeal appears to involve Teva‘s paradigmatic scenario in which de novo review is appropriate, future appeals are less likely to offer such a relatively simple posture.   Rather, the expectation is that district judges will seek to insulate themselves from review by relying upon evidence that the Supreme Court said is due deferential review.  This increasing reliance on extrinsic evidence by district courts will result in appeals that intertwine the intrinsic with the extrinic.  That said, the above sections of the opinion suggest to me that the court is probably going to focus its review on the intrinsic evidence first and, if that is clear, will decide the appeal on that ground alone.

There’s another layer of complexity going on here that relates to the starting meaning* of words.  In Teva, the Court observed that:

Construction of written instruments often presents a “question solely of law,” at least when the words in those instruments are “used in their ordinary meaning.”…But sometimes, say when a written instrument uses “technical words or phrases not commonly understood,” id., at 292, those words may give rise to a factual dispute. If so, extrinsic evidence may help to “establish a usage of trade or locality.” []. And in that circumstance, the “determination of the matter of fact” will “preced[e]” the “function of construction.”…This factual determination, like all other factual determinations, must be reviewed for clear error.

Teva v. Sandoz at 5-6 (internal citations omitted).  A tension that emerges from this passage is the tension between “ordinary meaning” and “technical words or phrases not commonly understood.”  The latter, the Court’s opinion states, may be due deference; but when “ordinary meaning” is involved, it is a “question solely of law.”

Here, the claim construction did require some discussion of the ordinary meaning of words.  At issue was the meaning of the claim term “virtual files,” which the district court construed as meaning “files that appear to be but are not physically stored; rather, they are constructed or derived from existing data when their contents are requested by an application program so that they appear to exist as files from the point of view of the host device.”  Slip Op. at 21.  This construction, in the district court’s eyes, limited “the “virtual files” of the “virtual file system” to files “not physically stored on the interface device,” whose content is data “originating from the data transmit/receive device.”  Id.

In reversing the district court’s construction, the Federal Circuit began with its —not the district court’s—ordinary meaning.   “‘Virtual’ conveys some kind of as if action, one thing emulating another; the term was prominently used that way in the computer field at the time of the inventions here.  See CardSoft v. Verifone, Inc., 769 F.3d 1114, 1117–18 (Fed. Cir. 2014) (discussing Java Virtual Machine in patent dating to 1998).”  Slip Op. at 22.  With this meaning as the starting point, the CAFC concluded that the patent identifies this emulation as not turning “on whether data in a ‘virtual file’ is physically located in the interface device or a data device when the host seeks it.”  Id.

The district court, however, relied on a different source for its starting meaning:

The 1993 New IEEE Dictionary defined the term similarly to the construction proposed by the Camera Manufacturers. In the context of a “virtual record,” “virtual” was defined as: “a record that appears to be but is not physically stored; rather, it is constructed or derived from existing data when its contents are requested by an application program….The Court adopts the definition from the New IEEE Dictionary as the most clear and pertinent….”

In re Papst Licensing GmbH & Co. KG Litig., 670 F. Supp. 2d 16, 60 (D.D.C. 2009).  It’s unclear why the Federal Circuit didn’t address the district judge’s choice of starting meaning, substituting its own with no explanation of why.  It’s also not clear to me that the different starting point really matters for the ultimate issue of whether the claim term excludes files stored on the interface device.  But this kind of dispute, where a district judge relied on an extrinsic source for its starting point when construing a claim term, seems to be one that parties will try to make hay with in future appeals on claim construction.

*I’m using “starting meaning” to refer to the meaning that the party construing the claim term begins with; it may or may not be the “ordinary meaning.”  For some words, that may be our individual “mental lexicons,” as Kristen Osenga has described ; for other words, those meanings may come about when we look up the word in a dictionary.  For court opinions on claim constructions, the court will sometimes, but not always, state what it’s using as the starting meaning for a term.  Here, the Federal Circuit started with its meaning from the cited case, while the district court began from the point of the IEEE dictionary and the OED.

A Constitutional Challenge to Inter Partes Review

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by Dennis Crouch

The America Invents Act (AIA) created a set of new administrative review procedures (IPR, PGR, CPR) that allow third-parties to challenge already issued patents.  This new approach takes a power that was previously held by courts and gives it instead to the USPTO. From a separation-of-powers perspective, the new law shifts power from the Article III courts in favor of the Article I executive-controlled agency.

After losing on the merits of the inter partes review brought by HP, patentee MCM has now appealed to the Federal Circuit — asking the court to find the inter partes review statute unconstitutional for violation of the Seventh Amendment right to a jury trial.

Question Presented:

Whether actions to cancel or revoke a patent must be tried in Article III Courts with access to a jury under the Seventh Amendment to the United States Constitution.

Ned Heller, author of the brief, reaches back to Marbury v. Madison, 5 U.S. 137 (1803), for the standard and accepted principle that “the question whether a property right may be revoked lies within the exclusive province of the Courts.” In 1893 the court explained further that:

The only authority competent to set a patent aside, or to annul it, or to correct it for any reason whatever, is vested in the courts of the United States, and not in the department which issued the patent.

McCormick Harvesting Machine Co. v. Aultman, 169 U.S. 606 (1898).

The largest hurdle for MCM is that the Federal Circuit decided the parallel issue with regard to reexaminations in Patlex Corp. v. Mossinghoff, 758 F.2d 594 (Fed. Cir. 1985). In Patlex, the Federal Circuit found that rexaminations did not violate Seventh Amendment.  In response, MCM argues (1) Patlex is wrongly decided; and (2) Patlex was effectively overruled by the Supreme Court in Stern v. Marshall, 564 U.S. 2 (2011) (although bankruptcy judge had statutory authority, it lacked Constitutional authority).

Notes:

  • Read the Brief: MCMBrief
  • In the Alternative: MCM also argues its case on the merits of obviousness and that the case is time–barred under 35 U.S.C. 315(b) since one of HP’s affiliates (Pandigital) was served with an infringement complaint more than one year before the IPR request was filed. Thus, it is possible that the court will rule in MCM’s favor without reaching the Constitutional question.
  • The patent at issue is US Patent No. 7,162,549 that broadly claims a controller chip for interfacing with a flash memory card used in many devices, such as digital photo frames.  More than 100 companies have been sued for infringement over the past six years, but no court has yet found the claims invalid.

 

Next Steps on the USPTO Sensitive Application Warning System

Patent

The USPTO has now offered some public information regarding its secretive Sensitive Application Warning System with the apt acronym: SAWS. [LINK]  SAWS came to light after it was ‘leaked’ by examiners and Devon Rolf has written about his experience with the program on IP Watchdog.

The basic idea is that examiners have been encouraged to flag applications that claim “highly controversial” or those that might create “unwanted media coverage.”  Those applications are then tiered and then before allowance must be approved by either a technology center director or upper PTO management.

A major problem with the program of course is that none of the heightened reviews are made of-record.  Thus, neither the applicants nor the public are told which applications are up for review or whether the review is following any semblance of legal process.

My position is that the USPTO is right to allocate more time and energy on applications whose claims are clearly very broad in a way that would significantly alter the marketplace.  Of course, the review cannot be directed at avoiding USPTO embarrassment but rather to ensure that the issued patent complies with the law of patentability.  Avoiding embarrassment will be a secondary benefit.  As I mentioned above, the real problem here is the Office’s continued secrecy in this front.  We do not know which applications have been chosen, why they were chosen, or whether the level of review follows the law.  Because nothing is done on record, applicants likewise have no recourse regarding potential political capture of the examination process.

After the SAWS reports were leaked (and on my private suggestion) the office finally publicly admitted that the program exists and has provided some information regarding its progress.

[SAWS] is one of many practical, internal efforts that the USPTO has in place to ensure that only the highest quality patents are issued by the Agency.  {DC What are the other internal efforsts?} By bringing an additional quality assurance check to a very small number of pending patent applications, the USPTO helps ensure that those applications that could potentially be of special interest, are properly issued or properly denied.    An application flagged for such a quality assurance check undergoes the same types of examination procedures as any other patent application, and is held to the same substantive patentability standards.

In terms of numbers, the USPTO also reported that only about 0.04% of applications fall into the program.  This is only one application out of every 2,500 considered — the message here is “trust us – we’re just dealing with the oddballs.”  Overall, it looks like about 1,000 applications have been part of this particular program.

[USPTO SAWS DISCLOSURE]

I have requested that the USPTO provide a list of publicly-available applications that have been flagged for the SAWS program. Thus far, the USPTO has refused – claiming that the list of applications is privileged under exemption (b)(5) of FOIA.  My position is that privilege is not applicable to protect this list – especially based upon the tradition and legal requirements that examination be done on the written record with proper notice. See 35 U.S.C s132 and 37 C.F.R. s1.104.

 

USPTO Telework Abuses

Patent

by Dennis Crouch

On November 18, the Congressional Judiciary an Oversight Committees will jointly hold hearings on the USPTO Telework Scandal.  As with many beltway-scandals, this one is double-dip involving both the scandal and then the cover-up.  Basically, USPTO managers allowed teleworkers to violate their time-reporting rules and then USPTO management attempted to hide at least some of those abuses from the Department of Commerce Inspector General after an anonymous whistleblower spilled the beans. [NOTE – The USPTO hotly contests the notion that it attempted any coverup]

[Hearing Notice and Written Testimony] [Testimony of Inspector General Zinser]

The Obama Administration appears to be shielding its USPTO Director Nominee Michelle Lee and is instead sending Patent Commissioner Margaret Focarino to testify.  The USPTO’s written testimony offers little information other than general statements of quality, performance, and seriousness.  The report offers no indication of whether any employees were fired, sanctioned, or prosecuted for reporting time worked without actually working (or encouraging that approach).  Further, even years after the PTO management became aware of the issues, the agency is still only in the process of “clarifying what steps supervisors should take if they suspect any misconduct.” [Focarino Testimony].  It will be interesting to see whether the committee members will allow the PTO to keep its comments at such a “high level of generality.”

Following Commissioner Focarino’s approach, Esther Kepplinger argues against transparancy — noting that many of the USPTO problems can an should be dealt with “outside the public eye.”

Bill Smith offers useful testimony on the count system and RCE-abuse.  [Smith Testimony] Smith notes that the count system offers some incentives for examiners to engage in bad or abusive behavior to ensure that they remain highly paid.  Smith proposes a change in the system with what he calls Compact Prosecution 2.0.

An Update on Patent Reform 2015

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by Dennis Crouch

The current outlook for legislative patent reform in 2015 is not so much whether reforms will be enacted but instead how far they will go.  In a Chamber of Commerce IP event on November 18, Representative Goodlatte and Senator Coons will discuss their outlook on IP legislation in the new term.  Goodlatte has championed strong legislative patent reforms that include a presumption of attorney fee shifting, broadening of post-issuance review proceedings, heightened pleading requirements, and patent ownership transparency.  Senator Coons has also favored patent reform as well as sponsoring bills to nationalize trade secret law.

Emerging as a leading Senate Republican on patent reform is Senator Cornyn of Texas. Julian Hattem (The Hill) quotes Sen. Cornyn as saying that the 2015 Senate will “absolutely” pass legislative patent reforms to address the problem of “patent trolls.”  In 2014, Senators Cornyn and Schumer drafted a compromise bill that was less extreme than the Goodlatte version (that passed the House).  However, that compromise was never strongly supported by members of either party.  For his part, President Obama appears to be willing and ready to sign the Goodlatte bill if approved by Congress.

In the longer game, members of both parties see these patent reforms as potentially offering experimental results for major tort reform initiatives.  The test of success is whether the reforms limit the enforcement of “bad” patents while upholding both the value of “good” patents and the research-incentives offered by the patent system.

With Democrats out of the majority in the Senate, it is unclear whether patent reformers will now push for reforms that go beyond the recent legislative proposals.  A major open issue is that of the short nine-month window for filing of post-grant review proceedings.  A simple proposal would extend that window to 18-months post issuance and additionally open a second window to challenge very old patents.  In the past, I have proposed a USPTO claim-construction proceeding that could be a simple and cost-effective tool for formally establishing claim scope.

Pending Patent Cases in Decline

Patent,

By Jason Rantanen

Over the past few months, I have heard numerous comments from folks about the perception that patents – or at least, enforcement of patents – is in decline.  Major substantive decisions by the Supreme Court – in Mayo, Alice, Nautilus, and Octane Fitness – have provided new tools for patent challengers to draw upon in infringement suits, and inter partes review has become an almost automatic procedure.   So far, the empirical evidence has supported this perception.  Last month, Dennis wrote about Lex Machina recent report on numbers of new patent case filings, which revealed a substantial drop in patent case filings over the past few months and a 40% decrease in numbers of filings in September 2014 as compared to September 2013.  Edit: yesterday Brian Howard of Lex Machina posted an update with October data showing a slight uptick over September.

Case filings tend to be highly stochastic, however, and a case that’s filed one day could be terminated the next or live on for quite a while.  To take another look at the state of patent litigation, I wanted to see whether there are changes in numbers of pending cases.  If cases are terminating faster than new cases are being filed, then the number of pending cases would drop.  On the other hand, if despite the drop in new filings the termination rate is also down, then the number of pending cases would remain stable or even go up.  My methodology is at the end of this post, but the bottom line is that the below chart reports the number of patent cases that are pending as of the first of each month using Lex Machina as my database.

Patent Cases PendingThe below chart shows the deltas from the above chart; in other words, how big the positive or negative change was from the previous month.

Pending Case DeltasThese charts are consistent with the conclusion that the number of patent litigations is indeed in a declining state, although it’s worth observing that the number of pending cases is still well above what it was as of October 2010.  Of course, one important piece of context is the anti-joinder provisions of the AIA, which led to at least some of the increase after September 2011.  If anyone has ideas for parsing these out (short of manual review), I’d be interested in hearing them. And this data doesn’t tell us anything about the quality of the patent litigation.

In addition to the decline in pending cases, I also thought it would be interesting to consider these numbers in contrast with the numbers of new applications, which, as the below chart indicates, do not exhibit a similar decline.  (Note that I set the vertical axis to start at 20,000 in order to improve readability).  One explanation is that it takes longer to shift out of application filing mode than it does to shut down a litigation.  That said, it’s also possible that companies continue to file patents based on the belief that patent law is like a pendulum and perhaps it will swing back in the other direction.  A third possibility is that the real value of patents lies not in their enforcement value, but in other areas: in signalling, in incentivizing employees, or in defensive publication. Apps

Methodology: For the first two charts, go to the “Cases” tab on Lex Machina.  Select “Patent” under “Case Type.”  Under “Filed On,” choose FROM 2000-01-01 TO YEAR-MONTH-01.  Run the search on a monthly basis (i.e.: as of the first of the month).  In addition, run a second search adding the TERMINATED “TO” field using the same YEAR-MONTH-01 dates.  Record those numbers as well.  To obtain the numbers of open cases as of each date, subtract the “Terminated” cases from the cases filed to that date.

For the second charts, the data is obtained from the Patent Dashboard (which appears to be very unstable at the present time and works only intermittently for me).  I used the downloadable excel file.  Also, as Chris Cotropia pointed out to me, pure continuations are included in the “new application” portion, and these are more like RCEs than new applications, or divisionals or CIPs.

Thanks to my research assistant, Alex Lodge, for help in collecting the Lex Machina data.

Edit: Anon observed that RCEs looked fairly constant and asked about a flipped graph.  Here is the graph with RCEs on the bottom. RCEs on bottom

Director Michelle Lee

Patent,

The White House has announced President Obama’s plans to nominate Michelle Lee for the position of Undersecretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office.  Although Lee is already the de facto Director of the office, this move has important political implications because it will help to better ensure both USPTO autonomy and USPTO influence within the Beltway.  Congratulations to Michelle Lee and the Patent Office on this important move forward.

It was almost one year ago that Michelle Lee was appointed as deputy director and de facto director.  At the time, I praised the selection of Lee, but questioned both the legality and the wisdom of appointing a prominent deputy director while leaving the slot of director still vacant.   Because of legal limitations, Lee has not be identified as the “Acting Director” but only “acting as Director.”

Part of the willingness of the White House to now appoint Lee may have come from the country’s new Chief Technology Office Megan Smith who is a former Google executive. (Lee led Google’s patent strategy for a decade).

Up to now, Lee has largely followed the lead set by former Director Kappos and Acting Director Rea. The unanswered question is whether the new role will now embolden and empower Lee to shift USPTO policies in a new direction.