We’ve witnessed significant upheavals in the patent system in the last few years, ranging from a surprisingly active Supreme Court that has weighed in on patent law, major legal changes that have impacted the validity of patents in litigation (particularly software patents) and repeated unsuccessful attempts at patent reform.
As a result, there is a sentiment amongst some lawyers that patent protection is the weakest it has been in a long time. Yet, patent litigation filings nearly hit an all-time high in 2015.
We enter 2016 with some mixed signals regarding the value of patents for technology companies. Many are preaching a death of patent rights and are questioning whether to invest in patents.
Will patents continue to be a worthwhile corporate investment? Is the recent trend a bubble of devaluation that will pop? We’ve identified some IP (intellectual property) trends that are important for companies planning their IP investments for 2016 and beyond.
Will there be an Alice/IPR backlash?
There have been two significant trends that have led to the invalidation of many patents over the last several years, and it will be interesting to see if these trends start to reverse themselves in 2016.
The first trend is the passage of the America Invents Act (AIA). The AIA made a number of changes to the patent system, including the creation of “inter partes review (IPR),” “post grant review” and “covered business method review (CBM)” proceedings. These proceedings permit a party to request the United States Patent and Trademark Office (USPTO) to review the validity of issued patents. IPR and CBM proceedings in particular became highly favored patent litigation defense strategies because they had a high “kill rate” for patent claims, were cheaper than a lawsuit and could be used to “stay” a pending patent lawsuit, reducing attorney fees.
At one point, a former Federal Circuit (the appellate court for patent cases) judge deemed IPRs and CBMs “death squads” for patent rights. Accordingly, IPR and CBMs are widely viewed to have shifted the pendulum in favor of patent defendants, driving lower-value patent settlements and generally reducing the offensive value of patents.
The second trend has been the fallout following the Supreme Court’s 2014 decision in Alice Corp. v. CLS Bank, which caused reverberations throughout the patent landscape by leading to the invalidation of many software patents. The Alice decision makes clear that patents cannot claim abstract concepts without adding anything inventive.
2016 will be a year of experimentation.
The decision has since been applied to invalidate many other software patents, ranging from patents covering financial techniques implemented using the Internet, ad-supported Internet content and many other computer-implemented concepts. These validity challenges are currently winning way more often than losing.
Alice’s broad impact has left software companies scratching their heads about how much to invest in software patenting, with at least some startups questioning whether to build a software patent portfolio at all. The IPR and CBM patent kill rates have only underscored these concerns.
However, we believe that a course correction may be on the horizon for 2016. Over the last few months, it appears that patent plaintiffs have been surviving Alice motions more frequently than in the past — perhaps because there is now for plaintiffs to consider before filing suit more developed case law that explains how Alice applies to patents. A recent hearing at the Federal Circuit (the appellate court for patent cases) in McRO, Inc. v. Bandai Namco Games suggests that the Court feels the pendulum has swung too far.
In particular, the judges’ questioning in McRO focused on whether the district court had overreached in finding that the patent claims (which related to synching lip movements of an animated character) were “abstract” and lacked inventive technical features. Recent data suggest that things are already starting to change.
Specifically, the percentage of IPR/CBM challenges the USPTO accepts is consistently falling, although, when the USPTO decides to review a patent, it is more likely to invalidate the patent. This means, roughly speaking, that the USPTO is refusing to review validity challenges with increasing frequency.
In addition, it is likely that many patent litigations that were stayed pending IPR and CBM proceedings in the 2012/2013 timeframe will become “un-stayed” and resume to trial in district court in 2016 and 2017 as IPRs/CBMs conclude. A few big patent jury verdicts could quickly change the perception on whether patents are valuable offensive tools.
Finally, the USPTO appears to be more willing to allow the issuance of new software patents based on revised guidance it issued in July of 2015 that provides a number of examples of valid patents under the Alice decision. If more software patents are allowed, and survive litigation and IPR/CBM proceedings and result in large trial verdicts, we could see a renewed interest in patent portfolio building by high-tech and software companies.
High finance comes to the patent sector
One of the goals of patenting is to create a “currency” for innovations, permitting inventors and companies to sell their innovation to companies interested in developing that innovation. One of the challenges in implementing this goal is the fact that parties routinely disagree about how much a patent is worth, given the lack of market comparables for patents.
Will patents continue to be a worthwhile corporate investment?
Some companies have tried to set up secondary markets for patent transactions that, thus far, have not attracted market-wide acceptance. Similarly, while non-practicing entities and operating companies have purchased patent portfolios for offensive and defensive purposes, these transactions tend to be one-off purchases that don’t provide that much meaningful data. Thus, patents remain relatively illiquid assets.
That may change with the renewed focus by financial entities in IP as an asset class. For example, Fortress Investment Group, a leading investment management firm that manages traditional funds for “alternative assets,” has created an investment fund specifically dedicated to undervalued companies with strong patent positions.
Another financing firm, Gerchen Keller, has announced expanded investment, pushing it to well over $1 billion of assets under management, with which to expand its portfolio of litigation (including patent litigation) financing services.
One can reasonably expect that these funds will be aggressive in searching for opportunities to identify patents for assertion and work out financing deals based on the expected value of those patents. If these entities are successful and profitable, they may start a wave of financing activity in the patent sector that could make it easier for companies to value, sell or assert their patents. 2016 will be a year of experimentation. The lessons learned are still a few years away.
But what about patent reform?
Patent reform had a groundswell of support, only to be blocked over the summer by a bipartisan group and lobbying by the pharma/biotech industry. At one point, it appeared that consensus had formed around the goals of patent reform, with bipartisan proposals requiring a greater upfront investigation by a plaintiff before bringing a lawsuit (a reaction to “patent trolling” tactics involving hastily prepared complaints filed for the purpose of nuisance value settlements), as well as some changes to make patent litigation less expensive amongst other more technical changes.
Most controversially amongst these measures were provisions that would make it easier for a defendant to recover its attorney’s fees after winning a patent litigation. Following extensive lobbying by the pharmaceutical industry and venture capital industry, however, patent reform stalled out.
While the odds of a potentially controversial patent reform bill being passed in the run up to a presidential election seem slim, there still remains significant interest amongst many members in the high-tech industry for further patent reform. Thus, patent reform may still be on the radar in Congress in the coming year.