To patent or not to patent? The market reality for software patents

Last week we published part 1 of my interview with Michael Gulliford, a patent litigator turned patent strategies to high-tech, start-up companies. At a time when most saw the patent market collapsing Gulliford left his partner’s position at Kirkland and Ellis behind, setting out to form Soryn IP Group, which is a patent management company that focuses on portfolio creation, patent brokerage, litigation finance and patent consulting.

What follows is the conclusion of our interview. For more on this topic please join us on Wednesday, January 28, 2015, at 12pm Eastern for a free webinar discussion on the future of the patent marketplace and the likelihood of a rebound in 2015.

GULLIFORD: Yeah. I think there’s been sort of almost a mixing of different technology areas and then generalities that have come out of that. My partner Fatih is an investor in one of the big accelerators, startup accelerators here in New York City. The technology in New York tends to be more software oriented, more in this sort of appy kind of world, like it can be in Silicon Valley. And in that instance I do understand, particularly given Alice and where we are now, where as a new company you have a finite amount of money and there’s a good chance that the IP that you’re spending all this money on isn’t even going to be enforceable. In those instances, and I guess I’m referring more to the app space, maybe more the social media kinds of things, there obviously are VCs in those communities who just do not believe in patents. And I think in those communities tend to be more anti NPE, anti-patent troll and tend to over generalize I think who are patent trolls in a sense, right?

QUINN: Let me stop you right there. Let’s have a brief conversation about the apps because I hear that a lot. The truth is apps largely have never been patented. I mean that’s just the way that it is. The app may be trendy for six months or a year or maybe in a case where you’re going to put development time into it and have next generations, maybe for a couple of years. You file a patent application you’re not going to have a software patent for at least four, five years. At least. So it doesn’t make a lot of sense in a market that’s moving that fast to get a patent. The market is going to be passed long before you would have a right that you could enforce anyway.

GULLIFORD: Absolutely.

QUINN: There are millions of apps and a lot of them are created by individuals who can write code and they’re going to make some money doing it. But it costs probably on average $30,000 to get a software patent now, maybe even more now after Alice given the amount of disclosure you will need to have any realistic chance to get a patent. And in a lot of situations you’re never going to make that kind of money on an app. So these people are comparing apples and elephants when they talk about app makers and the people who are funding the apps. It’s not that they don’t like patents, it’s that it doesn’t make business sense to pursue a patent. And that, at the end of the day, is the question everybody needs to ask: Why do you want to get a patent? Do you want to hang it on your wall? That’s one valid reason to get a patent, I get that. Do you want to use it as a business tool to make money? Well, then you really ought to be doing that only if the business plan and model suggest that getting those exclusive rights is going to be meaningful.

GULLIFORD: Absolutely. I guess there’s a lot of agreeing here. I’m with you on the technology issues. And I think some unfortunate conclusions have come out of certain areas. I mean let’s be honest, right? If you come from an open source kind of community your religion is one of sharing, right? So obviously I think you’re going to get more anti-patent sentiment out of those sorts of communities. For sure.

QUINN: Yes, certainly.

GULLIFORD: But where we are now is that the market has changed fundamentally, but I don’t know if the average inventor understands that. I don’t know if the average company understands that. They may read it, but I don’t know if they “get it.” Obviously, there was a lot of money to be made on having issued patents and being able to go out and assert them. And those days largely are over and you know what? It’s really darn expensive to do it, too. You know, and it’s also very hard to sell them now. Particularly I think from individual inventors. I think that’s a part of the market that’s been — I’ll use the word “decimated” — in the brokerage side of things. But folks should be giving some consideration into how tough the market has gotten. We try to really hammer that into people’s heads that it’s not, these aren’t the good old days of 2009, 2010 when people were selling and buying left and right following the Nortel deal and so forth. And everyone’s scrambling to get their portfolios in order— I mean the world has changed a lot and I hope people are really thinking about what they’re filing for and why exactly they want the patents before they do it, because let’s face it, I’d say the overwhelming percentage of patents out there don’t have a ton of economic value associated with them now.

QUINN: Well, that’s right. I think that there for a while the industry went to quantity far more than quality. And what we’ve learned over the last handful of years is that not only does quality matter, like it always should have mattered, but it’s the single most important factor in the equation. So I think that at least for a while gone are the days that you see these big huge patent portfolio acquisitions. Unless maybe it’s like a Twitter type acquisition of the IBM portfolio, which they were doing because they were going public. They acquired it right after they were public actually, so clearly all the institutional investors knew that that was almost a done deal.

GULLIFORD: Yes.

QUINN: But aside from that kind of strategic acquisition by a company who historically didn’t have a very big patent portfolio and they’re doing it for other reasons like IPO reasons, I don’t think you’re going to see that for the foreseeable future. You’re going to see a flight to quality instead, and that’s as it should be. Truthfully that’s as it should have been all along really. But moving forward here, I’d like to go back and bring up something that you mentioned earlier about the software and how you’re more focusing on things that maybe are more tech related but not strictly software related. How do you deal with that specifically? Because software is so ubiquitous. I mean automated processes are everywhere, they enhance everything. And the government accountability office said in their review of the patent market that up to 60% of patents in some way deal with software. So where are you drawing the line and how much does software contaminate an invention in your eyes?

GULLIFORD: Yes. So getting into software — people ask us a lot, “What does Alice mean to you?” “What do we do?” “What’s good?” “What’s bad?” Now, perhaps to oversimplify, we’ve created some lines in our head that we think the software world breaks down into. First, if you read what the Supreme Court was trying to say in Alice — we actually wrote an article a day or two after Alice saying, “This is the end of the world for a lot of software— for NPEs” and it definitely came true. So we were on the ball there. If you have any software patent that is essentially a software version of a human practice — something that was done in human practice — and you decide to write up a patent, even if you automated it in such a way and did things that the human brain could never do it will be problematic. If you can look at the patent and then make an argument that humans were doing this outside the software realm before you implemented it in software, under Alice, I think you’ve got a big problem.

QUINN: Right.

GULLIFORD: So that’s sort of rule number one. And that’s a lot of the business method-y kind of things. And if you look at how the Federal Circuit, obviously to look at DDR and Ultramercial — they’re putting some skin on things now — it’s sort of broken down to obviously the judge, the panel that you have at the Federal Circuit, but if you forget about that for a second, if you can make the argument that your software really exists only in the computer realm or is doing something really computer specific, it doesn’t really have an analog in human behavior, then you’re on the better side of things than not. To us, pure software, i.e., software created to run new hardware, that’s pretty safe territory. If you have software to control a gate array or a chip, obviously I don’t think you have Alice problems unless you just have a pure data processing kind of claim and not a lot of structure in there. So, for us, thinking about it categorically, we draw the line in the sand with the kind of things that are definitely a problem under Alice, which are the kinds of things that have analogs in human behavior. Unfortunately, I just think it’s hard to protect. I think where we are now, if you’re a judge and you’ve got a motion to dismiss on Alice and it’s a close call, I think we’re going to see most judges continue to dismiss the cases just for efficiency reasons. If the Federal Circuit is going to look at it it’s a no go anyway. Why let a case go all the way through trial or spend millions of dollars of money only to find out the patent wasn’t even eligible under 101 in the first place? So I think if there’s any uncertainty it’s not good. And if you’re trying to build a company and create a patent portfolio, and you’re looking at technologies, you obviously want to focus on certainty. So, where the certainty comes from is obviously more of the “hard” kind of technologies, hardware, you know, new technologies even if it’s in the biomedical field or the medical device field.

QUINN: Yeah, that makes a lot of sense. And I think that’s certainly where Judge Chen was going in DDR holdings when he says that in this situation this invention had no applicability in the real world and doesn’t exist outside of the Internet. So some of the analog issues that present in a lot of other business method cases just couldn’t really be presented there because this is only something that mattered in an Internet environment.

GULLIFORD: Yes. I read it the same way.

QUINN: And I think it was also insightful when you said that if you’re a district court judge and practically every issue is going to be reviewed de novo, even when the law says it’s not supposed to be reviewed de novo, why not just dismiss everything or issue early summary judgment decisions. I don’t know why judges don’t just let the Federal Circuit become the trial court that they seem so interested in being.

EDITOR’NOTE: We transition our discussion at this point to talk about claim construction and the Federal Circuit’s lack of deference to district courts. This interview took place prior to the Supreme Court’s decision in Teva v. Sandoz, which ordered the Federal Circuit to cease using the de novo standard of review with respect to questions of fact and instead apply the “clearly erroneous” standard of review.

GULLIFORD: I’m with you on that. There was actually an interesting law review article that was recently published and it’s escaping me the name of the journal, but I think the result they found when they looked at reversals at the Federal Circuit, was that when there is a reversal of a district court’s claim construction, 71 or 72% of the time it is is to broaden the district court’s construction. The conclusion I took from that was that district court judges are saying: “Let’s rule narrowly and then let the Federal circuit tell me what the claim term means and then we’ll go to trial once we know that. But we’re not having a trial until we at least have certainty on the claim construction issues.” So I think the evidence was there in that article that potentially that’s happening in Markman issues. This is a hot topic for me. This, I think, is the result and the trickledown effect of the system where you don’t give a lot of deference to the district court judges. I agree with you. I think it just creates incentive to kick the case up to the Federal Circuit, particularly given how district court judges are very overworked. They’ve got criminal cases that are much more “important” than simply IP business cases. So I don’t know where the motivation to sort through those issues is if there is not a good level of deference given to the decision-making down below.

QUINN: You’re right. And right now there’s practically no deference that’s given. Some deference absolutely should be given, but it’s just not going to happen because some panels of the Federal Circuit are going to do what they’re going to do. The patent laws have become completely panel dependent. And to some extent the Federal Circuit has lost its very reason for existence. Its reason to exist was because there was such disarray among the regional circuits. And now we have all the same disarray and dysfunction, maybe even more in a lot of ways, all at the same court.

GULLIFORD: I know, it’s—it is a tricky situation. If you were to look forward, and get that crystal ball out, I would predict that this is an issue that the Supreme Court will be dealing with. I think the issue of deference is inherent in the Teva case now before the Supreme Court — i.e. what’s fact and what’s law — and intertwined in that issue is the level of deference that should be given to the district court. I think the question is going to come up continually.

QUINN: I agree. And I wish that the Supreme Court would focus more of their attention on the process issues rather than the substantive law issues. Because it’s pretty clear to me that they don’t get the substantive patent law issues at all. They fundamentally don’t understand that at the end of the day the frontline decision makers in this space are 8,500 people many of whom have never gone to law school. They’re patent examiners.

GULLIFORD: Right.

QUINN: And if you can’t have a bright line rule then the system just won’t work. And whatever the Supreme Court comes up with at the end of the day the Patent Office has to translate into something that is a bright line, although they can’t call it that, so that they can be implemented. So we’re just living in this fantasy world. But the one thing that the Supreme Court does seem to get are the process and the administration of justice issues. Those are the issues that they deal with far more often and you would expect them to have a far better grasp of them. And if they did focus on those issues I think you would see a vastly improved patent system, and certainly a vastly improved patent litigation process.

GULLIFORD: I agree and I hope so. One of the problems is the way the system is set up right now because of this lack of deference that trial courts receive. The incentive is to kick a case to the Federal Circuit and every which way that’s done is not good for a patent holder. If that were to get sorted out a little bit, that would be one of the ingredients towards shifting that pendulum a little bit.

QUINN: I think you’re right. Well, I really appreciate you taking the time to talk to me about this. I knew we were going to talk about the patent market and building portfolios. I didn’t know we were going to get into such a good discussion about patent process and substantive law. So I appreciate you taking the time to chat with me today.

GULLIFORD: It’s a pleasure.