Are Patents Getting Their Mojo Back?

This past year, it has been all about how patents, as an asset class, were being devalued by a perfect storm of new judicial, regulatory and legislative activity. Especially in the US, Courts have been busy dismantling much of the established case law that had created some predictability over the years as to the main pillars of a healthy patent ecosystem, i.e., how we determine which patents are valid and infringed, how much in damages should infringers pay and who ends up paying for the winning party’s legal fees. Meanwhile, Congress has been up in arms against the perceived abuse of so-called patent trolls and sponsored no fewer than 6 different bills on the Hill, most of them intended to further weaken patent holders’ rights. Finally, the newly created PTAB has been axing most of the patents that it was asked to review under the new Inter Partes (or Covered Business Methods) review created 2 years ago under the new America Invents Act (AIA).

All of those efforts and actions were conducted under the common narrative of seemingly needing to curb down patent litigation and discouraging along the way patent owners who were not the original inventors of the issued title.

Well, guess what? After a 13% decrease in patent litigation in 2014, we are currently back to the same level of activity that we saw historically, with 2015 shaping up to have an average of circa 5000 new cases. Now the REALLY interesting data point is that most cases (roughly 70%) were brought this year by an operating company (according to a tally of data published daily by defensive patent aggregator RPX). Not by a troll, aka NPE, aka PAE… So much for curbing abusive “troll” behavior…

Yet, the campaign above has definitely taken a toll on NPEs. Many of them who are public IP companies (aka PIPCOS) are now trading as “junk” stocks (e.g., Inventergy) or had to do an aggressive reverse stock split to avoid such fate (e.g., ITUS), while others have had to merge (e.g., Marathon and Uniloc) in order to survive. In most cases, their stock is in sharp decline compared to a year ago, reflecting a consensus that the NPE business model has been considerably damaged by the recent events. In Q2 of 2015, the best performing stock in all major PIPCOs was ironically that or RPX, a defensive NPE which benefits directly when patents are devalued as it can acquire them cheaper to prevent them from being asserted.

However, for the first time in quite a while, we witness the emergence of a counter-narrative, whereas some respected players from different tribunes are voicing concerns that the pendulum has swung way too far and is threatening to destroy the natural incentive (i.e. a strong patent system) that has been in place for centuries to fuel and support innovation. Suddenly, the inventor is no longer a pariah (the “Save the Inventor” campaign deserves some credit for bringing the message home). Many respected organizations are now openly opposing some of the proposed bills. Partly as a result of this resistance (and of course because this is the US Congress), votes on all bills that contained “patent reform” provisions were postponed by the time representatives adjourned for their summer hiatus. We’ll see what happens next fall, but suddenly people are seeing two sides to the story and the odds are that politicians will be too busy fundraising for 2016 to bother too much with patents. It just doesn’t poll that well…

Second, the Federal Circuit is starting to rein in, albeit very modestly, the PTAB’s “ain’t seen a patent worth keeping” attitude to date by slapping it on the wrist a few times these past weeks. The Court also issued a very important decision a week ago in the Akamai case that should make it much easier for patent holders to prove direct infringement by companies that perform all steps of a patented method claim, except for the one step which involves the customer operating a device (e.g., a TV) the way it is intended to. Until recently, this case could have been rejected under the theory of “divided infringement” and required the higher burden of proving an intent to induce customers to infringe the claim.

Third, after a lot of bad press lately in the IP community, the PTAB is also trying to put its house in order and the acceptance rate of petitions to challenge the validity of a patent based on prior art appears to be going down, apparently down to ~ 50% according to recent statistics issued by the USPTO head Michelle Lee). . It will take more time and further data to confirm whether this is a trend or an anomaly, but we do not see how the USPTO can support its own offspring invalidating most of the patents it has issued, as this points directly back to its own incompetence. Speaking of the USPTO, it has been busy issuing new guidelines to find a “pathway to eligibility” for patent applications that could be deemed ineligible on the ground that “abstract ideas” are not proper subject matter under the Patent Act (Section 101). This new test since the Supreme Court decision in Alice has significantly affected software related patents – any of the courts have invalidated over 70% of those it has reviewed under that doctrine. Someone still needs to explain software development to judges, but at least we see an effort at the USPTO level to remove the current stigma over such inventions.

Finally, the same UPSTO is proposing new guidelines (i.e., sanctions) to put a damper to the recent short-selling game that some wealthy hedge fund managers have played using the IPR process as the trigger point. This in turn will favor patent holders against such schemes.

In short, although the pendulum has by no way stopped its course and there are still many forces at work that wish to push it to swing even further (and it will take years for the US Supreme Court to revisit some of its decisions), its momentum has definitely slowed down and the rhetoric that has prevailed in the past years is finally clashing with the absence of supporting facts, while there is now a genuine concern that a weakened patent system might discourage investments in R&D and hurt the US economy in the long run.