Have We Hit Bottom in the Patent Market?

By Erich Spangenberg
November 3, 2015

EDITORIAL NOTE: Erich Spangenberg, will be speaking at two upcoming industry events. First, he will speak at the IAM Patent Law and Policy event in Washington, DC on November 17, 2015. Second, he will speak at IP Dealmakers in New York, NY on December 7-8, 2015. IPWatchdog.com will be at both events.

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bull-bear-350-200The short answer: No. Longer answer follows.

The patent market—and I disagree with those who argue that there’s no such thing and that patents are not an asset class—had an amazing bull run from the late 1980’s through 2012. The peak was 2011 to 2012 when we saw a number of multi-billion dollar patent sales and patent-driven acquisitions.

Nortel sold 6,000 patents to the Rockstar Consortium (Apple, Microsoft and others) for $4.5 billion. Google paid $12.5 billion to acquire Motorola Mobility in a deal driven by Motorola’s 17,000 patents. Microsoft—with Facebook—paid over a billion dollars for 925 AOL patents.

The Slide

The patent market started slowing down substantially shortly thereafter. Many blame the America Invents Act (AIA) in September, 2011 for the downturn. The AIA introduced a variety of ways to inexpensively challenge the validity of patents in administrative proceedings at the patent office. All of a sudden the confidence that once a patent was issued it was valid was shaken.

However, the AIA was only part of the problem.

The origin of the current market malaise actually lies earlier — with some large tech companies aggressively lobbying Congress and the judiciary dramatically changing the rules. This started to become apparent in 2006.

Give Google credit. It made patents a populist issue and was successful in getting the AIA enacted. Google and the rest of the anti-patent “big tech” mob came very close to getting even more drastic reform enacted this past spring. Big tech used small companies hit with abusive lawsuits as the “poster boy” to push through changes that do far more to help big companies efficiently infringe “little guys’” intellectual property than they do to prevent abuse. The market is still struggling to adapt to the rule changes that were pushed through in the AIA.

In 2006 began a series of anti-patent-owner Supreme Court decisions — especially eBay v. MercExchange and KSR International v. Teleflex.

The eBay ruling effectively ended the availability of injunctions to block the continued sale of infringing products or services. Companies could keep making money from infringed IP, and pay for the privilege later rather than sooner. Or maybe pay never. Welcome to the dawn of “efficient infringement,” when companies consciously and confidently decide to infringe patents rather than seek a license.

The KSR decision made it easier to invalidate a patent on the grounds of obviousness. The test for obviousness was vague and it made for the further inefficiencies in litigation.

More recently, we’ve had the 2014 Supreme Court decision in CLS Bank v. Alice Corporation, calling into question the validity of many computer-enabled patents. The test announced in Alice is so vague that it could invalidate almost any patent and has been used by more than a few judges as a very effective docket clearing mechanism.


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The Patent Market

As in any downturn, transactions continue to happen. But we’re not seeing the billion-dollar deals or the same prices for patents we saw in 2011-2012.

According to some, transaction volume has stabilized, but I haven’t heard anyone claim that prices have stabilized.

A quick survey of publicly traded IP companies demonstrates that the equity markets aren’t the least bit enamored with their business models.  Most public IP companies, including Marathon Patent Group (MARA), Acacia Research (ACTG), and Vringo (VRNG), are trading at or near 12-month lows. A few companies that are patent-reliant but not pure licensing companies are doing a little (but not much) better – Qualcomm (QCOM) and RPX (RPXC).

Waiting for the Thud

We’ve not yet heard the “thud” of the market hitting bottom. Once we see a large patent portfolio or a large aggregator sold for a fire sale price we can look for the start of a recovery. Meanwhile, the patent market is still searching for the bottom.  It feels close, but it is simply not there yet.

One ray of hope that suggests we may be in the darkness before the dawn is a recent (September 17) decision by the Federal Circuit in the global thermonuclear patent war between Apple and Samsung. The latest Apple v. Samsung decision makes it easier for a patent owner to get an injunction under the onerous eBay factors.  The Supreme Court has also agreed to hear two cases that are widely expected to make it easier for patent owners to collect enhanced damages related to willful infringement. We hope this signals an end to the Supreme Court’s seeming anti-patent bias reflected in earlier decisions.

Non-Correlated Investments

Despite this generally pessimistic view of the patent market, many of the large funds that I regularly speak with are looking to put capital to work in the patent space.

Many investors believe the stock market is nearing the end of a very good run. As a result, smart money is looking for “non-correlated investments” – investments that go up or down independent of the trends in the overall equity and debt markets.

Patents are a potential option for capital in search of non-correlated investments. The market may not have quite bottomed out, but it feels close. The question is what patent-driven business models the smart money will find attractive – or whether money will flow to new models not yet fully developed.

Models for Investing in Patents

Licensing

Pure licensing is difficult in the US. Infringing companies have little motivation to simply take a license to patents they are using. The judiciary is making significant efforts to show Congress that the judiciary can handle reform without further Congressional action. Even if Congress does not enact new patent “reforms,” the judiciary is creating enough uncertainty to give capital pause.

The AIA’s inter partes reviews and the Supreme Court’s Alice decision lead many infringers to conclude they’re best off taking their chances on litigation. Add a political environment that is hostile to “non practicing entities” and, by extension all patent owners, means it will be a while before licensing models are attractive to new capital.

While I hear many extolling the virtues of the EU and the promise of the Unified Patent Court, there are many open issues. The Unified Patent Court doesn’t exist yet – it hasn’t yet been ratified by all the relevant countries – and it will also mean that a loss in one court is a loss in all of Europe. The sword cuts both ways. And since Europe is on a “loser pays” basis, where the loser of a patent lawsuit pays the other sides’ legal fees, a few negative experiences for patent owners could dampen the enthusiasm for Europe. Without a track record, capital is likely to be suspect of the EU model.

Litigation Financing, IP Lending and Aggregators

Litigation financing, an indirect patent play, is getting crowded and isn’t likely to attract new capital for a new entrant. IP lending is dominated by one huge fund that has a low enough cost of capital that it’s going to be difficult to compete with. Given the performance of the largest aggregator, aggregator models will not come back for some time.

Patent Analytics

Another indirect patent-related investment is in companies that provide patent analytics. One big problem here is that most of the products offered are not particularly good. The best ones aren’t publicly available. The number of people willing to pay and the overall size of this analytics market are not likely to attract significant capital.

Patent Sale Exchanges

There are also companies promoting exchanges and improved broker models for patent sales. Great idea, except now that there’s a free service coming on line that’s both simple and elegant, this transaction model is not likely to attract capital.

Insurance

Traditional infringement insurance is a crowded field and not one likely to attract meaningful capital. A recent offering in the market is going to drive pricing and margins way down. There are alternative insurance-like offerings that have the potential to attract capital.

New Business Models?

With the patent market nearing the bottom and the stock market nearing the top, smart money is looking at patent related investments. Still to be determined are which existing business models will be the winners and which new business models may emerge.

No asset class is immune from downturns—we got spoiled. The patent market will come back.

The Author

Erich Spangenberg

Erich Spangenberg is a Managing Director of SK14 Advisors, and co-founder of IPwe.com.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 32 Comments comments.

  1. David Stein November 3, 2015 11:49 am

    Quite a good article. Thanks for the commentary, Eric.

    I believe that patent valuation reflects patent strength – and that many of the factors driving toward weaker patents have plateaued:

    Alice is already seeing some steady pushback. A steady stream of district court cases have upheld patents under § 101. The USPTO is providing positive, productive guidance. Even the Federal Circuit is expressing regret over the ubiquity of § 101 challenges.
    The clamor against “functional claiming” seems to be losing energy, since no one can identify what was supposed to change. Looks like the end result will be a few more § 112(b) rejections to request a little more detail, and… that’s it.
    The “patent trolls” drumbeat has lost much of its force. Most of the stories that hit the news wire are either years old or very questionably skewed, such as characterizing WARF as a patent troll.
    2015 legislative patent reform efforts have foundered like they usually do, and no one in the 2016 Congress will blow political capital on such a complex issue.
    Other than minor adjustments to current rules, I can’t anticipate much further damage being done to the patent system in the near future.

    Of course, our patent system has been structurally damaged, and there’s not much pushing it to re-solidify, either. The Supreme Court injunction cases that Eric noted are probably the only likely improvement. Edward Heller’s compelling argument about the unconstitutionality of inter-partes review might find traction, but it’s hardly a sure thing.

    So what might we, the practitioners in the trenches, do to cope with or improve the patent system? Some ideas:

    More detailed patent specifications. Gone are the days of three-page specifications with two method flowcharts attached (which reflected bottom-of-the-barrel patent drafting even in 2011, but today it’s legal malpractice). Push hard in disclosure interviews for more detail, and put all of it into the specification.
    Somewhat narrower patent claims. The USPTO and courts are so paranoid about overbreadth that broad patent claims are more likely to require extended examination, and more likely to be challenged and invalidated under § 101. Claims should be quite specific about the point of novelty, and those for logical inventions should be structured more like an algorithm than qualitative results.
    More patents. When an inventor team devises a fairly broad invention, the counter-trend to narrower claim scope per patent will be filing more patent applications, each covering a specific variation of the broad technique. Better to have three narrow patents, each covering a discrete subset of functionality in a big space, than one patent with broad claims that takes forever to get allowed and may get invalidated. Budget-wise, this will balance out, since narrower claims will sail through examination more easily.
    Anecdotes and studies about the weakened patent process. Now that the march of “patent trolls” and “patent reform” has run aground, now would be a good time to start discussing the disadvantages of a weakened patent system: investor skittishness about startup concepts that are difficult to protect; the Zynga-ization of software and web services innovation; antitrust violations such as “tying” that cannot be thwarted by patents; renewed interest in trade-secret protection and reverse-engineering protection. As these trends manifest, we should identify and document them.

    It’s certainly an interesting time to be a patent owner or practitioner. It’s certainly more challenging – but challenge is a good thing: it rewards those who closely study and adapt to its altered mechanisms. The name of the game is Who Moved My Cheese… let’s all go find it.

  2. JNG November 3, 2015 11:52 am

    Greetings Eric,

    I agree with everything you say here, but you omit one huge case, namely, ST/Medimmune which made it impossible to have dialogs about patents without involving the judiciary. That case and its brethren (which came out in the time frame you refer) had far more to do with destroying the “market” for patents, because it changed from being in a a businessman’s domain to a big litigation defense attorney domain. We now live in the “shoot first ask questions later” patent game.The effect was rapid and still persists today.

  3. Bemused November 3, 2015 1:14 pm

    I largely agree with the commentary in this article. However, I don’t believe that the patent market will recover until and unless the inter partes review process is significantly reformed (or better yet, repealed). With a kill rate of nearly 80% on patent claims where the petition for inter partes review is granted, why would any infringer ever pay to license a patent? If I was in the infringer camp and I knew that I could wipe out an asserted claim(s) nearly eight out of ten times (not including the other district court defenses available to me if the claims do survive inter partes review), why would I ever agree to give a patent holder money?

  4. David Stein November 3, 2015 1:40 pm

    @Bemused: “Efficient infringement” is the buzzword now.

    Earlier this year, I had an opportunity to present questions to some PTAB judges about the growing anti-patentee tilt of the past decade. I noted the trend – Alice/Mayo, eBay, KSR, Nautilus, IPRs, third-party submission of prior art – and asked if they could offer any signs of current or future improvements for patentees that might balance things out. Guess what their response was? “We don’t perceive that there is any such trend. But to answer your question: well, there’s Therasense.” Full stop.

    In the absence of some drastic and unexpected occurrnece, here’s how I see this dynamic playing out over the next few years:

    * The USPTO continues to improve the Interim Guidance and steadily guide the examining corps to a conservative application of § 101 (except for TC 3600, which will cease to exist by 2017).

    * The district courts continue to issue a growing set of cases with § 101-approved claims. More of those reach the Federal Circuit level, and many survive (partly encouraged by the Supreme Court’s warning that it can’t just de-novo everything), and a trickle of Federal Circuit § 101 validations cases starts to cordon off § 101 to select areas.

    * The PTAB, continuing to slash-and-burn everything under § 101, steadily falls behind the curve, until their metrics stick out like a sore thumb. Defenses like “the PTAB encounters the worst cases” will be offered but will be unpersuasive. Pressure mounts both from above (the courts) and laterally (USPTO administration), possibly involving personnel change, until PTAB culture matches that of the rest of the patent community.

    It may take a while for these mechanisms to run their course – maybe three or four years – but I feel pretty secure in that prognostication, given the current status and events to date.

  5. TH November 3, 2015 2:10 pm

    I see what you did there…why no mention of Hayman?

    And do tell, who…”There are also companies promoting exchanges and improved broker models for patent sales. Great idea, except now that there’s a free service coming on line that’s both simple and elegant.”

    BTW – agree with JNG above on ST/Medimmune – keeping the lawyers in it is not good for business right, JNG?

  6. A Rational Person November 3, 2015 4:01 pm

    David@4

    With respect to the out-of-control PTAB, I’m hoping things might happen sooner rather than later. In particular, I’m hoping that IBM will fight the PTAB’s § 101 decision in Ex Parte Bak and/or Siemens will challenge the PTAB’s
    that either IBM (Ex Parte Bak) or Siemens (Ex Parte Base) will challenge the PTAB’s § 101 decision. IBM and Siemens are the type of patent owners that could afford a court challenge if necessary.

    As we have discussed on your blog, these two decisions show little regard for due process or the Administrative Procedure Act on the part of the PTAB. Not only did the PTAB make factual determinations based on no evidence in Ex Parte Bak and Ex Parte Base, but the decisions the PTAB reached appear to be wrong on their face: there is no definition I can find of the term “abstract” that would make the concept of scheduling an appointment an abstract activity (Ex Part Bak) and I find it hard to believe that the method steps of Ex Parte Base are mental steps or could be performed using pencil and paper as stated by the PTAB.

    Plus the Ex Parte Base was a de novo § 101 decision based on no referency to any evidence in the prosecution history or provided in the PTAB’s decision.

  7. Patexia November 3, 2015 4:28 pm

    Eric makes some very good points here. One critical and timely observation is his take on patent reform in Congress. Lobbying really has made patent reform a populist issue, with the current push resting heavily on rhetoric about patent trolls. We already have the AIA, and it has provided a set of tools to work on systemic improvement, unpopular though they might be in some circles. We need to let the dust settle and work with what we have, rather than shake the system up again before gaining a complete understanding of the impact of the last reform. Change for change’s sake, or because lobbyists whip up a frenzy will hurt the whole system in the long term.

    However, the point that the AIA shook confidence in patents as valid assets through the introduction of new post grant review options is flawed. The issue of low quality patents was already systemic long before the AIA created a way to address it. While the AIA and post-grant review at the PTAB is certainly not flawless, it is a valuable tool to address a critical issue. It is better to have a review mechanism in place allowing us to test patent validity then to pretend the problem didn’t exist. Patents that pass that test successfully can then be viewed with complete confidence as assets. The PTAB and the review process is not perfect, and will continue to evolve. In fact, internal reform is already underway with a number of proposed changes. It is still early to comprehensively analyze the costs and benefits of the PTAB, and we need to wait and see the real power of patents that have survived an IPR, but we believe that in the long term these reviews will result in greater confidence that the patents left in the system are genuinely valid assets. That in turn will take the system one step closer to a true patent asset market which will benefit not only patent owners and innovators, but the economy as a whole.

  8. Anon November 4, 2015 7:21 am

    Patexia,

    I am not sure that you see the point in that the AIA and any after the fact measure on “patent quality” will not – and cannot – affect where the focus should have been all along: on examination quality.

    You do note the rhetorical effect (a la “trolls” – anyone see the Executive Office response to Ron Katznelson’s petition yet? We are into November and not a peep…), but you seem to miss the fact that ANY post grant activity is more of the same type of rhetoric. Post grant mechanisms merely advantage infringers in the sense that one has the ability to wait and see as to what is attempted to be enforced before challenging the “quality” of the item. Ask yourself: “WHY” that particular selective mode? When one realizes who most benefits from a weaker patent enforceability, the answer becomes quite stark.

    Your notion of “valuable tool” falls to the fallacy of “well, it’s better than nothing.” In addition to the questionable constitutionality (which very well may sink the entire AIA), there is an adage that applies here: “the opposite of great is not awful, but instead, is ‘good enough’. ” By allowing ourselves to think that such band-aids are “valuable,” we allow ourselves NOT to focus on the heavy – but necessary – lifting that needs to be done in the very first instance.

    This is NO better than the previous attempt at “fixing” the problem wherein the Office simply tried to Reject its way out of the work to be done.

    Bottom line is that we have an examination problem. The more we allow ourselves to not address that problem, the more “unforeseen” (and needless) consequences and additional problems we create for ourselves.

  9. Edward Heller November 4, 2015 7:37 am

    Patexia, IPRs are a problem that cannot be fixed by tweaks: No standing requirements; statutory lower standard of proof; BRI; the same people who decide to institute make the final decision, etc. One cannot appeal wrong decisions under 315, even when the PTAB is not applying the correct law.

    Moreover, the PTAB is a political institution whose members include politicians and who ultimately report to the president, a politician. The APJs do not have lifetime appointments.

    Small businesses can afford neither IPRs or PGRs. With their very high costs and with a very high invalidity rate, their very existence is adversely affecting investments in new technology that depend upon the enforceability of patents in order to attract investment.

    IPRs are killing the goose that laid the golden eggs.

  10. A Rational Person November 4, 2015 10:11 am

    Anon@9,

    “Bottom line is that we have an examination problem. The more we allow ourselves to not address that problem, the more “unforeseen” (and needless) consequences and additional problems we create for ourselves.”

    Exactly right. The fact that PTAB is allowed to arbitrarily and capriciously reject claims under § 101 as “abstract” allows to USPTO to ignore the fact that the problem with many “poor quality” patents is that the patents were not properly examined to make sure the patents meet the requirements of §§ 102, § 103 and § 112.

    Many of the problems with examination probably relate to the Examiners not being given enough time to do a proper examination and adding on the new § 101 review only makes thing worse by taking away time from the Examiner that could be better used by the Examiner to determine if the claims meet the requirements of §§ 102, § 103 and § 112.

    I am particular I am concerned about what seems to be happening with respect to § 112 in examining claims involving software and computers. For example, as pointed out by numerous posters on this blog, the control system of the claims in the “hoverboard” patent Mark Cuban licensed seem to have some pretty clear § 112 enablement issues that could be caught just by a 15 minute review of the patent by were not caught by the USPTO before issuing the patent.

  11. Anon November 4, 2015 10:21 am

    Mr. Heller,

    Your post reminds me of another problem with the Executive Agency Article I configuration: lack of sufficient “distance” between the judicial type power and the executive “policy” type power. Roll into that the (to me, obviously misguided) notion of legislative power – through the guise of writing statutory law by way of judicial common law – and you have created a political entity that can violate ALL manner of separation of powers. That such a rolled up entity of Executive/Judicial/Legislative might exists at all is one (frightening) thing, but to realize that this thing exists in the single powerful domain of innovation is almost too much.

    I am reminded of the “agency capture” effects of the S&L crisis. I do hope that we can learn our lesson by not repeating history.

  12. A Rational Person November 4, 2015 11:00 am

    Anon@11

    “. . . you have created a political entity that can violate ALL manner of separation of powers.”

    Not only “can” but “has” violated ALL manner of separate of powers.

    See the Kyle Bass IPR cases on which Gene has written articles on this blog.

    See Ex Parte Bak and Ex Parte Base:

    http://e-foia.uspto.gov/Foia/RetrievePdf?system=BPAI&flNm=fd2013009289-10-19-2015-1

    http://e-foia.uspto.gov/Foia/RetrievePdf?system=BPAI&flNm=fd2013009505-10-13-2015-1

  13. Erich Spangenberg November 4, 2015 11:20 am

    1. Should have mentioned Medimmune — horrific decision–not so much for trolls as it is for the true small inventor/small company–if the Fed Cir does what I think they will do on venue, it may not matter–the bad case list (LG, Myriad, ….) is a long one

    2. The improved broker model is the IAM Market–not sure why it is free, but maybe doing the evil Dr. Kananga trick and giving it away and will charge once they have a bigger piece of the market — my point was, broker/exchange models are not likely to attract meaningful capital

    3. I could not agree more with the people making the point that the USPTO has an “output problem” (things got through that just should not have), but the best way to fix that is to fix the input end with better (motivated?) examiners, examination practices and research systems–I thought that what Ms. Lee was going to do, but so far a disappointment

    4. I agree with the criticisms of IPRs–and believe they raise significant Constitutional issues–but they are not going away. The most that can be hoped for is some fixes around the edges–but I think some in Congress are taking a step back from some of the more controversial provisions of HR9 and S1137 — I will never understand how the companies outside of a handful of big tech companies think the AIA helps them–the hope is that reform will start to focus on litigation abuse (that is the problem) and stop enabling efficient infringement by the companies that want to compete based on the availability of capital and not ideas

  14. Curious November 4, 2015 11:45 am

    Once we see a large patent portfolio or a large aggregator sold for a fire sale price we can look for the start of a recovery.
    I don’t think so. The recovery will start when there is reduced uncertainty over the valuation of patents. In asset evaluation, greater uncertainty = greater risk and greater risk = lower valuation. Between KSR, Alice/Bilski, the AIA (with interparte reexams), and a Patent Office that is unabashed pro-infringer rights, there is tremendous uncertainty over the validity of any issued patent. Why pay millions (or even a thousand dollars) for an asset that may be worth $0 after the Board and/or Court gets a hold of it.
    The only way to get that reduced uncertainty is via the Supreme Court reigning in the let’s characterize every invention under the sun as an abstract idea mindset of many District Court judges and/or action by Congress. Unfortunately, I don’t see either of these options happening anytime soon. Granted, there is hope in that the constitutionality of IPRs might be successfully challenged and getting greater damages might be easier, but those don’t help if your patent is invalidated.
    In the meantime, what this leads to is:
    “efficient infringement”
    I ran across that term a couple days ago. The anti-patent side framed the debate with their use of the phrase “patent troll.” This could be the pro-patent side’s answer so as to frame the debate another way.

  15. JTS November 4, 2015 1:39 pm

    @David Stein (1): Can you please explain “Even the Federal Circuit is expressing regret over the ubiquity of § 101 challenges.” ?

  16. Patexia November 4, 2015 1:52 pm

    @Anon

    We completely agree with you that there is an examination problem. The real work on patent quality absolutely needs to be done on the examiner side at the application review phase. The USPTO is making some progress there considering more innovative approaches like integrating crowdsourcing as a tool for examiners to more efficiently get art. However, there is clearly a long way to go there, and you are absolutely right that it needs to be the core focus.

    The point we were trying to make is not that IPRs are either perfect, or a cure all. However, as you point out there is an examination problem and a large number of poor quality patents made it through the application review process and are now in the system, often being misused in frivolous litigation. We need a mechanism to deal with those invalid assets and the new review process under the PTAB, which as replaced the old re-examination process, is one way to start working on clearing out the system. Maybe there is a better approach, but some action is needed on the post grant side so we can move forward towards an asset market made up of patents in which we can have a high level of confidence

    @Edward Heller

    Point well taken. We tried to be careful to note in our original comment that the AIA review system is far from flawless. But we do feel that a review mechanism is needed to address poor quality patents in the system.

    There has already been downward price pressure as AIA reviews have become commoditized, and there has been some interesting work done bringing together coalitions of small business facing suits using the same patent to take advantage of cost sharing and file a review more affordably.

    It is not that we believe the current system is perfect, or that small tweaks will make it that way. It is simply that we believe that at this point another major legal upheaval from Congress, prompted largely by lobbying and rhetoric, would do more harm than good.

  17. David Stein November 4, 2015 3:35 pm

    JTS @ 13: Yes – this fascinating exchange occurred during the recent oral arguments in Amdocs v. Openet:

    Judge: “Would you agree that the idea of an ‘abstract’ idea is abstract? Would you concede that much for me? … You haven’t really told us what an ‘abstract’ idea is, but you notice the Supreme Court hasn’t, either.”

    Counsel: “This is an issue the Supreme Court has been struggling with – ”

    Judge: “I know that they’ll continue to struggle with it, because the idea of an ‘abstract’ idea is abstract. That’s our problem, right? And Judge Brinkema, by hooking this decision to Step 1, has created a big problem for us, right?”

    Counsel: “This decision falls squarely with the other cases that have come down since Alice, where if you take basic steps – collecting data to put together two pieces of data; collecting data from existing sources to store it in a database – that’s an abstraction; that’s a concept. The problem here is that these claims don’t say how to do it.”

    Judge: “That’s not fair. It does say that it does it in a distributed fashion, and it is claimed that you produce a single report. And it’s that single report – that’s what was lacking before this invention. At that point – where the network service provider has a single report that indicates the amount of usage, and who’s doing the usage – that is not an abstract idea, is it.”

    Counsel: “That is still an abstract idea.”

    Judge: “How can that be? To begin with, it’s a piece of paper – it’s specific information dealing with specific usage, specific charges, specific dollar amounts – you say that’s an abstract idea?”

    Counsel: “It is! It’s a bill, which has been generated by telephone companies for decades – ”

    Judge: “These bills have not been generated for decades! They’ve only been generated since the advent of the internet, and because of the internet. There’s no need to generate these types of bills before then.”

    Counsel: “Even if that’s the useful end of the invention, that’s not what’s being claimed here. The problem that troubled Judge Brinkema, and what troubled us too, is using existing devices in a predictable, conventional way to put together pieces of data – the claims just describe function; they tell you what to do, they don’t tell you how to do it.”

    Judge: “If you use conventional methods, and yet your application results in an innovation that resolves a conventional and well-known applications problem, does that…”

    Counsel: “I don’t think it does. … In all these cases that have come before the court under section 101, there has been an argument that the invention was valuable.”

    Judge: “It’s a plague on the patent system nowadays. Almost every other case comes in on a 101 basis.”

    Counsel: “I think the plague was that the patent office allowed too many patents, particularly in the 1990’s, that should never have been allowed in the first place.”

    Judge: “Here we’ve got claim 15, details (a) through (s) – ‘periodically determining whether the network device is currently licensed’ – by the time you get to this specificity, you certainly are removed from abstraction. There may be other problems, but once you have the computer capability by setting it up in this way, collecting the data from all of the sources and putting them together… aren’t we beyond abstraction? One of the things I didn’t see in the district court’s opinion was whether these steps (a) through (s), for example, were in the prior art, and then all you need is an ingenious programmer to put them together. But somewhere, there was a line of abstraction, it seems to me, that was crossed – which takes us to a number of areas of potential invalidity, I suppose, that the trial judge didn’t reach. I think that’s what concerned this court when the case was here before, and I am not persuaded that that concern was met.”

    Counsel: “The specifications talk about every device here as a generic or a commercially available device. … The specification described here says: ‘the gatherers are any hardware or software that gathers data.’”

    Judge: “Of course, every mechanical device – I like to use the example: ‘I claim a method of increasing the gasoline efficiency of a carburetor.’ You could say that’s abstract. [But] if you put a whole bunch of mechanical pieces together – none of which is new, but it’s the way they’re collected and used that’s new – we’re no longer talking about abstraction. So why is this any different?”

    Counsel: “If you were to take a method of improving a carburetor of a car, and you were to say you improve the carburetor by making it more efficient by saying: ‘this is what we want to do, and this is the output,’ that probably would be an abstract idea.”

    Judge: “It certainly wouldn’t do you any good. So here we have the preamble, which is a method of collecting data so you can bill the user. And that seems to be, from what the district court wrote, where she stopped.”

  18. Texas Inventors for Justice November 4, 2015 3:41 pm

    ‘Companies could keep making money from infringed IP, and pay for the privilege later rather than sooner’

    Actually, the affect is worse. Without the ability to stop infringers from using our inventions we have no chance of ever commercializing our inventions. If you’ve seen ‘Flash of Genius’, you’ll know what we mean. Most every inventor develops their product or process with the intent of commercializing. But when far larger competitors are permitted to use our inventions without our permission, they can easily outspend us and run any effort we may make into the ground. Permitting infringers to continue to use our inventions after infringement is found is just not right, it’s not fair, and by any rational and sensible reading of the Constitution it’s not lawful.

    From ‘Section 8 – Powers of Congress:
    To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;’

    As James Madison wrote in Federalist No. 43 regarding constitutional rights of inventors and that portion of the Constitution as proposed, “The utility of the clause will scarcely be questioned. The copyright of authors has been solemnly adjudged, in Great Britain, to be a right of common law. The right to useful inventions seems with equal reason to belong to the inventors. The public good fully coincides in both cases with the claims of the individuals.”

    Real reform is desperately needed to restore full rights back to inventors. We are now organizing in CA.

    https://txinventorsforjustice.wordpress.com/

  19. Night Writer November 4, 2015 9:24 pm

    Still the problem is that Alice is sitting there. Not sure there is any case law that could be created that would prevent a dist. ct. judge from using Alice to invalidate the claims. It is just so broad.

  20. Edward Heller November 5, 2015 5:08 am

    @anon, no. 11, a definition of tyranny is unchecked power.

    Our founders separated the powers to check each other. But IPRs move validity from the courts to the same institution that grants, both run by the same political appointees.

    Regardless of good intentions and a perceived need to address junk patents “efficiently,” the move to undo the separation of powers is a wrongheaded as it can be.

  21. Anon November 5, 2015 8:30 am

    Mr. Heller @ 20,

    It is more than just “wrongheaded.” It does not withstand scrutiny. As has been stated in various fora, the means to the ends are critical.

  22. angry dude November 5, 2015 9:34 am

    Texas Inventors for Justice@18

    Yes, the guy in ‘Flash of Genius’ was out of luck – he already disclosed invention in his patents plus he could not possibly keep it a trade secret – it could be reverse-engineered by anyone skilled in electric circuits in about half hour.

    In today’s world this same effect (intermittent windshield wipers) could be reproduced by anyone skilled in micro-controllers (e.g. Arduino) in couple hours.

    So the effect is trivial (intermittent swipes) and the solution is trivial today (using microcontrollers) but was not trivial and deserving patent protection back in those ancient times (using capacitors, resistors, transistors etc)

    Fast-forward to present times: US Patent 8738278 (owned by Mark Cuban)
    http://www.google.com/patents/US8738278

    Effect is trivial: self-balancing something with two wheels

    Solution is (presumably) not trivial but completely missing in patent specification (it says “programmable logic”)

    Me thinks USPTO has some serious issues distinguishing between trivial effects and non-trivial solutions and vice versa.
    Plus, they don’t even understand that patent description is supposed to be a recipe for “skilled in the art” to be able to reproduce at least some minimal claimed functionality of the invention.
    Me thinks that until USPTO can figure out how to issue a good valid patent the mess will continue …(Needless to say that all those crazy scotus decisions like Alice should be reversed)

  23. SoftwareForTheWin November 5, 2015 4:41 pm

    “Give Google credit. It made patents a populist issue and was successful in getting the AIA enacted. ”

    Slight clarification – the anti-software patent sentiment is a grassroots movement which mainly started with software developers.

    “The market is still struggling to adapt to the rule changes that were pushed through in the AIA.”

    Is it possible that you are being overly optimistic? My perspective is that the best way for a software innovator to adapt to today’s patent climate is to greatly reduce expectations on patents providing protection on investment. Or at least for smaller entities. The ~$20k spent on getting a patent to issue is only the start of the costs to come – all without any kind of reasonable certainty.

    “Companies could keep making money from infringed IP, and pay for the privilege later rather than sooner. Or maybe pay never. Welcome to the dawn of “efficient infringement,” when companies consciously and confidently decide to infringe patents rather than seek a license.”

    Exactly my point. Small software innovators are foolish to place any faith on patents.

    Waiting for Congress to enact patent reforms is called “hope” – and making business decisions based on hope is doomed.

    The patent market may one day come back – but not in the lifetime of today’s (or tomorrow’s) small software innovator. They will continue using other mechanisms to fund their innovations.

  24. SoftwareForTheWin November 5, 2015 4:48 pm

    David Stein,

    Your solution of:
    1) More detailed patent specifications,
    2) Somewhat narrower patent claims,
    3) More patents

    Increased $costs and narrower claims is a non-starter for small software innovators.

  25. SoftwareForTheWin November 5, 2015 4:57 pm

    Anon,

    “When one realizes who most benefits from a weaker patent enforceability, the answer becomes quite stark.”

    Entities bringing product to market have/are/will-continue-to benefit. Small software innovators have greater probability of success by implementing their software rather than relying on licensing or selling their patents.

  26. SoftwareForTheWin November 5, 2015 5:02 pm

    Edward Heller,

    “Small businesses can afford neither IPRs or PGRs. With their very high costs and with a very high invalidity rate, their very existence is adversely affecting investments in new technology that depend upon the enforceability of patents in order to attract investment. ”

    You’re right about small biz and IPR/PGRs, however I disagree with your conclusion that things are hopeless. There are numerous examples of small software innovators that have NOT relied on patents and yet have been wildly successful.

  27. angry dude November 5, 2015 7:56 pm

    @SoftwareForTheWin

    Can you kindly share your winning strategies for “small software innovator” to make some money AND to keep making money in the market and not be ripped off by larger entities ?

    First, what kind of software are you talking about ? The one that runs on a client side (e.g. your Windows or Mac PC) or the one that runs on a server side (e.g. in a private cloud)
    In the first case you are doomed to eventual failure – your code will first be cracked (assuming you have enough paying customers) and then it will be reverse-engineered to extract your “software invention” (assuming it has one and it looks important to someone)
    Now what ?
    Copyright means nothing, absolutely NOTHING.
    Trade secrets don’t work if anyone can have access to your binary executables.
    What kind of protection mechanism are you proposing ?
    My guess it is “keep competing, keep writing lines of code, keep introducing new features on customers request, keep providing tech support to your loyal customers etc etc”

    Well it only goes so far…

    Eventually you are gonna be overrun by a large software corporation introducing very same features in their much larger and better integrated software packages.

    Ever watched HBO’s “Silicon Valley” ? It’s all in there: hide your (binary) code as diligently as you can or you are *****d

  28. Anon November 6, 2015 7:42 am

    SoftwareForTheWin,

    You are nothing but a shill, a mouthpiece of tired rhetoric. Nothing you have said is true. Even the “gloss” has worn off.

  29. Night Writer November 6, 2015 7:44 am

    >>Ever watched HBO’s “Silicon Valley” ? It’s all in there: hide your (binary) code as diligently as you can or you are *****d

    That is just the first stage. The next stage is don’t share how things are done. Now it is a giant love fest where inventors write articles in journals and everyone share how to get stuff done. Without patents it will get very ugly quickly.

    One thing about IPRs is who will do all the work the PTBA judges are doing? The dist. courts were playing with the idea of a bunch of magistrate judges that are like the PTAB before the AIA.

  30. Night Writer November 6, 2015 7:49 am

    Another thing to think about is that the “trolls” don’t seem to be doing so bad. All the changes have made everything much more complex, but there are ways to game the system and the complexity favors sophisticated clients.

    Anyway, just look at the financials of some of the public “trolls”. They seem to be doing OK. Massive complexity favors the big players.

  31. JNG November 10, 2015 5:34 pm

    Ned, you say

    “IPRs are killing the goose that laid the golden eggs.”

    Not really. IPRs are killing all the hatchlings from those golden eggs; they are leaving the goose (PTO) pretty much alone. This is in fact the genius of the scheme, birthing stock at cheap prices while slaughtering them on the other end at higher prices to the highest bidder.

  32. JTS November 11, 2015 9:18 pm

    @David Stein, Nov. 4: Thank you!

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