The past several years have been difficult on patent owners. The erosion of patent rights has continued, and with it patent value has largely collapsed in several key sectors of the U.S. economy, including in the biotechnology and software industries. There is, however, a light at the end of the tunnel and real reason to believe that the industry has hit the bottom and will experience a bounce upward in 2015.
While timing a bottom is never a good investment strategy, recognizing a bottom does present real opportunity. As the 18th century British nobleman Baron Rothschild is famously quoted as saying: “The time to buy is when there’s blood in the streets.” This contrarian philosophy is based on the realization that when things hit bottom they can’t get any worse, and can only get better. In the patent/innovation sector there are some recent signs that things may have hit the bottom and be trending up, although I recognize that it doesn’t yet feel that way for many.
It seems to me that we have largely weathered the storm. The Supreme Court did not say software is patent ineligible, and we know from previous decisions that at least some business methods are in fact patent eligible. The Federal Circuit finally found software patent claims patent eligible, and according to Michelle Lee’s testimony at her confirmation hearing, the guidance from DDR Holdings will be incorporated into the forthcoming Alice guidelines. Furthermore, Senator Dick Durbin (D-IL) seems to have no appetite for patent reform, and from what I hear the industry is poised to fight for patent eligibility in Congress if the right opening presents itself. So all things considered, as a whole the industry seems to have bottomed out in 2014. If Congress stands down on patent reform, or instead actually focuses on things that might bring change for the better, 2015 promises to be a much better year. After all, it couldn’t get much worse.
Hitting the Bottom in 2014
To understand why there is reason for optimism moving forward it probably helps to first understand how bad things have gotten. In terms of valuation, in terms of frequency of deals, the market for patents and patent portfolios has been under extreme downward pressure in recent years. “The landscape has changed dramatically — eBay started it, but after the AIA it has gotten much worse,” said to Richard Baker, a senior IP licensing executive who is on the Board of LES, during a recent webinar I hosted on the topic of our political patent system.
Baker would go on to explained that IP Offerings provides some raw data that gives a good look at what is really transpiring in the marketplace, and the data is not good. Using this raw data Baker did a number of calculations and explained that “the dollar value of patent sales are down 83% and the number of patents sold is down about 50%, and this is just in the last two years, but the most striking piece of data is that the average price per patent has gone down about 55%. So you a dramatic drop in value.” Baker would go on to say that a number of people at LES aren’t convinced that the IP Offerings data, which is based on a survey, doesn’t accurately reflect what is going on in the marketplace. “It may be that patents are now only worth about 30% of what they were just 3 or 4 years ago,” Baker explained. According to Baker a lot of this dramatic drop in the value of patents has to do with the availability of inter partes review at the United States Patent and Trademark Office, the hostility that courts are showing against patent owners, as well as an overall public sentiment that has swung away from innovators.
“It is very easy to put the title of a patent into a press release and say this never should have been issued,” explained Baker. “A good PR firm can then spin that into a problem with the overall patent system.”
Judge Paul Michel, former Chief Judge of the United States Court of Appeals for the Federal Circuit, who was also a participant in the webinar agreed with Baker. “What gets lost are specifics, metrics and any sense of proportion. So if there is some patent that actually shouldn’t have been granted, and it is trumpeted in the press, pretty soon people get the idea that that’s typical, that most patents are like that, therefore, the majority of patents are not valid and never should have been issued,” Michel explained. The reality may be that something like 2% or 5% may be are questionable or invalid, but the political leaders have been led to believe that the majority of patents are invalid that the majority of lawsuits are frivolous or abusive, and that just isn’t true, but the truth has been drowned out by the propaganda.”
Indeed, there has been a steady propaganda effort to devalue patents, which has been lead by some elite Silicon Valley companies. Indeed, Google has lead the charge, along with Cisco and others. Google has teams of lobbyists in Washington, DC, promoting the demise of the patent system. Unfortunately the half truths and misrepresentations about the patent system promoted by Google and others have gained mainstream acceptance. See Silicon Valley’s Anti-Patent Propaganda: Success at What Cost?
The Supreme Court over the last several years has been openly hostile toward innovators, significantly curtailing what is viewed as patent eligible in a line of cases starting with Bliski v. Kappos and tracing through Mayo, Myriad and finally Alice v. CLS Bank earlier this year. The one theme that runs consistently through the Supreme Court’s decisions is that they simply refuse to read the statute they are interpreting. For example, in Myriad, the Court explained that discoveries are not patent eligible, but if you read 35 U.S.C. 101, the statute says otherwise. The Supreme Court’s disdain for Congress and the Patent Act was also on display in Mayo, when they refused to address novelty under sections 102 and 103, instead choosing to rewrite their own 101 jurisprudence to say that something cannot be patent eligible if it is not novel, which irrationally conflates patent eligibility with novelty and obviousness inquiries.
The Tide is Turning
There is no doubt that the patent system has been unfairly criticized, and that the system as a whole has hit rock bottom in 2014. Patent values have cratered and deals are not getting done. However, if you myopically focus on the marketplace today you have probably missed some recent events that seem to signal that things have already hit bottom and are showing signs of improvement.
Over the last several months the Partnership for American Innovation (PAI), which is comprised of Apple, DuPont, Ford, GE, IBM, Microsoft and Pfizer, has started to take on the Google PR machine. While there have been others, such as the Innovation Alliance, that have continued been pushing back against the Google narrative, the PAI is significant because there has been little or no space between what Google has been saying and what Apple and Microsoft saying. Apple and Microsoft splitting with Google and now along with others large U.S. corporations championing the importance of innovation and a strong and functioning patent system is critically important. There is no doubt that Google is well positioned within the Obama Administration, so having Apple, Microsoft, GE, IBM and others offering a counter-narrative is a very encouraging sign.
Just recently the United States Court of Appeals for the Federal Circuit also ruled that certain software patent claims are indeed patent eligible, which snaps a string of decisions finding similar patent claims patent ineligible. While one decision does not make a trend, it does signal that in the wake of the Supreme Court’s Alice decision the Federal Circuit will not simply rubber stamp rejections and district court decisions that invalidate software patent claims. At least some software has to be patent eligible, which is the appropriate conclusion given that the Patent Act specifically recognizes the patentability of software in multiple places. So as long at the Federal Circuit is evaluating innovations on a case by case basis there will be some well written patents that will survive, which makes these assets all the more valuable in a world where many are falling to the side. It also means that there has not been a capitulation on the issue of software patents, thereby making an upward turn likely.
Over the last year there has also been a subtle but persistent shift at the PTAB. During FY 2014, the PTAB has instituted 557 trials from inter partes review challenges. During this same time frame the PTAB has instituted 91 covered business method challenges. During FY 2014 the PTAB also denied 193 inter partes reviews and 30 covered business method challenges. This corresponds to an institution rate of 74.2% for inter partes reviews and 75.2% for covered business methods. By comparison in FY 2013 the PTAB instituted 87% of inter partes reviews and 82% of covered business method challenges. This trend is rather significant, particularly if you jump inside the numbers. Scott A. McKeown, a partner at Oblon Spivak and co-chair of the Oblon post grant practice group and author of the popular Patents Post Grant blog, reviewed PTAB grants and denials between April 2014 and July 2014 and he found that the IPR institution rate dipped during that time frame to 68%, with 42% of petitions granted as to all claims and 26% of petitions granted with respect to some claims challenged. Thus, the PTAB does not seem to be the death squad they once rightfully were accused of being. This downward shift in post grant proceeding institution rates from FY 2013 has held even as FY 2015 has started. Based on FY 2015 statistics available through December 4, 2014, the PTAB has instituted 129 inter partes reviews while denying 46 petitions, which corresponds to an institution rate of 73.7%. Similarly, during FY 2015 the PTAB has instituted 13 covered business method proceedings while denying 4, which corresponds to an institution rate of 76.5%.
While the downward shift in post grant institutions may not seem dramatic, it does mean that approximately 25% of petitions being filed with the PTAB are not being granted at all, which bolsters those patents, making them even harder to challenge moving forward. As more and more patents survive challenge at the PTAB there will be a growing number of solid, strong and thoroughly litigated patents being litigated, which should make for more positive, pro-patentee rulings. This is true because bad facts make bad law, so law being made relative to good, strong, thoroughly vetted patents will necessarily be more pro-patentee.
The impact of a negative event for a challenger at the PTAB was also on display when the United States Federal District Court for the Southern District of Ohio ruled in favor of the patent owner on Summary Judgment. In The Procter & Gamble Company v. Team Technologies, Inc. et al, 1-12-cv-00552, the District Court pointed out that the invalidity argument was deemed insufficient at the PTAB and that the PTAB applies a much more challenger friendly standard. At trial the challenger must show that claims are invalid by clear and convincing evidence, but at PTAB employs a much lower threshold. The Court explained: “As further evidence that Defendants cannot meet their burden of showing that claims 1-3 and 7 of the ’017 patent and claims 2-3, 6-9, 11 and 18 of the ’453 patent are invalid, the PTAB recently rejected the same inherency arguments, with respect to the same references, under a lower standard of proof…” Thus, there is a legitimate believe that patents that survive PTAB challenge will be nearly bullet proof.
Additionally, during a recent confirmation hearing for USPTO Director nominee Michelle Lee, several of the Senators on the Senate Judiciary Committee used the opportunity to question the need for additional patent reform, which up until now had largely seemed like a forgone conclusion. Indeed, Senator Mazie Hirono (D-HI) was quick to remind everyone that “one person’s patent troll is another person trying to protect his or her patent.” This is an important reminder because all too frequently anyone who seeks to enforce a patent is labeled a patent troll. That is, of course, nonsense. If this current rational were applied to history inventors of the likes of Thomas Edison, the Wright Brothers, Nikola Tesla and many others would have been deemed to be patent trolls.
Also encouraging were the statements of Senator Dick Durbin who seemed most opposed to additional patent reform efforts, which bodes well for those who feel that another round of patent reform isn’t necessary and would be helpful. As the second highest ranking Democrat in the Senate, Durbin certainly has the gravitas and seniority to slam the breaks on patent reform if he chooses, and his words today suggested that he just doesn’t think additional reform is the answer. Indeed, he has been holding meetings and talking to constituents about the possibility of more patent reform and everyone is telling him that additional patent reform would be premature and that Congress needs to slow down. Durbin also echoed Senator Hirono’s concerns about labeling patent owners as patent trolls, asking Lee “What is a patent troll? What is your definition?” Lee responded: “it is not productive to define a patent troll,” but rather that it is important to “focus on abusive behavior.”
Therefore, we will end 2014 with the Federal Circuit finally finding software patent claims to be patent eligible, a Senate Judiciary Committee that does not seem as receptive to patent reform as many would have previously believed, and a PTAB that is less of a death panel than it was during FY 2013. Still further, the USPTO is continuing to issue financial services software patents to the likes of Bank of America and JP Morgan Chase. Even further still, robotics, alternative energy innovations, mobile devices, identity theft solutions and medical devices continue to be hot sectors with a lot of patent activity. It seems none of these sectors have been negatively impacted by the Supreme Court’s patent eligibility decisions, and focus on these and other sectors where patent eligibility isn’t in question should remain high moving into 2015.
In November at the IP Dealmakers Forum in New York City, there was near unanimous agreement by panelists that quality means more than quantity with respect to patent portfolios moving forward. It will be better to have a strong, solid, smaller portfolio than to have large quantities of patents that likely only have invalid patent claims. Therefore, moving forward we could see individual patents and small, quality portfolios become far more interesting and lucrative. If this does materialize it would be an extraordinarily important development because it would it reward quality innovation and thoughtful, deliberate attempts to protect that innovation. Rather than huge portfolios with vast numbers of mediocre and below average patents, purchasers will be looking for high quality assets and less concerned with a numbers game.
At the IP Dealmakers Forum there were also a number of people who indicated that well run non-practicing entities are in a particularly good position to start accumulating patents at a steep discount, which is something I am on record predicting will happen. John Lindgren, who is President and CEO of Conversant (formerly MOSAID Technologies), predicted that we will see consolidation of the industry both with respect to private and public companies in the NPE or patent monetization space.
Patents being devalued will create opportunity for those with vision and situational awareness, but those who act most quickly will score the largest advantage. Any student of history knows the patents are constantly swinging between stronger patent rights and weaker rights, so smart monetizers will be seeking to acquire quality patent portfolios at a discount and wait for the law to shift, which may not take as long as some are predicting. Once we see Chinese companies invade Silicon Valley, which is already starting to happen, Silicon Valley tech companies will find themselves helpless to the invading Chinese companies because their patents all contain invalid claims. This will then set in motion a dramatic counter-narrative about the importance of patents for job creation and U.S. economic interests. We are already seeing that with the PAI. The shift back will be sudden when it happens, and the forward thinking patent accumulators will be rewarded for buying low and selling high.
Innovators don’t despair! 2015 can’t be any worse than 2014, and if Q4 of 2014 is any indication things could well be turning around. It is always darkest before the dawn.