“The pendulum is swinging back to re-balance the patent legal process over the next 3-5 years. When this happens, the value of a U.S. patent will increase while its cost will stay relatively low.”
After 12 years of doom and gloom for U.S. patents, the pendulum will swing back, leading to increased value. Like the age-old stock market rule says: buy low, sell high. This motto applies in the patent world as well.
The cost of obtaining a U.S. patent has not significantly changed for the past 10 years. This remarkable stability is confirmed by the AIPLA Economic Survey, our own fees, and our general knowledge of the market. The major costs for obtaining a U.S. patent include the drafting fee, the cost of responding to USPTO office actions and the USPTO fees. The first two fees have not increased in over 10 years for many firms and the government fees have increased but remain relatively low compared to the other fees.
With respect to the price of issued patents, the 2018 IAM Benchmarking Survey points to a bear market for U.S. patents, which are “cheaper” year after year. A fall in prices is reported, with 24% of corporate respondents stating that patents are cheaper than a year ago; the previous year’s survey had 36% reporting a fall in prices.
Such relatively stable cost and low price are disharmonious with the fact that a U.S. patent covers the largest market in the world—and a growing market. Despite a slight dip in 2009, the U.S. GDP has grown steadily for the past 20 years. Even if the recent volatility in the stock market is a sign of a difficult 2019, the long-term positive trend is likely to continue. In fact, the U.S. is back on top as the most competitive country in the world, regaining the No. 1 spot for the first time since 2008 in an index produced by the World Economic Forum. The U.S. ranks first overall in business dynamism, labor markets and financial system. It comes second in innovation (behind Germany) and market size (behind China). Why would a patent that covers such a healthy market be so cheap?
Factor 1: Pre-AIA Case Law
A number of factors are at play, especially legal developments that influenced the ability of patent owners to extract value from their U.S. patents. Since 2006, this ability has been restricted. The first hit was the eBay v. MercExchange Supreme Court decision, when the Court determined that a permanent injunction should not be automatically granted based on a finding of patent infringement. Instead, the Court held, injunctions can only be granted if justified under the principles of equity. Since then, patentees have the added burden of proving, inter alia, that they suffered irreparable harm (for example lost market shares) not compensable by damages. The decision was alarming from the point of view of patent owners who had viewed the ability to obtain injunctions as an important part of a patent’s value.
The KSR v. Teleflex Supreme Court decision followed in 2007 when the Court adopted an “expansive and flexible” approach to show obviousness, which can be established without an explicit motivation to combine prior art references. According to the Court, “any need or problem known in the field of endeavor at the time of invention and addressed by the patent can provide a reason for combining [prior art] elements in the manner claimed.” The KSR decision on its face facilitated a showing of obviousness based on seven (7) independent rationales, as opposed to the sole motivation-to-combine rational previously relied upon by accused infringers. The decision was viewed as another assault on patent rights.
Factor 2: the AIA and Subsequent Case Law
The next major attack on patent rights came from the legislature via the America Invents Act (AIA) of 2012. Initially presented as a balanced act with multiple provisions, it quickly became clear that the net effect harmed inventors and patent owners due mostly to the newly introduced Inter Partes Review (IPR) proceeding adjudicated by the Patent Trial and Appeal Board (PTAB). The new IPR proceeding provided any third party with a powerful and relatively fast means of challenging the validity of a U.S. patent based on prior art patents or publications. The initial invalidity rates were high, around 80% of instituted claims, and the PTAB was called the “patent death squads” by Judge Rader in 2013.
The most recent major blow to U.S. patents was the so-called Mayo/Alice framework, courtesy of the Supremes via a pair of decisions in 2012 and 2014. This framework has been heavily criticized and used to exclude inventions from the patent eligible subject matter under 35 USC 101. It has been referred to as “the weapon of choice for summary execution” of U.S. patents by Judge Plager in 2018.
Other Supreme Court decisions that generally made life more difficult for patentees included Octane Fitness (2014), Nautilus (2014), Impression Products (2017) and TC Heartland (2017). The carnage created by these legal developments since 2006 has been so significant that the U.S. Patent System fell to the 12th place in the Chamber Global IP Index. The effects included a decrease in new patent litigation proceedings. Docket Navigator reported a fall of nearly 11% between 2012 and 2017. Lex Machina reported a 40% drop in district court cases filed between 2015 and 2018, and so it seems that the pack has lost some faith in the U.S. patent.
Tracking the Pendulum
That said, we know that a good strategy for investing is to not follow the pack. As Warren Buffet said, “be fearful when others are greedy and greedy only when others are fearful.” In light of the most recent developments, now is the perfect time to be greedy and to obtain/buy U.S. patents. The pendulum is swinging back to re-balance the patent legal process over the next 3-5 years. When this happens, the value of a U.S. patent will increase while its cost will stay relatively low. Why such optimism?
First, the new USPTO Director Andrei Iancu has proposed to clarify and simplify the Mayo/Alice framework in a way that generally favors patent applicants and owners involved in USPTO proceedings that raise questions of patent eligible subject matter under 35 USC 101. His approach provides more clarity about the categories of inventions that fall within the judicially created exceptions to patentability. He also went back to an old criterion, used during the 1990s and the heydays of subject matter eligibility, when software inventions were generally found to be patentable as long as they were claimed as a practical application. In addition, the USPTO has latched on to a few positive decisions from the CAFC in this context, such as Core Wireless v. LG Electronics (Fed. Cir. 2018), where the court found a specific graphical user interface to be patentable; and Berkheimer v. H.P. (Fed. Cir. 2018) where the Court held that the second part of the Mayo/Alice framework was a question of fact requiring factual evidence to support the conclusion that an invention is not patentable under the framework.
The Playing Field Levels at the PTAB
Another reason for optimism is that the AIA proceedings are no longer the “patent death squads,” especially in certain technologies. Several factors are at play and no single one is a game changer but, in the aggregate, they will level the playing field for patent owners. For example, in 2018 the PTAB updated its practice guide such that patentees now have, as a matter of right, the “last word” over the petitioner in the filings. Also, the PTAB indicated that it would deny institution of “follow-on” petitions on the same patent where efficiency and the ability “to timely complete proceedings favor denying a petition even though some claims meet the threshold standards for institution.” Following the SAS v. Iancu Supreme Court decision, the PTAB may deny the entire institution even if the petition has some good grounds. The PTAB now relies on a narrower claim construction standard, consistent with the standard used in district court litigation, as opposed to the broadest reasonable interpretation. The CAFC held that the PTAB must assess proposed substitute claims without placing the burden of persuasion on the patent owner. The CAFC has limited the window for filing petitions, for example holding that even withdrawn complaints start the one-year clock. The PTAB seems to be taking a closer look at Real Parties in Interest, thus complicating the life of certain defensive patent groups. Petitioners may not have standing to appeal without demonstrating “injury in fact.” And finally, we will likely see more estoppel effects against petitioners/accused infringers.
PTAB proceedings will continue to invalidate overly broad claims. But many claims will survive and will come out stronger. Patent applicants and owners understand that a key to surviving an IPR, and more generally to successfully asserting a patent, is to introduce diversity in claim scope, claim terms, categories of claims, and claimed targets. Patent claims that survive PTAB proceedings will have a greater chance of success in litigation.
With respect to the KSR decision noted above, it is now clear that it did not change much and the initial fear that most inventions would be found obvious has dissipated. The Courts and PTAB are still looking for an explicit “reason” why one of ordinary skill would modify the prior art. The CAFC regularly vacates PTAB’s IPR holding of obviousness for failure to “adequately explain” its reasoning. The CAFC and PTAB are strict with respect to establishing a motivation to combine references to show obviousness of challenged claims. Petitioners must clearly show why a person of ordinary skill in the art “would” (not just “could”) combine the references. “Common sense” is not enough to supply a limitation missing from the prior art for most technologies.
The Sky Has Not Fallen
With respect to the eBay v. MercExchange decision noted above, its impact has evolved over time. Statistics in this area can be misleading because the absolute numbers are small and do not take into account relative negotiation positions during settlements. While the rate of obtaining injunctions likely dipped after the decision, our experience and informal research suggests the rate has stabilized and is relatively high for practicing entities who can show loss of market share (irreparable harm), and for patent claims directed to overall products, or major component thereof, as opposed to being directed to a minor sub-components of multi-component products. Recent decisions favor injunctions by being less demanding to patentees, such as Genband v. Metaswitch (Fed. Cir. 2017) where the Court stated that “causal nexus and consumer demand may be apparent from the simple fact of infringing sales … when the infringing product contains no other feature relevant to consumers’ purchasing decisions other than what the patent claims.”
Other recent developments point toward better days for patent owners. In the area of damages, hope is pinned on the 2018 WesternGeco v. Ion Supreme Court decision. The Court held that patent owners can recover lost foreign sales when they prove infringement under 35 USC 271(f) by exportation of components of a patented system. But perhaps the most interesting part of the decision was the Court’s reasoning, which was based on basic notions of tort law and could be applied more broadly to other types of infringement. In particular, the Court’s reasoning enables the patent owner to recover damages from foreign sales resulting from domestic infringement. Still in the area of damage, the AIA introduced virtual marking as a more convenient means to protect past damages, as compared to conventional marking. The provision was held to apply to both utility and design patents. Initially, few companies adopted the new marking procedure, but today we see more and more products being virtually marked with companies looking for increased dividends from their patents.
It is also worth mentioning two other Supreme Court decisions, although less recent: the 2016 Halo v. Pulse decision that resulted in higher success rates for findings of willful infringement and enhanced damages. Additionally, the 2017 SCA Hygiene Prod. v. First Quality Baby Prod. enabling patentees to “wait and see” how a market develops before filing suit, without facing a laches defense. Finally, while TC Heartland represented a sea change in how the venue laws limit venue against U.S. defendants in patent infringement actions, there is no corresponding limitation with respect to foreign defendants.
2018 seems to have been a turning point away from the negative trend that started in 2006, which had followed a long period of pro patent developments. Of course, this optimistic view about the resurgence of U.S. patent rights is somewhat speculative and others will still see the glass half empty. More work is needed, probably legislative in nature, to formally re-establish patent rights to where they should be, but based on these initial positive developments, one can be bullish about the future value of U.S. patents.
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