Standard Essential Patents: Statistics and Solutions to the Real Party in Interest Problem

The following introduction and article have been adapted from a panel presented during IPWatchdog’s Patent Masters Symposium – “Standard Essential Patents: Striking a Balance Between Competition & Innovation,” held September 10-11 in Arlington, Virginia. This is part two of a two-part series. Read part one here.

As I noted in part one of my talk at the IPWatchdog Patent Masters Symposium, the validity statistics for SEPs do not look very good at first glance. Thus, according to a 2017 PricewaterhouseCoopers study, plaintiffs in U.S. courts (ignoring patent type) have on average a 33% chance of success—only a 27% chance in the case of telecommunications patents. This chance of success is probably overstated for Standard Essential Patents (SEPs), based on the easy availability of prior art. Indeed, according to RPX’s 2014 study, in the United States, SEPs are likely to be less than half as successful as non-SEPs.

To be fair, recently, and using a similar dataset, Professor Mark Lemley  found high validity rates for SEPs (80% and 88% for practicing entities and NPEs, respectively) and an infringement rate of 42% for practicing entities and 21% for NPEs  While this point seems to favor the validity strength of SEPs, I argued in my talk that it is inconclusive. Specifically, I argued that given the structural process of most jury and bench trials, having found an SEP not infringed, most decision makers would be inclined to go out of their way to find the SEP valid (a) to avoid having to deal with the work to overcome the higher burden to invalidate, especially where the question of validity is likely moot having found non-infringement; and (b) in recognition of the supposed technical importance of SEPs.

In my talk, I pointed to the high invalidation rates in Europe to buttress my point that, at first glance, SEPs seem particularly vulnerable to validity challenges. Thus, in Germany, a supposed nirvana for patent assertion, the authors of the study “Patent Paper Tigers” reviewed the case law of the German Federal Patent Court and the German Federal Court of Justice in nullity matters in the period from 2010 to 2013 and found that:

• The nullification rate of all Senates of the German Federal Patent Court is 79.08% in total.
• The nullification rate at the German Federal Patent Court regarding Software and Telecom patents which are (currently) of particular relevance from an economic point of view is 88.11%.

While I do not have access to the relevant data, given the very high pleading requirements and the lack of fact discovery in Germany it is highly likely that most of the telecom patents asserted in Germany are SEPs.

Again, in fairness, I noted in my talk that these numbers have been criticized as ignoring the broad fact that only half of German infringement cases result in a nullity suit. The author concludes that is because the patents are likely valid. I believe that this conclusion is problematic because it ignores the expense of filing a nullity suit; no defendant wants to both defend the case and patent for a new lawsuit. Moreover, the data used in this criticism does not parse out technical type of patent. I would posit that the much higher patentee win rate in mechanical cases in bifurcated systems like Germany’s (averaging 82%) than the unified systems (averaging 37%) goes a long way to explain the lack of nullity cases, i.e., I believe that most of the “missing” nullity suits are in mechanical cases.

While anecdotes do not have the same strength as rigorous data, in the absence of such data they can be illuminating. Nokia’s disputes with IPCOM over the former Bosch SEP portfolio is one such example. In 2012, Richard Vary of Nokia published a paper which found that, of the 150 patents asserted against Nokia, 71 have been pursued through to judgment, and only one may possibly be valid.

Obviousness is Subjective

While illuminating, anecdotal evidence can be highly impressionistic and subjective. Indeed, I would argue that the question of SEP validity—at least based on my experience in asserting SEPs (I recognize the logical flaw here)—is plagued by the problem of subjectivity. That is, I would venture that most of SEP nullifications come from obviousness or inventive step. Indeed, I have heard unscientific numbers that some 80% of IPRs are for obviousness.

I would agree that novelty killing—or in U.S. parlance, Section 102 art—is important and that killing a patent on 102 grounds does probably provide a public service. However, I would argue that obviousness can include a high degree of subjectivity, so I am not sure that it is a public service to kill patents on that ground—though it might benefit potential licensees financially. As such, I would posit nullifying patents for obviousness should create no special exemption in the context of SEPs due to public interest.

Returning to the point made in the first part of my talk, having noted that most SEP nullification comes from obviousness, and not novelty, there should be no public interest exception to my argument that: unprovoked—that is, without first having made a FRAND offer or counteroffer—serial nullification of SEPs is contrary to the duty to negotiate in good faith and should remove a party’s defense against an injunction to SEPs.

Now, there is a flaw in this theory, and that is that, in the past few years, third parties have emerged that will—for their members or other contracted entities—kill patents. How do these parties fit into my theory?

The Real Party in Interest Problem

Under 35 U.S.C. § 312(a), an IPR petition must identify “all real parties in interest” (RPI) and an IPR petition is time-barred under 35 U.S.C. § 315(b) if “filed more than 1 year after the date on which the petitioner, the real party in interest, or a privy of the petitioner is served with a complaint alleging infringement of the patent.”

As it stands, the case law (articulated by the Federal Circuit in 2016 in WesternGeco., based on the Supreme Court’s decision in in Taylor v. Sturgell) is that a party is subject to Section 315(b)  if:

• There is an agreement with the petitioner to be bound
• There is a pre-existing, substantive legal relationships with the petitioner
• There is adequate representation by someone with the same interests who was a party (e.g. “class action” and “suits brought by trustees, guardians and other fiduciaries
• There is assumption of control over the IPR
• The petitioner acts as a proxy to re-litigate the same issues.

This issue came to a head in the summer of 2018 in Applications in Internet Time, LLC v. RPX Corporation. In its decision, the Federal Circuit concluded that the Patent Trial and Appeal Board (PTAB) was applying an “unduly restrictive test for determining whether a person or entity is a ‘real party in interest’ within the meaning of § 315(b) and failed to consider the entirety of the evidentiary record.” The court instead emphasized taking a fact-based approach and looking for a “clear beneficiary that has a preexisting, established relationship with the petitioner.” It further ruled that:

Determining whether a non-party is a “real party in interest” demands a flexible approach that takes into account both equitable and practical considerations, with an eye toward determining whether the non-party is a clear beneficiary that has a preexisting, established relationship with the petitioner.

And yet, the PTAB has not seemed to have received the message, instituting IPR2018-01047, filed by Google. In that IPR, Google—despite a hearing where this issue was argued—was not required by the PTAB to identify its parent and 100% owner, Alphabet Inc., as a real party-in-interest under 35 U.S.C. § 312(a)(2). It will be interesting to see (if the suit is not dismissed) how the courts connect the interests of Google in Alphabet as it relates to key payouts of former Google employees and whether these connections are applicable to the PTAB.

It thus is not surprising that the PTAB consistently refuses to find the members of  Unified Patents as real parties in interest. For example, in, Unified Patents, Inc. v. Realtime Adaptive Streaming, the PTAB instituted the IPR despite finding that Unified’s business model was the same as RPX. That is, a for-profit company that files IPRs to serve its clients, with whom its interests are 100% aligned.

Despite this, the PTAB, in tension with the Applications decision, asserted that the inquiry does not end there; rather, because “a litigant is not bound by a judgment to which she was not a party” except in special circumstances. While this may in fact be a general principal, it would seem that Congress’ intent when deciding that RPIs are to be named in an IPR petition was to severely limit that rule. The PTAB then tried to distinguish Applications by arguing that that the Applied decision was rooted in a unique situation, specifically the relationship between RPX and Salesforce (the party who stood to benefit from the petition in Applied). For example, unlike with RPX, none of Unified’s members share officers or board members with Unified. Nor were there any significant payments made shortly before the IPR was filed, as appears to have been the case in Applied. Most importantly, according to the PTAB, unlike in Applied, no members of Unified are time-barred but want to file an IPR.

What the PTAB seems to be saying is, so long as an IPR benefits lots of members or shareholders in a patent-killing company equally, then no members need to be identified as an RPI, but if a single member benefits, then they must be identified. Or, in other words, if one person is responsible then they are liable, but if everyone’s responsible, no one is liable.

A Solution in Securities Law?

While not a foolproof solution, perhaps instituting a requirement for RPI similar to that under U.S. securities law regarding when an 8-K must be filed with the U.S. Securities and Exchange Commission would be a reasonable solution. Thus, where an entity has a financial or contractual relationship with the petitioner and, if:

• the entity’s entry into relationship with the petitioner;
• the petitioner’s entry into a relationship with the entity;

OR

• the success of the IPR petition for the entity’s business interests;

would require filing an 8-k were either the petitioner or the entity a public corporation, then it should be a rebuttable presumption that the entity is a real party in interest.

Regardless of the real party in interest doctrine for IPRs, I would argue that, from a FRAND perspective, when a third party starts killing an SEP owner’s patents AND

• the SEP owner has merely advertised their willingness to license SEPs and not made any assertions;

OR

• The SEP owner made a FRAND offer to a member of the third party and the member failed to provide a FRAND counter-offer;

then the members of the third party—or at least the members of the third party that encouraged or facilitated the third party’s nullification efforts—should lose their defense to injunction.

Image Source: Deposit Photos
Image ID: 157411408
Copyright: nicholashan