Into the Dark: Patent Trend Post America Invents Act and <i>Alice</i>

After a slow start in 2012 in which 20 to 30 filings per month were filed, the rate of growth in IPR filings continued on a steep upward trend with an average of 150 filings per month in 2015. While cost and efficiency are the predominant motivators, the most prevalent rationale for the explosion in IPR filings is the extraordinary “kill” rate of the claims being asserted. While the statistics on patent claim survival appear to be improving, a kill rate that still approaches 80% provides heady incentive for patent challengers to launch IPR proceedings. The increased rate of IPR filings is even more stunning when it is balanced against a double digit decrease in the rate of patent infringement related cases that were filed in federal courts in 2015.

The high success rate in invalidating patent claims is one of the unanticipated impacts of the AIA and can fairly be attributed to the elimination of the presumption of validity of a patent and the broadening of the claim construction that is required to be conducted by the Patent Trial and Appeal Board (PTAB) of the USPTO. Historically, the federal courts found that once a patent had been issued by the USPTO, it was presumed to be valid and that presumption of validity would not be overturned baring clear and cogent evidence. The AIA changed the standard of evidence used by the administrative court of the USPTO from the “clear and cogent” federal court standard to a lower standard that is based on a “preponderance of evidence.” This lowered bar in evidentiary standard weakens existing patents, as it allows for decisions to be reached by the PTAB about the validity of patent claims based on subjective opinions as to the applicability of prior art, which ignores the judgment with respect to patentability of the original examiner.

The weakening of existing patents is exacerbated by the standard used in IPR proceedings under the AIA. While federal courts will interpret the patent claims in accord with their “ordinary and customary” meaning, the PTAB instead uses a “broadest reasonable interpretation.” This “broadest reasonable interpretation” standard allows for the introduction of additional “prior art” that can be used by challengers to invalidate patents.

Supreme Court Impact

There have been several impactful Supreme Court opinions that have issued over the past decade. The 2014 Alice decision, however, stands alone as having the most depressive and lasting impact on patent portfolios consisting of computer science/business method patents. Third parties had vociferously argued for years before Alice that a majority of computer science/business method patents were not valid, because the prior art cited in the prosecution of the cases was insufficient for an examiner to determine patentability. The Alice ruling did not address novelty or obviousness issues, but went to the very heart of whether or not the claims sought to be covered were even appropriate subject material for patents. Alice found that such computer science/business method claims would not be considered patentable if they claimed mere “abstract ideas.” The test for such “abstract ideas” expressed in the Alice ruling was so vague that it called into question the validity of thousands of issued patents and negatively affected the valuations of billions of dollars in patent assets. While Court rulings subsequent to Alice have backed fractionally away from this precipice and the USPTO has attempted to provide guidance as to patentability of such computer science/business method claims post- Alice, it is clear that the lower validation standards expressed in the case provide motivation to competitors to enter the IPR game.

Rise of Abuse

Because both the provisions of the AIA and Alice have made the use of IPRs very attractive to parties that are interested in invalidating patents, it has given rise to aggressive and abusive uses of IPR proceedings. IPR proceedings allowed under the AIA have provided a boon to non-practicing entities who attempt to leverage, some would say extort, patent portfolios using the cost and time efficiencies available under the USPTO proceeding. It is also anticipated that additional IPR proceedings will increasingly be filed against patents owned by operating companies. The leverage provided by instituting an IPR can be used by businesses to effectively clear out potential patents that are competitive impediments at a price point that is cheaper than licensing the technology.

Hedge fund manager Kyle Bass has creatively used IPR proceedings in a widely panned moneymaking scheme. He targets pharmaceutical companies that have a large portion of their revenue coming from a single patented drug. Bass then shorts the company in advance of filing an IPR, challenging the validity of the patent. Normally, the publicity of the filing of the IPR results in the company's stock price being negatively affected because of the assumed vulnerability of the patent at issue, which allows the hedge fund to profit from the short position.

All of the noted practices adversely affect the potential value of existing and future patent portfolios, and negatively affect the ability to raise cash for emerging high-technology companies. Businesses are reacting to this environment by moving from a strategy of depending upon a single or a limited number of core patents to protect their patent portfolios. Instead, they are seeking to obtain multiple patents of relative strength and similar commercial value in an effort to ensure that at least some of the patents survive the myriad challenges presented during the IPR proceedings.

Additionally, businesses are looking to other fundamental intellectual property protection regimes, such as trade secret and copyright, in a further effort to expand the possibilities of obtaining substantive and enduring intellectual property valuations. This latter course of action is especially true for the computer science/business method companies that were adversely affected by the Alice ruling.

Congressional Action

Not surprisingly, Congress has been under increasing pressure to “fix” some of the unintended consequences of the AIA. Several bills are making their way through Congress to put an end to this unbalanced and unjust patent litigation system. The PATENT Act (S.1137) in the Senate introduces more stringent pleading requirements that would compel parties to clarify and define the patent infringement in question. The STRONG Patents Act (S.632), also in the Senate, proposes changes to remedy the current imbalance in IPR proceedings by requiring the PTAB to abandon the broadest reasonable interpretation standard and mandating that claims be presumed valid. In effect, the STRONG Patents act will require the PTAB to use the federal court standards in IPR proceedings. The Innovation Act (H.R. 9) in the House includes a strong but fair approach to venue reform by requiring a lawsuit to be filed in the most suitable jurisdiction, irrespective of perceived “friendliness” to one party or another. These provisions will not prevent legitimate patent owners from defending their patents in court, but will prevent non-practicing entities from dragging their victims to distant courts with no connection to the alleged patent dispute. Beneficially, most of the bills address fee-shifting, which requires the loser to pay the winner's legal expenses.

Conclusion

Presuming that Congress acts to institute these AIA reforms and businesses continue to the adapt to the changing patent enforcement environment, it is hoped that a new norm will be achieved, in the not too distant future, in which patent valuations of companies assets can be fairly accessed by the market place. Placing a degree of certainty in the potential validity of patents would go a long way to increase the market for patents and innovation investments that are such a critical driver of the world economy. We anticipate that the necessary changes will light the dark path we currently pass along, as we watch out for the next set of unexpected consequences.

Kean J. DeCarlo is an attorney with Taylor English Duma, where he represents mechanical and medical technology clients in patent, trademark, trade dress, licensing, unfair competition, copyright, trade secret and Internet matters. He can be reached at 678-336-7288 or [email protected].