A Sea Change In Patent Law

A Sea Change In Patent Law

The America Invents Act streamlines the patent challenge process, but is it fairer?

Large Minnesota companies have fared fairly well under the patent reform passed by Congress four years ago. Hailed as the biggest change in patent law in nearly 60 years, the America Invents Act streamlined the process of deciding patent challenges by creating a faster, cheaper alternative to litigation.

Instead of spending years and millions of dollars in U.S. District Court fighting over who came up with a patentable idea first, the parties can duke it out before a decision-making body within the U.S. Patent and Trademark Office and have a decision in 18 months. This new approach is affecting huge companies like Medtronic and smaller firms that aren’t household names.

Frequently, patent holders who are being sued in federal district court turn to the patent office’s Patent Trial and Appeals Board (PTAB) for one of those less expensive, speedier decisions. In many cases, the court will stay its proceedings until the PTAB makes its decision, another money-saver for both sides. To expedite the process, the patent office expanded the PTAB from its headquarters in Alexandria, Va., to open satellite offices in Detroit, Denver, Dallas and Silicon Valley.

These PTABs use a process called inter partes review (IPR) to decide the winner of a patent fight based on a preponderance of evidence, rather than the district court’s stricter standard of clear and convincing evidence. PTABs also give preference to the first party to file for a patent rather than the first party to invent, and they do not award monetary damages.

Many Minnesota companies like the America Invents Act (AIA) because it “flips the switch” on so-called patent trolls, according to patent attorney Grant Fairbairn, a shareholder at Fredrikson & Byron in Minneapolis. Patent trolls claim to have invented something before another company. They may sue, file an IPR, or both, or threaten the patent holder in a letter to prove its patent is valid.

Fairbairn says that companies defending their patents against trolls have found the AIA to be “a great thing.” IPR has “a very high kill rate” of unenforceable patents, adds Fairbairn, whose firm represents medium-sized to large Minnesota companies in patent matters.

‘Kill and maim’ rate

“If it doesn’t kill the patent, it maims the patent,” he adds. “People talk about the kill and maim rate.”

Minnesota Ranks 10th in Patent Filings

business innovations and are home to major research universities, dominate the list of those with the most patents. Minnesota is 10th in the nation for the number of patents held as of Dec. 31, 2014.

California—617,497
New York—262,347
Texas—196,499
New Jersey—178,514
Illinois—172,933
Pennsylvania—158,988
Michigan—155,522
Ohio—146,675
Massachusetts—140,115
Minnesota — 90,198

Source: U.S. PATENT AND TRADEMARK OFFICE

In 2013, Randall Rader, then-chief judge of the U.S. Court of Appeals for the Federal District, dubbed the PTABs “death squads, killing property rights.” Maiming a patent means making one or more of its claims unenforceable without killing the entire patent.

A recent study by New York patent law firm Fitzpatrick, Cella, Harper & Scinto of all final PTAB decisions issued in 2014 found more than 73 percent of claims that were originally challenged in IPR petitions were cancelled or found unpatentable. Patent owners cancelled 601, or 16 percent, of the 3,592 challenged claims, the study found.

Those self-cancelled claims and a similar number of court decisions against patent holders tend to mute the “death squad” moniker, the study says.

Under the AIA, the patent office has six months from the time it receives an IPR request to decide whether the filing party has enough information to proceed to trial. Initially, the patent office was agreeing to try 95 percent of those cases, notes Brad Pedersen, a shareholder in the Minneapolis law firm Patterson Thuente. More recently, that rate has dropped to about 70 percent.

High rate of invalid claims

Of the cases they decide to hear, the PTABs find about 90 percent of the challenged claims invalid, Pedersen added, a rate that Minnesota’s high-technology companies have noticed.

Medtronic in particular has been “a very active participant” in IPR proceedings, challenging others’ patents in 30 to 40 cases, according to Pedersen.

“They are one of the top, if not the top, medical device company to make use of these new proceedings,” he adds. Medtronic declined to comment for this story.

The AIA has also led companies to scrutinize their existing patents to ensure they are strong enough to withstand a challenge, according to patent attorney Thomas Leach, a shareholder at Merchant & Gould in Minneapolis. That includes making sure that “prior art”—anything similar that was previously patented or described in a printed publication—does not invalidate the patent.

Leach says he thinks the AIA works well because the PTABs consist of patent experts who understand what makes something patent-worthy, such as obviousness and novelty, and know how to read and interpret prior art.

Merchant & Gould filed a lawsuit challenging two patents on behalf of a U.S. firm against a Canadian firm and persuaded the patent office to deny the Canadian company’s petition for IPR based on the patent’s merits and the way its claims were constructed. With the litigation already stayed before the Canadian company requested the IPR, the outcome was “a huge win” for the U.S. company, Leach says.

The U.S. company is “in a much, much better position now, and the defendants know it,” he adds, while declining to name the parties. “They’re trying to figure out a way out.”

Small companies disadvantaged

The AIA doesn’t please everyone. Patent attorney Thomas Oppold, a shareholder at Larkin Hoffman in Bloomington, says the 2011 law has hurt small companies’ ability to enforce their patents against large corporations. Oppold regularly works with agriculture companies.

Although he declined to name the companies, Oppold says his firm recently brought a patent infringement suit on behalf of a small company against a Fortune 100 company, which turned to the PTAB to fight it. Unless the federal court enters a stay of the litigation, the plaintiff has to fight for its patent on two fronts, with fewer resources than its opponent. Sometimes the large corporation will delay filing for an IPR until the lawsuit has reached the expensive discovery stage, he adds.

IPRs are used “both as a sword or as a shield, depending on what side of the equation you are on,” Oppold says. “I think there are some good things about the AIA, but I also think that there are some abuses.”

Efficiency vs. fairness

By setting time limits on IPRs, the AIA has made the process more efficient. But is it fairer?

“Fairness is like beauty. It’s in the eye of the beholder, and it depends on what side you’re on,” says Pedersen.

Hastening the process has been “a real game-changer” in terms of the number of patents that the PTABs have invalidated, says Matt Samuel, a partner at Fish & Richardson in Minneapolis.

“That has, by far, in my judgment, been the biggest impact on the Minnesota technology community and the national tech industry,” Samuel says. “The medical device community has certainly been impacted. But although we don’t have as large of an electronics or a software tech community, we do certainly have some very strong businesses in those areas. And they’ve been impacted across the board among technology companies.”

In addition to the changes wrought by the AIA, a June 2014 U.S. Supreme Court decision in Alice vs. CLS Bank has made it very difficult to uphold patents on software, because the court ruled that claims based on abstract ideas are not patentable. Software patents written in the late 1990s and early 2000s are being struck down “at a prodigious rate,” says Fairbairn.

“There are a lot of individual inventors, small start-up companies that have relied upon software patents and business method patents for their business,” adds Oppold. “In view of the Supreme Court Alice decision, what a lot of these companies had relied on as an asset of their corporation or as a basis for keeping competition at bay, it’s neither now.”

Are patents worth it?

All of this raises the question of whether it’s even worth filing for patent protection. The costs rise with the complexity of the invention. Attorney’s fees for filing, plus a patent search with an opinion on whether the attorney believes the invention can obtain a patent, range from about $6,000 to about $20,000, according to an April article at ipwatchdog.com.

Fairbairn argues that the AIA favoring the first to file a patent makes it worthwhile. Patents are good for marketing purposes, reduce competition and improve the odds that a larger company will buy your invention, he says. Whether to file depends on the market for a product, in Leach’s opinion.

“There has to be a business decision for filing a patent,” he says. “The hard part is knowing what features are going to matter five years down the line.”

Pedersen likens patents to insurance for a company’s profits. If a company expects to earn only $1 million during the lifetime of a product, it’s probably too expensive to insure, he says.

The value of patents has become more difficult to predict, according to Oppold. Because patents are expensive to obtain and much more vulnerable to challenge due to the AIA and the Alice decision, Oppold is advising some clients to protect their assets as trade secrets instead.

IPR defendants can expect to spend $300,000 to $1 million, notes ipwatchdog.com blogger and patent attorney Gene Quinn.

Patent challengers requesting an IPR must pay $9,000, plus, after 20 claims, a fee of $200 per claim they are trying to invalidate. Once the IPR begins, these petitioners must pay $14,000, plus a $400 fee for each claim after 15, according to the patent office.

Other factors that affect the value of obtaining a patent include restrictions on the damages a patent-holder may win from an IPR and the increased difficulty of obtaining a court injunction in a patent lawsuit, a move by the court to discourage patent trolls. Samuel calls these “friendly-fire casualties.”

“It’s harder for everyone to get an injunction now,” he says. “It may not be money as well-spent as before.”

Patent reform, round 2

Because the AIA has made it easier to kill or maim patents, Congress is poised to replace the law just three years after it took effect, in part to dissuade patent trolls.

The AIA does not require patent challengers to file suit to begin the IPR process. Some patent trolls don’t even get to IPR before they begin writing threatening letters to patent holders, claiming they can prove a patent is invalid and advising the patent holder to save money on litigation by paying the troll to drop the matter.

“People without enough information pay to make it go away,” Pedersen says. “That, really, on a consumer protection level, was the driving instigator behind this round two” of patent legislation.

Sen. Amy Klobuchar (D-Minn.) is co-sponsoring the PATENT Act, introduced in April. A House bill is also in the works. Pedersen expects these to pass during this summer’s legislative session, particularly because patent issues drive members of Congress’ allegiance to their districts rather than to their parties.

The bills would narrow the standard by which the PTABs interpret the challenged patent claims. They would also make it easier for a company to modify or amend the language in a claim it is defending. This provision would help fend off challengers who say they have found prior art that a company was not aware of when it wrote its claim.

Leach contends that the AIA has given businesses a good tool to weed out questionable patents, especially now that IPR decisions are thinning the weeds of invalid patents. “I think it’s going to become a more normal equilibrium,” he says, “and I still think patents are more important than ever.” TCB

Nancy Crotti is a St. Paul-based freelance writer and editor.

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