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Patent system often stifles the innovation it was designed to encourage

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Over his career Thomas Edison garnered more U.S. patents than anyone in his time. Edison profited from his patents, but he was also exposed to the dark side of the patent system. He had to contend with lawsuits by other patentees who sought – and sometimes won – a piece of his success. While the patent system is designed to spur innovation like Edison’s, it also hampers it.



Easy copying and imitation discourage innovation, because why make the effort if someone else will profit from it? The patent system works by enabling inventors to block unauthorized use of patented technology.

Most technologies are developed by many inventors over many years, a process called “cumulative” innovation. Too often, however, early inventors get a patent on a small and perhaps insignificant piece of the technological puzzle, yet their patent covers the entire puzzle. Inventors who solve subsequent parts of the puzzle may need to pay royalties to the patentee, even if their contributions are larger.

As legal experts who focus on technology law and policy, we suggest that the problem boils down to two issues: too many patents and too little accurate information about them.

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Fast Courts, Big Funders Kept Patent Suits Flowing In 2020

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Following a four-year decline in new patent litigation, case numbers rose in 2020, and attorneys have attributed the increase to an enhanced ability to dodge patent challenges, the COVID-19-induced recession and the presence of litigation funders.



Despite the pandemic, there were 4,060 patent cases filed in 2020, according to a new report from Lex Machina. That’s the first time there’s been an uptick since 2015, although it was only a slight increase: up from 3,591 in 2019 and 3,600 in 2018.

“Lawyers have been resourceful, I’m amazed,” said McKool Smith principal Alan L. Whitehurst. “Lawyers in this space, they’re busier than ever before.

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Whitehurst said the increase is likely the combination of several factors that pushed companies hesitant to file patent cases to finally pull the trigger.



“I do think there’s been a backlog for a long time,” he said. “There’s been so much uncertainty with 101, [inter partes review], venue, trial dates, damages, especially on standard essential patents, that all of a sudden you’re seeing — with [Judge Alan] Albright especially in the [Western District of Texas] — a lot of these issues have been cleared up.”



For example, he said companies are filing more suits about semiconductors and fewer about business methods and e-commerce, since the former is less likely to be invalidated under Section 101 of the Patent Act.



Judge Albright, who joined the bench in late 2018, has promised to get cases to trial quickly, meaning companies don’t have to decide whether to wait two or three years to see their case resolved.



“It’s like we used to see in the Eastern District of Virginia: justice delayed is justice denied,” Whitehurst said. “Albright is committed to moving these cases forward, and he’s said repeatedly that he’s not going to stay for IPRs. That’s a large factor in the increase that we’re seeing in the Western District of Texas.

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The other impact of Judge Albright not staying cases for inter partes review is that fewer patents are actually being reviewed by the Patent Trial and Appeal Board. Using a piece of precedent called Fintiv, the PTAB has started turning away patent challenges if the parallel district court litigation is likely to be decided around the time of its own final written decision.



“The fact that there are more discretionary denials of institutions by the PTAB is pushing a number of clients to say, ‘Let’s pull the trigger now,’ because you may get an advantage,” said Finnegan Henderson Farabow Garrett & Dunner LLP partner Laura Masurovsky. “The other side may not be ready to file [at the] PTAB, and the further along you can say that your district court case is toward resolution or how quickly it will get to resolution, that may also bear on either the PTAB denying institution under its discretionary authority, or the district court saying, ‘I don’t think we need a stay anyway.'”



Masurovsky also said patent suits are likely to go up during recessions as a different way of bringing in income.



“People who are seeing declines in certain areas of economic growth look for other ways to monetize their assets or get returns on their investment, or as a hedge against some of what may be happening to their other investments,” she said. “Those that are feeling some of the pinch may use litigation as a backstop for what they are not able to succeed in in other arenas.

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The Finnegan partner also pointed to steady litigation from nonpracticing entities during the pandemic, and support garnered by litigation funders.



“In general, we’re seeing an increase in our new clients asking us to file contentious matters and also an increase in the supporting financing from litigation funders,” she said.



WSOU Investments LLC, a company that Lex Machina designates as a “high-volume plaintiff,” brought the most cases of the year, at a whopping 182. It was followed by Cedar Lane Technologies Inc. and Juul Labs Inc., with about 50 cases each. On the defendant end, Google LLC was the company sued most, with 48 cases, followed by Samsung Electronics America Inc. and Microsoft Corp.

Lex Machina said several of the WSOU cases were asserting patents it had obtained from companies including Nokia.



There was also a big increase in cases decided on default judgment, up to 79 in 2020 from 41 in 2019. Masurovsky said this was likely due to defendants being sued for infringing design patents as a way of targeting foreign counterfeit goods.



”A lot of these folks don’t respond, or it’s not clear exactly who they all are. A number of these are the ‘versus 69 John Does’ kind of cases,” she said. “[They’ve] been convenient for plaintiffs to then be able to shut down the counterfeit entities or get them removed from sites like Amazon or Etsy or wherever they’re selling their goods. This has been another weapon in the larger picture of trying to stop the sale of counterfeit goods.”



Last year also had a record amount of damages, Lex Machina found, with $4.7 billion awarded across 52 cases. Those included particularly large verdicts in The California Institute of Technology v. Broadcom Ltd. et al.  and Centripetal Networks Inc. v. Cisco Systems Inc.

 

Given that 2021 has already seen a $2.2 billion verdict against Intel, Masurovsky said she only expects that to increase.



”We’re hardly into 2021, and we’re already almost eclipsing or getting halfway to where we were in 2020,” she said, adding later that “if the Intel verdict is any measure, I think 2021 will see this trend continue with more and more cases, and more and more interesting verdicts, and this is going to be a boom time for patent litigation.”



–-Editing by Marygrace Murphy.

Law360 is owned by LexisNexis Legal & Professional, a RELX company, which owns Lex Machina.

Second Economic Study Finds Billions of Dollars in Benefits to U.S. Economy from IPR…with most going to manufacturers.

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Second Economic Study Finds Billions of Dollars in Benefits to U.S. Economy from IPR…with most going to manufacturers. Manufacturers saw a savings of nearly $900 million during patent lawsuits when there was also an IPR proceeding pending in the same case, according to a new economic study by the Perryman Group. The study, which broadly found that IPR saved approximately $2 billion for American businesses facing patent lawsuits, noted that manufacturers saved nearly six times as much in cost when compared to the next highest beneficiary.

PTAB Discretionary Denials Up over 60% in 2020

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In 2020, the PTAB logged a record increase in “discretionary” denials, with 228 petitions denied without considering the merits.  The vast majority—62%—came under either the NHK Spring/Fintiv “trial date” framework or were based on the new parallel petition requirements.  In a year where denials were up generally, roughly 20% of all institution decisions (and almost half of ALL denials) were procedurally denied, compared to 12.5% in 2019.  

Remarkably, the Board has accelerated their use of procedural denials based on trial dates, despite district trials continually being delayed—and many cancelled outright—due to the current pandemic. This 60% increase in denial rates was due to the explosive use of 314(a).  Indeed, even in the trial on which this line of decisions were based–-the NHK Spring decision—the trial never materialized.  

That overall decisions were down in 2020 (based on a dip in filings in 2019) throws those numbers in to even starker relief; as you can see from the chart below, “procedural” non-merits denials made up almost half (43+%) of all denials, merits or otherwise. 


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Congress Must Stop USPTO from Arbitrarily Denying Access to IPR Process

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In the past, productive, innovative companies found themselves in years-long, costly patent lawsuits facing accusations of infringing on weak or invalid patents. Many companies were – and still are – sued by shell companies that produce no goods or services and had no employees themselves.

Congress passed the America Invents Act (AIA) in 2011 to help reduce the explosion of abuse occurring in our nation’s patent litigation system. Congress wanted to strip the shell companies – ‘patent licensing entities’ who existed only to file these lawsuits – of the bad patents they used to fuel their litigation.

For the first several years of its operation, the system Congress created to eliminate bad patents worked well. An efficient, inexpensive new system to review questionable patents was put in place, and as the ‘worst of the worst’ patents were invalidated, the number of these reviews sought annually dropped. More importantly, the explosion in patent lawsuits subsided and started to decrease, and the number of those suits brought by patent licensing entities started to drop as well.

Unfortunately, over the last year, the US Patent and Trademark Office (USPTO) under Director Andrei Iancu made a radical course change with regard to this procedure for getting rid of bad patents called the inter partes review (IPR). Director Iancu has been engaging in a series of actions aimed at cutting off access to the review process in a way that seems diametrically counter to the very reasons Congress passed the AIA.

Through a series of ‘precedential’ rulings, the USPTO Director (and hence the Patent Trial and Appeal Board (PTAB) judges) has created a series of administrative and procedural rules that has led to even the most meritorious review requests (called “institution requests”) being denied – without ever considering the merits of the case itself. Worse yet, Director Iancu has put these new roadblocks in place without any opportunity for public comments, with no formal rulemaking process and with no ability to appeal for judicial review. US*MADE recently joined 14 other leading think tanks and industry associations in protesting these actions.

These changes are already leading to harmful but unsurprising results: patent lawsuits are once again on the rise and in particular, lawsuits brought by patent licensing entities that produce no goods or services have exploded.

In late August, some of the nation’s leading companies took the rare step of filing a lawsuit against the USPTO to stop the agency from thwarting the purpose of the AIA – to restore access to the efficient review of invalid patents. That lawsuit is now pending.

These new PTAB decisions are illogical and run directly counter to the intent of Congress. IPR allows only the most truly questionable patents to get a second look to see if they should have ever been granted in the first place. With only 8,500 patent examiners to review nearly 650,000 patent applications every year, it certainly makes sense that a few bad patents could slip through the cracks.

Before Congress created the IPR, the only way to adjudicate a patent infringement case was in the federal District Court. This could take five or more years and cost millions of dollars – even to win. An IPR takes 12-18 months and often costs under $1 million. While hardly inexpensive, it is a far more efficient and cost-effective way to invalidate the most unquestionably bad patents.

The IPR process is conducted by three PTAB judges. If a party requests an IPR for a patent, there is a two-step process for moving toward a review of the patent: first, the PTAB judges decide whether the IPR request has potential merit. If it does, they then ‘institute’ the IPR – or move the process to the second step – which is an actual trial over whether the patent should be invalidated or not. If they do not ‘institute’ the IPR, the process ends there.

Since passing into law, the IPR has worked very well. It is used judiciously: Of over 3 million patents currently in force, under 1,000 were partially or entirely invalidated by an IPR last year or the year before. Yet when IPRs do find patents to be invalid, their findings are upheld on appeal 9 in 10 times.

We applaud the effort by the companies who filed the APA case questioning the validity of the recent line of decisions by the PTAB put into place under Director Iancu and look forward to returning to the IPR process as set out by the America Invents Act.

Beau Phillips is Executive Director of US*MADE, a coalition of manufacturers working to protect U.S. employers from abusive patent litigation.

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