United States: Q1 Data Update: The New Year Brings Greater Clarity As The Pendulum Swings Back

Last Updated: April 10 2018
Article by RPX Corporation

The end of 2017 left the patent ecosystem at a crossroads, with pending judicial rulings, new strategies by plaintiffs and defendants, market realignments, and the possibility of further reform seemingly poised to swing the pendulum back toward patent owners. While much remains to be resolved, the first quarter of 2018 brought some clarity—or, at least, further change—to certain notable points of uncertainty and controversy, including the further evolution of the law surrounding patent eligibility and pushback against certain novel strategies designed to avoid inter partes review. The patent market, in turn, saw new divestitures further the shift away from formerly dominant players as newly resurgent NPEs continued to solidify their recently assumed roles at the forefront of patent assertion.

Litigation Update: NPEs Hold Steady, While BioPharma Operating Companies Rush to File

Patent Venue: Stabilized Since TC Heartland

Alice Upended: Berkheimer Casts Doubt on Early Eligibility Challenges

PTAB: The Impact of Aqua Products, and Setbacks for Tribal Sovereign Immunity Deals

Market Realignments: Notable Portfolios Change Hands, Some NPEs Expand, and Others Diversify

Trump Administration: New USPTO Director Calls for Stability, While Antitrust Head Stirs Controversy

District Court Litigation

The first quarter of 2018 saw roughly the same amount of patent litigation as in Q1 2017, with 931 defendants added to infringement suits filed (compared to 928 filed within the same period last year). For their part, NPEs added 394 defendants in the first quarter of 2018, or around 42% of those sued; while operating companies added 537 defendants, or 58%. By contrast, NPEs filed the majority of infringement litigation one year ago, adding 495 defendants, versus the 397 added during Q1 2017 by operating companies. The greater share of operating company litigation in Q1 2018 included a notable increase in the number of lawsuits filed in the biotechnology and pharmaceutical market sector, which saw 82 defendants sued in 130 cases filed in that quarter, compared to the 57 defendants sued in 97 cases filed in that sector during the same period last year.

That increase in biopharma litigation may be partly the result of the unique uncertainties caused for drug companies by the Supreme Court's opinion in TC Heartland v. Kraft Foods Group Brands. Since that May 2017 holding restored a narrower definition of where patent defendants "reside" for venue purposes, subsequent litigation has placed greater importance on another prong of the patent venue statute, under which venue is proper wherever a patent defendant has a "regular and established place of business" and has committed "acts of infringement". In pharmaceutical lawsuits filed under the Hatch-Waxman Act, the filing of an Abbreviated New Drug Application (ANDA) is considered the act of infringement—an anticipatory and "highly artificial" act that has no true location. That ambiguity has caused a split among courts considering venue for Hatch-Waxman litigation, with one side finding venue under the "acts of infringement" prong just in the district where the defendant prepared and/or submitted an ANDA, and the other where the defendant intends to market the drug and has a regular and established place of business (essentially, nationwide jurisdiction). Thus, the recent glut of biopharma suits could be the result of drug company plaintiffs looking to lock in the exclusivity period offered as a Hatch-Waxman remedy as soon as possible, should the split ultimately limit their available venues.

Patent Venue Overall

While the issue of Hatch-Waxman venue remains in flux, the overall distribution of venue has mostly stabilized for NPE litigation now that parties and courts alike have adjusted to TC Heartland. In Q1 2018, the District of Delaware was the top district for NPE suits, followed closely by the Eastern District of Texas, with those two venues accounting for just under half of all infringement cases brought during that period. The Northern District of California, the Northern District of Illinois, and the Central District of California, in turn, took the remaining spots of the top five during the first quarter. (This list largely matches the top districts from the same period of 2017.) Delaware and the Central District of California were also the first and second most popular districts for operating company litigation in Q1, while their rankings were reversed in 2017 post-TC Heartland.

Berkheimer and Its Impact on Alice

The Supreme Court's 2014 decision in Alice v. CLS Bank has undoubtedly shifted the balance of power in patent infringement litigation, allowing many defendants to avoid litigation costs by permitting subject matter eligibility challenges much earlier in litigation. However, February's decisions in Berkheimer v. HP and Aatrix Software v. Green Shades threaten to change both the timing and nature of the Alice challenge. In Berkheimer, the Federal Circuit reversed a district court's grant of summary judgment of invalidity under Alice, finding that the inventor had raised sufficient issues of material fact regarding whether the asserted patent was sufficiently inventive (the second step of Alice). Shortly after, the Federal Circuit applied this same reasoning in Aatrix, ruling that unresolved factual disputes over inventiveness also barred dismissal under Alice at the earlier Rule 12 stage.

These decisions further muddy the analysis underlying the Alice test; while courts have historically held that an evaluation of subject matter eligibility under 35 USC Section 101 is primarily a question of law, Berkheimer and Aatrix elevate the role of facts to a much greater extent than previous Alice case law. Perhaps more importantly, if courts prove receptive to plaintiff opposition briefs that assert facts supporting the inventiveness of challenged patents, these recent cases could move patent subject matter eligibility from a threshold issue to one not appropriate to address until much later, even at trial.

RPX data currently show that as of March 22, 2018, 66% of the patents challenged in district court under Alice had at least some of their claims cancelled. Broken down by case stage, 72% of the patents challenged in Rule 12 Alice motions saw claims cancelled, while that success rate drops to 57% for motions for summary judgment. There is also significant variation among the districts that have seen the greatest number of Alice challenges by patent: the District of Delaware, which has ruled on the validity of the greatest number of patents under Alice, has invalidated patents at around the same rate as the overall district court average, 66%, while the Northern District of California (which holds the number-two spot) has invalidated 74% of the patents it has reviewed for eligibility. Unsurprisingly, the Eastern District of Texas (the third most prolific Alice district) has the lowest success rate of the top five, at just 48%, while the Central District of California and the Eastern District of Virginia had success rates of 63% and 82%, respectively.

While Berkheimer has already led to the denial of multiple Alice motions, other judges have applied the decision more cautiously, with one declining to consider evidence of inventiveness when the claims themselves did not contain the cited inventive concept (in D&M Holdings v. Sonos). Berkheimer's true impact should become clearer in the months ahead, and RPX will continue to provide analysis of the resulting case law as it evolves.

PTAB Filings and Claim Amendments

The Patent Trial and Appeal Board (PTAB) saw 411 petitions for AIA review filed in Q1 2018, including 376 petitions for inter partes review (IPR), 12 petitions for covered business method review, and 23 petitions for post-grant review. A similar number of petitions were also filed in Q3 (392) and Q4 (373) of 2017, indicating that filings have now stabilized and begun to rebound after rates fell in both Q1 and Q2 of that year. (Those quarters saw 566 and 468 petitions filed, respectively.) That decline was likely in anticipation of the Supreme Court's ruling in Oil States v. Green's Energy Services, in which the constitutionality of IPR is under review; certiorari was granted for that case in June 2017, shortly before the end of the second quarter.

PTAB and Parties Adapt to Aqua Products

Meanwhile, the PTAB and parties alike have continued to adapt to the Federal Circuit's October 2017 decision in Aqua Products v. Matal, in which the majority held that the Board must place the burden of proof for the patentability of proposed new or amended claims on the petitioner, rather than on the patent owner as under the PTAB's previous rules. The decision significantly lowers the threshold for a motion to amend, effectively requiring that the patent owner merely show that the proposed amendments do not expand the scope of the patent or introduce new subject matter to become part of the IPR process. This change may shift the strategic implications of an IPR petition dramatically for petitioners/defendants, given both the danger that non-infringement could end up being harder to prove for amended claims and the fact that the petitioner may need to rely on additional prior art, thus broadening the scope of estoppel.

Since the Federal Circuit issued its decision in Aqua Products, patent owners have filed motions to amend at a greater rate than they did previously, filing an average of 8.7 such motions per month through March 22, 2018 (compared to the prior average of 5.5 motions to amend per month). RPX data also indicate that the PTAB has been granting those motions at a higher rate than before Aqua Products. Of the 19 motions to amend that have received rulings on the merits since that decision was published, four have been granted in whole or in part through March 22: a 21.1% success rate, compared to 8.2% before Aqua Products.

PTAB Rejects Tribal Sovereign Immunity IPR Defense

In late 2017, the Saint Regis Mohawk Tribe provoked a heated public debate through its controversial deal with Allergan, under which the tribe acquired the patents for the company's flagship Restasis drug in order to shield the patents from IPR using the tribe's sovereign immunity. However, despite early fears that the strategy would provide an end-run around the IPR process, the tribe hit a roadblock in late February when the PTAB denied its motions to dismiss the IPRs against the Restasis patents, ruling that tribal sovereign immunity did not apply in the context of IPR. The tribe has since appealed that decision to the Federal Circuit. In the meantime, no other companies have since announced similar partnerships with Native American tribes, likely in anticipation of the Federal Circuit's ruling.

Market Developments

In the first quarter of 2018, RPX continued to observe the balance of power shift in the patent market through certain large patent assignments, including sales from both NPEs and operating companies, and through the diversification of NPEs previously focused solely on patent assertion.

  • In 2017, Intellectual Ventures LLC (IV) indicated that it will stop acquiring patents and accelerated the divestiture of assets from its massive patent portfolio. One of the most notable beneficiaries of those divestitures has been patent monetization and advisory firm Dominion Harbor Enterprises, LLC. On March 5, the NPE announced that it had acquired from IV a portfolio of more than 1,000 patents assets that originated with American Express, with that portfolio set to be monetized by Dominion's subsidiary Liberty Peak Ventures LLC. The acquisition came just a month after Dominion announced its purchase of more than 1,200 LCD patents from NEC, assets that will apparently be monetized by the NPE's subsidiary Vista Peak Ventures LLC. In addition, Dominion has also begun to assert, through subsidiary Monument Peak Ventures, LLC, yet another major portfolio obtained from IV in February 2017, comprising assets that originated with Kodak.
  • In February, publicly traded Pendrell Corporation disclosed that it had divested the majority of one of its significant patent portfolios, held by subsidiary Pendragon Wireless LLC, to an unspecified buyer. The recipient turned out to be Australian NPE Uniloc Corporation Pty. Limited, which has since begun asserting a subset of the over 400 patents acquired from Pendrell against manufacturers of various types of consumer electronics. This continues Uniloc's recent pattern of asserting patents acquired from outside sources, before which the NPE had litigated only homegrown patents.
  • Q1 also saw NPEs assert multiple patent portfolios that were acquired from operating companies. In early January, VenKee Communications LLC, an affiliate of patent monetization firm IP Valuation Partners LLC (d/b/a IPVal), acquired multiple networking patents from Harris Corporation. Last month, VenKee began asserting the patents in litigation against providers of enterprise networking equipment and network management software. Meanwhile, also in March, DIFF Scale Operation Research, LLC began asserting a portfolio of patents acquired last November from CommScope against a host of semiconductor and networking companies. In addition, the quarter also saw multiple patent transfers from Panasonic, including assignments to publicly traded Xperi Corporation and to an entity controlled by Brian Yates, a patent attorney who has been linked to numerous litigating NPEs.
  • On March 1, publicly traded InterDigital, Inc. announced that it had made a binding offer to acquire Technicolor's patent licensing business. The Technicolor portfolio reportedly includes more than 21,000 patent assets, including over 2,500 patents related to video coding; InterDigital says that it will "deploy the acquired assets into its existing mobile industry licensing efforts, and extend its licensing program to new activities in the consumer electronics field". Under the terms of the acquisition, Technicolor will receive "42.5% of all future cash receipts (net of estimated operating expenses) from InterDigital's new licensing efforts in the consumer electronics field".
  • The first quarter also saw two publicly traded NPEs continue to diversify their business models through investments in cryptocurrency. Marathon Patent Group, Inc. has been directly engaged in cryptocurrency mining starting with its November acquisition of mining company Global Bit Ventures, Inc., and in February Marathon announced that it had purchased additional mining equipment. Also in February, Acacia Research Corporation announced that it had made a $1M investment in Bitzumi, a company operating in the cryptocurrency and blockchain industries.

While some longtime NPEs have begun to pivot toward more traditional operations, other frequent plaintiffs still appear committed to patent assertion. For example, publicly traded Quarterhill Inc. filed new litigation against mobile device manufacturers in Q1 despite its shift toward the acquisition of Industrial Internet of Things businesses, announced last year; and Acacia has continued to litigate existing cases in two of its most noteworthy campaigns in both the US and Europe. In addition, publicly traded Finjan Holdings, Inc. continues to wage its long-running campaign against providers of cybersecurity products; the NPE recently entered into a settlement with Symantec for up to $110M and filed new litigation, targeting Carbon Black, in March.

The Trump Administration on Patent Policy

The patent market could also see significant changes later this year should reform efforts continue to gain traction. As previously reported by RPX, several key proponents of defendant-focused patent reform have either retired or resigned from Congress due to political scandals. Meanwhile, patent owners were given cause for optimism by Senator Chris Coons's (D-DE) June 2017 introduction of the STRONGER Patents Act, which in part seeks to limit the speed, scope, and availability of IPR, make repeated PTAB challenges much more difficult, and bring back the prospect of injunctive relief in patent litigation. On March 20, Rep. Steve Stivers (R-OH) and Rep. Bill Foster (D-IL) introduced the bill's counterpart in the House, the STRONGER Patents Act of 2018.

As patent owner-centric reform efforts proceed in Congress, the first quarter of 2018 also provided further indications of the Trump administration's developing posture on patent issues. Newly confirmed USPTO Director Andrei Iancu echoed his earlier calls for stability in a speech delivered at his February 23 swearing-in, emphasizing the importance of providing "reliable, predictable, and high-quality IP rights" that give confidence to both owners and the public. Iancu has since continued to speak to the importance of predictability in subsequent interviews, but has not publicly outlined any specific reforms with respect to the Patent Office—nor has he yet taken a position on the STRONGER Patents Act. He has, however, stated that the US IP system should be "industry neutral".

Meanwhile, the administration has provided clearer indications of its policy goals with respect to standard essential patent (SEP) licensing. In a speech given in November, Makan Delrahim, head of the Department of Justice's Antitrust Division, stated that the government's prior antitrust policy had been overly skewed toward SEP implementers, focusing too much on patent owners' strategic delays in licensing to gain more favorable terms (hold-up) but not enough on such delays by implementers (hold-out). Delrahim's resulting call for greater "symmetry" between these competing policy concerns has sparked a heated debate on both sides of the issue, with a group of prominent tech companies sending Delrahim a letter warning that his proposed policies could "undermine fundamental patent licensing obligations" that they and their customers rely upon. A group of academics and former government officials, including former Federal Circuit Chief Judge Paul Michel and former USPTO Director David Kappos, have expressed their support for Delrahim's proposals. FTC Commissioner Terrell Sweeney, appointed by President Obama in 2014, has also pushed back against Delrahim's statements, asserting that there has long been a bipartisan consensus, backed by extensive scholarship, underlying the government's focus on hold-up.

Finally, the Trump administration has also weighed in on patent cases pending before the Supreme Court, most recently in WesternGeco v. Ion Geophysical. In that case, for which certiorari was granted in January, the Court will review the Federal Circuit's holding that lost profits cannot be recovered for patent infringement occurring outside the US. Solicitor General Noel Francisco argued for the reversal of that ruling in a March amicus brief, asserting that the decision was "inconsistent with the text and purpose" of the statute governing patent damages.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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