Q&A: Patents portfolio management and licensing
January 2017 | SPECIAL REPORT: INTELLECTUAL PROPERTY
Financier Worldwide Magazine
FW moderates a discussion on patents portfolio management and licensing between Paul Collier at Kirkland & Ellis LLP, Brian Hinman at Philips, and Joeeta Murphy at Stratagem IPM Ltd.
FW: Why is it important for companies to adopt robust patent portfolio management practices? What trends and developments have you observed in this area over the past 12 months or so?
Collier: Patents remain one of the most important tools to protect a company’s intellectual property, and the US Patent and Trademark Office (USPTO) continues to issue patents at record levels. In 2015, the USPTO issued over 350,000 patents, almost 100,000 more than it issued in 2010. While companies still seek patent protection, statistics suggest a growing reluctance to enforce their patent rights over the past few years. For example, 2016 saw a decrease in patent suits filed in US district courts, which continues a five-year trend. According to estimates, the number of suits filed in 2016 is expected to be around 4500, the lowest level since the America Invents Act (AIA) reformed patent law in 2011. There is little doubt that the reduction in district court filings is linked in part to the AIA and its establishment of post-issuance proceedings to challenge patent validity before the USPTO. Over the last five years, these administrative trial proceedings, most notably inter partes review (IPR), have become a prominent tool for those accused of patent infringement. Numerous reports have touted their ‘kill rate’ for invalidating patents, earning them the ‘patent death squad’” moniker. Nevertheless, there is reason to believe that this may be changing. This year has seen a plateau in IPR filings, with filings this year estimated to be roughly the same as 2015 levels. Although largely attributable to the decrease in district court filings, thereby reducing the need for an IPR, it also comes at a time when the USPTO’s bar for instituting an IPR trial appears to be rising – USPTO statistics show that institution rates have dropped materially from 2014. Whether this means that IPR proceedings are becoming less attractive for accused infringers, especially with the risk of estoppel for any invalidity arguments that are raised or reasonably could have been raised, is yet to be seen.
Murphy: Registered protection in the form of patents, design and trademarks are all costly to create and maintain, and can quickly become a liability if not managed. A good analogy is building a house to live in, let or sell. No one builds a house, a costly asset to create and maintain, to leave it standing empty. This is the equivalent of filing a patent or several patents and not managing them, merely paying the costs as they arise without ensuring the rights are worth having. To obtain a return on that investment, a robust management practice involving evaluation and re-evaluation of what each and every part of the portfolio is contributing to the business as it evolves is essential. As uncertainty with Brexit and the US government changes take effect, such ongoing review is even more essential in case action is needed to deal with a changing legislative environment.
Hinman: Companies are seeing drastic changes in the patent environment which may result in their hesitation on spending the money to expand their patent portfolios and hence to pursue robust patent portfolio management practices. Indeed, the validity challenges which have gained some success in the patent offices worldwide, and decisions like Alice Corp. v. CLS Bank International, in the US, have resulted in many patents not surviving such scrutiny. In Alice, the issue in the case was whether certain claims about a computer-implemented, electronic escrow service for facilitating financial transactions covered abstract ideas ineligible for patent protection. The patents were held to be invalid because the claims were drawn to an abstract idea, and implementing those claims on a computer was not enough to transform that idea into patentable subject matter. This decision has resulted in setting a precedent for other such cases where such patentable subject matter is in question. However, in my opinion, such decisions as well as the increasing frequency of validity challenges should not stop companies from pursuing a more robust patent portfolio approach.
FW: Could you outline the main challenges facing companies when licensing their patent rights? What portfolio management techniques can be deployed to maximise the value of intellectual property assets in this context?
Murphy: The key to effective licensing is to understand the market, as well as the full potential of the technology protected by the patent rights. It is also vital to fully understand the potential licensees and what they are capable of commercialising. In doing so, a licensing strategy that ‘salami slices’ the rights to ensure each licensee is given just those rights needed for the commercialisation they are capable of delivering, will maximally leverage the rights. Slicing by geography, product or application are all typical ways to structure a licensing strategy. To be able to license a later dated narrow patent covering the specific product or application, it is useful if the technology is generic and the patent rights are broad. That way the licensee obtains a defined field of use licence under the generic IP and all the rights under a specific patent giving them two ‘layers’ of comfort, and the licensor obtains an extended term of revenue.
Hinman: One of the main challenges companies face when licensing their patent rights is that they have to be prepared for what may be a long period of time before such deals get consummated. The licensing world has morphed tremendously over the past five years and it is much more difficult to close such transactions, for a variety of different reasons, not the least of which has to do with whether or not such patents are indeed valid. Validity challenges have become much more common and companies often wait for the results of such challenges in the patent offices before they decide to take a licence. This makes it much more difficult for the licensors and adds much more time to these discussions. Add to this the complexity of the Standard Essential Patent (SEP) licensing environment, which is still very much in flux at the moment, and the inability in many cases for such licensors to secure injunctions in the courts. Having a strong patent portfolio that contains high quality patents that can weather the storm of validity challenges is essential for licensors in this very difficult licensing climate.
Collier: For licences not prompted by litigation, the parties enter the licence with a sense of collaboration and anticipated cooperation, not conflict. When parties are getting along, no one wants to sour the moment by creating contingencies for potential disputes. But this is precisely the time where this planning must occur. Specifically, licensees should consider forum selection and binding arbitration clauses. Having a favourable forum when a dispute arises can significantly improve both the efficiency and effectiveness of conflict resolution. Over the past several years, it has become more common to include a binding arbitration clause in a patent licence agreement. An arbitration proceeding often grants the arbitrator the discretion to narrow disputed issues and streamline the discovery process, resulting in a proceeding that is likely less expensive and more efficient than litigation. There are, however, certain rules that apply to arbitration that should be considered when including a binding arbitration clause and deciding whether to forgo traditional litigation.
FW: Given the dominating presence of IP in many M&A transactions, how should acquirers go about ensuring that their due diligence processes are robust and identify full value in these assets?
Hinman: In the case of a divestment, companies must be able to effectively value the IP in their own portfolio in order to convey this value to the potential acquirer. In the case of an acquisition, these companies must be able to effectively value IP that is owned by the acquired party. The due diligence process must include a complete inventory of all IP assets, the encumbrances, the costs and fees associated with maintaining such a portfolio and a justification for the relevance of the portfolio to the business that is being divested or acquired. This should include solely owned and also jointly owned IP, and copies of any relevant licensing agreements associated with the IP. M&A transactions are very time consuming and difficult to navigate if you do not have the right legal and business teams to ensure that your checklists and timelines are adhered to.
Murphy: The due diligence process should be one of the first activities that is instructed during an M&A transaction. Depending on the nature of the target, the IP situation can be complicated and require significant time and effort to unravel issues of ownership, validity and infringement. Identifying issues at an early stage provides the opportunity for both parties to the M&A transaction to identify potential resolutions which may not be possible later on in the transaction. Certain issues may have an impact on the acquirer’s valuation of the target, hence early identification can be crucial for there to be any chance of the M&A transaction completing. IP can be the main, or the only, asset that the target has, and will likely contribute up to 80 percent of the target’s value. Therefore, the importance of a robust due diligence process cannot be emphasised enough.
FW: Have there been any recent, high-profile cases involving patent portfolio infringement which have grabbed your attention? In what way do they demonstrate the importance of sound portfolio management and licensing practices?
Collier: The Supreme Court’s recent decision in Halo Electronics Inc. v. Pulse Electronics Inc. has significance not only for its impact on the wilful infringement standard, but also because it reverses a trend of recent Supreme Court and Federal Circuit decisions that collectively gave the impression of making it less attractive for a patent owner to assert their patent rights. Alice Corp. v CLS Bank Int’l is the most notable of those decisions, limiting patent eligibility for software implemented on a generic computer. Halo, however, runs counter to that trend. In Halo, the Court relaxed the standard for obtaining enhanced damages for wilful infringement, overturning the Federal Circuit’s rigid Seagate two-part test that had required a finding of “objective recklessness” even where there was clear subjective intent. The Court’s ruling can be seen as an extension of the Court’s Octane Fitness decision, which similarly relaxed the standard for receiving attorney’s fees for exceptional cases, as both grant the district court more deference for awarding damages where evidence of bad behaviour exists.
Murphy: A disturbing number of patents in the US have been found invalid by US courts this year for being directed to unpatentable subject matter, with the Isis case, licensed to Sequenom, being a good example. Patentees should remember that the law, and the courts’ interpretation of the law, changes over time and that while a granted patent is the initial aim, that should not be considered the end of the patenting process. While patent prosecution ceases upon grant by the patent office, filing continuation applications in the US is a relatively cheap activity. Patentees, and particularly licensees of patents, should be advised to file continuation applications in the US upon obtaining an allowed set of claims in a patent family. Having a pending application can help mitigate the risk that your precious assets are found invalid or not infringed when the time comes to actually use those patents in court. With respect to licensees, while it may seem like a good idea to take a licence to a patent owned by a third party and leave the costs of patent prosecution with the third party owner, there is a substantial long term benefit to the licensee in being able to direct prosecution of those patents.
Hinman: There are two recent cases which are relevant. On 16 July 2015, the Court of Justice of the European Union in Germany (CJEU) handed down its long-awaited judgment in Huawei Technologies Co. Ltd v ZTE Corp., ZTE Deutschland GmbH , concerning the potential for enforcement action by holders of SEPs to infringe EU competition rules against abuse of a dominant position. The CJEU ruled that the holder of a SEP that has committed to licence its SEP on FRAND terms may be found in breach of the competition rules by seeking an injunction against a potential licensee in certain circumstances. The second case is Samsung v. Apple. Samsung appealed the Federal Circuit’s ruling that it should pay $399m in profits from its Galaxy phones to Apple under infringement of design patents. Instead each party, as well as the Office of the Solicitor General, proposed their respective approaches to two questions about design patents: what test or standard should be used to identify the ‘article of manufacture’ in question, and how should the value of that article be determined. Samsung argues that the burden of proof should belong to the patentee, as is true in most damages cases, while Apple argues the opposite. This has the attention of many patentees who hold design patents, as they await the ultimate court decision on this issue.
FW: To what extent is today’s regulatory environment impacting on patent management and licensing considerations?
Murphy: The Brexit vote will not have an immediate effect on patent management or licensing considerations, but it could have a more major impact in the future and is certainly being much discussed. The Unitary Patent, a single patent covering the whole of Europe, and the Unified Patent Court are to be established in 2017, after decades of negotiation. As the European Patent Office is not based on or affected by the EU, the Unitary Patent System will no longer cover the UK unless some way is found to implement it and for the UK to ‘stay in’. The UK is the third largest filer of patents in Europe after Germany and France and there are concerns as to whether the Unitary Patent System can continue if the UK is not a party. Moreover, London is to host the division of the Unified Patent Court hearing chemical and pharmaceutical cases, and even if the UK does remain part of the Unitary Patent, it is hard to imagine the Court will still be staged in London. Much more dramatic is the possible effect on EU trademark and design registrations, which will cease to have effect in the UK with some form of re-registration of existing EU rights as UK national registration possibly being required.
FW: What do you consider to be the biggest challenges facing patent practitioners when it comes to protecting and enforcing patents?
Hinman: Maintaining patent quality is a difficult challenge in today’s IP environment. The patent offices worldwide struggle with this issue, since the sheer volume of patent applications pending issuance continues to grow and this affects the associated backlog with the patent examiners. The patent offices have to figure out ways to address this challenge such that the patents which are ultimately issued contain claims that are of sufficient quality for the patent owners to be able to protect and enforce such patents.
Collier: One challenge for those seeking to enforce their US patent rights continues to be the broad accessibility of the USPTO’s post-issuance proceedings to challenge a patent’s validity. As an initial matter, a patent infringement defendant may file an IPR request and if instituted, may use it as a basis to stay the district court action. Further, the IPR proceeding applies standards that are generally more favourable for a finding of invalidity than a district court proceeding. For example, these proceedings apply a broader claim construction standard and no presumption of patent validity applies. But if a final decision is issued and the patent survives, the accused infringer may be estopped from later raising any invalidity ground that they raised or reasonably could have raised, during the IPR. This is a risk that accused infringers must carefully consider before initiating an IPR proceeding. Another challenge comes from the more rigid standards generated by recent Supreme Court and Federal Circuit decisions for patent eligibility, most notably the standard for software patents under Alice Corp. v CLS Bank International. In Alice, the Court narrowed patent eligibility for software implemented on a generic computer under Section 101 as an abstract idea. Since Alice, the number of rejections by the patent office based on Section 101 – which addresses patentable subject matter under US patent law – has dramatically increased, prompting particular concern for the future of software patents.
Murphy: One of the biggest challenges facing patent practitioners when protecting or enforcing inventions is to be informed at too late a stage that the invention has already been disclosed by the inventors at a public presentation or article before the patent application was filed. Then it becomes a scramble to salvage any remaining novel and inventive parts of the invention that were not in the public disclosure. The situation is even worse if the disclosure comes to light when enforcing the patent against a potential infringer, as the publication could invalidate the patent in its entirety. In some jurisdictions, such as the UK, it is possible to make post-grant amendments allowing the patent to be maintained in a limited form, but the infringer could escape. We urge inventors to give their practitioners full disclosure of any publications they have made or are about to make, to avoid problems down the line.
FW: How do you expect patent portfolio management strategies to develop in the years to come?
Collier: As Alice and the many related cases that have followed it have shown, the eligibility of software patents is an area of substantial focus and concern. The Federal Circuit’s recent decision in Intellectual Ventures I LLC v. Symantec Corp. has shed further light on this topic. In an oft-discussed concurrence, Judge Mayer asserted “all software implemented on a standard computer should be deemed categorically outside the bounds of section 101”, which has been interpreted by some as a pronouncing the end of software patents under Alice. While the scope of the Court’s Alice ruling will continue to be the subject of intense debate, software patent eligibility, needless to say, will be an area of scrutiny in coming years and its contours will develop further with future court rulings. On the international front, the announced impending withdrawal of the United States from the Trans-Pacific Partnership (TPP) agreement has the potential to impact the international patent landscape. The TPP agreement sought to harmonise patent rights among members, providing for increased protections for patent owners in Asian markets. Assuming the new regime follows through with its intention to withdraw, it is unclear what impact that will have for those standardisation efforts under the TPP agreement and whether those efforts will be revived and continued in another form.
Murphy: Patent portfolio management strategies in the coming years will need to develop to a more dynamic management system, taking account of the changing needs of business and the global changes in intellectual property laws as well as wider commercial and ethical considerations. Patent filing strategies and extent of territorial cover, in particular, are likely to change to conserve resources while still protecting key markets. Establishment of the Unitary Patent, which can be obtained from a European Patent, is likely to make a significant impact on the filing strategy in Europe, where we foresee a combination of national and unitary patents co-existing. A regular review of the competition, the products and regulatory requirements will become more important to ensure key inventions are patent protected and supplemented with second and third generation patents to take advantage of the changing situations.
Hinman: Companies need to have a balanced approach to determining and executing an effective IP strategy, which includes an integrated intellectual asset management (IIAM) approach. This requires companies to take a holistic view of determining the right portfolio mix of IP – patents, trade secrets, copyright, trademarks and design rights – to secure in order to fully enable this IP strategy to be executed. With areas like the Internet of Things (IoT) becoming much more prevalent, companies are forced to consider trade secrets, for instance, as a more prominent way to secure their IP rights. Patents will continue to be an extremely important means of IP protection, but other forms of IP will also continue to grow in importance, and companies must recognise the benefits of each form of IP and determine the right mix to protect their respective business interests.
Paul Collier is a trial lawyer who focuses his practice on intellectual property and high profile litigation matters involving complex technical issues. Mr Collier also has extensive experience litigating intellectual property and complex litigation matters in federal and state courts, as well as the United States International Trade Commission. He has tried numerous patent infringement and litigation cases in various district courts around the country and spent a considerable portion of his practice focusing on disputes involving telecommunication technology. He can be contacted on +1 (312) 862 2471 or by email: email@example.com.
Brian Hinman is chief intellectual property officer at Philips, where he leads a worldwide team in conducting intellectual property management, strategy, litigation, standards, patent portfolio management and IP monetisation. He previously co-founded Unified Patents Inc., served as vice president of IP and licensing at InterDigital and also vice president of IP and licensing at Verizon. Mr Hinman was also the founding CEO of Allied Security Trust (AST), vice president of IP and licensing at IBM and director of licensing at Westinghouse. He can be contacted on +31 (40) 274 0555 or by email: firstname.lastname@example.org.
Joeeta Murphy is a chartered patent attorney and a European patent attorney specialising in the life sciences and handles a diverse range of technologies including stem cells, RNAi, small molecules, antibodies, peptides and collagen based scaffolds for start-ups, multinationals and universities. Having joined Stratagem in 2010, Ms Murphy brings expertise in strategic management and development of IP portfolios, drafting and prosecution, freedom to operate analysis and due diligence for in-licensing/out-licensing and M&As. She can be contacted on +44 (0)1223 550 740 or by email: email@example.com.
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