The resurgence and revaluation of US patents
January 2019 | SPECIAL REPORT: INTELLECTUAL PROPERTY
Financier Worldwide Magazine
January 2019 Issue
During the past decade, domestic and international corporations have seen the value of their US patent rights steadily erode. Deep concern regarding a faltering global economy and changes to US patent policy and enforcement, combined with the high cost of obtaining and enforcing such rights, drove companies to re-evaluate investing in US patent rights. This is evidenced by the abandonment rate of US patent applications, which more than doubled between 2005 and the start of the global recession in 2008, and remains at the higher rate today.
While the abandonment of US patent applications has increased, the filings for US patent rights have remained relatively constant before and after the global recession. In fact, the US courts and United States Patent Office (USPTO) have taken recent actions that strengthen US patent rights and valuations. Included among those changes are: (i) broadening the scope of permissible damages for infringement; (ii) long-awaited changes to the patent examination and post-grant nullity proceedings; and (iii) the appointment of a pro-patent USPTO director.
How did we get here?
For years, US and foreign companies protested that the USPTO issued poor quality patents to inconsequential improvements that inhibited the ability to research and develop real innovations. Businesses also complained that damages awarded in litigation often exceeded the value of the inventive rights being asserted. Companies lobbied all branches of the US government for change.
In 2006, the US Supreme Court ruled injunctive relief should not be automatically awarded when a patent was held valid and infringed, despite past practice to that effect. Rather, a patent holder had to prove entitlement to an injunction. This holding lessened the negotiation leverage of a patent holder and made it more difficult and expensive to obtain injunctive relief.
This decision heralded a new, activist role of the Supreme Court in the field of patent law. To the extent patent law is unique, the Court sought to establish a single set of standards applicable to all technology types, albeit not always successfully. This is most evident in the area of patent eligibility. The Supreme Court has long held laws of nature, natural phenomena and abstract ideas to not be patentable. While seemingly straightforward, the application of the exceptions became increasingly difficult, especially with respect to software and medical diagnostic devices that utilised laws of nature or abstract ideas to perform functions.
Between 2010 and the present, the courts attempted to clarify what constituted patentable subject matter. The result was a complicated patchwork of decisions that made sense when applied to the particular facts of the case decided, but was less useful in creating a standard framework for future cases, and resulted in inconsistent decisions on similar facts. Initially, the USPTO broadly interpreted the US Supreme Court holdings to potentially disallow broad categories of otherwise patentable subject matter.
During this same time frame, courts issued numerous opinions requiring damages to be apportioned to compensate the patent owner only for the incremental value that their invention added to the commercial product, and nothing more. The courts also further restricted the type and form of evidence that could be relied upon and required that the evidence be closely tied to the facts and circumstances of the particular case in dispute. These rulings had the effect of greatly reducing damages awards for patent infringement.
Congress also took action, passing the America Invents Act (AIA) in 2011, which authorised post-grant nullity proceedings before the USPTO. The proceedings rapidly obtained a reputation of being patent ‘death squads’. The initial high rate of invalidation for instituted patent claims drove some companies to accept smaller settlements and damages awards, rather than risk the nullification of their patent rights.
Finally, Congress also passed the Defend Trade Secrets Act in 2016. This Act strengthened trade secret protection by making misappropriation of trade secrets a violation of federal law and providing federal remedies for misappropriation. Companies, accordingly, considered protecting inventive subject matter as trade secrets rather than as patented subject matter.
While industry protested that the pendulum had swung too far in the contra-patent direction, divisive US politics and disparate industry views regarding the appropriate scope of patent protection prevented a legislative resolution.
The resurgence of US patent rights
Recent developments, however, promise to re-establish the value of obtaining and enforcing US patent rights.
On 22 June 2018, the Supreme Court held that patent owners could recover for infringement damages for foreign sales. The Court’s opinion relates to a very specific charge of infringement under 35 U.S.C. 271, whereby components for the patented invention were supplied from the US and assembled outside the country in a manner that would infringe if the components had been assembled in the US, provided (i) the component was not a staple article and (ii) not capable of substantial non-infringing use. This scenario does not arise that often, but greatly expands the potential recovery for infringement. The rationale provided by the Supreme Court for permitting extraterritorial damages, however, was broad and sweeping.
At least one lower court has applied the Court’s rationale to acts of direct infringement under 35 U.S.C. 271(a), which, historically, only allowed damages for infringement within the US to permit the recovery of damages for foreign sales resulting from direct infringement. If this holding is affirmed, patent owners can expect to obtain damages, for example for foreign lost sales where the product is made in the US, but is sold abroad.
The confirmation of a new USPTO director, Andrei Iancu, is also a positive development. Mr Iancu is widely viewed as being pro-patent and is likely to implement changes to the patent examination and review policy which will favour patent holders. During a speech at the Patent Policy Conference, Mr Iancu emphasised that it was time to focus on the positives of innovation and to reclaim the US’ position as global leaders in patent policy by “creating a pro-innovation, pro-IP dialogue and increasing the reliability of the patent grant”.
In conformance with Mr Iancu’s remarks, the USPTO appears to be taking steps to strengthen patent rights and to make nullity challenges more predictable. With respect to the examination of newly filed patent applications, Mr Iancu announced that the USPTO planned to simplify the process of determining whether an invention was directed to patent eligible subject matter, or fell into one of the recognised exceptions. As part of that process, the USPTO will only reject claims for lack of patent eligible subject matter if the subject matter of those claims falls into specifically defined categories of judicial exceptions to patentable subject matter and does not integrate that otherwise patent ineligible subject matter into a practical application. This approach will lend much needed clarity and predictability to the examination process and will allow inventors to craft claims that will protect their inventions.
Likewise, under Mr Iancu’s direction, the USPTO has made changes to post-grant proceedings that will lend greater certainty and predictability to such proceedings. For example, previously, the PTAB applied the “broadest reasonable interpretation” standard to challenged claims. This change ostensibly favours the challenger because it purportedly results in broader interpretations of the claims that cause the claims to fall within the scope of prior art. But with respect to post-grant petitions filed on 13 November 2018 or later, the USPTO has determined that patent claims will be construed by the Patent Trial and Appeal Board (PTAB), using the same standard as a district court. This is generally considered a more conservative standard that may avoid the claims reading on the prior art – although, practically, that effect is probably limited to a few cases.
Additionally, the USPTO updated its Trial Practice Guide for post-grant nullity proceedings to clarify the factors for the institution of a proceeding, to explain the proper use of expert testimony and to provide for a pre-hearing conference, which would help the parties understand the issues of interest to the PTAB judges and hopefully expedite the resolution of some of those issues. Mr Iancu also stated that the USPTO would be revising the claim amendment process in post-grant proceedings to permit meaningful opportunities to draft patentable claims in light of the prior art and arguments presented by the challenger. Each of these procedures is intended to provide for greater predictability in the outcome of a post-grant proceeding.
The recent judicial decisions expanding the scope of patent damages and the changes to USPTO practice to permit greater predictability of outcomes regarding the examination and post-grant review process will help reinstate public trust in the US patent system and restore the value of US patents.
Frank West is of counsel at Oblon, McClelland, Maier & Neustadt, LLP. He can be contacted on +1 (703) 412 7049 or by email: email@example.com.
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Oblon, McClelland, Maier & Neustadt, LLP