PAEs, IPRs and Improving the Patent System...PAEs, IPRs and Improving the Patent System Jay P. Kesan, Ph.D., J.D. Professor and H. Ross & Helen Workman Research Scholar University

PAEs, IPRs and Improving the Patent System

Jay P. Kesan, Ph.D., J.D.

Professor and H. Ross & Helen Workman Research Scholar

University of Illinois at Urbana-Champaign

All papers are available on SSRN, http://www.ssrn.com

http://www.ssrn.com/

The Role of Patent Assertion Entities (PAEs) in the Patent System

• Why PAEs exist?

• PAEs are serving a market need, and they are important intermediaries for some patentees

• Risk and uncertainty associated with representing patentees that do not have the ability to pay traditional hourly billing rates is prohibitive

• Most such patentees are shut out of the typical enforcement mechanisms available to large companies

The Role of Patent Assertion Entities (PAEs) in Patent System

• Taking the burden of enforcing patents through a contingency fee representation is an option available primarily for a select group of innovators with patent rights that are perceived as valuable before litigation commences

• PAEs together with contingency fee lawyers create avenues for appropriating rewards for valuable patent rights that are owned by such entities with limited resources including universities

Criticisms of Patent Assertion Entities (PAEs) in the Patent System

• They are opportunistic players in the system, they settle for nuisance amounts, far below the cost of litigation.

• They assert marginal patents and read patent claims expansively

• They create fear of hold-up by going to venues where they can get injunctive relief like the ITC

• There is a “leaky bucket” problem with PAEs, and the rewards do not inure to the benefit of inventors

Analyzing the Role of Patent Assertion Entities (PAEs) in Patent System

• David Schwartz and my work on PAEs is available on SSRN

• We also discuss Bessen and Meurer’s analysis of litigation costs and settlement expenses incurred by a subset of defendants in NPE cases

• We urge that we need a data-driven, objective approach; understand PAE vs. non-PAE patent litigation outcomes


• We analyzed the data reported by Prof. Feldman and looked at settlement rates, SJ losses rates and win rates for PEs, individuals, and monetizers

• We find no discernible statistical differences among the types of entities reported in that study

• We cannot say that there is a difference, either way, with 95% confidence among PAE plaintiffs and PEs, in terms of these variables


• Regarding the “leaky bucket”, we need to look at the data available; at least for publicly traded NPEs.

• For instance, the Acacia Research Group reported in 2011 that it paid more in royalties to inventors that it did to contingent fee attorneys who enforced their patents

• Need a baseline for comparison, and patent litigation costs for all parties are notoriously high


• Regarding asserting “marginal” patents…

• There are several studies including one by Michael Risch, one by Lemley, Allison & Walker, and several by economists, that patents asserted by NPEs are strong – at least based on metrics used by economists. Those include forward citations, number of technology classes, number of claims, etc…


• We need to get to the merits of these disputes

• We should ask:

– Are the claims likely invalid?

– Is the allegation of infringement untethered to the original invention?

– Is the quantum of damages sought based on a sound damages theory?

• We need to find lower transaction cost ways of doing things like determining patent validity

IPRs in the AIA

• IPRs have the potential (shorter, cheaper) to be an efficient mechanism to contest patent validity

• Compare and contrast IPRs to the invalidation trial regime in the JPO

• Empirical analysis of invalidation trials in the JPO

• Empirical analysis of dual invalidity decisions in the JPO and in the district court and high court in Japan

JPO Invalidation Trial

Threshold Standard

Grounds Novelty, obviousness, etc. – almost any grounds upon which a patent can be found invalid.

Availability Anytime during the life of the patent, even after expiration.

Patents Affected

Any issued patent

Appeal of Judgment

Appealable to High Court

USPTO Post-Grant Review Effective Mar. 16, 2013

USPTO Inter Partes Review Effective Sept. 16, 2012

“more likely than not” that at least one claim is unpatentable or raises a novel or unsettled legal question that is important to other patents

“reasonable likelihood” that petitioner will prevail as to at least one of the claims challenged

§ § 101 (patentable), 102 (novel), 103 (non-obvious), and 112 (Specification) - except best mode

§ § 102 (novel) or 103 (non-obvious) – and only on the bases of prior art consisting of patents or printed publications

During first nine months after issue

After the first nine months after issue, or after the termination of any post-grant review of the patent (whichever is later)

Patents with a filing date of 3/16/13 or later (i.e. Patents issued from applications subject to the first-to-file provisions)

Any issued patent.

Appealable to Federal Circuit Court of Appeals

Appealable to Federal Circuit Court of Appeals

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Estoppel None. But do courts defer to a JPO validity decision? Third parties who have not yet been involved in the earlier trials may file a request for another trial based on the same facts and evidence as the previous trials.

Scope 1 or more claims. If two or more, a request for an invalidation trial may be filed for each claim.



USPTO: Estopped with respect to the same claim on any ground that the petitioner raised or reasonably could have raised during PGR Civil or ITC Action: Estopped from asserting invalidity claim on any ground that the petitioner raised or reasonably could have raised during PGR Estoppel requires a final written decision, and does not apply to a petitioner who exited by settlement. Estoppel applies to petitioner, privy, or real party in interest (patent owner not estopped)

USPTO: Estopped with respect to the same claim on any ground that the petitioner raised or reasonably could have raised during IPR Civil or ITC Action: Estopped from asserting invalidity claim on any ground that the petitioner raised or reasonably could have raised during IPR Estoppel requires a final written decision, and does not apply to a petitioner who exited by settlement. Estoppel applies to petitioner, privy, or real party in interest (patent owner not estopped)

1 or more claims. Director may join multiple petitions against the same patent.

1 or more claims. Director may join multiple petitions against the same patent.


Anonymity Can file anonymously.

Duration One to two years, depending on the complexity of the case.

Termination Withdrawal can be made with consent of the patentee at any time before the trial decision becomes final and conclusive.

Amendment of Patent

May narrow / correct claims before appealing to High Court from lower court decision.

Decision-Maker

3-5 trial examiner panel



Not anonymous. Petition must identify all parties in interest.

Not anonymous. Petition must identify all parties in interest.

1 year or less from the date on which the Director notices the institution of a review.

1 year or less from the date on which the Director notices the institution of a review.

May be terminated upon joint request. May be terminated upon joint request.

May move to amend once during PGR. May move to amend once during IPR.

PTAB panel of at least 3 members PTAB panel of at least 3 members

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Who can request?

Anyone Two exceptions where only an interested person may request: 1) All joint owners did not

file application, or 2) Applicant was not the

inventor and did not succeed to the right to obtain the patent.

Relation to other proceedings



Any third party. Any third party.

Barred by earlier filing of civil action challenging validity. Later filings are stayed. Note: Counterclaims of invalidity do not bar PGR.

Barred by earlier filing of civil action challenging validity. Later filings are stayed. Note: Counterclaims of invalidity do not bar IPR.

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Cost The average cost of preparing and prosecuting an invalidation appeal before the JPO is from US$25,000 to US$120,000 – but may be more depending on the complexity of the case.

USPTO - Post-Grant Review

USPTO - Inter Partes Review

Estimated cost of preparing a petition: $61,333 Proposed fees for filing a petition: *$35,800 for up to 20 claims *$44,750 from 21-30 claims *$53,700 from 31-40 claims *$71,600 from 41-50 claims *$89,500 from 51-60 claims *Add’l $35,800 for additional groups of 10 claims Proposed IT fee: $2,270 Proposed Judges’ Fee: $258.32 per hour *121 hours for up to 20 claims *151 hours from 21-30 claims *181 from 31-40 claims *242 hours from 41-50 claims *302 hours from 51-60 claims Estimated cost to file preliminary response: $34,000 Estimated cost to file a Request for Reconsideration: $27,200 Estimated cost to prepare a motion, with an average of 8.89 motions, oppositions and replies per post grant proceeding: $44,500 per motion Estimated cost for oral hearing: $6,800

Estimated cost of preparing a petition: $46,000 Proposed fees for filing a petition: *$27,200 for up to 20 claims *$34,000 from 21-30 claims *$40,800 from 31-40 claims *$54,400 from 41-50 claims *$68,000 from 51-60 claims *Add’l $27,200 for additional groups of 10 claims Proposed IT fee: $2,270 Proposed Judges’ Fee: $258.32 per hour *97 hours for up to 20 claims *121 hours from 21-30 claims *145 from 31-40 claims *194 hours from 41-50 claims *242 hours from 51-60 claims Estimated cost to prepare a preliminary response: $34,000 Estimated cost to file a Request for Reconsideration: $27,200 Estimated cost to prepare a motion, with an average of 6.92 motions, oppositions and replies per inter partes review: $47,600 per motion Estimated cost for oral hearing: $6,800

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16

Attorneys’ Fees

for Patent Cases*

Small Patent Litigation Medium Patent

Litigation

Larger; More Complex

Patent Litigation

<US$300,000 ~US$550,000 >US$850,000

• Hourly rates vary from US$180 to US$550 • “Many Japanese attorneys still estimate their fees according to the Japan Federation of Bar Associations standard for attorney’s fees that was abolished in 2004” • Plaintiff must pay filing fee, calculated as a percentage of the economic value of the case.

•E.g. if the amount at issue is US$1,000,000, the official filing fee will be about US$4,000; and if the value is US$10,000,000, the filing fee will be about US$30,000.

• District Court: In patent cases, “the plaintiff can add a certain portion of the attorney’s fees as part of the damages suffered. In practice, courts usually allow up to 10% of damages to cover attorney’s fees, and they consider factors such as the degree of difficulty of the case, total

damages awarded, file history and conduct of the litigation.” • Appellate Proceedings: Attorneys’ fees can range from US$75,000 to US$250,000 (or more) depending on complexity; average duration of 7.7 months in 2008.

•Source: WIPO Magazine “IP Litigation Costs” – 2010 available online at

http://www.wipo.int/wipo_magazine/en/pdf/2010/wipo_pub_121_2010_01.pdf

http://www.wipo.int/wipo_magazine/en/pdf/2010/wipo_pub_121_2010_01.pdf

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2% of patents (300 out of 150,000 issued patents)

are opposed using JPO invalidation.

Opposition percentage in JPO used to be 3%

with the Opposition System, but after the merger,

oppositions just dropped out.

18

Number of Invalidation Trials at JPO:

2001-2011 The # of patent invalidation trials in 2011 increased to 259

Source: 2011 JPO Annual Report, page 31; 2012 JPO Annual Report, page 41

283

260 254

4.5

343

273 284

292

257

237

259

60

42 35

2.8

21 20 14 10 8 3 10

45 43 48

5

29 19 24 22

15 20 16

205 214 215

191

170 183

193

139 140

113 112

0

50

100

150

200

250

300

350

400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Patents

Utility Models

Designs

Trademarks

0

20

40

60

80

100

120

Only Abuse of

Patent Rights

Abuse AND

Invalidation

Only Invalidation in

JPO

No Arguments on

Invalidation

Number of Infringement cases ruled

Only Abuse of

Patent Rights

2 26 17 15 23 17 9 18 10

Abuse &

Invalidation

13 35 36 29 33 28 24 22 16

Only JPO

Invalidation

20 9 6 1 1 8 1 1 3

No Arguments

on Invalidation

39 32 31 20 13 10 6 9 8

Case History

19

Trial Duration

0

5

10

15

20

25

30

2000

2001

2002

2003

2004

2005

2006

2007

2008

Invalidation Trial re

Infringement Cases in

JPO

Infringement Cases in

Tokyo District Court

Duration

(Months)

JPO

27.8 21.4 19.6 15.8 13.8 15.7 13 15.9 12.5

Court 19 16 15.2 12.2 10 7.5 9.1 8.4 9.2

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UPDATE: Duration is currently shrinking.

In 2011, the JPO trial lasted an average of 8.7 months.

(Source: Notes from Conversation with JPO official at IIP)

JPO and District Court Findings

Regarding the Same Case

Valid Invalid

Valid 7 6 *

Invalid 11 * 57

JPO

District

Court

81 Cases from April 2005 to June 2009

* The JPO and District Court disagreed 21% of the time

21

Valid Invalid

Valid 3 3 *

Invalid 7 * 41

54 Cases from April 2005 to June 2009

* The JPO and District Court disagreed 19% of

the time when presented with the same claim

and same evidence.

(Note: these cases are included in the

previous statistics regarding cases in general)

22

JPO and District Court Findings Regarding the

Same Case, Claim, and Evidence

JPO

District

Court

Appeals Trends of Suit Against Appeal Decision (Patent, Utility Model)

23

82.3% 78.5%

84.8% 82.6%

91.2% 92.8%

85.5% 87.7% 83.1%

67.7%

78.7%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

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What can we learn?

• We can reduce transaction costs and get to the merits of the patent

• We can develop low cost mechanisms to challenge patents

• Over 80% agreement in Japan when expensive court look at the same case

• Understand the estoppel disincentive, while appreciating the incentive for delay and harassment

Summary

• The focus should be on ensuring that patents are commensurate with innovation

• The focus should be on contesting patent validity cheaply

• As the IPR/PGR/CBM regimes are beginning to be implemented in the U.S., there is much to learn and analyze from other post-issuance patent challenge regimes abroad

• We are at the beginning, and we need to continue to study IPRs and how they are performing

Summary

• These regimes in the EPO and the JPO provide a window into the kinds of issues that were are likely to see in the U.S.

• With some more tweaking, the goal of creating a relatively cheap, relatively swift, and accurate (as determined by affirmance on appeal) patent challenge regime can be realized

Documents

PAEs, IPRs and Improving the Patent System...PAEs, IPRs and Improving the Patent System Jay P. Kesan, Ph.D., J.D. Professor and H. Ross & Helen Workman Research Scholar University