Patent Litigation Insurance

Patent litigation insurance definitely exists, and every so often a casual observer will be confronted by the enormous cost of litigating a patent case and suggest that maybe you should get insurance. After all, there are a lot of other kinds of insurance for the normal hazards of doing business: product liability, business interruption, even cyber attack. So why not patent litigation insurance?

The problem is that insurance works by grouping a whole bunch of entities together that all have similar risk, and then figuring out how to get them to share that risk while still making some money on the premiums. That doesn’t work for patent litigation because companies have wildly different risk profiles. It is impossible to take a group of companies, somehow average out their risk of patent litigation, and then calculate a premium that both covers that average risk and makes you some (but not too much) money on the side. The companies will either overpay or underpay.

As a result, patent litigation insurers take a look at your individual risk profile, figure they can estimate the risk better than you can, and then charge an individualized premium to make sure they are covered. Public reporting places the annual cost of patent litigation insurance at about 2-5% of the insured amount, with the addition of hard liability caps and co-payments. Most big companies decline those terms and end up self-insuring or mitigating risk through license aggregators like RPX.

But still patent litigation insurance seems to fascinate, especially the academics. In a November 2018 paper titled The Effect of Patent Litigation Insurance, researchers examined the effect of recently introduced insurance on the rate of patent assertions. And they found (headline!) that the availability of defensive insurance was correlated with significantly reduced likelihood that specific patents would be asserted. They conclude:

Whatever the merits of specific judicial and legislative reforms presently under consideration, our study suggests that it is also possible for market-based mechanisms to alter the behavior of patent enforcers. Indeed, it has been argued that one reason legislative and judicial reform is needed is because collective action is unlikely to cure the patent system’s ills because defending against claims of patent infringement generates uncompensated positive externalities. Our study suggests that defensive litigation insurance may be a viable market-based solution to complement, or supplant, other reforms that aim to reduce NPE activity.

The Effect of Patent Litigation Insurance at 59-60.

But there is a very important caveat: the insurance company selected in advance every patent they would insure against. IPISC sold two menus of “Troll Defense” insurance: one for insurance against 200 specific patents, and one for insurance against an additional 107 specific patents. Indeed, this is how the researchers were able to assess whether assertions went down. (Other patent litigation insurers use more complex policies that do not identify specific patents.) In addition, IPISC capped the defense insurance limit at $1M, which is well below the cost of litigating your average patent case. This is a very narrow space for patent litigation insurance!

IPISC must have had confidence they could accurately quantify the risk associated with these patents. The insured patents had tended to be asserted before by well-known patent assertion entities. I suspect the prior assertions settled quickly for relatively small amounts because that’s how these entities tend to work. Indeed, that is the whole business model. But throw in the availability of insurance specific to these patents and now you have a signal that many potential defendants will not simply settle and move on. Wrench in the model, assertions go down.

So yes, this narrow type of patent litigation insurance might be useful if you are an entity concerned about harassment by specific patents in low value patent litigation. Interesting study, your mileage may vary.

SRI International v. Cisco

On March 20, 2019, a Federal Circuit panel decided SRI International v. Cisco, addressing subject matter eligibility (yes), willfulness (no), exceptional case (yes), a running royalty (yes), and claim construction among other issues. Let’s break it down.

Subject matter eligibility. Over a dissent, the majority held the following method of cybersecurity network monitoring to be eligible because it is fundamentally “directed to a technological solution to a technological problem“:

1. A computer-automated method of hierarchical event monitoring and analysis within an enterprise network comprising:
deploying a plurality of network monitors in the enterprise network;
detecting, by the network monitors, suspicious network activity based on analysis of network traffic data selected from one or more of the following categories: {network packet data transfer commands, network packet data transfer errors, network packet data volume, network connection requests, network connection denials, error codes included in a network packet, network connection acknowledgements, and network packets indicative of well-known network-service protocols};
generating, by the monitors, reports of said suspicious activity; and
automatically receiving and integrating the reports of suspicious activity, by one or more hierarchical monitors. 

The dissenting judge saw it differently:

The claims only recite the moving of information. The computer is used as a tool, and no improvement in computer technology is shown or claimed. 

Willfulness. The jury found that Cisco willfully infringed the patents. The district court judge denied JMOL of non-willfulness. And, in the only win for Cisco, the Federal Circuit reversed:

  • Evidence that Cisco employees did not read the patents-in-suit until their depositions is not evidence of willfulness; Cisco has plenty of lawyers to diligently respond to these issues.
  • Evidence that Cisco designed their products in an infringing manner is not evidence of willfulness; it’s evidence of infringement.

While the jury heard evidence that Cisco was aware of the patents in May 2012, before filing of the lawsuit, we do not see how the record supports a willfulness finding going back to 2000. As the Supreme Court recently observed, “culpability is generally measured against the knowledge of the actor at the time of the challenged conduct.” Halo, 136 S. Ct. at 1933. Similarly, Cisco’s allegedly aggressive litigation tactics cannot support a finding of willful infringement going back to 2000, especially when the litigation did not start until 2012. Finally, Cisco’s decision not to seek an advice-of-counsel defense is legally irrelevant under 35 U.S.C. § 298.

Exceptional case. The district court judge found that the case was exceptional and awarded attorneys’ fees based on Cisco maintaining “nineteen invalidity theories until the eve of trial but only presenting two at trial and pursuing defenses at trial that were contrary to the court’s ruling or Cisco’s internal documents.” The Federal Circuit affirmed.

Running royalty. The district court judge imposed a running royalty of 3.5% on infringing products not colorably different and that was ok.

How will licensing IP in the autonomous vehicle space be different?

Autonomous vehicle IP licensing will have all the problems we saw with smartphone IP licensing, but on steroids. Here’s a short list:

  • Damage base is bigger. Value of the end product is bigger (i.e. cars vs smartphones), so royalty demands are bigger. There will be a correspondingly wider range of “acceptable” royalty amounts and FRAND offers.
  • Injunctions are more dramatic. And lock-in is more severe. You can’t roll a software update on a week’s notice just due to the safety / regulatory issues. You can’t substitute a new chip at the factory as you soon as you’re convinced it’s good. Also, is Germany seriously willing to enjoin the sale of a car because some random chip inside it infringes? This is going to put a lot of pressure on proportionality in legal systems.
  • Whole new issue: safety! Safety issues will dominate (perhaps out of proportion to the actual risks), and the safety issues will supercharge everything from mandatory licensing to pricing to cybersecurity.

Auto manufacturers have so far avoided massive IP battles, and have insisted that their suppliers take care of IP and indemnity issues. This has not been done in the smartphone space. Which model will prevail?

New USPTO Section 101 Guidance

On January 7, 2019, the US Patent and Trademark Office issued revised guidance on whether an invention is eligible for patenting. (For example, can you patent a method of hedging risk?)

Patent law has always been, and remains, unpredictable on the eligible-for-patenting point. But the Supreme Court’s decision in Alice Corp. v. CLS Bank (2014) reset much of the case law that had built up, and it therefore allowed district court judges wide latitude to invalidate “bad patents” on the basis that the underlying ideas simply weren’t eligible. The sudden spike in invalidations increased the sense that the law was unpredictable.

Hence, there is much guidance and revised guidance on whether certain ideas are patentable. But I hate reading this kind of guidance; it’s boring. So I drew a picture.

The main revision appears to be the following:

Examiners should note, however, that revised Step 2A specifically excludes consideration of whether the additional elements represent well-understood, routine, conventional activity. Instead, analysis of well-understood, routine, conventional activity is done in Step 2B. Accordingly, in revised Step 2A examiners should ensure that they give weight to all additional elements, whether or not they are conventional, when evaluating whether a judicial exception has been integrated into a practical application.

And… you’re welcome.

Paper Summary: Faith-Based Intellectual Property

Is there any evidence — like actual data — that intellectual property protection does what we want, namely encourage creativity and innovation? This turns out to be highly controversial. And relevant when reviewing proposals that would, for example, “chang[e] the copyright regime without really understanding where the problem is.”

I recently ran across a set of papers discussing this truly fundamental inquiry in intellectual property law. The most easily accessible of these is Mark Lemley’s Faith-Based Intellectual Property, which reads almost like a personal complaint.

Lemley begins by summarizing past attempts to actually answer this question. Here’s one:

Fritz Machlup, commissioned by Congress in the 1950s to evaluate the patent system, came to the strikingly wishy-washy conclusion that if we didn’t have a patent system, the evidence wouldn’t justify creating one, but since we already had one the evidence didn’t justify abolishing it.

62 UCLA L. Rev. 1328 at 1331-32

This excerpt reflects the consensus tone. Researchers don’t seem to be able to say whether the data supports the notion that intellectual property actually accomplishes what we believe it accomplishes.

Frustratingly, Lemley complains, many researchers react to this ambiguity by retreating to “moral rights theory,” the notion that intellectual property protection is simply a recognition of what you own as a matter of basic rights, the fruit of your labor. He calls out Prof. Rob Merges at Berkeley specifically:

After decades at the forefront of economic analysis of the patent system, Merges threw up his hands: “Try as I might, I simply cannot justify our current IP system on the basis of verifiable data showing that people are better off with IP law than they would be without it.” While one might think that the logical thing to do if the evidence doesn’t support one’s theory is to question the theory, Merges instead observes that “through all the doubts over empirical proof, my faith in the necessity and importance of IP law has only grown.” IP rights, he decides, are Rights in the moral sense: things to which people have some intrinsic entitlement that “social utility alone is not reason enough to override.”

Id. at 1336-37.

Lemley suggests that justifying IP protection solely on the basis of moral rights is deeply problematic. Intellectual Property law does not correspond well to our instincts about what intellectual labor should be awarded property rights:

We grant extremely valuable patents to accidental discoverers [citing photography and penicillin] and extremely valuable copyrights to photographers who happened to be in the right place at the right time [citing Zapruder film of JFK assassination and Reginald Denny beating that led to LA riots]. Further, we allow those rights to be enforced even against people who put more productive work into the final product than the IP owner—the companies who actually make products based on an idea sketched out by a patent troll [most lawsuits are filed against independent inventors] and the artists who remake a photo into an iconic image [discussing copyright case against Shepard Fairey].

Id. at 1340.

Lemley concludes with his rather personal, and it seems well-founded, complaint:

Rather, the line I hope to draw here is between theories of IP that are responsive to evidence and those that are impervious to it. The evidentiary support for the current IP regime is dubious enough that it should prompt us to have a serious conversation as a society about when IP is serving the goals of encouraging the creation and dissemination of new content and when it isn’t.

Id. at 1345.

But serious conversations are in short supply these days.

Guaranteed Patent Validity vs No Permanent Injunctions

Fascinating and bold proposal by Professor Paul Janicke of the University of Houston Law Center to fix the U.S. patent system:

(1) Continue to allow prosecution of as many claims as desired, but after allowance require the applicant to choose no more than three for issuance. During the first three years from grant, attacks on these claims can be made in the PTO or the courts, to the same extent as now. After three years from the issue date, validity of the claims becomes incontestable.

(2)  In exchange for (1), the remedy of permanent injunction disappears, except in ANDA cases. It will be replaced by a revised financial remedy: equitable sharing in the infringer’s revenues from the infringing activity, as set by the judge.

He anticipates the objections but argues radical change is needed. And it is certainly appealing to think about a fundamental rebalancing. The patent system is broken.

Showing possession of a coffee filter system: Rivera v. ITC

Written description decisions are unusually fact intensive. The court must answer (1) what exactly was invented? and (2) what exactly was claimed? Then the court must dissect the differences between the invention and the claims.

A patent has an adequate written description if it “reasonably conveys to those skilled in the art that the inventor had possession of the claimed subject matter as of the filing date.”

In Rivera v. ITC, the patent concerned a coffee brewer that could accept both “cup” and “pod” containers. A “cup” is a small, self-contained plastic cartridge. A “pod” is a small disc-shaped filter containing coffee grounds. Cups and pods hold coffee grounds differently, so it’s a bit of a trick to develop a brewer that can use both.

But Rivera took their claim on a cup-or-pod brewer and asserted that a loose-grounds-inside-a-cup apparatus infringed. This was too far for the ITC and ultimately the Federal Circuit panel:

[T]he question is whether a pod adaptor assembly intended to allow compatibility between distinct brewing systems, also supports an undisclosed configuration that eliminates a fundamental component of one of those systems (i.e., the “pod”) through integration. It does not.

I’ve long supported meaningful enforcement of the written description requirement: Inventors should get patents on what they actually invented. The written description requirement helps enforce that basic (and fair) requirement.

 

Edging towards a bright-line rule for CBM eligibility: Secure Axcess v. PNC Bank

Back in November 2016, the Federal Circuit narrowed the scope of patents eligible for Covered Business Method review. They held that a patent is not eligible for CBM review just because it could involve a financial transaction. Instead, the patent must have a claim that actually contains a financial activity element.

The Federal Circuit’s 2-1 decision in Secure Axcess v. PNC Bank reaffirms that narrowing, and adds that the litigation history of the patent (here targeting financial institutions) is also not relevant:

[A] patent owner’s choice of litigation targets could be influenced by a number of considerations, such as the volume of a particular target’s perceived infringement; the financial condition of the target; which targets are most likely to be willing to settle rather than bear the cost of litigating; available and friendly venues; and so on.

But Judge Lourie dissented, arguing that the patent specification and litigation history clearly described a patent on a “financial product or service,” regardless of whether the claims specifically include a financial transaction.

Will we have a bright-line rule, or an “all the circumstances” test? So far the bright-line rule has the upper hand.

An opportunity to re-read MedImmune: ArcelorMittal v. AK Steel

A complicated decision by the Federal Circuit gives us all an opportunity to review the MedImmune standard. Prior to MedImmune a licensed party could not bring an invalidity suit because it need not fear infringement (i.e., no case or controversy). MedImmune loosened that standard and essentially set forth a “look at all the circumstances” test.

So what if a party kinda asserts patent claims, but it’s really not clear, and then later gives a covenant not to sue. Somewhat predictably the “all the circumstances” test leads to a 2-1 split in ArcelorMittal v. AK Steel. The panel ends up disagreeing on whether the circumstances of a “covenant not to sue” moot the underlying controversy.

Aaaaaand… that’s really all you need to know unless you want the complicated details of this case.

When the PTO will listen to you, but the Federal Circuit won’t: Phigenix v. Immunogen

In Phigenix, Inc. v. Immunogen, Inc., a Federal Circuit panel concluded that a company can have standing to initiate an IPR against a patent, but not have standing to appeal the results of that IPR to the Federal Circuit. This standing gotcha arises because the Article III “case or controversy” requirement requires that a party:

must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the [appellee], (3) that is likely to be redressed by a favorable judicial decision.

In this case Phigenix was a third-party biotechnology company in the same space as the patent owner, and initiated an IPR that the PTO ultimately closed after concluding that the claims were not obvious. Phigenix then of course sought to appeal that decision to the Federal Circuit under the relevant statute that says, “A party to an inter partes review . . . who is dissatisfied with the final written decision of the [PTAB] . . . may appeal the [PTAB]’s decision only to the . . . Federal Circuit.”

Not so fast. The Federal Circuit held that Phigenix could appeal the result, but that didn’t mean it had standing to actually get a decision:

Phigenix does not contend that it faces risk of infringing the ’856 patent, that it is an actual or prospective licensee of the patent, or that it otherwise plans to take any action that would implicate the patent.

Phigenix tried some other arguments surrounding standing, but the Federal Circuit methodically shut these down as well based on relatively solid Supreme Court jurisprudence. It’s hard to say this case is wrong given the case law, but it is no doubt frustrating to see patent decisions dodging the merits of patent validity. These decisions have major public consequences even if they are (very) technically advisory with respect to the advocating party.