$2 to $8 million 2 1 7/30/2013 M ANAGING RISK UNDER THE AIA $1.8 - - PDF document

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MANAGING RISK UNDER THE AIA

AMERICA INVENTS ACT

MANAGING IP RISK IN THE NEW ERA OF POST GRANT PROCEEDINGS

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John B. Scherling Antony M. Novom Sughrue Mion, PLLC July 30, 2013 MANAGING RISK UNDER THE AIA

$2 to $8 million

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• $1.8 billion
• $1.5 billion
• $1.2 billion
• $1.0 billion
• $1.0 billion

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• $1.8 billion (Centocor v. Abbott) (2009) –

arthritis medication

• $1.5 billion (Lucent v. Microsoft) (2007) – MP3

technology

• $1.2 billion (Carnegie Mellon v. Marvell Tech.

Group) (2012) – disk drive noise reduction

• $1.0 billion (Apple v. Samsung) (2012) –

smartphone software

• $1.0 billion (Monsanto v. Dupont) (2012) –

genetically modified soybean seeds

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$1.9 to $16.5 million

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5778

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7 (2013 PwC Patent Litigation Study)

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Are businesses making irrational decisions?

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S&P 500 Companies’ Market Cap

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The value of innovation

“The real value of the iPhone doesn't lie in its parts or even in putting those parts

• together. The bulk
• f the iPhone's

value is in the conception and design of the iPhone.”

Professor Mark J. Perry, School of Management, Flint campus, The University of Michigan.

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• Damages

– Six years (notice may be required) – Lost profits – Reasonable royalty

• Injunction

– Preliminary – Permanent

• Attorneys' fees and other litigation expenses
• Uncertainty (costs and time)

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Major risks faced by potential infringers

MANAGING RISK UNDER THE AIA

CHALLENGING PATENTS PRIOR TO THE AIA

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• A company faced with a patent infringement

suit or the threat of one had the options of:

• District court litigation (as a defendant or

declaratory judgment plaintiff)

• Ex parte reexamination
• Inter partes reexamination (limited to applications filed on or

after November 29, 1999)

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Mechanisms for challenging patents prior to AIA

MANAGING RISK UNDER THE AIA

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District court litigation milestones

(1) Complaint (2) Answer (3) (6) Expert Discovery Closes (9) Jury Trial Begins (11) Beginning of Appeal (7) Dispositive Motions (10) Verdict/ Post

• Scheduling Order

(5) Fact Discovery Closes (8) Pretrial

• Submissions

(1) Complaint (2) Answer (3) Conference Discovery Closes Begins (Summary Judgment) Posttrial

Scheduling Order

(12) Appeal Decisition (4) Claim Construction Discovery/Scheduling

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• District court litigation challenging patents

– Standing to challenge patent: sued or under an imminent threat of suit – Presumption of validity/clear and convincing evidence standard – Lay judges and jury trials – Claims construed in light of intrinsic record/not under “BRI” standard – Duration not fixed (2‐4 years) and typically not until 7‐10 years after patent issues. (See Nat’l Research Council, A Patent System for the 21st Century 95–96

(2004))

– Very expensive $$$ – Success rates* when challenged about 40% (2000‐2011):

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Drawbacks of district court litigation

Invalid under 102 Invalid under 103 Invlaid other Total 40% (425/1052) 42% (299/709) 39% (353/894) 40.5% (invalid) 59.5 (valid) (Success rates reflect adjudicated patents and does not reflect settlements)

Source: PATSTATS.ORG

MANAGING RISK UNDER THE AIA

• District court litigation forum selection strategies increases

uncertainty/risk due to lack of uniformity among district courts

– Different local rules – Different judges

• Range of competencies with patent litigation
• Range of competencies with technologies

– Different lengths of time through trial – Different jury pools

• Most patent cases settle. When cases do go to Judgment patentees

win 32.5% on average nationally

– National average masks the range of win rates by district: 11.5% to 55.

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Drawbacks of district court litigation

Source: AIPLA QUARTERLY JOURNAL, Volume 38, Number 4 Fall 2010

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Ex parte reexamination trend

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100 200 300 400 500 600 700 800 900 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

KSR MANAGING RISK UNDER THE AIA

Inter partes reexamination trend

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KSR

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• Ex parte reexamination

– ex parte − potentially one‐sided in favor of patent owner – Limited to novelty and obviousness based on publications – Inconsistency in quality of reexamination among examiners – Patent owner may add unlimited new narrower claims – Appeal to Board – Duration indeterminate (ave. 25.4 months) – Percent known to be in litigation 32% – Success rates (when challenged by third party ‐ 67 % of all ex parte reexams):

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Drawbacks of pre‐AIA mechanism

All claims confirmed All claims canceled Claim changes 23% 12% 65% MANAGING RISK UNDER THE AIA

• Inter partes reexamination

– Limited participation by third party requestor with no discovery – Limited to novelty and obviousness based on publications – Inconsistency in quality of reexamination among examiners – Patent owner may add unlimited new narrower claims – Appeal to Board – Duration indeterminate (ave. 36 months) – Percent known to be in litigation 67% – Success rates when challenged by third party:

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Drawbacks of pre‐AIA mechanism

All claims confirmed All claims canceled Claim changes 11% 42% 47%

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CHALLENGING PATENTS UNDER THE AIA

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• Post AIA, a company faced with a patent

infringement suit has the options of:

• District court litigation
• Ex parte reexamination
• Inter partes review
• Post grant review (including covered business

method patents)

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Mechanisms for challenging patents post AIA

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• Ex parte reexaminations

– All patents (unexpired) – Multiple petitions permissible – No presumption of validity – Claims construed under the “BRI” standard – No estoppel – Anonymity – No page limits – Less expensive

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Advantages of the AIA mechanisms

MANAGING RISK UNDER THE AIA

• Inter parte review ("IPR")

– Converted inter partes reexamination into an adjudicative proceeding – All patents (unexpired) – Full participation by challenger – Certain discovery permitted (initial disclosures, deposition of declarants) – Trial presided over by administrative law judge (PTAB) – Patent owner's ability to add new claims restricted – Duration of proceeding is fixed (12 months from institution of trial) – Percent known to be in litigation (as of November 30, 2012): 77% – Success rates expected to parallel inter partes reexamination

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Advantages of the AIA mechanisms

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• Post grant review ("PGR") (effective March 16, 2013)

– Applicable for all first‐to‐file patents – Within 9 months after the grant of a patent or issuance of a reissue patent – Challenge can be on any ground of patentability (not best mode) – Certain discovery permitted (initial disclosures, deposition of declarants) – Trial presided over by administrative law judge (PTAB) – Patent owner's ability to add new claims restricted – Duration of proceeding is fixed (12 months from institution of trial) – Success rates may be greater than inter partes reexamination given additional grounds

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Advantages of the AIA mechanisms

MANAGING RISK UNDER THE AIA

• Settlement

– Permitted in inter partes reexamination, post grant review, and covered business method patent review – Settlement terminates the proceeding with respect to the petitioner – No estoppel

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Advantages of the AIA mechanisms

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Summary comparison

Ex parte Reexamination Inter Partes Review Post‐Grant Review Eligible Patents Any in‐force patent Any in‐force patent Patents issuing from applications subject to first inventor to file provisions

• f the AIA (effective date
• n or after March 16,

2013) Timing After issuance of any in‐ force patent 9 months after issuance

• f patent or after

termination of post grant review Within 9 months of issuance of the patent Who 3rd Parties, Patent Owner, USPTO Director 3rd Parties 3rd Parties Grounds Novelty and obviousness grounds based on prior art, printed publications, and patents Novelty and obviousness grounds based on prior art, printed publications, and patents Any grounds for invalidity

• f the patent under §

282(b)(2) or (3) (except for failure to comply with the best mode requirement)

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Summary comparison (cont'd)

Ex parte Reexamination Inter Partes Review Post‐Grant Review Threshold Substantial new question (SNQ) of patentability affecting any claim of the patent based on printed publication and patents Reasonable likelihood that the requester would prevail with respect to at least one of the claims challenged More likely than not that at least one of the claims challenged is unpatentable;

• r

whether the request raises a novel or unsettled legal question important to

• ther patents or

applications Anonymity Yes No, must identify real party in interest No, must identify real party in interest Participation 3rd Party is limited to making the initial request for reexamination Requester may submit declarations, obtain limited discovery, submit

• bservations on

discovery, file replies and has right to oral hearing Requester may submit declarations, obtain limited discovery, submit

• bservations on discovery,

file replies and has right to

• ral hearing

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Summary comparison (cont'd)

Ex parte Reexamination Inter Partes Review Post‐Grant Review Discovery None Discovery limited to deposition of witnesses submitting declarations and “what is otherwise necessary in the interest

• f justice”

Discovery limited to “evidence directly related to factual assertions advanced by either party in the proceeding” Estoppel None Real party in interest is estopped from challenging a patent claim before the Patent Office and in district court by prior Inter Partes Review decision with respect to any ground that was raised

• r reasonably could have

been raised in the Inter Partes Review Real party in interest is estopped from challenging a patent claim before the Patent Office and in district court by prior Post‐Grant Review decision with respect to any ground that was raised or reasonably could have been raised in the Post‐ Grant Review

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Petitioner Patent Owner EP Rx

PTO Fees: $12,000 (large entity) Atty Fees: $ 50K Atty Fees: $ 75K

IP Rx

PTO Fees: $8,800 Atty Fees: $250K Atty Fees: $250K (expired)

IPR

PTO Fees: $9,000 request (1‐20 claims) + $14,000 post institution (1‐15 claims) ($200/$400 for each additional claim) Atty Fees: $375K Atty Fees: $375K

PGR

PTO Fees: $12,000 request (1‐20 claims) + $18,000 post institution (1‐15 claims) ($250/$550 for each additional claim) Atty Fees: $450K Atty Fees: $450K

D.Ct.

Atty Fees: $2M ‐ $8M Atty Fees: $2M ‐ $8M

Cost comparison example

* Estimate 15% to 25% for additional costs relating to disbursements such as expert fees, deposition cost, etc.

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Post grant proceeding: certainty within one year

USPTO Office Patent Trial Reference Guide, Federal Register/Vol. 77, No. 157/Tuesday, August 14, 2012/Rules and Regulations

MANAGING RISK UNDER THE AIA

2‐Track Patent Litigation

TRIAL OF VALIDITY AND INFRINGEMENT TRIAL OF VALIDITY AND INFRINGEMENT DECISION BY JUDGE DECISION BY JUDGE PRETRIAL DISCOVERY AND MOTIONS PRETRIAL DISCOVERY AND MOTIONS

MOTIONS AND USPTO DECISION USPTO TRIAL TRIAL OF INFRINGEMENT ONLY TRIAL OF INFRINGEMENT ONLY

VALID

NO TRIAL NO TRIAL INFRINGEMENT TRIAL, NO PAST DAMAGES INFRINGEMENT TRIAL, NO PAST DAMAGES

INVALID AMENDED

LIMITED DISCOVERY LIMITED DISCOVERY LIMITED DISCOVERY LIMITED DISCOVERY

1 YEAR 2 YEARS 3 YEARS

Track 2 Track 1

COURT ACTION COURT ACTION

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MANAGING RISK UNDER THE AIA District Court Litigation Patent Office Trials Article III Judge and lay jury Adminstrative law judge with both technical and patent law background Infringement and validity Validity (unpatentability) Clear and convincing evidentiary standard (validity only) Preponderance of the evidence evidentiary standard Claims construed in light of the intrinsic evidence Claims given the broadest reasonable interpretation Two to five years through trial One year to decision Broad discovery Limited and focused discovery Expensive Significantly less expensive Settlement possible Settlement possible Bound by Patent Office finding of unpatentability Not bound by district court finding that patent not shown invalid MANAGING RISK UNDER THE AIA

Fresenius USA, Inc. v. Baxter Int'l, Inc.

2013 U.S. App. LEXIS 13484 (Fed. Cir. July 2, 2013)

• Prior Case Law: Once a district court case has

concluded in favor of the patentee, res judicata precludes a later PTO finding of invalidity from upsetting the district court judgment. See, e.g.:

– Moffitt v. Garr, 66 U.S. 273, 283 (1861) (“[i]t is a mistake to suppose . . . that . . . moneys recovered on judgments in suits . . . might be recovered back” after a patent is invalidated); – In re Baxter, 698 F.3d 1349, 1350‐51 (Fed Cir. 2012) (under “well‐established principles of res judicata,” the invalidation of a patent’s claims cannot be used to reopen a final damages judgment based on those claims) (O’Malley, J., concurring in a denial of rehearing en banc).

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Fresenius USA, Inc. v. Baxter Int'l, Inc.

(cont.)

• Facts:

– CAFC affirmed district court's finding that Baxter's '434 patent was valid, but remanded for further proceedings regarding damages and injunctive relief. – District court reduced damages award and Fresenius again appealed. – While district court case was on appeal, CAFC affirmed PTO's rejection of the '434 claims in reexamination.

• Issue: Whether the cancellation of the asserted claims

by the PTO in reexamination must be given effect in "pending" infringement litigation.

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Fresenius USA, Inc. v. Baxter Int'l, Inc.

(cont.)

• Held: CAFC (2‐1) "In light of the cancellation of

Baxter's remaining claims, Baxter no longer has a viable cause of action against Fresenius. Therefore, the pending litigation is moot."

• Dissent by Judge Newman: The remand for the

district court to address remedies issues did not undermine the finality of the previous CAFC validity determination. Accordingly, the majority decision improperly authorizes the PTO "to

• verride and void the final judgment of a federal

Article III Court of Appeals."

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Fresenius USA, Inc. v. Baxter Int'l, Inc.

(cont.)

• What does this mean?

– Any remaining issue makes a district court verdict for the patentee vulnerable to attack from pending PTO proceedings – Speed of new AIA procedures a major factor – Off to the races!

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THANK YOU

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John B. Scherling

John Scherling is a Partner in the San Diego office of Sughrue Mion, PLLC. Mr. Scherling's practice focuses on litigation and resolution of intellectual property disputes, primarily relating to patents, trademarks and trade secrets, from the inception of the case through trial and appeal.

• Mr. Scherling previously served as an Assistant United States Attorney in the United States Attorney’s Office in

the Southern District of California. In that capacity, he handled all aspects of litigation, including district court jury trials, bench trials and appeals in the United States Court of Appeals for the Ninth Circuit, and received numerous awards from the United States Department of Justice and the Department of State. Handling litigation matters across a wide variety of technologies, Mr. Scherling also has a technical emphasis in chemistry, as well as biochemistry and microbiology, acquired during his undergraduate studies at Iowa State University (B.S. with Honors and Distinction).

• Mr. Scherling received his J.D. from Vanderbilt University, where he was Order of the Coif and Associate Articles

Editor of the Vanderbilt Law Review. Following receipt of his J.D., Mr. Scherling served as a law clerk to the Honorable Judith N. Keep in the United States District Court for the Southern District of California.

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Antony M. Novom

Antony Novom is Of Counsel in the San Diego office of Sughrue Mion, PLLC. Mr. Novom’s practice includes counseling clients on strategic creation and management of intellectual property portfolios, non‐infringement and validity opinions, due diligence work in connection with mergers and acquisitions, and litigation in infringement actions. Mr. Novom also has experience in litigating administrative actions before the USPTO, including interference proceedings and reexaminations. Handling technologies including molecular and cell biology, diagnostics, therapeutics, mechanical and medical devices, semiconductors, sports equipment, and green technologies, Mr. Novom has a B.S. in Biochemistry from the University of California, San Diego, and received his J.D. from California Western School of Law. Since 2006, Mr. Novom has served as a Judge Pro Tem for the Superior Court of San Diego, Central Division, during which he adjudicates small claims cases.

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