Sued As A Young Startup? Don’t Surrender
Editor’s note: David Soofian is an associate at Kaye Scholer LLP, where he specializes in defending technology companies against allegations of patent infringement by competitors and trolls.
Patent trolls are on the offensive, using weak patents to go after young tech startups with the hopes of securing licensing deals. These trolls bank on the assumption that these young companies will pay without putting up a fight in order to avoid the high cost of a long drawn out litigation.
However, two recent changes in patent law are turning the tables and giving the accused the opportunity to attack the validity of these weak patents — the most valuable assets a patent troll has — without having to go through the cost of a full-blown litigation:
- The Supreme Court’s recent Alice opinion paved the way for early challenges to patents that try to monopolize algorithms or basic ideas.
- The America Invents Act created a quick mini-trial in the U.S. Patent Office for challenges to the inventiveness of a patent (e.g. did someone else invent it first, or was it obvious based on what others were doing at the time).
These developments can fundamentally shift the narrative in a typical troll lawsuit by giving the troll something to lose (their patent) and giving the accused a quicker path to vindication.
Know Your Enemy
Patent trolling starts with investors looking to turn a (relatively) quick buck. They pool their money and form a shell company to hide their identities. The shell company, typically with an adviser, then hits the open patent market to find a patent. There, patents are sold in packages designed for trolling, with detailed suggestions and strategies (e.g. infringement charts) on how to target specific companies/products with patent-infringement lawsuits.
The essential partner of the patent troll is the law firm that will act as the public face of the company by sending threatening demand letters and filing lawsuits. This law firm is often a small shop that works on contingency, aligning the interest of the investors with the interests of the law firm—spend as little as possible and bring in as much money as possible.
- Demand Letters: Patent trolling typically begins with a first wave of letters that accuse companies of patent infringement and invite them to discuss licensing opportunities. Because the cost of sending a letter is negligible, the troll sends these letters to a wide swath of companies. In this phase, the troll hopes that a small number of companies respond to these letters by taking an early license at a low price. Those early licensing fees can be put aside to fund the more expensive phase two—lawsuits.
- Lawsuits: Lawsuits are expensive, even for trolls. But the upfront cost of merely filing a lawsuit is not prohibitively expensive, so often-times trolls will file waves of lawsuits against big companies with the hopes of pressuring them into licensing negotiations to settle the lawsuit. Like the demand letters, the troll will be able to use those early settlement payments to fund the lawsuits against the companies that fight back.
Being on the receiving end of a demand letter isn’t fun, and the prospect of being caught up in an expensive lawsuit can be daunting. That is why many companies take an early license at a reduced rate to make the troll go away. But for many companies—especially young technology startups whose reputation is built on innovation and disrupting entrenched interests—the idea of settling out or taking a license is unacceptable.
For those companies, their only choices are to persuade the troll to go away or to vindicate themselves in court. Luckily, recent changes in patent law have given these companies two new weapons with which to fight back and attack the validity of the troll’s prized patent without incurring the costs of a full-blown litigation.
- Consider Challenging the Eligibility of Software Patents: Recent cases have paved the road for early challenges to software patents as abstract ideas: in Ultramercial v. Hulu (later called Ultramercial v. Wildtangent), the patent was successfully challenged in the district court shortly after the case was filed (the case is now being reviewed for a third time on appeal); and in a case called Alice v. CLS Bank International (“Alice”), the patents were successfully challenged in the district court before extensive and expensive discovery took place. (Note: The author represented CLS in district court and during the initial appeal of the Alice case).
The underpinnings of this “abstract idea” exception are rooted in the patent bargain. A patent is an exchange—the governments grants a monopoly over an invention for a limited time and, in exchange, the inventor makes their invention public by disclosing all of their secrets and details in a patent.
The idea of the exchange is that it is worth stifling innovation in the short term by granting a monopoly, if society can benefit in the long term by getting free rights to use the invention after the patent expires. The abstract idea exception focuses on one instance when that bargain is unfair—when the invention that is being patented is an idea that is so fundamental and basic that it does more harm to society by granting a patent than the good of making that invention public.
Software patents became a favorite for patent trolls because, in effect, they allowed trolls to monopolize abstract ideas as long as they were implemented on a computer or the Internet. The trolls relied on the argument that an idea cannot be abstract if it involved a physical machine like a computer. But in hearing the Alice case on appeal this year, the Supreme Court rejected that argument by holding that an abstract idea is not patentable merely because it was implemented on a general purpose computer in a generic way (“each step does no more than require a generic computer to perform generic computer functions”).
While the exact contours of this new decision are still being fleshed out, the important thing for companies to understand is that the case has opened the floodgates to challenges of software patents as abstract ideas. To successfully make a case that an invention is nothing more than an abstract idea based on Alice, you and your lawyer should follow the following steps:
- Strip away the technical jargon (g. ignore generic physical computer components such as “a communications controller” or “a data storage unit) and determine what is the “invention.”
- Determine whether the “invention” in an “abstract idea.” In doing so, ask: whether the invention can be executed on a generic computer, in the human mind, or with a pen and paper; whether the invention is “fundamental” to, “long prevalent” in, or a “building block” of society; and whether the invention is an economic practice.
- Assuming there is an abstract idea at play, look to the technical jargon that you previously ignored and ask yourself whether they add anything meaningful, or if the patent is really trying to cover nearly every possible way to perform the abstract idea on a computer or the Internet.
- Consider Challenging Novelty and Non-obviousness in an Inter Partes Review at the Patent Office: A second way to attack a patent is to challenge whether it is innovative. The most commonly invoked requirements for a patent are that the invention be novel and not obvious. An invention is not novel if it was already public knowledge at the time of invention. Similarly, an invention is not patentable if it would have been obvious to someone in the field based on what was already public knowledge at the time.
The problem with this type of challenge is that it was traditionally only available late in the litigation process, after the accused had to go through most of the expense of discovery and expert reports (everything except for trial). But in 2011, President Obama signed the America Invents Act, which created a mini-trial in the Patent Office called Inter Partes Review (“IPR”) where almost anyone can challenge whether an issued patent is really novel and not obvious.
Based on my experience helping to obtain four favorable IPR decisions, IPR challenges to novelty and non-obviousness at the Patent Office appear to have many benefits over making those same challenges in district court:
- IPR challenges can brought at almost any time, making it a great option for an accused company to make an early challenge to a troll’s patent.
- IPR trials are quick, and are typically complete within 12-months of being instituted.
- There is very little discovery.
- The review is focused solely on novelty and non-obviousness.
- The judges have technical backgrounds.
- The words of the patent are interpreted according to a better standard (i.e. broadest reasonable interpretation in light of the specification).
- The challenger’s burden of proof is lower (i.e. preponderance of evidence).
- And if the Patent Office agrees to the review, any pending district court case may be put on hold (i.e. stayed) while the review takes place.
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