At the heart of almost every claim of patent infringement is a battle fought over the validity of the patent at issue. Born out of the idea that an invalid patent cannot be infringed, accused infringers have defended themselves from claims of patent infringement by arguing that the patent at issue is invalid. But the defense of patent invalidity is now changing. Now, the defense has offensive value. And that change threatens to throw a system, which functions best in balance, out of balance once again. 

While every patent issued by the U.S. Patent and Trademark Office receives an examination and is presumed valid in the eyes of the law, no patent owner can truly take confidence in the validity of their patent until the patent’s validity is tested in the fires of litigation. It is in litigation where huge resources can be brought with focused attention on every nit and nuance of the patent at issue to truly test the validity of the claims asserted. Pass this test, and show that the accused infringer is practicing the covered technology, and patent infringers succeed. Fail, and they lose their asset.

Historically, the interests of those owning a patent were balanced by an accused infringer’s motivation to invalidate the patent at issue. There was always a chance that by asserting their patent, the patent owners may find their patent assets invalidated — freeing all competitors to practice the once exclusive technology covered by the now extinct patents. This could give patent owners pause if their patents had any potential validity issues.

But, with the rise of non-practicing entities — the so-called patent trolls — the balance began to shift. Non-practicing entities were not in the marketplace of those they were accusing of infringement.  These entities had no competitors. They were not practicing the technology covered by their patents and thus had little concern with whether their patents were invalidated during the course of litigation. The non-practicing entities held presumably valid patent rights and they would assert them against anyone and everyone they could identify as possible infringers. If an asserted patent was invalidated, they had a stable of many more patents waiting to be asserted against new defendants. And thus, the danger of patent invalidity ceased to be the break on aggressive, or even suspect, patent litigation it once was.

This shift in the balance between patent owners and those seeking to invalidate patents opened the gates to increasingly aggressive patent litigation. This meant that more and more patents with weak, vague, and even suspect claims were being asserted against more and more defendants. With little to lose, there was no reason for non-practicing entities to think twice before filing suit on virtually any patent they could find potential defendants infringing. 

For this reason, and others, efforts began to curb the rise of these non-practicing entities. Cries to reform patent law increasingly rang out from technology companies who found themselves involved in wave after wave of expensive, and increasingly abusive, patent infringement litigation. One result of this reform was an increase in the options available to accused infringers for challenging the validity of patents in administrative proceedings. Patent reform created the Post-Grant Review, Inter-Partes Review and Covered Business Method Review procedures as alternatives to litigation.

These administrative methods for reviewing issued patents at the U.S. Patent and Trademark Office allowed for issued patents to be challenged on the same grounds as could be raised in litigation — but often at lower costs and with burdens of proof which favored those challenging the patents. These proceedings were given streamlined dockets that guaranteed reviews were completed on tight timetables. These tight timetables allowed courts to more easily stay expensive (and potentially abusive patent litigation) in lieu of the administrative proceedings until it could be determined that a valid patent was at issue. As these new administrative proceedings took off in popularity, Courts increasingly stayed litigation in favor of the administrative reviews and the administrative reviews increasingly invalidated the challenged patents, the balance between patent owner and patent invalidator appeared to be reaching equilibrium again.

And then Wall Street figured out how to profit from the proceedings.  A group of hedge fund managers were intrigued by the vast number of patents being invalidated in the new administrative proceedings created by patent reform. Patents that were successfully put into these administrative proceedings were being invalidated at very high rates. So long as one could muster enough prior art to place a patent into one of these reviews, the patent at issue was more than likely to be invalidated. 

For companies who relied heavily on patent protection to recoup research and development expenses — like pharmaceutical companies — the difference between having patent protection and no patent protection could be huge to the company’s bottom line. When hedge fund managers learned the likelihood of having patents in post-grant review administrative proceedings found invalid, they realized that money could be made on the process.

The hedge fund managers noticed that the broad regulations allowing for the challenge of patents in these administrative proceedings were open to anyone who wished to participate. Anyone could challenge patents — all the better to rid the country of worthless, suspect patents.  So hedge fund managers realized that if they targeted certain pharmaceutical companies challenged those companies’ key patents, they could drop the value of those companies’ publicly traded stocks.  The hedge fund managers would know which companies patents were being targeted (because they were the ones doing the targeting) and they could simply short those stocks on the exchange and reap huge profits for their work. 

This result has swung the balance between patent owners and patent invalidators once again — this time in favor of those challenging issued patents. There is now financial incentive to remove patents from the marketplace and to target companies who rely heavily on patent protection in doing so. This does nothing to promote the development of new and useful technology — it does the exact opposite. It disincentivizes companies from investing in patent protection for fear of putting a target on their backs.  This ultimately results in less technology being developed.

As patent reform continues to be debated in Congress (and as its chances of passing seem to be growing slimmer and slimmer every day), this issue is not on the table. While discussions continue on fee shifting legislation or pleading standards, little to nothing is being said about abusive patent validity challenges. At a minimum, the rise of “patent invalidation for profit” should give Congress pause. Every effort to “reform” or adjust the patent system and its laws and regulations will have unintended consequences. The rush to kill the patent troll has already produced some. Congress would be wise to consider this lesson as it mulls still further changes to the patent system.