The patent ecosystem continued to show signs of a shift back in favor of patent owners in the second quarter, as some of the plaintiff-centric trends from Q1 remained at play. Patent validity challenges, in particular, underwent further changes in Q2 as a result of judicial decisions issued earlier this year. Although inter partes review (IPR) survived the US Supreme Court decision in Oil States, the limitations imposed on IPR by the Court’s opinion in SAS Institute may curtail the review proceeding’s speed and efficiency in the months ahead. Meanwhile, the impact of the Federal Circuit’s recent decisions affecting early patent eligibility motions brought under Alice continued to ripple throughout the patent system. The Supreme Court also issued its opinion in WesternGeco, allowing plaintiffs to win additional damages in patent cases involving certain foreign-manufactured products that include US-made components.

Outside the courts, operating companies continued to transfer patents to prominent NPEs, while other NPEs continued to acquire and assert patents divested from larger assertion entities that have largely stopped litigating. In addition, various Trump Administration officials began to stake out increasingly defined positions on various patent issues, including Alice, claim construction standards for the Patent Trial and Appeal Board (PTAB), and standard essential patent (SEP) licensing.

In this quarterly update, we review the following:

Litigation Update

NPEs added 419 new defendants to patent lawsuits in the second quarter of 2018, an increase of about 5% from Q1 (during which time NPEs added 399 defendants). However, operating company litigation dipped during Q2, with new defendants totaling 389 for the quarter—compared to the 538 defendants added by operating companies in the first quarter. Taken together, a total of 808 defendants were added to patent suits in Q2, a decrease of around 13.7% from Q1 (which saw 936 defendants added overall).

The Evolution of Alice: Courts and the USPTO Adjust to Berkheimer and Aatrix

The Federal Circuit made waves in Q1 with its February decisions in Berkheimer v. HP and Aatrix Software v. Green Shades Software, both of which for the first time elevated the role of facts in the subject matter eligibility analysis. In Berkheimer and Aatrix, the Federal Circuit overturned Alice invalidations brought at the summary judgment and Rule 12 stages, respectively, because the plaintiffs had raised sufficient questions of material fact as to whether the challenged patents were sufficiently inventive (the second step of Alice) such that dismissal was premature. Early analyses of those cases raised concerns that the decisions would together undercut the availability of Alice as a tool for achieving the early resolution of patent suits by making it far more difficult to challenge the eligibility of patents before trial.

Just about five months later, though, district courts have thus far applied Berkheimer and Aatrix fairly conservatively. As of July 9, district courts have issued around 16 orders on Alice motions that address factual disputes raised in light of Berkheimer and Aatrix, and of those orders, about four resulted in the denial of an Alice motion due to such disputes over inventiveness. Meanwhile, RPX has observed NPEs adapting their pleadings in response to the Federal Circuit’s decisions; some (including IP Edge LLC, which RPX data shows has cumulatively added more defendants to patent lawsuits than any other plaintiff since 2000) have begun to fill their complaints with extensive citations to their asserted patents’ specifications in apparent attempts to preemptively establish the patents’ inventiveness.

Berkheimer, in particular, has had perhaps the greatest impact on patent examination standards. On April 19, the USPTO issued a memorandum addressing Berkheimer that changed Step 2B of the patent examination process, which encompasses step two of the Alice analysis: whether a patent’s limitations amount to “significantly more” than the abstract idea alone (i.e., if limitations add an “inventive concept”). The memorandum states that an examiner must now show specific evidence for a determination that a claimed limitation instead amounts to a “well‑understood, routine, and conventional activity”—evidence that can include prior art. Here, the USPTO clarified that the cited prior art cannot just disclose the element at issue, as for a 102 or 103 analysis; rather, it must show that the element is “widely prevalent or in common use in the relevant industry”. This effectively creates a presumption that an element amounts to “significantly more” absent a specific showing to the contrary, and (at least in theory) reduces the subjectivity of the “inventive concept” analysis.

Meanwhile, in late May, the full Federal Circuit declined to rehear Berkheimer and Aatrix en banc, and the opinions issued along with those decisions showed the court to be divided as to the decisions’ impact on Alice jurisprudence. While Circuit Judge Kimberly Moore (the author of the Berkheimer and Aatrix opinions) stated in a concurring opinion that the holdings’ treatment of facts in the 101 analysis was “unremarkable”, Circuit Judge Jimmie Reyna—who authored a blistering dissent in Aatrix—again dissented, arguing that “the consequences of this decision are staggering and wholly unmoored from our precedent”.

As the impact of the two decisions continues to play out, RPX data indicates that the overall percentage of patents invalidated by district courts under Alice stands at around 66% nationwide as of July 5, 2018. Broken down by district, as shown below, the invalidation rate for Delaware—the most active district by number of patents assessed under Alice—hovers close to the national average, around 63%. The Northern District of California, the number two district, invalidates 71% of the patents it reviews under Alice; while the Eastern District of Texas unsurprisingly has the lowest invalidation rate of the top five at 54%.

WesternGeco: Opening the Floodgates for Foreign Damages?

On June 22, the US Supreme Court issued its decision in WesternGeco v. ION Geophysical, holding that a patent infringement plaintiff can recover damages for lost profits when a defendant supplies certain components in the US to be assembled into an infringing product abroad. Given the wide range of products that are manufactured in other countries using US-made components, the majority’s decision could pave the way for much higher damages.

While RPX data shows that plaintiffs have historically alleged infringement under the statute addressed by WesternGeco (35 USC Section 271(f)) relatively infrequently since January 2017—about 5% of the time—that is likely to change in the near future as a result of the decision. WesternGeco may also affect more than just filing levels; for instance, parties will undoubtedly have to spend more time litigating whether a given defendant was the true cause of a plaintiff’s foreign lost profits, since the Supreme Court’s opinion failed to provide guidance on that issue. In addition, it remains to be seen how the decision will impact the software and e-commerce market sectors, since prior case law on Section 271(f) deals more with physical components.

For a more in-depth analysis of the impact of WesternGeco, see RPX’s recent blog post. A detailed summary of the decision can be found on RPX Insight.

Venue: One Year After TC Heartland

Meanwhile, the distribution of venue for patent lawsuits has largely settled down in the wake of another important Supreme Court holding: the May 2017 decision in TC Heartland v. Kraft Foods Group Brands. Just over a year later, the District of Delaware remains the most popular venue for NPE litigation, as it has been for every full quarter since TC Heartland issued. The Eastern District of Texas, the NPE venue of choice before TC Heartland, has been relegated to the number two spot during each of those quarters as well. Delaware has also consistently held the top spot for operating company patent suits since TC Heartland.

Although TC Heartland’s impact on new filings has largely evened out, the Federal Circuit has continued to provide clarity on a variety of issues related to venue disputes that were not addressed by the Supreme Court’s opinion. This guidance includes three decisions in the last quarter alone, each of which could impact strategic decisions for both plaintiffs and defendants. In early May, the Federal Circuit held in In re: HTC that foreign defendants may still be sued in any district; although this leaves the door open for forum-shopping as to those entities, plaintiffs still have to show that foreign parent corporations, and not their American subsidiaries, have committed acts of infringement in the chosen district. Less than a week later, the Federal Circuit held in In re: ZTE that plaintiffs bear the burden of proof when faced with an improper venue motion, a standard that may require more plaintiff due diligence before filing. Shortly afterward, the Federal Circuit held in In re: BigCommerce that defendants incorporated in multi-district states like Texas only “reside”, for venue purposes, in the district where they have their principal place of business or registered office. Although this decision will probably have less of an impact than the other two handed down in Q2, it will undoubtedly disappoint the subset of NPEs hoping to sue affected Texas defendants in the Eastern District.

PTAB Filings and the Aftermath of SAS Institute

In the second quarter, 406 petitions for AIA review were filed with the PTAB, including 385 petitions for IPR, 12 petitions for post-grant review, and 9 petitions for covered business method review. Overall filing levels were about the same as in the first quarter, which saw 410 petitions filed in similar proportions.

In late April, the Supreme Court issued two long-awaited decisions addressing IPR in Oil States Energy Services v. Greene’s Energy Group and SAS Institute v. Iancu. Although the IP community had mainly focused on Oil States, in which the Court ultimately found IPR constitutional, its decision barring partial institution decisions in SAS Institute will likely have a greater impact. SAS Institute may affect the PTAB’s efficiency over the long term, as the Board may no longer choose to institute trial for just a subset of the claims challenged in an IPR petition. As such, resource constraints may make it more difficult for the PTAB to issue final decisions in a timely manner. Furthermore, litigation defendants now have to contend with SAS Institute’s impact on estoppel, which in the context of IPR means that petitioners may not raise any invalidity arguments in a district court lawsuit that the petitioner “raised or reasonably could have raised during” an IPR. However, the Court’s opinion may also make it easier for defendants to obtain stays for those lawsuits, given that the result of the broader range of claims addressed by institution decisions will be greater overlap with the claims at issue in the corresponding district court litigation.

While SAS Institute will undoubtedly affect the strategies of some IPR petitioners, RPX data shows that a fairly low percentage of IPRs have received partial institution decisions over the lifetime of the IPR program. On average, just 14% of IPR petitions have been partially instituted since the first of those decisions issued in December 2012, suggesting that SAS Institute will only affect around the same portion of IPRs going forward.

Market Developments

Intellectual Ventures Continues to Divest Patents to Active NPE Litigants

Throughout the second quarter, Intellectual Ventures LLC (IV) continued to divest patents to other NPEs, some of which have since asserted the patents in litigation. This trend first picked up steam in Q1 after IV previously announced, in 2017, that it would move away from the active acquisition of patents.

  • IPValuation Partners, LLC: RPX saw the assignment of multiple portfolios from IV to two litigating affiliates of patent monetization firm IPValuation Partners, LLC (d/b/a IPVal) in Q2. In early June, as reported by RPX, the USPTO disclosed the December 2017 assignment of patents originating with Samsung and Raytheon to IPVal affiliate PC Coma LLC, which in late May began asserting the patents against printer manufacturers. In addition, an assignment from IV to IPVal affiliate Contemporary Display LLC was recorded in May; the latter NPE has asserted those patents, starting in April, against companies offering smart TVs.
  • Quest Patent Research Corporation: In early May, the assignment of multiple patent assets from IV to CXT Systems, Inc. was recorded with the USPTO. CXT, a subsidiary of publicly traded Quest Patent Research Corporation, began asserting a subset of the patents in April against a series of online retailers. As reported by RPX, Quest has disclosed in multiple SEC filings that IV has retained an interest in CXT’s litigation, with IV to receive 50% of any net proceeds from asserting the acquired patents.
  • Dominion Harbor Enterprises, LLC: In early April, an assignment of more than 400 patents from IV to Vista Peak Ventures, LLC, an affiliate of Dominion Harbor Enterprises, LLC, was recorded with the Patent Office. That transfer appears to be part of a deal between Dominion Harbor and IV that the former announced in February, under which the NPE purportedly acquired over 1,200 US and foreign LCD patents that originated with NEC. That agreement follows another acquisition from IV that Dominion announced in March, reportedly including a portfolio of nearly 1,000 patents that were developed by American Express.
  • Longhorn IP LLC: In late April, monetization firm Longhorn IP LLC announced that its subsidiary Nordic Interactive Technologies LLC had acquired an international portfolio of patents from IV. The assignment of that portfolio (recorded in May) revealed that the portfolio included assets that originated with Nokia, with subject matter including predictive coding, video compression, wireless communications, and digital image encoding. Although Nordic has not yet filed any US litigation, Longhorn subsidiary Lone Star Silicon Innovations LLC has waged a domestic campaign against various semiconductor companies. The firm’s subsidiaries L2 Mobile Technologies LLC and Ox Mobile Technologies LLC have also asserted patents in China.

Operating Companies Selling Patents to NPEs, Potentially Fueling Future Litigation

Throughout the second quarter of 2018, RPX also observed and reported on the assignment of patent portfolios from operating companies to a variety of prominent NPEs, including several highly active plaintiffs. For example, in late April, Panasonic assigned a patent portfolio to Conversant Intellectual Property Management, Inc., the parent of active litigant Conversant Wireless Licensing S.à.r.l. In addition, Wi-LAN Inc. (the patent licensing arm of publicly traded Quarterhill Inc.) announced in May that its subsidiary Security Video Camera Systems Inc. had acquired from Panasonic a set of patents covering “various security camera surveillance technologies”, a transaction that included an agreement to share licensing revenues. Meanwhile, in mid-April, VLSI Technology LLC, a Fortress Investment Group LLC affiliate, acquired a patent from NXP Semiconductor; to date, NXP has assigned more than 100 patents to that same NPE. VLSI asserted five of those patents against Intel in late June and another eight against the company last October. Furthermore, in early Q2, the USPTO published the September 2017 assignment of a patent from Huawei to VID SCALE Inc., a subsidiary of publicly traded InterDigital, Inc.; this followed another late 2017 assignment to InterDigital from LG Electronics that was recorded in March.

Brian Yates-Controlled NPE Launches New Licensing Program

Just before the end of the second quarter, iPEL, Inc.—an NPE controlled by Brian Yates, an attorney behind numerous other entities that have filed litigation—announced the launch of a new licensing initiative. iPEL appears to have obtained funding by leveraging various patent assets as part of a financing agreement with a private credit manager. While the amount borrowed is not known, iPEL reports having raised $100M in initial capital. Yates has also indicated that he plans to spend at least $100M to acquire more patents over the next 18 months; iPEL has already reportedly acquired over 1,000 Chinese patents from Huawei, Panasonic, and ZTE.

Patent Policy

Various government agencies and officials began to flesh out earlier positions on several key patent issues, most notably Alice, striking a posture much more overtly friendly to patent owners. In addition to the USPTO’s Berkheimer examiner memorandum, USPTO Director Andrei Iancu has in recent months been outspoken about his desire to see changes for Section 101. In a speech given in early June, Iancu decried the current Alice regime as one under which groundbreaking inventions like Edison’s phonograph would likely be found ineligible. Iancu further characterized the Alice test as both unclear and as a “tortured exercise” that questionably bars the patenting of inventions that are otherwise “perhaps entirely novel, completely nonobvious, enabled, and well-claimed”. Although Iancu has not laid out any specific policy proposals, in that same speech he emphasized the need to be clear about the limits on eligibility, suggesting that to be transparent a discrete list of unpatentable subject matter, building on prior case law, might be warranted.

Iancu has also expressed his support for legislative 101 reform; in an April hearing, he testified at a Senate Judiciary Committee hearing that “should Congress decide to explore a legislative adjustment of Section 101, [the Patent Office] would work with this Committee and with stakeholders to explore viable options”. Various industry stakeholders have also proposed changes to Section 101 through legislation, including the American Bar Association’s Intellectual Property Law Section, the American Intellectual Property Law Association, and the Intellectual Property Owners Association. Suggested reforms include the codification of certain exceptions to patentable subject matter and provisions that prevent the consideration of issues central to patentability under Sections 102, 103, and 112. Iancu has not specifically addressed those proposals in his public commentary.

Separately, the USPTO has proposed a rule change that would require the PTAB to switch from the “broadest reasonable construction” standard for claim construction in AIA reviews to the narrower Philips standard used in district court litigation. Testifying before the US House Judiciary Committee in late May, Iancu defended the change as needed to prevent the PTAB and courts from interpreting claims inconsistently. Critics on that committee raised concerns that the change could unduly narrow the gap between the PTAB and the courts, in part by obligating the PTAB to adopt a court’s prior rulings on claim construction.

Finally, Assistant Attorney General Makan Delrahim, the head of the DOJ’s Antitrust Division, has expanded upon his controversial statements from Q1 in which he argued that prior antitrust policy for SEP licensing had been overly skewed toward SEP implementors and called for a greater focus on licensing delays by those implementors (hold-out). In a speech given in early April, Delrahim renewed his call for a balance of interests between patent owners and would-be licensees but clarified that his previous comments on antitrust and IP were really “advocacy positions” designed to illustrate ideal conditions and contrast them with conduct that “might attract enforcement scrutiny”, rather than actual “enforcement intentions”. Despite this clarification, Delrahim has pushed back against those who have criticized his policy statements. For instance, in May, a group of 77 former government officials and professors of law, business, and economics sent Delrahim an open letter arguing that there was bipartisan agreement that licensor hold-up was a greater concern than hold-out, among other issues. Delrahim responded by reiterating his call for “greater symmetry between concerns regarding patent hold-up and patent hold-out”.