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The Cost of Defending Against Patent Trolls

Posted in Intellectual Property Litigation, Technology News & Events

It should come as no surprise that defending against Non-Producing Entities—most of which are Patent Trolls[1]—is expensive, especially for small businesses and corporations. In support of his ongoing legal battle with the patent troll Personal Audio, LLC, Adam Carolla has currently raised over $445,000 dollars towards litigation through the crowdfunding website FundAnything.com.[2] Yet, unless Personal Audio decides to drop the litigation entirely, Carolla’s legal costs will certainly climb much higher.

 AVERAGE COSTS OF DEFENDING AGAINST NPEs

Carolla estimates that defending against Personal Audio’s patent suit could cost around $1.5M. This number is a reasonable prediction based upon the average expenses of other defendants in patent infringement lawsuits brought by NPEs. In recent years, over half of plaintiffs in patent infringement claims have been NPEs. In 2013 alone, 67% of patent infringement cases were filed by NPEs.[3] The median litigation cost to defend against a patent infringement claim by a NPE where the amount in controversy is between $1M-$25M is a staggering $983,000 at the end of discovery and $1.75M after trial.[4] The mean litigation cost is even higher—1.3M after discovery and $2.0M after trial. Predictably, the cost of litigating against a NPE rises as the amount in controversy rises. If Personal Audio pursues its case to a judgment, it will likely cost Carolla at least $1M in legal costs.

SETTLEMENT AND PROGNOSIS

In his battle against Personal Audio, Carolla has determined not to settle and fund his legal defense out of pocket if necessary. Patent trolls are frequently criticized for pursuing settlement costs as a key source of revenue. Approximately 90% of patent infringement suits initiated by NPEs settle.[5] Of those that do not settle, many more are defeated at the summary judgment stage. Ultimately, only 26% of patent infringement claims by NPEs within the past few years have been successful.[6] Yet, of those patent infringement claims that do reach trial, 65% are successful. In light of the potential to be stuck with massive royalty damages and momentous litigation costs, it is little surprise that most defendants choose to settle. Personal Audio has previously offered to settle for $3M.[7] If, as Carolla believes, Personal Audio does not have a valid legal claim[8], there is a strong probability that he can win the case at the summary judgment stage.

 COST-SHIFTING OF ATTORNEY’S FEES

 In light of high legal costs and the tendency of patent troll entities to pursue litigation for financial gain, there has recently been a movement to reform patent law by granting attorney’s fees to the prevailing party in a patent infringement suit. Federal law does allow parties to recover attorney’s fees, but only in “exceptional” cases.[9] Recently, the Supreme Court has adopted a broader interpretation of what is an exceptional case in Octane Fitness, LLC v. ICON Health and Fitness.[10] Previously, a case was only exceptional if it was brought in bad faith or was objectively baseless. Under the Supreme Court’s new interpretation, an exceptional case in one that stands out from other similar cases with regards to the substantive strength of a party’s litigating position or the unreasonable manner in which the case was litigated.

 In theory, Octane Fitness may assist defendants like Carolla, but the determination is ultimately left to the trial court’s discretion and its interpretation of the plaintiff’s claim. Current law may likely be insufficient to compel courts to apply cost shifting against NPEs and encourage defendants to litigate patent infringement claims to a final judgment. The most popular jurisdictions, in which NPEs file over half of their patent infringement claims, are the Eastern District of Texas and Delaware.[11] These two districts have two of the highest success rates for NPE claims which reach a final judgment.[12] Though the full impact of Octane Fitness remains to be seen, given that NPE litigation is concentrated within two favorable jurisdictions, shifting the costs from defendants to patent trolls in vexatious cases could require a further legislative push.

 In 2013, the Innovation Act (2013 H.R. 3309) passed in the House. This bill included a provision which allowed the prevailing party to recover reasonable attorney’s fees. But, previous attempts to pass patent reform targeted specifically at patent trolls through the Senate failed after Sen. Leahy (D-VT) pulled patent reform from the Senate’s agenda.[13] There were many bills being considered in the Senate, but the main bill was the Patent Quality Improvement Act (2013 S. 866). This compromise bill did not include a cost-shifting provision. Many news outlets have reported that the decision to pull patent reform was motivated by interests groups such as biotech, pharmaceuticals, Universities, and law firms.[14] These entities, which rely on their ability to assert patent rights, oppose cost-shifting reform.

CONCLUSION

The current risk of defending against patent infringement claims is very high. Because of high legal costs and the difficulty of recovering reasonable attorney’s fees, defendants are motivated to settle even when faced with claims that a defendant believes will be unsuccessful. If patent trolls are to be deterred in the future, it must become more cost effective for defendants like Carolla to mount a legal defense. Otherwise, settlements will continue, and patent trolls will continue to dominate patent infringement litigation.


[1] See RPX Corp., 2013 NPE Litigation Report 39, available at http://www.rpxcorp.com/wp-content/uploads/2014/01/RPX-2013-NPE-Litigation-Report.pdf.

[2] Adam Carolla, Save Our Podcasts Legal Defense Fund, FundAnything.com, https://fundanything.com/en/campaigns/patenttroll (last visited July 17, 2014).

[3] Pricewaterhouse Coopers LLP, 2014 Patent Litigation Study 2, available at http://www.pwc.com/en_US/us/forensic-services/publications/assets/2014-patent-litigation-study.pdf

[4] Am. Intellectual Prop. Law Ass’n, Report of the Economic Survey 35 (2013).

[5] John R. Allison et al., Patent Quality and Settlement Among Repeat Patent Litigants, 99 Geo L.J. 674, 694 (2011).

[6] Pricewaterhouse Coopers supra note 3, at 11.

[7] Brian Lund, Can Adam Carolla Defeat a Patent Troll and Save Podcasting?, Daily Finance (April 9th, 2014, 12:24 AM)http://www.dailyfinance.com/on/adam-carolla-patent-troll-podcasting-lawsuit-stakes/.

[8] Michael Pham, Carolla Going after the Patent Trolls, WinTech Blog (July 8th 2014) http://www.wintechblog.com/2014/07/carolla-going-after-the-patent-trolls/.

[9] 35 U.S.C.A. § 285 (West, Westlaw through 2014).

[10] Octane Fitness, LLC V. ICON Health and Fitness, 134 S.Ct. 1749 (2014).

[11] RPX Corp., supra note 1, at 18.

[12] These numbers are based upon patent infringement suits litigated by NPEs in the period from 1995-2013. Pricewaterhouse Coopers LLP, supra note 3, at 18.

[13] Sam Gustin, This is How the Patent Trolls Won, Time (May 24, 2014) http://time.com/111639/patent-reform/.

[14] See, e.g., Erin Mershon & Tony Romm, Patent Reform Hits Dead End in Senate, Politico (May 21, 2014) http://www.politico.com/story/2014/05/patent-reform-senate-106968.html.

Authors: Michael Pham, Matthew Heller

 

Victims of Patent Trolls Get Re-Sharpened Weapon in their Defense

Posted in Intellectual Property Litigation, IP Counseling and Strategies, Technology News & Events, Technology Transactions

 Fee-shifting in patent infringement suits has been authorized by statute since 1952, for application in “exceptional cases.” [1] For the past nine years, that statute has not often been applied as a result of the Federal Circuits’ decision in Brooks Furniture, which requires the prevailing party in a patent infringement action seeking attorney’s fees establish either: (1) their opponent had committed an act independently sanctionable under federal rules; or (2) that the claim against them was objectively baseless and subjectively brought in bad faith. [2] Given that both tests were governed by a “clear and convincing” evidentiary standard, the fee-shifting statute was effectively neutered and the modern patent troll – a non-practicing patent holding entity hoping only to coerce a licensing fee via the threat of litigation – had little to fear when asserting their potentially dubious rights.

The Supreme Court has recently taken steps that may loosen the Federal Circuit’s “unduly rigid” definition of that fee-shifting statute in April’s Octane Fitness decision. In place of structured tests the Supreme Court returned to pure judicial discretion – “exceptional cases” in the post-Octane Fitness world are to be determined on individualized basis that factors in any and all aspects of the litigation the presiding judge finds relevant. [3]

In the Southern District of New York, Justice Denise L. Cote swung the sword handed to her in Octane Fitness. Cote awarded attorney’s fees to a plaintiff who had been met with threats of extensive litigation, including “all motion practice as well as protracted discovery.” The court didn’t just look at what the defendant’s said and did with regards to the plaintiff, but analyzed their behavior in general, finding they employed a “predatory strategy” that resulted in a number of nearly identical suits filed in a small time frame. The plaintiff had even continued to assert their claim despite leaving it undisputed that the defendant did not infringe the plaintiff’s patent. Without utilizing the term, Cote made it clear that the plaintiff was a patent troll and one who would be paying for his own day in court in addition to his opponent’s. [4] Other courts are following in Cote’s footsteps and using Octane Fitness to punish plaintiff’s bringing questionable patent infringement claims. [5]

The transition back to freer fee-shifting is undoubtedly a positive development in the fight against patent trolling. However, concerns still exist for defendants, namely that even should they prevail in an action the judge might not find the behavior of the opposing party offensive enough to grant fees, even under the relaxed Octane Fitness framework. For a litigant who fears the worst outcome, the same motivation to settle the suit early on in the judicial process still exists and the patent troll behavior isn’t curtailed.

At the least, however, Octane Fitness has freed courts’ hands from the Federal Circuit’s rules and Lumen View has given the legal world an idea of what behaviors will put those hands into motion. Given the broad grant of judicial discretion and case-by-case basis of application, different profiles of an “exceptional case” will emerge over the coming years and it will take a measured, focused, and sometimes brave approach to prove victorious in and help minimize vexatious patent litigation.

 [1] See 35 U.S.C. § 285.

[2] Brooks Furniture Mfg. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381-2 (Fed. Cir. 2005).

[3] Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749, 1755-6 (2014).

[4] Lumen View Tech. v. Findthebest.com, 1:13-CV-03599, 2014 U.S.Dist. LEXIS 75209, at *5-*6 (S.D.N.Y. May 30, 2014).

[5] See Precision Links Inc. v. USA Prods. Grp., 3:08-CV-00576, 2014 U.S. Dist. LEXIS 85694 (W.D.N.C. Jun. 24, 2014).

Authors: Kyle Dugan* and Robert Shaddox

*BENJAMIN N. CARDOZO SCHOOL OF LAW, Candidate for Juris Doctor, June, 2015

Are Computer-implemented Inventions Patent Eligible? Go ask Alice

Posted in Biotechnology, Development & Commercialization of Technology, Nanotechnology, Patent Counseling & Strategies

On June 19, 2014, the U.S. Supreme Court issued a unanimous decision in Alice Corp. v. CLS Bank Int’l (Alice)[i].  In Alice, the Court held that several computer-implemented patents were not eligible for patenting under 35 U.S.C. §101 because they were drawn to nothing more than an abstract idea[ii].  In response to the decision, the United States Patent and Trademark Office (USPTO) issued preliminary examination instructions to patent examiners for determining the patent eligibility of computer-implemented inventions involving abstract ideas (Guidelines)[iii].

The above decision and Guidelines provide some guidance on the patent eligibility of computer-implemented inventions that involve abstract ideas.  However, their full effect remains to be determined.

The Supreme Court Decision

The patents at issue in Alice related to a computerized platform for eliminating risk in conducting financial transactions between two parties.  The platform utilized an escrow as a neutral intermediary.  The neutral intermediary ensured that each party met its respective obligations before any obligations were actually exchanged.

The Court held that Alice’s patents were ineligible under 35 U.S.C. §101 because they were “drawn to the abstract idea of intermediated settlement.”  In addition, the Court held that the claimed invention merely required a “generic computer implementation” that failed “to transform that abstract idea into a patent-eligible invention.”

In reaching this conclusion, the Court relied on the 35 U.S.C. §101 analytical framework that was outlined in the Court’s prior decision in Mayo v. Prometheus (Mayo) [iv].  In Mayo, the Court asked two questions for determining patent eligibility. First, the Court asked if the invention was directed to any of the judicial exceptions to patent eligibility, such as “abstract ideas,” “laws of nature,” or “natural phenomena.”  If so, then the Court asked if the invention contained an “inventive concept” that was sufficient to transform the abstract idea into a patent-eligible invention.

In applying the first prong of the Mayo analytical framework, the Court in Alice reasoned that the ideas of intermediated settlement that were outlined in the claimed invention were abstract ideas because they pertained to prevalent and fundamental economic practices.  With respect to the second prong, the Court reasoned that the claimed invention did not contain an “inventive concept” because it was only a mere implementation of an “abstract idea” by “using a general-purpose computer.”

The Guidelines

In the Guidelines, the USPTO also followed the analytical framework that was outlined in Mayo and Alice.  In particular, the Guidelines indicated that patent examiners can utilize a two-part analysis for evaluating the patent eligibility of abstract ideas.  First, examiners must “determine whether the claimed invention is directed to an abstract idea.”  Second, if an abstract idea is present, the examiners must determine whether the claimed invention is sufficient to ensure that it amounts to “significantly more than the abstract idea itself.”

First Prong: What is an Abstract Idea?

With respect to the first prong, the Guidelines explained that abstract ideas can include the following: (1) fundamental economic practices; (2) some methods of organizing human activities; (3) an idea itself; and (4) mathematical relationships or formulas.

Second Prong: What is “Significantly More”?

With respect to the second prong, the Guidelines explained that the following aspects of an invention may be “significantly more than the abstract idea itself”: (1) improvements to a technology or technical field; (2) improvements to the functioning of a computer itself; and (3) limitations that link the abstract idea to a particular technological environment.

However, the Guidelines indicated that terms such as “apply it” or equivalent words would not be enough by themselves to add “significantly more” to an abstract idea. Likewise, the Guidelines indicated that claimed inventions that recite “no more than a generic computer to perform generic computer functions that are well-understood, routine and conventional activities previously known to the industry” are not enough to add “significantly more” to an abstract idea.

Where Things Stand

Prior to the issuance of the Supreme Court’s decision in Alice, there were concerns that the decision would completely eliminate software and business methods patents.  However, the decision and Guidelines indicate otherwise.

For instance, the Guidelines explicitly state that “Alice Corp. neither creates a per se excluded category of subject matter, such as software or business methods, nor imposes any special requirements for eligibility of software or business methods.”  Moreover, the Guidelines explain that Alice’s patents were held to be patent ineligible because “the generically-recited computers in the claimed invention add nothing of substance to the underlying abstract idea.”

Therefore, it is unlikely that all software, computer-implemented and business method inventions would be affected by the decision and Guidelines.  For instance, software inventions that improve the functioning of a computer may still be eligible for patent protection.  Likewise, software inventions that improve other technical fields may also be eligible for patent protection.

Nonetheless, the full effect of the decision and Guidelines remains to be determined.  For instance, the extent of the application of the Guidelines by the examiners remains to be determined.  Moreover, the definition of “abstract ideas” and “significantly more” may be modified or confined by subsequent court decisions or USPTO guidelines.


[i] Alice Corporation Pty. Ltd. v. CLS Bank International, et al., 573 U.S. ___, No. 13-298 (June 19, 2014).

[ii] 35 U.S.C. §101 states that, “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”  Judicial exceptions to what constitutes patent eligible subject matter have included “abstract ideas,” “laws of nature,” and “natural phenomena.”

[iii] June 25, 2014 Memorandum issued by Andrew H. Hirshfeid, Deputy Commissioner For Patent Examination Policy, to the Patent Examining Corps, entitled “Preliminary Examination Instructions in view of the Supreme Court Decision in Alice Corporation Ply. Ltd. v. CLS Bank Illternational, et al.”  http://www.uspto.gov/patents/announce/alice_pec_25jun2014.pdf

[iv] Mayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc., 132 S.Ct. 1289  (March 20, 2012)

Carolla Going after the Patent Trolls

Posted in Intellectual Property Litigation

Adam Carolla continues his battle against the patent troll, Personal Audio, LLC.  So far, Carolla has spent more than $450,000 in attorney fees.  The result?  There has been enough discovery for Carolla to determine that Personal Audio does not have a case against him.  The lawsuit, however, is still proceeding against Carolla.[1]

But there is some good news.  Jay Leno has reached out to Carolla and offered to help his fight against Personal Audio.  Carolla also plans to have another benefit concert, this time with Hanson and Kelley James.[2]  Carolla is adamant about not settling with Personal Audio and was vocal about Personal Audio making the mistake of messing with the wrong people, i.e., the Adam Carolla Show.

According to Rich DeMuro, a guest on the Adam Carolla Show and tech reporter for KTLA-TV Channel 5 in Los Angeles,[3] one of the problems with the current patent system is that sometimes the involved judge, jury, and lawyers do not adequately understand the underlying technology at dispute.  Although expert witnesses assist the judge and jury in understanding the underlying technology, expert witnesses are costly, as it has been in Adam Carolla’s case.

For patent reform, DeMuro mentions the concept of awarding attorneys’ fees to defendants if a judge rules that there was no reasonable basis for a patent infringement lawsuit.[4]  Carolla has an additional patent reform idea that borrows from California’s Vexatious Litigant List, which is a list of litigants that have filed numerous lawsuits in the past.[5]  Under that law, a California court may enter a prefiling order that prohibits a vexatious litigant from filing any new litigation in California without first obtaining permission from the court.

DeMuro says that Personal Audio has, in the past, sued Apple, Samsung, and several other companies for technology that involve playlist systems and podcasts.  Although Adam Carolla’s lawsuit was not filed in California, Personal Audio has probably made it onto Carolla’s personal list of trolls that need to be banned.


[1] Rich DeMuro, The Adam Carolla Show (July 1, 2014), http://adamcarolla.com/rich-demuro/.

[2] Carolla held a concert in March at the Redondo Beach Performing Arts Center as part of his legal defense crowdfunding campaign on FundAnything.com.

[3] See Rich DeMuro–Tech Guy, http://richdemuro.com (last visited July 7, 2014).

[4] See also the patent bill that was removed from the Senate Judiciary Committee’s agenda on May 21, 2014.  Michael Pham, Removal of Patent Troll Bill, WinTech Blog (May 28, 2014), http://www.wintechblog.com/2014/05/removal-of-patent-troll-bill/.

[5] Cal. Civ. Proc. Code § 391.7; Vexatious Litigant List, California Courts, http://www.courts.ca.gov/12272.htm.

Financing with IP Collateral

Posted in Biotechnology, Development & Commercialization of Technology, Nanotechnology, Patent Counseling & Strategies, Technology News & Events, Technology Transactions, Venture Capital, Private Equity and Other Financings

In a recent guest post on the Patently-O blog by Dennis Crouch, http://patentlyo.com/, William Mann, an assistant professor of finance at the Anderson School of Management, UCLA, notes the explosion in USPTO filings that record a creditor’s security interest in a patent.  Secured debt can be a significant source of financing for many technology companies, with the value of their patent portfolio contributing heavily to financing capacity.  Professor Mann’s work (recent paper) reflects the importance of intellectual property as an asset class and increasing efforts by businesses to monetize that asset class.

Given the significance of IP portfolios as collateral it is somewhat surprising to find that frequently lenders fail to secure or properly document interests in the IP.  These failures can lead to damage to or loss of a lender’s priority, and in some circumstances to loss of IP rights held by the borrowers.

A security interest is perfected by filing the right document in the right place.  Perfection of security interests in general is controlled by the Uniform Commercial Code (U.C.C.) as adopted by the states, but ownership of patents, trademarks, and copyrights is controlled by federal law.  The interplay between state and federal law, and the differences between patent, trademark and copyright ownership and recording requirements under federal law, make it important not to miss key elements required.

PATENTS

The Patent Act does not specifically preempt state law regarding security interests.  Case law indicates that U.C.C. filings perfect security interests in patents as to subsequent lien creditors and PTO filings perfect security interests with respect to subsequent purchasers and mortgagees.  Searches for prior interests should be done both in state records and in the USPTO.  Best practice is to file both with the U.C.C. and with the USPTO.  Note also that under the patent statute there is a three month grace period for filing assignments which could lead to a previously perfected state U.C.C. security interest being superseded.  Records searches cannot locate these types of transactions so warranties should be obtained from creditors that no conflicting interests in the patent have been granted.

TRADEMARKS

The federal law controlling trademarks is the Lanham Act.  Searches for prior interests should be done both in state records and in the USPTO.  Like the Patent Act, the Lanham Act does not specifically preempt state law regarding security interests.  Case law indicates that U.C.C. filings perfect security interests in trademarks.  The trademark statute also has a three month grace period for filing assignments which could lead to a previously perfected state U.C.C. security interest being superseded by assignments filed within the grace period.  Best practice is to file the security interest both as a state U.C.C. filing and with the PTO.

Documentation for security interests in trademarks must also account for the requirement under trademark law that “goodwill” associated with a trademark must be included with any assignment or transfer of the trademark.  Transferring, or attempting to transfer a trademark without the associated goodwill is invalid, and may affect or even destroy the value of the trademark.

COPYRIGHTS

The Copyright Act covers more types of transactions, transfers of ownership, than the Patent Act or the Lanham Act.  The recording system under federal law for copyrights provides for recordation of security interests in the Copyright Office and sets up a scheme for priority, and generally is understood to be sufficient to perfect a security interest in a copyright.  Priority under the Copyright Act generally is awarded to the first executed transfer rather than the first recorded transfer as under the U.C.C.  However transfers must be recorded within one month after execution or before a later transfer is recorded, in order to obtain priority.

Note however, that only registered copyrights may be recorded in the Copyright Office.  The Copyright Act does not preempt the U.C.C. for unregistered copyrights which must be perfected under the U.C.C.  If and when such unregistered works become registered, the Copyright Act automatically applies and the security interest must be re-recorded with the U.S. Copyright Office.  A typical handling of unregistered copyrights might be to require the work to be registered, to first file the security interest under the U.C.C while the application is pending, and then to record the security interest with the Copyright Office once the copyright application is finalized.

SUMMARY

Just creating an exhaustive list of intellectual property assets and filing it with the U.C.C. will ordinarily not provide the most complete and effective protection for a security interest and in some circumstances could lead to damaging the collateral itself.  Monetizing IP portfolios is increasingly a focus for technology companies.  In every case, careful analysis of the collateral is important to make sure that the right language is used for documentation, and that the right documents are timely filed in the right place.

API Protection Under Copyright Is Upheld by Federal Circuit

Posted in Development & Commercialization of Technology, E-Commerce (Internet Agreements and Issues), Intellectual Property, Technology News & Events, Technology Transactions, Uncategorized

There has been a lingering, divisive question in the software industry as to whether application programming interfaces (APIs) are entitled to copyright subject matter protection.  Critics argue that this type of source code is functional in nature and, as such, should not be protected by copyright. However, in Oracle America, Inc. v. Google, Inc., CAFA 2013-102, the Federal Circuit Court concluded that “a set of commands to instruct a computer to carry out desired operations may contain expression that is eligible for copyright protection” and Section 102(b) of the U.S. Copyright Act does not automatically prohibit copyright protection for functional elements of a computer program.

The impetus for this lawsuit arises from the smart phone wars where interoperability of programs on different platform systems is essential for commercialization. Oracle claims that Google had copied and distributed the literal code and the non-literal structure, sequence and organization (SSO) elements of Oracle’s Java APIs in conjunction with Google’s Android platform.  Google asserts that the SSO portions of the Java APIs copied were ineligible for copyright protection under Section 102(b) in pertinent part under the merger doctrine.  The merger doctrine stems from the idea-expression dichotomy of copyright wherein a work is not protected if the idea can be expressed intelligibly only in one or a limited number of ways such that the expression is inextricably merged with the idea. Section 102(b) states that “in no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.”

The Federal Circuit clarified in its ruling that the merger doctrine did not preclude the non-literal structure, sequence and organization elements of the code from copyright protection but it could be asserted as a defense to infringement, as well as fair use.  The court pointed out that the analytical focus for the copyrightability analysis should be on the external factors compelling the selection of these non-literal elements by the author of the API code at the time of creation rather than interoperability or design options available to or considered by the infringer at the time of infringement. Since Oracle’s Java APIs were found to contain creative expression in the particular selection and arrangement of method declarations, these SSO elements of the code were held to be protectable expression under copyright.

This decision is seminal for the smart phone software industry whose commercial practices are dependent upon using other’s interfacing code to make applications interoperable with a particular platform.  Our advice is to proceed with caution if your company desires to use API method declarations and/or code without first obtaining a license or other consent from its owner.

Crowdfunding in Texas – When?

Posted in Technology News & Events, Technology Transactions, Venture Capital, Private Equity and Other Financings

The Texas intrastate crowdfunding rules were adopted in April and the Texas Securities Board will consider comments to the rules through the end of June (even though the official deadline for comments is June 8th).  The matter will be considered at the next Board meeting which is expected to occur in August.  If there are no substantive changes to the rules resulting from the comments, then the Board may adopt the rules at its August meeting, the rules will be published a couple of weeks later and they will become effective 20 days after publication.  If there are substantive changes to the rules resulting from the comments, the entire schedule will be thrown off.  So – the earliest we can expect crowdfunding to non-accredited investors in Texas to become effective is September of this year.

None of this affects the current crowdfunding craze where people are only accepting investments from accredited investors.  This was made possible by the SEC’s lifting the ban on “general solicitation” in certain cases.  The unique aspect of the Texas rules is that crowdfunding to non-accredited investors will be permitted, subject to the rules set out in our May 13, 2014 post.

Removal of Patent Troll Bill

Posted in Intellectual Property Litigation, Technology News & Events

Last Wednesday, May 21, the Senate Judiciary Committee removed a bill from their agenda that sought to protect companies against “patent trolls,” which are companies whose main business is to gather patents, threaten infringement lawsuits and then offer to settle for less than the cost of defending the suit.  The effort to write this new bill came two years after the America Invents Act (“AIA”) was signed into law in 2011 by President Obama.  The AIA was a sweeping overhaul of the patent system that attempted to reduce lawsuits by patent trolls; however, it had the opposite result and caused the number of lawsuits to soar.[1]

Similarly, the bill sought to reduce patent litigation by: (1) awarding attorneys’ fees to defendants if a judge rules that there was no reasonable basis for a patent infringement lawsuit; (2) limiting the scope of preliminary discovery; (3) requiring more detailed information regarding patent ownership; and (4) allowing a manufacturer to step in to defend a customer accused of infringement.  A very similar legislation was passed overwhelmingly by the House of Representatives in December.[2]

In the Senate, however, the bill was shelved due to the failure to reach a compromise on a provision that opponents feared would inadvertently punish legitimate inventors, such as universities, small businesses, and medical and drug companies.  That provision would have required a patent plaintiff to post a bond to cover the potential payment of the opposing side’s legal fees.  “We have heard repeated concerns that the House-passed bill went beyond the scope of addressing patent trolls, and would have severe unintended consequences on legitimate patent holders who employ thousands of Americans,” said Senator Patrick Leahy, chairman of the Senate Judiciary Committee.

In an effort to gain support, Senator Leahy had been working with other senators to address these concerns and also delayed committee consideration of the bill in hopes of reaching a compromise.  However, the bill failed to gain the broad bipartisan support needed to get patent-reform legislation passed by the Senate.  The bill was ultimately dropped when Senate Majority Leader Harry Reid said he would not bring the bill up for a vote due to objections from the pharmaceutical industry and trial lawyers.[3]  “Because there is not sufficient support behind any comprehensive deal, I am taking the patent bill off the Senate Judiciary Committee agenda,” Senator Leahy said.

Retail and technology companies, the main supporters of the bill and the most frequent targets of patent infringement lawsuits, expressed disappointment over the death of the bill.  “Patent trolls and their special interest allies are the only winners today,” said Matt Tanielian, executive director of the Coalition for Patent Fairness.  “Let’s hope this setback marks the last victory for patent trolls,” said David French, senior vice president for government relations of the National Retail Federation.  French also stated that the federation was “deeply disappointed that groups representing the status quo have continued to stall and stymie attempts at effective patent reform.”

Critics of the bill said they remain open to a compromise that will tackle the patent troll issue without hurting legitimate inventors.  “This shows pretty clearly that addressing these issues is more complicated than many may have thought,” said Q. Todd Dickinson, director of the American Intellectual Property Law Association.  “The key has always been to find the right balance: deal with truly abusive behavior, while making sure that real innovators can enforce their rights,” Dickinson said.

Senator Leahy stated that although legislation is needed to “address the problem of patent trolls,” there was not enough agreement on how to approach the problem without “burdening the companies and universities who rely on the patent system every day to protect their inventions.”  Nevertheless, Senator Leahy vowed to bring the bill up again if “stakeholders are able to reach a more targeted agreement that focuses on the problem of patent trolls.”


[1]  Ron Katznelson, The America Invents Act at Work – The Major Cause for the Recent Rise in Patent Litigation, IP Watchdog (April 15, 2013), http://www.ipwatchdog.com/2013/04/15/aia-the-major-cause-for-rise-in-patent-litigation/.

[2] Timothy B. Lee, Patent reform bill passes the house 325 to 91. Here’s what you need to know., Washington Post (Dec. 5, 2013), http://www.washingtonpost.com/blogs/the-switch/wp/2013/12/05/the-house-votes-on-patent-reform-today-heres-what-you-need-to-know/.

[3] Kate Tummarello, Patent reform bill dealt fatal blow in Senate, The Hill (May 21, 2014), http://thehill.com/policy/technology/206793-leahy-takes-patent-reform-off-committee-agenda.

 

Mike Krill co-author

Is Dolly the Sheep Dead Again?

Posted in Biotechnology, Development & Commercialization of Technology, Patent Counseling & Strategies

The exceptions to patent eligibility under 35 USC 101 always fell into three distinct categories: laws of nature, abstract ideas, and natural phenomena.  In deciding a case about whether claims of farm animals may be patented, according to some commentators, the U.S. Court of Appeals for the Federal Circuit may have created a fourth judicial exception to patent eligibility.  Ruling against the inventors of Dolly the sheep, the U.S. Court of Appeals for the Federal Circuit held that since the claimed clone had the same genetic information as its parent or donor, it is an exact genetic replica of another sheep, and because the parent exists in nature, the cloned copy is also a product of nature and is therefore unpatentable.  Essentially, the court seems to be stating that if the end product is a copy of something that exists in nature, it is not patentable, regardless of the human ingenuity involved.

The story began in 1996, when Dolly the Sheep, the first mammal to be cloned from an adult cell, generated international headlines and intense ethical debates.  Dolly was euthanized six years later due to complications of a progressive lung disease.  The Roslin Institute applied for and received a patent to the method of cloning, called somatic cell nuclear transfer, which created Dolly.  Roslin had also applied for a patent to the clones themselves.  The patent to the clones was rejected by a U.S. Patent and Trademark Office (USPTO) examiner in 2008 for a lack of patent-eligibility (§ 101), anticipation (§ 102), and obviousness (§ 103).  In February 2013, the USPTO Patent Trial and Appeal Board (PTAB) affirmed the examiner’s decision.  On May 8th of this year, the U.S. Court of Appeals for the Federal Circuit affirmed the finding of the USPTO Patent Trial and Appeal Board (PTAB) that clones, although man-made, are non-patent eligible subject matter under 35 USC § 101 of the Patent law.  The Federal court decision cited the Supreme Court decisions in Myriad, Chakrabarty, and Funk Bros., as making it “clear that naturally occurring organisms are not patentable.”  The court held that only discoveries that possess “markedly different characteristics from any found in nature” . . . are eligible for patent protection.

Roslin argued that the claimed clones were not identical to donor parent because: (i) the clones had different mitochondrial DNA from the donor parent, since the method of cloning resulted in the mitochondrial DNA coming from the egg cell used to create the clone, and not the donor parent; (ii) the clones had observable differences in shape, size, color and behavior due to environmental factors, i.e., while genes help determine traits, environmental influences have a considerable impact on shaping the clone’s physical appearance and personality; and (iii) that clones are “time‐delayed versions” of the donor mammals.

The Federal court in rejecting all of Roslin’s arguments stated that the claims were written in term of genetic identity, not mitochondrial or phenotypic differences and that “there is nothing in the claims…that suggests that the clones are distinct in any relevant way from the donor animals of which they are copies.”  Further, the court stated that any phenotypic differences between Roslin’s donor mammals and its claimed clones are the result of ‘environmental factors,’ and that Roslin itself had conceded that such differences were produced “quite independently of any effort of the patentee.”  Additionally, the court stated that the argument that the clones are a time-delayed version of the donor mammals does not confer patent eligibility because the same is true of any copy.  In effect, Dolly is not patentable because she is too similar to her parent.

 In re Roslin Inst. (Edinburgh), No. 13-1407 (Fed. Cir. May 8, 2014).

Funk Bros. Seed Co. v. Kalo Inoculant Co., 333 U.S. 127 (1948).

Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980).

Association for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107 (2013).

Crowdfunding: It’s Coming to Texas

Posted in Development & Commercialization of Technology, Technology News & Events, Technology Transactions, Venture Capital, Private Equity and Other Financings

In late April, the Texas Securities Board issued proposed regulations that would allow crowdfunding in intrastate transactions in Texas.  The word on the street is that the proposed regulations will become final in August 2014.  If they do, Texas will become the 8th  and the largest state to enact intrastate crowdfunding.

Under the proposed regulations, the maximum amount that a company can raise in the offering is $1,000,000 in any 12-month period. There is no limit on the amount of money that an accredited investor can invest.  (An accredited investor is one with $200,000 in annual income (or $300,000 with his spouse) or a net worth, exclusive of home, of $1,000,000).  But an investor who isn’t accredited can’t invest more than $5,000 in any offering. The issuer has to be a Texas entity; at least 80% of its gross revenues must be derived in Texas; at least 80% of its assets must be located in Texas; at least 80% of the net proceeds of the offering must be used for Texas operations; and its principal office must be in Texas. The offering must be made exclusively through an Internet website operated by a registered general dealer or by a registered Texas crowdfinding portal.   All funds have to be maintained in an escrow account until the minimum amount established by the Company is raised.

Communications under the proposed regulations are tightly controlled.  A company may distribute a limited statement to prospective investors that it is conducting an offering in order to let prospective investors know how to get information about the offering.  All other communications between the company and the prospective investors have to take place on the Internet website of the registered general dealer or the crowdfunding portal.  Potential purchasers must be able to communicate with each other and all communications must be available to everyone who gets onto the website.    The idea here is to give everyone the benefit of everyone else’s questions and concerns as well as to the information being provided by the company.

No prospective investor can enter the website without demonstrating Texas residency.  This can be done either by a valid Texas driver’s license, a voter registration card or tax records showing the individual occupies property in Texas as his principal residence.

A company raising money under the new rules has to post extensive information on the website of the general dealer or on the portal.  This includes a summary of the offering, a description of the entity, its history, business plan and use of funds; compensation to be paid to any owner, officer, director or manager; the identity of all executive officers, directors and managers, including their prior experience; the identity of all persons owning more than 20% of any class of securities; a description of the securities being offered; the amount of the offering; and the percentage ownership of the company represented by the offering.  The company also has to make a disclosure statement available to each prospective purchaser that must contain much of the same information, as well as additional information such as risk factors and information concerning legal proceedings.  The issuer has to inform all prospective investors that the securities are not transferable, that they haven’t been registered under state or federal law and cannot be resold, that the investor is relying on his or her own examination, and that no federal or state securities commission has reviewed or passed on the offering information.  Finally, the company must provide current financial information.  However, unless the company already has audited or reviewed financial statements, the financial statements only need to be certified by the company’s principal executive officer.

With the SEC proposed rules still under consideration, and given how long it typically takes the SEC to finalize proposed regulations, it’s entirely possible that crowdfunding that includes non-accredited investors will come to Texas before it is generally available on a federal level.