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Legal Insight for Start-Up and Established Technology Businesses

Board Oversight of Cybersecurity

Posted in Biotechnology, Nanotechnology, Technology News & Events

 Cyber-attacks on U.S. companies have increased over recent years resulting in significant costs to companies.  According to surveys, U.S. companies have experienced a 42% increase between 2011 and 2012 in the number of cyber-attacks they experienced per week[1] and the average annualized cost of cyber-attacks for various U.S. companies surveyed in 2013 was $11.56 million, which represents a 78% increase since 2009.[2] Cyber-attacks may also expose companies to business disruptions, negative publicity, reputational harm and litigation.

SEC Commissioner Luis Aguilar addressed cybersecurity threats in his presentation at the “Cyber Risks and Boardroom” Conference held in June, 2014.[3]  At this conference, Commissioner Aguilar stressed the importance of board oversight of cybersecurity risks stating that “. . . ensuring the adequacy of a company’s cybersecurity measures needs to be a critical part of a board of director’s risk oversight responsibilities.”[4]  In addressing the oversight responsibilities of boards of directors, Commissioner Aguilar stated that, at a minimum, boards of directors should work with management to assess company policies with respect to cybersecurity to ensure that such policies are consistent with the National Institute of Standards and Technology’s Framework for Improving Critical Infrastructure Cybersecurity.[5]

Commissioner Aguilar stated that companies may consider implementing one of the following measures to help ensure that the board of directors have the ability to adequately meet their cybersecurity oversight responsibilities:

  • Require mandatory cyber-risk education for directors;
  • Have the board be adequately represented by members with a good understanding of information technology issues that pose risks to the company; or
  • Create a separate enterprise risk committee on the board.[6]

Commissioner Aguilar’s comments do not necessarily represent the views of the U.S. Securities and Exchange Commission.


[1] See 2012 Cost of Cyber Crime Study: United States, Ponemon Institute LLC and HP Enterprise Security (Oct. 2012) available at http://www.ponemon.org/local/upload/file/2012_US_Cost_of_Cyber_Crime_Study_FINAL6%20.pdf.

[2] See HP Press Release, HP Reveals Cost of Cybercrime Escalates 70 Percent, Time to Resolve Attacks More Than Doubles  (Oct. 8, 2013), available at http://www8.hp.com/us/en/hp-news/press-release.html?id=1501128.

[3] See Cyber Risks and the Boardroom, Commissioner Luis A. Aguilar (June 10, 2014) available at http://www.sec.gov/News/Speech/Detail/Speech/1370542057946#.U_8-Wz4o6Um.

[4] See id.

[5] See id.

[6] See id.

Personal Audio No Longer Trolling Adam Carolla

Posted in Intellectual Property Litigation, Technology News & Events

Adam Carolla has reportedly settled the lawsuit that was filed against him by Personal Audio LLC.[1]  The Agreed Motion to Dismiss Claims is available for review, but the specific terms of the settlement have not been disclosed—the parties have agreed to not make any public statements concerning the litigation until September 30th.[2]  Nonetheless, there are a few observations that can be made in light of the settlement.

As of today, Carolla has raised $475,352 through his crowdfunding campaign to help pay for his legal defense fees.[3]  If, however, the lawsuit had gone to trial and Carolla had prevailed on the merits, Personal Audio could have potentially been required to pay Carolla for his defense fees.  The payment of fees could have consequently been a huge deterrent to future litigation by Personal Audio.

Furthermore, Personal Audio’s patent remains valid because the lawsuit never went to trial, and Personal Audio could potentially sue other podcasters for allegedly infringing its patent.  According to Daniel Nazer from the Electronic Frontier Foundation (“EFF”), this is, however, unlikely to happen.  Personal Audio made a press release in July, stating that it had offered to drop the lawsuit against Carolla after learning through discovery that Carolla’s podcasting business does not generate a significant amount of revenue.  Nazer suggests that because Adam Carolla is one of the most successful podcasters in the business, it is unlikely that Personal Audio will sue other podcasters.[4]

Although the patent is currently valid, the EFF had filed a petition for inter partes review that is scheduled for a hearing in December with an expected ruling by April 2015.[5]  If the inter partes review is decided favorably for EFF, this could be the final nail in the coffin for Personal Audio’s patent and another victory for all of the trollhunters.


[1] Jefferson Graham, Adam Carolla settles podcasting lawsuit, USA Today (Aug. 19, 2014, 5:08 PM), http://www.usatoday.com/story/tech/2014/08/19/adam-carolla-settles-podcasting-lawsuit/14301105/.

[2] Agreed Motion to Dismiss Claims without Prejudice, No. 2:13-CV-00013 (E.D. Tex. Aug. 15, 2014), available at https://www.eff.org/files/2014/08/18/ecf_272_-_mot_to_dismiss_pa-carolla.pdf.

[3] Save Our Podcasts Legal Defense Fund, FundAnything: Money for Your Dreams, http://fundanything.com/patenttroll (last visited Aug. 20, 2014).

[4] Personal Audio, Adam Carolla Rejects Dismissal from Podcasting Lawsuit (July 29, 2014), available at https://www.eff.org/files/2014/08/18/personal_audio_press_release_7-29-14.pdf.

[5] EFF v. Personal Audio LLC, Patent No. 8,112,504 (USPTO Mar. 4, 2009), available at https://www.eff.org/document/podcasting-petition-inter-partes-review; see also EFF v. Personal Audio LLC, Electronic Frontier Foundation: Defending Your Rights in the Digital World, https://www.eff.org/cases/eff-v-personal-audio-llc (last visited Aug. 20, 2014).

Reviewing Potential Investments With Your Clients

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

On August 4, 2014, the SEC issued an Investor Alert citing 10 Red Flags that should give investors an indication that an unregistered offering may be a scam.  If you are considering an investment in an unregistered offering or you are advising a client who is considering such an offering, you should consider the following Red Flags:

  1. Claims of High Returns with Little or No RiskAny offering, registered or unregistered, has risk.  Investors should be suspicious of any offer that claims it has no risk.
  2. Unregistered Investment Professional.  Investors should be wary if sales are being made by people who are not registered and licensed to sell securities, even if the they know the person personally.
  3. Aggressive Sales Tactics.   If the investment is pitched as a “once-in-a-lifetime” opportunity or you or your client is pressured to invest quickly without taking the time to research the investment, caution should be exercised.
  4. Problems with Sales Documents.  Failure to provide sales documents, such as a private placement memorandum, or provision of sloppy sales documents that contain typographical, spelling or other errors, are Red Flags.
  5. No Net Worth or Income Requirements.  In some cases, sales of unregistered securities may only be made to “accredited investors” – investors with over $200,000 (or $300,000 with his or her spouse) in income in the last two years and the expectation of the same level of income in the current year or investors with a net worth, exclusive of home, of at least $1,000,000.  If the offering doesn’t contain income or net worth requirements, skepticism may be warranted.
  6. No One Else Seems to be Involved.  Care should be taken if others, such as attorneys, accountants, brokerage firms or other third parties, are not involved in the offering or if the investor is told not to contact someone who is supposedly involved with the offering.
  7. Sham or Virtual Offices.  The investor should verify that the company has an actual operating or physical presence in the state in which it says it is doing business.
  8. Company Not in Good Standing.  The investor should check the applicable state office, usually the state Secretary of State, to make sure the company actually exists and is in good standing under the laws of the state in which it purports to be organized.
  9. Unsolicited Investment Offers.  The SEC advises that an unsolicited offer may be a sign that the investment is a scam even if the offer is from a friend, trusted co-worker or family member.  People engaging in a fraud often exploit the trust that exists in groups of people (“affinity fraud”).  An investor should be particularly wary if he or she is told to keep the possible investment confidential or a secret.
  10. Suspicious or Unverifiable Biographies of Managers or Promoters.  An investor should independently verify the claims of experience the management or promoters claim to have by asking for references and doing an Internet search.  Additionally, an investor should be concerned if an honest promoter has no relevant experience.

A careful review of these Red Flags might be just what is needed to prevent an expensive mistake.

Ongoing Developments in Patent Law: Claim Construction on Appeal, Indefiniteness, and PTAB Decisions

Posted in Intellectual Property Litigation

There are a few patent cases to keep track of in the future that may have an impact on claim construction, indefiniteness, and Patent Trial and Appeal Board (PTAB) decisions.  Here is a list of cases to watch:

  • The Supreme Court granted certiorari in the Teva Pharmaceuticals USA, Inc. v. Sandoz Inc. (Dkt. No. 13-854) to consider whether claim construction of claim terms should continue to be reviewed de novo or for clear error.  As noted in the petition:

QUESTION PRESENTED

Rule 52(a) of the Federal Rules of Civil Procedure provides that in matters tried to a district court, the court’s “[f]indings of fact. . . must not be set aside unless clearly erroneous.”

The question presented is as follows:

Whether a district court’s factual finding in support of its construction of a patent claim term may be reviewed de novo, as the Federal Circuit requires (and as the panel explicitly did in this case), or only for clear error, as Rule 52(a) requires.

  • In Nautilus, Ing. v. Biosig Instruments, Inc. (June 2, 2014, Dkt. No. 13–369 (Slip Opinion)), the Supreme Court noted that “the expressions ‘insolubly ambiguous’ and ‘amenable to construction,’ which permeate the Federal Circuit’s recent decisions concerning §112, ¶2′s … leave courts and the patent bar at sea without a reliable compass.” Thus, the case was remanded “so that the Court of Appeals can reconsider, under the proper standard, whether the relevant claims in the ’753 patent are sufficiently definite.”  Look for further guidance from the courts on evaluating whether claims are sufficiently definite in the future.
  • In SAP America, Inc. v. Versata Data Development Group (PTAB Case CBM2012-00001) SAP filed a petition seeking a covered business method patent review of Versata’s patent pursuant to section 18 of the Leahy-Smith America Invents Act (AIA).  The PTAB held “Versata’s claims 17, and 26-29 to be unpatentable under 35 U.S.C. §101.”  Versata has now appealed the PTAB’s finding of invalidity to the Federal Circuit, notably challenging the PTAB’s broadest reasonable interpretation (“BRI”) standard for claim construction.  As one of the early cases involving PTAB reviews under the AIA, it will be interesting to see what impact this case will have on such PTAB reviews in the future.

Is Your Purchaser Accredited? Clarifications from the SEC

Posted in Technology News & Events, Technology Transactions

Under Rule 506(c), companies can now engage in a general solicitation in conducting private placements but if they do so, they must verify that each purchaser is accredited.  The SEC has provided some safe harbors for verification and will also allow “principles based verification” if the verification is adequate.  On July 3, 2014, the SEC issued Compliance and Disclosure Interpretations, some of which deal with the issue of how to determine accredited investor status under Rule 506(c).  The questions dealing with this issue and the Staff’s interpretation follow:

  • In determining whether an investor is accredited when his annual income is not reported in US dollars, the issuer should use the exchange rate on the last day of the prior year or the average exchange rate for the prior year.  (Question 255.48)
  • Assets in an account or property held jointly with a person who is not the prospective purchaser’s spouse may be included in the calculation of net worth but only to the extent of the investor’s percentage ownership in the account or property. (Question 255.49)
  • Rule 506(c)(2)(ii)(A) provides a non-exclusive safe harbor to verify that a purchaser is an accredited investor by reviewing any IRS form that reports the prospective purchaser’s income for the two most recent years.  (These forms could include a Form W-2, Form 1099, Schedule K-1 or Form 1040.)  The CD&I provides that the safe harbor is not available if, because of the fact that a return for the most recent year is not available, the issuer relies on the two prior years.  However, the SEC states that the principles based verification method may be satisfied if the issuer relies on the two prior years that are available and also obtains written representations from the prospective purchaser that (i) an IRS form that reports his income for the recently completed year is not available; (ii) specify the amount of income he received for the most recently completed year; and (iii) he has a reasonable expectation of reaching the requisite income level in the current year.  The SEC cautions that if the issuer has reasonable grounds to question the information provided (such as if the prospective investor barely meets the income requirements), the issuer would need to take additional steps to verify accredited investor status.  (Question 260.35)
  • The safe harbor granted for issuers relying on US tax returns is not available to an issuer relying on foreign tax returns of a prospective purchaser who does not file US returns.  However, the principles based verification method may be satisfied if the issuer relies on foreign tax returns of a foreign jurisdiction that imposes penalties for falsely reporting information similar to those imposed by the IRS.  However, if after reviewing these forms, the issuer has reason to believe that the investor may not be accredited, the issuer must engage in additional due diligence.  (Question 260.36)
  • Rule 506(c)(2)(ii)(B) grants a safe harbor if the issuer reviews certain documents evidencing an accredited investor’s net worth as long as the documents are not more than three months old.  In the CD&I, the SEC states that this safe harbor is not available for verification of net worth based on tax assessments that are more than three months old.  Nevertheless, the principles based verification method may be satisfied if the issuer uses the most recent tax assessment.  If the issuer has reason to question whether the assessment reasonably reflects the value of the purchaser’s assets, it must take additional measures to verify that the prospective purchaser is accredited.  (Question 260.37)
  • The safe harbor provided by Rule 501(c)(2)(ii)(B) requires an issuer to review a consumer report from a national consumer reporting agency.  The CD&I provides that this safe harbor is not met by reliance on a report from a foreign consumer reporting agency.  However, an issuer could reasonably conclude that a purchaser is accredited under the principles-based verification method if it relies on a foreign report and takes other steps necessary to determine the purchaser’s liabilities such as a written representation from the purchaser that all liabilities have been disclosed.  (Question 260.38)

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 is 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.