United States: 2017 In Review: A Year Of Transition

2017 was a tumultuous time for the patent system, which has evolved dramatically since patent reform litigation passed in 2011. With even more changes underway—for instance, new leadership at the US Patent and Trademark Office and high-profile (and potentially high-impact) cases being considered by the Supreme Court—2018 will likely be every bit as dynamic as the past few years, if not more.

Last year brought many important cases, issues, and trends to the forefront. In this year-end post, we focus on the following substantive and statistical areas:

2017 Litigation Volume

Non-practicing entity (NPE) litigation filings in 2017 continued an erratic downward slide from their peak in 2011. In the fourth quarter, NPEs added 521 new defendants to their lawsuits—slightly up, but still in line with previous quarters—and the year finished with around 2,000 defendants added by NPEs, a decrease of about 27% over last year. Operating companies, meanwhile, added 344 new defendants to patent suits in the fourth quarter of 2017, the slowest pace since 2003. In all, just 1,540 defendants were added to operating company lawsuits in 2017, roughly a 32% decrease from a steady average of 2,250 defendants added per year since 2004.

Today, NPE activity stands where it did just before the AIA, though still about two to four times above filings in the early 2000s. The slow adjustment since 2011 most likely stems from a combination of the AIA's post-grant review process, introduced in 2012; from judicial changes brought about by watershed cases like Alice v. CLS Bank (2014) and TC Heartland v. Kraft Foods (2017); and from the cumulative effect of market solutions like RPX, Unified Patents, and others. Perhaps these changes are beginning to affect operating companies, too, as this drop is the first noticeable one in operating company patent litigation in recent history. Overall, 2017 may represent a return to a slightly more manageable volume of litigation, with greater emphasis on patents more likely to survive early eligibility and validity challenges, given the focus on such issues in case law and administrative procedures.

NPE Settlement Prices Shift

Most of the changes since 2011 have made patent enforcement more difficult. This effect can be seen most clearly in settlement data collected through RPX's Cost Study. NPE cases that have settled since the Alice decision did so at a lower average price ($1.5M) than before the AIA ($2.1M). On the other hand, the middle segment of the market appears to be affected more than others. Settlements with NPEs have always followed a skewed distribution in which the majority of cases settle for less than $500K, while a handful of cases settle for tens or even hundreds of times as much. Fewer cases today settle in the middle tranche of the market, between $500K and $10M. More cases settle in the lower tranche ($0 to $500K), which sits roughly below the median, and a persistent group of cases—the top 5%—settle for $10M or more.

This shift is likely a symptom of the falling cost of defense. Before the AIA and Alice, an effective validity or eligibility defense typically awaited summary judgment and thus the completion of fact discovery in district court—an extremely expensive process. Today, a defendant can move to dismiss a case early, on the basis of ineligibility, citing Alice, or can file for post-grant review and seek to stay the litigation (including the discovery process) while the Patent Trial and Appeal Board (PTAB) reviews the validity of the patent. Both options have made patent validity a threshold issue and have reduced the cost of earlier litigation stages for defendants, thereby reducing plaintiffs' leverage early in the case. It makes sense that cases in which the defendant might have settled early, primarily to avoid the cost of legal defense would be settling for less today. That said, the top 5% of cases still settle for far more significant amounts.

Nevertheless, many NPEs continue to find opportunity in this more challenging market for patent monetization. By far the most prolific plaintiff in 2017 was IP Edge LLC, which added over 350 defendants to new and existing litigation through its numerous affiliated NPEs. Second, but still far below IP Edge, was inventor Leigh M. Rothschild, who has recently diversified his litigation through the assertion of patents acquired from other NPEs. The top five NPEs also include plaintiffs affiliated with monetization shops Monument Patent Holdings, LLC and IP Valuation Partners LLC, both of which have launched multiple campaigns this year, as well as SportBrain Holdings LLC, which has maintained a wearables campaign that now tops 100 defendants and continues to see new filings. Hybrid Audio LLC and NPEs affiliated with Bradley D. Liddle also joined the ranks, with Hybrid Audio adding four times as many defendants in 2017 as they did in 2016. Shipping & Transit LLC fell off, adding just five defendants in 2017 (compared to 106 in 2016), as did Brian Yates (–70%) and Empire IP LLC (–66%).

IPR Sees Judicial Review and Private Gamesmanship

The Patent Trial and Appeal Board (PTAB) saw a total of 1,787 petitions for AIA review filed in 2017 (1,711 petitions for inter partes review (IPR), 34 covered business method reviews, and 42 post-grant reviews). This level is just above the 1,758 total petitions in 2016 and is comparable to overall filing volumes observed since 2014. That said, IPR filings fell gradually over the course of 2017, from 548 in Q1 to 344 in Q4. The dip at the end of the year may signal some anxiety triggered by several cases that threaten to alter the PTAB's process.

Chief among them are the US Supreme Court's two pending cases on inter partes review: Oil States v. Greene's Energy Services and SAS Institute Inc. v. Matal. Oil States proposes the most dramatic shift, as it challenges the very constitutionality of IPR. As previously reported by RPX, supporters of the IPR regime were left cautiously optimistic after the November 27 oral arguments; the justices seemed inclined to rule that the USPTO has the authority to reconsider its own decisions to grant patents. Several of the justices seemed averse to eliminating IPR, as it bears similar characteristics to other, less controversial agency proceedings. Then again, some expressed skepticism and concern about the constitutionality of elements of the IPR process. Meanwhile, arguments for SAS Institute—which challenges the PTAB's ability to issue partial institution decisions—gave less of a clear indication as to which way the Court is leaning.

Likewise, the Federal Circuit's October 4 decision in Aqua Products— covered in detail on RPX Insight—may shift the strategic implications of an IPR petition dramatically, especially for defendants in litigation. The court rejected the Patent Office's rules on amendments in IPRs and held that the petitioner, not the patentee, bears the burden of proving the unpatentability of proposed new or amended claims. Now, any defendant, not just the IPR petitioner, will have to weigh a higher likelihood that patent claims will survive IPR intact. RPX and USPTO data together show that 9.4% of IPR motions to amend so far have been granted through December 13; this figure could jump significantly in 2018 as Aqua Products begins to have more of an impact.

Further, the public debate continues over the issue of sovereign immunity as it relates to PTAB proceedings, with controversy surrounding Allergan's transfer of patents to the Saint Regis Mohawk tribe in order to shield them from IPR. Parties have weighed in on both sides, with opponents of the Tribe's strategy dismissing it as a "sham" or a "calculated technical ploy" in addition to a variety of more specific substantive objections. The issue should play out early this year, as the PTAB expects to issue a decision by April 6, 2018.

Sovereign immunity also remains an issue in disputes between public universities and operating companies, following a January decision in which the PTAB held that such universities cannot be subjected to IPR. However, on December 19 an expanded PTAB panel denied several motions to dismiss filed by the University of Minnesota in IPRs filed by Ericsson, ruling that the university had waived its Eleventh Amendment sovereign immunity as to IPR by asserting the challenged patents in district court litigation. The PTAB's decision effectively takes the wind out of the sails for now, although the issue will inevitably be appealed to the Federal Circuit, if not the Supreme Court.

Venue After TC Heartland: The Dust Continues to Settle

The Supreme Court's decision in TC Heartland in May caused a sea change in the distribution of patent suits. A variety of NPE plaintiffs that had once litigated almost exclusively in the Eastern District of Texas were hit by venue challenges from defendants that no longer "reside[d]" in that district for venue purposes under the narrower standard reinstated by that opinion. As reported by RPX shortly after TC Heartland, the decision led some of those NPEs to concede to transfers and others to dismiss their Texas suits and refile in other districts. Likewise, the decision caused an overall realignment in venue choices for new NPE suits.

As shown below, the District of Delaware is now the most popular venue for NPE lawsuits in the wake of TC Heartland, followed closely by the Eastern District of Texas. The Central and Northern Districts of California and the Northern District of Illinois, each of which encompasses an urban corporate hub (Los Angeles, Silicon Valley, and Chicago), round out the top five. This new distribution represents a massive shift from before TC Heartland, when 57% of all new NPE disputes were brought in the Eastern District of Texas and only 8% were brought in the next most popular venue, the District of Delaware. Operating company litigation again remains spread across a variety of historically popular districts. The reduction in operating company litigation in the District of Delaware may be a sign that such plaintiffs are now avoiding the court's increasingly congested patent docket.

Two recent court decisions helped to clarify some uncertainties that remained after TC Heartland came down. In the months following the ruling, a district court split developed over the issue of whether defendants in existing litigation had waived the right to challenge venue by not having raised the defense in time. The Federal Circuit resolved the split in its November 15 opinion from In re Micron, in which it held that "TC Heartland changed the controlling law in the relevant sense" because the venue defense at issue could not have been brought under the Federal Circuit's previously controlling decision in VE Holding.

Further, in late September, the Federal Circuit overturned a test developed by Eastern District of Texas Judge Rodney Gilstrap that had attempted to help courts apply the second prong of the statute, which allows suits to be brought where a defendant "has committed acts of infringement and has a regular and established place of business". The Federal Circuit decision, In re Cray, held that the test abused the judge's discretion by deviating too far from the text of the venue statute. Rather, under a correct reading, a defendant must have "a physical place in the district" and that place of business must be "regular", meaning "transient activity" is not enough); "established", meaning that the business location must have been stable and established for a "reasonable period of time"; and "of the defendant", meaning a place not solely controlled by an employee.

Patent Divestitures from IV Beget New Litigation

Certain notable NPEs with large portfolios shifted away from active litigation in 2017, choosing instead to monetize through divestiture. Chief among these has been Intellectual Ventures LLC (IV), which earlier this year launched its first litigation campaign in two years. IV signaled earlier in the year that it was moving away from actively acquiring patents, while at the same time accelerating the sale of assets from its massive portfolio—activities that RPX has been observing since late 2016. As tracked by RPX throughout 2017, many of those patents have since been asserted in litigation by their new owners.

IV to Dominion Harbor Enterprises and Monument Patent Holdings

One such NPE that has benefited from IV divestitures is patent monetization firm Dominion Harbor Enterprises, LLC. In February of this year, Dominion acquired from IV a portfolio of over 900 US patents (and numerous international assets), mostly comprising patents originating with Kodak, which the NPE has reportedly begun monetizing in Europe by partnering with Swedish IP brokerage and consulting firm Parallel North IP AB. Other notable NPEs—including Acacia Research Corporation; Finjan Holdings, Inc.; and Xperi Corporation—have increasingly shifted their assertion efforts into Europe, with a particular emphasis on Germany.

Meanwhile, Dominion's litigating affiliate Monument Patent Holdings, LLC has launched four litigation campaigns in the US asserting patents acquired from IV, hitting providers of wireless and home broadband service, laptops, and mobile devices.

IV to Equitable IP Corporation

The first NPE to assert patents acquired through IV's recent divestitures was Equitable IP Corporation, a Nevada-based patent monetization and brokerage firm that first began asserting patents (all through various affiliated NPEs) in late 2015. Out of Equitable IP's 18 litigation campaigns, four have involved IV patents. That litigation has targeted a varied assortment of products, including devices incorporating HDMI, laptops and docking stations, and music-based online games.

IV to IP Valuation Partners

Patent monetization firm IP Valuation Partners (IPVal) has been particularly active in asserting former IV patents, launching four such campaigns in late 2017 against companies providing multifunction printers and scanners, social networking sites, and mobile Systems-on-Chip.

IV to Leigh Rothschild

Three out of four of inventor Leigh M. Rothschild's most recent campaigns have asserted patents acquired from IV. Companies hit by those campaigns include those offering e-commerce websites and mobile apps, products incorporating QR codes, and GPS navigation apps and devices.

Uniloc Starts Asserting Outside Patents After Invalidity Loss for Homegrown Asset

Uniloc Corporation Pty. Limited, a former operating company based in Australia, began its life as an NPE litigating patents developed internally. However, in 2017 Uniloc launched a barrage of campaigns asserting patents acquired from other companies. Several of these campaigns have involved patents from a group of 13 acquired from HP Enterprise (HPE) in May, targeting makers of wearables, mobile devices, and wireless remote controls. Most recently, in early November, Uniloc started a new campaign targeting enterprise software technology with a patent acquired from IBM in September.

Despite this wave of litigation, Uniloc had a significant setback in October when the Federal Circuit upheld the PTAB's invalidation of its most widely litigated patent, related to software licensing, in a campaign that has lasted 14 years.

USPTO assignment records also reveal that Uniloc co-founder Craig Etchegoyen at least partly controls WSOU Investments LLC, a Delaware NPE that acquired more than 3,700 patent assets from Nokia in late summer. WSOU has not yet filed any litigation, but in early November it assigned 14 patents to operating company Ciena.

Publicly Traded NPEs Pass the Baton to Fortress as Litigation Finance Grows in Popularity

A number of notable, publicly traded NPEs withdrew from the business of patent assertion in 2017. For instance:

• Pendrell Corporation announced in March that it would be pivoting away from patent assertion following setbacks in its ContentGuard DRM campaign, stating that it had begun pursuing business opportunities that can provide a more stable source of income.
• The former Wi-LAN Inc. announced in April that it would deemphasize patent licensing and refocus on the acquisition of Industrial Internet of Things businesses as part of a major restructuring, which resulted in the company adopting the name Quarterhill Inc.
• Acacia Research Corporation continues to file new litigation in existing campaigns, including lawsuits in the US and Germany, but it has not launched a new campaign since 2015.

Meanwhile, other publicly traded NPEs found themselves in dire financial straits in 2017 after entering into financing agreements with investment firm Fortress Investment Group LLC. One such NPE was Crossroads Systems, Inc., which announced its bankruptcy in August after the PTAB invalidated the patents from a heavily leveraged campaign originally financed by Fortress in 2013. Meanwhile, in April, Inventergy Global, Inc. gave Fortress sole discretion over a portfolio of nearly 750 telecommunications patents under the terms of a December 2016 restructuring agreement, which the parties entered into after Inventergy was unable to make payments on $10M of debt. Fortress subsequently took over and expanded Inventergy's campaign litigating those patents, and in October the investment firm started a second litigation campaign, pertaining to semiconductor technology, through affiliate VLSI Technology LLC.

See here for more information on those publicly traded NPEs and Fortress as well as IV's divestitures and Uniloc's recent litigation.

RPX has also begun to observe other established NPEs start to rely on outside financing for the launch of new campaigns. This development includes Brian Yates, a patent attorney revealed in early 2017 as the principal behind numerous litigating NPEs, who entered into a security agreement with DLI Lending Agent, LLC (f/k/a Blackbird Financial Group, LLC); and Document Security Systems, Inc. (DSS), which began a campaign after obtaining $13.5M in litigation financing from Brickell Key Investments LP in late 2016. See here and here for more information on the new Yates and DSS campaigns, respectively.

The Year Ahead

The tumult of 2017 will probably get worse before it gets better. Important decisions and pending cases, as noted above, are likely to affect litigation and market behavior. On top of that, the proposed STRONGER Patents Act seeks, among other things, to limit the scope and availability of IPR and make repeated PTAB challenges far more difficult. Patent owner-friendly reform efforts like the STRONGER Patents Act may see a boost due to Congressional shakeups in the coming year, including the retirements of two key proponents of past reforms that have benefitted accused infringers: Rep. Bob Goodlatte (R-VA), chairman of the House Judiciary Committee and co-sponsor of the Innovation Act bill proposed in 2013 and 2015; and Rep. Lamar Smith (R-TX), who spearheaded the Leahy-Smith America Invents Act passed in 2011.

The end of 2017 also brought some early signs of how the Trump administration might approach patent law in 2018. While Andrei Iancu gave few specifics in his November confirmation hearing for the position of USPTO director, he called for balance in the patent system, providing some cautious encouragement for observers on both sides of the aisle. Mr. Iancu's nomination was unanimously approved by the Senate Judiciary Committee on December 14; he will likely be confirmed by the full Senate early this year.

Finally, in November of 2017, the newly confirmed head of the Department of Justice's Antitrust Division, Makan Delrahim, stated that the administration will take a more restrained approach to antitrust enforcement with respect to standard essential patent (SEP) licensing. This apparent shift in favor of SEP owners comes as the European Commission issued a long-awaited set of guidelines calling for balance between implementers and IP creators, advocating for injunctive relief as a key element of a fair enforcement regime. While injunctions for SEP infringement remain harder to obtain in the US, the climate here may become more favorable to SEP holders relative to Europe should the administration's antitrust enforcement ultimately align with Delrahim's stated priorities.

For continued analysis and up-to-date information on patent litigation and related trends, visit RPX Insight.

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