LES President

The Year of Living Dangerously

My article, The Year of Living Dangerously, was published in the July 2007 issue of IP Law and Business. Click here to download and read my article. Feel free to share your comments with me.

The Licensed Patent Challenge

This year’s theme is “change” – and specifically the forces of change impacting the business of licensing.  This was a somewhat risky theme because the whole year could go by without anything significant happening and no real change.  So you can imagine my relief on January 9th, when the Supreme Court handed down its decision in the MedImmune v. Genetech case, the biggest licensing decision since Lear v. Atkins in 1969.  In the MedImmune decision, the court held that a licensee may keep paying royalties while challenging the validity of a licensed patent.  This changes the fundamental calculus of determining whether to revisit a closed deal because you can avoid any risk of triple damages by continuing royalty payments while challenging validity.

Now this was exciting.  LES had even submitted a friend of the court brief prepared pro bono by our friends at Finnegan Henderson asking for clarification on a variety issues.  We were asking for clarification on issues fundamental to the sanctity of a license and directly related to the issue before the court like “whether or not a promise not to challenge the validity of a patent is enforceable.”  So again, you can imagine my excitement as I read through the decision, looking for our questions to be answered.  Maybe LES would even get a nod of approval from the court for raising these commercially significant issues? 

As I read through the decision, my hopes were dashed.  In typical Supreme Court fashion, the Court addressed only what they believed was the issue at hand and specifically stated they were not addressing the question of “whether or not a promise not to challenge the validity of a licensed patent is enforceable.”  LES had asked the very question that would need an answer to avoid future litigation – can I avoid the result of the MedImmune case by extracting a promise from a licensee not to challenge validity?   

The Supreme Court has the ultimate say on these matters.  However, we live in the trenches where legal theory meets commercial reality.  It would be nice to know they are listening.  I look forward to an upcoming decision to see what they do with the standard for determining which inventions are obvious in the KSR v. Teleflex case. 

Some may wonder why this decision matters and what its commercial impact may be.  Thanks to the 186 respondents that participated in our “snapshot” survey in the wake of the decision, we know that LES members immediately realized the impact of the decision.

About 80% of respondents said the case holds large implications for the licensing profession.  79% said that patent licensees are somewhat more likely or much more likely in the future to challenge the validity, infringement or enforceability of a patent after consummating a license agreement when faced with substantial ongoing royalties or milestones.  57% said that patent licensors are somewhat more likely or highly more likely to seek higher upfront payments to offset the downside risk of being able to collect future royalties or milestones.

So we are left with change, and more uncertainty.  In the absence of guidance from the Supreme Court, smart licensing professionals and their lawyers are creatively drafting clauses that they believe will withstand challenge to circumvent the decision.  Will we have to wait another 40 years to get an answer as to the enforceability of these clauses?  We hear licensors saying things like “should I sue first and then conduct a license negotiation believing that there is a better chance a promise not to challenge validity from a licensee will more likely be upheld if the agreement looks more like a settlement of litigation”?  Is this progress?  I’m not sure.  But it is change, and for that I am grateful.

Intellectual Assets Under Fire

Since the Annual Meeting in New York, the forces of change continue to press on. After Thanksgiving, the Supreme Court heard oral argument in a case that has the potential to redefine which patents or patent applications cover obvious improvements and should never issue from the patent office. At the hearing, Supreme Court Justices expressed concern that the Federal Circuit (the court that hears all appeals in patent cases) is “leaning too far in the direction of never seeing a patent they didn’t like” and that the current test for obviousness is “gobbledygook.” Chief Justice Roberts described the test as “worse than meaningless.” In an article on the decision, The Wall Street Journal reported that the Federal Circuit’s rulings have “converted patents from handguns to bazookas, and at the same time stopped requiring permits to get them.”

Why, as licensing professionals, should we care about this? Fundamental changes in the law will impact the strength of the assets we license. A stricter standard for obviousness will make it harder for young companies to raise money to develop new technologies with big up-front investments. It will also open up new avenues for attacking patents allowed under the old test. This will likely lead to more litigation and greater uncertainty in the deals we do with respect to the validity of issued patents. On the other side of the coin, companies that feel they are being unfairly “held up” by patent owners will have new weapons to use.

The fundamental debate is not new and hits at the intersection of two great American values: competition and the protection of innovation. What is new is the level of involvement from the public at large and the polarity of views. Patent disputes have become mainstream. Unfortunately, there is a lot of misinformation out there and it is frustrating to see baseless arguments go unanswered.

Where is all of this headed? Should LES play an educational role in the public debate? Conventional wisdom is that our membership is too diverse to take positions on anything other than “licensing intellectual property is generally good.” However, our membership has special expertise in the area of commercialization of intellectual property—moving ideas from the lab to the real world. We also understand the importance of innovation and exclusivity in bringing products to market. Maybe there is a way to provide the benefit of our knowledge without taking a stand on a particular issue. Should we provide balanced information concerning the business implications of the various changes under consideration to decision makers?

Share Your Personal Views
I invite you to express your personal views on whether LES should participate and your views on the business implications of pending proposed legislative changes, Supreme Court rulings, and Patent Office rule changes. Views on the following issues are welcome:

1. Should LES develop information packages addressing the business implications (pro and con) on an industry sector by industry sector basis for various proposed changes?
2. What are the business implications of the U.S. adopting a post grant opposition proceeding at the Patent Office to give challengers an opportunity to challenge allowed patents?
3. What are the business implications of the U.S. becoming a first to file country instead of a first to invent country when determining who should own a patent to the same invention developed at about the same time by two different companies?
4. What are the business implications of limiting the availability of injunctions to patent owners?
5. What are the business implications of limiting the number of continuation applications a patent applicant may file?
6. What are the business implications of providing prior users an exemption for patent infringement?
7. What are the business implications of removing the best mode requirement?
8. What are the business implications of a tougher obviousness standard?
9. What are the business implications of limiting the circumstances under which a patent owner may obtain triple damages for willful patent infringement?
10. What are the business implications of a “loser pays” provision that would require a losing party in a patent infringement case to pay the opposing party’s legal fees and expenses?

-Allen
president@les.org

Pendulum Swings And Things Change

The 2006/2007 year got off to an exciting start in New York with a blow-out meeting of over 1,500 registrants and 300 accompanying persons. It was our largest meeting ever. I’d like to share my thoughts on the theme for the year and a personal story about the long term benefits of LES membership.

Change
The theme for 2007 is “Change.” I chose the theme of “Change” because there are tremendous forces of change in play right now. These forces will affect license negotiations and the balance of power between licensor and licensee. These changes will impact licensing professionals in all industry sectors because they are poised to impact the relative scope and strength of the very assets we license. New licensing business models are already cropping up.
Once in a great while, the pendulum swings and things change. This is one of those times. The last time the pendulum swung in a major way was 1982, and we got the Court of Appeals for the Federal Circuit which hears appeals in all patent cases. The result of that swing of the pendulum is that patents became much stronger – some say too strong. As a result, companies are filing more patent applications than ever and the U.S. Patent and Trademark Office is bursting at the seams. Some argue that patent quality has suffered as a result leading to more litigation.
According to patent office statistics, more than 350,000 patent applications were filed in 2005, up from about 200,000 in 1995, and about 100,000 in 1985. Over 500,000 patent applications are awaiting a first substantive review and about one million total applications are currently pending. This is a lot of work for less than 4,000 examiners. As a result, average time to allowance is about 30 months with much longer periods in specific technology areas such as biotechnology. According to patent office studies, about 5% of allowed patents include at least one claim that would be found invalid by a court.
There are other forces at work as well. At one end of the spectrum, we have the open source movement. At the other end of the spectrum, I think you will enjoy the following rhyme written by Alexander Poltorak which appears in Bruce Berman’s book, Making Innovation Pay:

This is the Ballad of the Patent Troll:
On the road of innovation
Sits an ugly Patent Troll.
From the largest corporations
He extorts a Patent Toll.

Armed with mighty patent claims,
Claiming willfulness and tort,
Treble damages and pains
He drags infringers into court.

Your resistance is futile
Patent Troll is strong and vile.
Wielding claim as an ax
He’ll exact his patent tax.

Corporations, be united!
He who slays the Patent Troll,
By the Queen he will be knighted
And exalted by us all.

Although once quite rare, contingent fee patent enforcement is now quite common. The Business Software Alliance reports that even personal-injury law firms are getting into the patent infringement business. In Marshall, Texas, a hotbed of patent litigation known for its rocket docket and patent owner friendly juries, personal injury law firms have begun taking on patent infringement cases, after Texas legislators limited how much could be collected in personal-injury cases. There are publicly traded companies with patent collection and enforcement as their business plan with access to substantial resources. And companies have collectively paid huge sums of money to license asserted patents.
The backlash to all of this has its own forces. A record number of patent cases are pending before the Supreme Court. The most extensive changes to U.S. patent laws since adoption of the patent act in 1952 are pending before Congress, and the patent office is poised to adopt extremely significant rule changes that will impact what an applicant can file and substantially curtail the number of bites a patent applicant will get at the apple.
All of these forces are coming together and the press is reacting. Licensing and intellectual property are “enjoying” an unprecedented level of awareness. Almost every day, the Wall Street Journal, the New York Times, and USA Today feature an article about perceived abuses of intellectual property. Some days, we read about a company that asserts a patent against a competitor. On other days, we hear about the unavailability of life saving drugs to third world nations.
My personal hope in all of this is that we don’t overreact and squelch innovation in the process. The founding fathers of our nation, many of whom were inventors, recognized the importance of protecting intellectual property and wrote it into the Constitution. This protection has fueled  investment in new technology and enabled the United States, and LES professionals, to lead the world in the commercialization of new technologies.
My personal belief is that changes in the law that make the complex, simple, and the uncertain, certain, are generally good for business. However, I worry that some of the changes under consideration could have unintended consequences that will harm fledgling companies with exciting technology as well as large companies that are not in the same technology area as industries directly impacted by alleged abuses.
As a professional society, a core mission of LES is to keep its members plugged-in to what these changes are and how they will affect the professional endeavors of its members.
The Society must also evolve to meet the ever changing needs of the membership. In an effort to meet this challenge, last year the board focused on a strategic plan to move the Society forward. This exercise resulted in two strategic initiatives that we are now preparing to implement.
The most significant (and expensive) initiative is designed to enhance the educational value LES can deliver to its members—a certification process for certifying licensing professionals. Significant positive input from our members indicates that this would be a positive aspect of LES membership. In view of the educational offerings the Society has developed over the last ten years, the Society is now well poised to develop criteria for certifying licensing professionals. This will permit our members that choose to take advantage of the certification process to enjoy important professional recognition.
There is also strategic interest in taking advantage of the international LES network to assist members of LES (USA & Canada) extend their networks and learning opportunities abroad. Although not known to many LES members in the USA and Canada, you are all part of the LES International umbrella organization that includes an international network of almost 12,000 members in 31 chapters representing more than 85 countries. We are exploring ways to increase international connectivity with our worldwide partners and exchange educational assets that will facilitate international dealmaking.
These strategic missions will not be completed without countless hours of volunteer time. Volunteers have been at the core of LES strength, determination, and high standards for the last forty-two years. Although we will undoubtedly rely on professionals to help us navigate these initiatives, it is our volunteers that will put the LES stamp on whatever comes from these initiatives. I invite you to become a part of it and spend some time “kicking it up a notch.” You never know, you might just walk away with more than you put into it. At a minimum, you will shape the future of the organization.
In addition to these strategic objectives, LES is also in the process of revamping its committee structure by adding ad-hoc committees that will exist to address specific issues and then sunset. If you feel that there is a licensing issue or study of interest that would be appropriate for an ad-hoc committee, please contact me at president@les.org. We are also testing the cyber learning waters this year with experimental Web based e-learning opportunities. Depending on the extent to which members take advantage of these e-learning modules, we may expand the range of offerings moving forward. We will also continue to support the LES Foundation and its important projects, the collegiate licensing competition, the annual licensing survey and other activities.