Tuesday, March 10, 2015

New Patent Legislation: Please Pass Either Bill

New Patent Legislation: Please Pass Either Bill

Patent reform seems to pop up every year that brings everyone out of the woodwork.  I believe most of the commentary is useless, misguided, and probably has a number of financial conflicts of interest that are never disclosed.  The following is my perspective from someone who purely invests and trades patent investments.  I am not affiliated with a publicly traded company, law firm, investment firm, and I am not a lawyer.

My thoughts are to pass either Bill.  The three key issues I have identified are: loser pays, PTAB IPR claim construction being changed to District Court / Phillips standard, and heightened pleading requirements.

- I am a big fan of loser pays.  Most publicly traded patent companies spend considerable time and monetary resources to buy or partner patents.  I believe when they file any litigation they expect there is a very good chance they will prevail in court.  A loss at court for a publicly traded company will have much larger problems than paying an extra $3-5mm in attorney fees to the defendant.  A publicly traded company accrues premium as investors handicap a future revenue stream from the patent portfolio.  It usually amounts to tens if not hundreds of millions in market value.  A loss wipes it all away in a flash.  The attorney fee payment will sting, but will be immaterial to the much larger picture.  If I am a NPE, I would welcome the opportunity to recover attorney fees, which will improve my margins.  I view loser pays as a game changer in favor of plaintiff NPEs.

I believe loser pays effectively makes it nearly impossible for a private small inventor to assert their patents.  I estimate an inventor or anyone asserting patents will need 3 to 5 years along with $5mm+ to go through the monetization process from the initial filing, IPRs, District Court, and Appeals.  The effect of the loser pays legislation will be large well financed public and private NPEs will buy or partner with small inventors.  The large NPE will be able to provide the necessary capital, risk profile, and experience to litigate / license the patents successfully.  The large NPE's will be selective in their patent acquisitions, which I see loser pay ramifications reducing the upfront and licensing dollars flowing down to the original inventor.

- It is not a secret that the PTAB is a death squad for patents, with the term coined by H. Rader.  The claim construction standard being used is the broadest reasonable interpretation, which is making it much easier for petitioners to invalidate patents.  Both proposed bills want to change it to the much narrower District Court / Phillips standard.  The strategy that I have been seeing used is to file an IPR and ask questions later, which was usually right before the one year time bar kicked in.  There has been a new trend in IPRs where the petitioner will file an IPR four months after being served.  They will receive the institution decision, which involves the claims construction and regardless if it was instituted or not there will be new IPRs filed with new art and new reasons based on the claims construction from the first IPR.

I expect large NPEs can't have the new legislation pass soon enough as their chances to succeed at the PTAB will increase with the new standard in place.  I further expect a last ditch rush to file IPRs under the old standard.

- Heightened pleading requirements should not be an issue as recently filed complaints have become much more detailed.  All publicly traded patent entities are already required to disclose proper ownership.  NPEs typically go through an internal product tear down in order to find it likely they will prevail on infringement.  They can easily add more information into new complaints filed after the new bill is enacted.  Again small inventors will be a loser from this portion of legislation as it is not cheap to complete a tear down and develop claim charts showing how each limitation of each asserted claim in each patent is found within each accused infringing product.

In my view as an investor in publicly traded companies, the reform will be another driver of patent assets into NPEs that I follow and invest in.  I do not understand the hysteria that pops up as it relates to these investments every time that new legislation is proposed.  I believe big tech is spending considerable amounts in lobbying and marketing to dissuade public opinion around patents, which eventually flows down into the investments.  I also don't believe its an accident certain NPEs are cherry picked in the multitude of articles that are published.  It is my opinion that just the uncertainty of a pending bill creates confusion causes short term declines in patent stocks.  Once the bill is passed I expect other investors who moved to the sidelines will realize either patent bill was a positive, not a risk.

If you are a small inventor trying to monetize your inventions, I would say that you are in trouble.

Disclosure:  I am an investor in publicly traded patent investments and trade special patent situations in operating companies.  Nothing should be construed as investment advice. 

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