Blurred Lines-Responding to Patent Suits: Practical Strategies and Tips for Responding to Warning Letters and Licensing "Invitations"

Blurred Lines—Responding to Patent
Suits: Practical Strategies and Tips for
Responding to Warning Letters and
Licensing “Invitations”
Paul Devinsky – McDermott Will & Emery
Artem Sokolov – McDermott Will & Emery
George Wang – JDS Uniphase Corp.

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© 2015 McDermott Will & Emery.

Paul Devinsky

                       • Paul Devinsky is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s
                         Washington, D.C., office. He focuses his practice on patent litigation and counseling, trade secret litigation
                         and counseling, licensing and transactional matters and post-issuance PTO proceedings such as reissues
                         and AIA reviews.
                       • Paul has extensive experience in litigating patent, trademark and unfair competition-based federal district
                         court infringement actions and in litigating patent-based investigations before the U.S. International Trade
                         Commission (ITC). He also has experience in post issuance PTO proceedings and litigating invention
                         ownership disputes, in arbitrating trade secret disputes, in negotiating and drafting U.S. and international
                         licenses for protecting technology, and negotiating and drafting manufacturing agreements, software
Paul Devinsky            agreements and general intellectual property-based.
Partner
Washington, D.C.       • Paul has extensive experience in connection with performing intellectual property due diligence as an aspect
Tel: +1 202 756 8369
                         of merger and acquisition activities, joint venture formation activities and/or venture capital financing and in
Fax: +1 202 756 8087     connection with certain licensing situations, such as assignments for the benefit of a debtor-in-possession,
                         and in a litigation settlement environment.
pdevinsky@mwe.com
                       • Paul has particular experience in connection with protection of technology relating to semiconductor
                         fabrication tools and processes, machine tools and machine tool controllers, computer-related devices,
                         telecom and internet related technologies, laser technologies, ion beam technologies, medical and biotech
                         devices, consumer and industrial electronics, telephony, computer-controlled electro-mechanical systems,
                         automotive electronics, nuclear fuel assemblies and reactors, programmable logic chips designs, power
                         tools, digital cameras, photocopiers, rechargeable Li-ion batteries and integrated circuits.
                       • Paul has also handled intellectual property audits for both start-up and mature technology clients, in order to
                         plan and implement cost-effective intellectual property protection programs.

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Artem N. Sokolov

                       • Artem N. Sokolov is counsel in the law firm of McDermott Will & Emery LLP and is based in the Firm’s
                         Washington, D.C. office. Art practices in all areas of intellectual property law with an emphasis on complex
                         intellectual property litigation and counseling. He has litigated intellectual property cases spanning a broad
                         range of technologies in federal courts around the country and before the International Trade Commission
                         (ITC). As part of his litigation practice, Art is routinely involved in proceedings before the U.S. Patent and
                         Trademark Office (USPTO).
                       • Art’s practice also includes licensing and due diligence work, including reviewing, drafting and negotiating
                         license agreements and contracts. In addition, Art has experience in preparing opinions addressing
                         infringement, validity and patentability issues.
Artem N. Sokolov
Counsel                • Art is a registered patent attorney with significant experience in patent prosecution matters. Art has prepared
Washington, D.C.         and prosecuted patents covering a wide range of technologies, including semiconductor devices, networking,
                         cellular and digital telecommunications, digital signal processing and imaging, medical devices, optics,
Tel: +1 202 756 8441
Fax: +1 202 591 2811     computer software and hardware, and the mechanical arts. As part of his prosecution practice, Art has
                         handled a number of oral arguments before the Board of Patent Appeals and Interferences.
asokolov@mwe.com
                       • Art previously served as a law clerk to the Honorable Leonard P. Stark, U.S. District Court judge for the
                         District of Delaware.

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George Y. Wang
                       • George Y. Wang is Patent Counsel at JDS Uniphase Corporation (“JDSU”) and is based in the
                         Germantown, MD office.
                       • George has a degree in Biophysics from Johns Hopkins University and is a registered patent
                         attorney with over 14 years experience in IP Law, specifically in computer and electrical
                         technologies.
                       • George has extensive experience in IP litigation (district court, appellate, ITC), post-grant
                         proceedings, prosecution and portfolio management, due diligence, and counseling.
                       • In his current role at JDSU, George is responsible for the following:
George Y. Wang
Patent Counsel                • Managing JDSU’s IP portfolio for the Network Services and Enablement (NSE) and Optical
JDS Uniphase Corp.
Germantown, MD                  Security Pigments (OSP) divisions;

Tel: +1 240 404 3375          • Providing legal support for a host of IP, business, and technological issues, including:
Fax: +1 240 404 2195            litigation strategy, licensing, joint development projects, mergers and acquisitions, clearance
george.wang@jdsu.com            and invention submission, open source software and contracts issues; and
                              • Developing global training programs and policies for continued growth of IP assets
                       • Before joining JDSU, George was Counsel at Wilmer, Cutler, Pickering, Hale & Dorr LLP
                         (“WilmerHale”) and Associate at Hunton & Williams LLP. George also served as Law Clerk for the
                         USPTO Patent Trial & Appeal Board (“PTAB”) and as Patent Examiner at the USPTO.

                       *DISCLAIMER: The views presented are my own, and are not necessarily the views of my
                       employer, JDSU
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Agenda

 Definitions/Background
 Dealing With Warning Letters
 Considerations/steps for In-House
 Successful Litigation Strategies
 Challenging Patents at the USPTO
 Legislative Initiatives
 Questions/Discussion

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Definitions/Background

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Definitions

 A non-practicing entity (“NPE”): Any entity that earns or
  plans to earn the majority of its revenue from the licensing or
  enforcement of its patents
    • Patent Assertion Entities (PAEs) – a.k.a., “patent aggregators”, some of
      the more notorious entities are derisively labeled “trolls”
    • Universities and research institutions
    • Individual inventors and small/start-up companies
    • Corporate NPEs – internal patent holding companies created by
      operating companies, usually for purpose of portfolio monetization

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Common Characteristics of NPE’s
Business Models*
 NPEs do not “practice” asserted patents
 NPE licenses do not include “technology transfer”
 Timing: NPEs often wait in the weeds until after industry
  participants have made irreversible investments
 Motivation: NPEs acquire patents solely for the purpose of
  monetization
 NPEs often acquire patents having unclear claims (pre-Alice and
  pre-AIA CBMs were very popular). NPE typically approach many
  companies at once seeking moderate payments for early
  settlement. The business model is predicated on the assumption
  that some will settle instead of risking a costly and uncertain trial.
 Who are you? NPEs hide their identity by creating numerous shell
  companies and requiring those who settle to sign non-disclosure
  agreements                                          *White House Report
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Definitions (con’t)

 A “Competitor Company” is any company that practices the
  patents which it is enforcing
 Blurred lines – entities that engage in both practicing and
  non-practicing behavior, such that an entity may practice one
  patent, but assert a patent which it does not practice

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The End Goals

 Competitor Company
     • Injunction/withdrawal of product from market
     • Protect/recover market share
     • Obtain both lost profits and reasonable royalty damages
 Non-Practicing Entity
     • Priority is to license/monetize patents either through an upfront
       payment, judgment or settlement
     • Obtain a quick settlement: In 2014, 42% of cases characterized as
       NPE assertion settled in under 6 months

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Some statistics

 In 2014, more than 60% of the roughly 4500 patent infringement
  suits nationwide were filed by NPEs
 NPEs have increasingly targeted smaller companies: 62% of
  unique defendants in 2014 had less than $100M in annual revenue

11                                     *RPX Litigation Report   www.mwe.com

Some statistics (con’t)

 NPEs are less successful overall than
  practicing entities/competitor
  companies
         NPEs win 25% of the time
         Practicing entities win 35% of the time
         This is mainly due to summary judgment
          grants

 Both win about 2/3 of the time at trial

 12                                                 *PWC Litigation Report   www.mwe.com

Some statistics (con’t)

 Overall damages awards to NPEs more than triple those
  awarded to practicing entities over the last four years

13                                *PWC Litigation Report   www.mwe.com

Dealing With Warning Letters

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Responding to “warning” letters

 Investigate the Author
 Evaluate the Patent(s)
 Conduct Internal Investigation
 Assess the Risks
 Prepare Strategy for Response
 Explore possibility of settlement

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Investigate the Author

 NPE
     • What type of NPE (PAE, university, etc.) is making the assertion? Who
       is their counsel?
     • Check state records/SEC filings – some NPEs (e.g., Acacia) are public
       companies
     • Review NPE litigation history; assignment and litigation history of the
       asserted patent(s)

 Competitor Company
     • You are likely already familiar with each other
     • Current/previous relationship between companies, mutual customers
     • Identify any previous analysis of risk (if any exists)

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Initial Assessment Of Patents

 History of asserted patents
      • Number, scope and strength of claims (preliminary)
      • Prosecution histories for patent(s) in suit (and any other members of same
        patent family)
      • Assignments (possible ownership/standing issues)
 Have patents previously been litigated
      • Prior claim construction(s)
      • Prior summary judgment or trial results
      • Prior settlements (could educate as to Plaintiff’s goals and strategies)
 Investigate NPE’s remaining patent portfolio – possible
  additional claims?

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Conduct Internal Investigation

 Review accused products
     • Where does the accused functionality reside in the accused product? (core
       functionality or peripheral?)
     • Level of Your investment in the product?
     • Are additional current products at risk (beyond those identified in the
       complaint)
     • Implications for future products?
     • Consider Iqbal/Twombly motions for more information (possibly call the
       other side informally)
 Review internal financial information: (1) for product; (2) for market
  (are customers/others affected)
 Review existing licenses for products/technology (if any)
 Consider re-design possibilities
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Conduct Internal Investigation (con’t)

 Non-infringement defenses
     • Identify in-house engineers for discussion (be careful what you tell/ask,
       they may be potential witnesses)
     • Get counsel involved early (if case calls for it)
     • Honest discussion of strengths and weaknesses
 Invalidity defenses
     • Start in-house:
           Meet with appropriate engineers
           Literature associated with accused product
           Prior versions of accused product
     • Commission an outside invalidity search
 Investigate potential for indemnification or insurance coverage
 Investigate your own patent portfolio (including foreign IP, if
  appropriate) for potential countersuit [competitor only]
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Initial Assessment Of Potential Risk

 Factors to consider:
     • Goals/demand by plaintiff
     • Strength of asserted claims (including damages)
           Any royalty established through licenses?
           Potential for lost profit damages [competitor only]
     • Strength of potential defenses
     • Importance of accused product (core/peripheral)
     • Financial exposure of accused products
     • Likelihood of additional patents being asserted
     • Likelihood of injunction (and resulting harm to the business) [competitor
       only]
     • Cost of litigating through trial
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Settlement Negotiation Strategies

 Identify Goals and Expectations
     • How much would you pay to settle?
     • What is impact of injunction on future of business?
     • Defending the case on principle (protect reputation regarding “soft
       touch”)
 Call the other side early:
     • May discover early resolution possibility
     • May get early discovery/information even if initial demands are not
       reasonable
     • Establish lines of communication
     • Caution – be careful not to give the other side information that may
       help shape their infringement analysis or contentions

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Settlement Negotiation Strategies (con’t)

 NPE Strategies:
     • NPEs may be looking for small/quick settlement
     • Business model: make money by concluding a number of small
       transactions
     • Timing of settlement may drive amount
          First-to-settle discounts are often offered
          Some NPEs offer different settlement levels, depending on the stage of the
           case

 Competitor Strategies:
     • Early settlement unlikely, but call anyway to establish communication,
       understand the real demand and set the tone for the case

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Considerations/Steps for In-house

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First Steps (in-house)

 Initiate a Document hold
 Gather relevant products
     • Level of investment in the product, in view of potential injunction
     • Consider previous relationship between companies, mutual customers [competitor
       case]
     • Licenses, indemnification, etc.
     • Any previous risk analysis
 Obtain financial projections regarding exposure
 Identify individuals with potentially relevant information
 Consider potential settlement vs litigation costs (ask counsel for budget
  estimate)
 Create a litigation timeline (counsel can provide)
 Consider obtaining opinion letter (to defend against willful infringement or
  inducement allegation)

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Successful Litigation Strategies

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Different Tactics By Different Plaintiffs

 Overview of Typical NPE litigation and licensing strategies
     • Drive up litigation costs (especially discovery) as a settlement tactic
     • Assert numerous claims as a settlement tactic
     • Assert large damages claims vs low settlement offers
           Reminder: NPE likely to be limited to reasonable royalty/no injunction
     • Changes as a result of Octane Fitness/Highmark (fee shifting)

 Competitor Tactics
     • Scorched earth litigation
     • Pressure on business through discovery and public disclosure;
       especially if there is an imminent corporate transaction
     • Allegations of willful infringement
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Forum Selection

 District Court
     • Significant discovery available
     • Possibility of money damages
     • Possibility of injunction (competitor case)
     • Popular forums: ED TX, D. Del, ND CA, ND IL, CD CA, MD FL, WD WI
 ITC
     • Short time frames
     • Exclusion order (LEO) as the sole remedy usually available
 USPTO - defendants
     • New IPR procedures have dramatically increased filings
 Foreign Jurisdictions – defendants/competitors
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Forum Selection Statistics

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Forum Selection Statistics (con’t)

                  Five district courts (out of a total of 94) accounted for
                   41% of all identified decisions where the patent holder
                   was an NPE (PWC 2014 report)
                  The Eastern District of Texas and the District of
                   Delaware accounted for 70% of NPE cases filed.

29                                        *RPX Litigation Report   www.mwe.com

NPEs at ITC

 Limited opportunities for NPEs at the ITC after the Optical
  Devices and InterDigital cases:
     • Section 337 requires “substantial investment” in the patent’s
       exploitation
     • In InterDigital, the Federal Circuit explained that: the “substantial
       investment in [the patent’s] exploitation, including engineering,
       research and development, or licensing” must be “with respect to the
       articles protected by the patent.” (707 F.3d 1295, 1297-98 (Fed. Cir. 2013))
           So, the engineering, research and development, or licensing activities must
            pertain to products that are covered by the patent that is being asserted
     • In Optical Devices, the Commission opined that it would accord less
       weight to "a revenue-driven licensing model targeting existing
       production rather than the industry-creating production-driven licensing
       activity that Congress meant to encourage" in the calculus of whether a
       complainant's investment are substantial.

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Litigation Strategies – Overview

 Use the Local Rules
 Limit the scope of discovery
 Early strategic motions (12(b)(6); 12(c)) – set the tone and
  buy time to negotiate
 Develop early non-infringement/invalidity defenses
 Consider a counterclaim against competitor
 Consider challenging patent at USPTO

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Early Procedural Motions

 Early Motions on the Merits
     • Particularly helpful in software cases due to Alice

 Tying up claims in strategic procedural motions
  (12(b)(6)/transfer) to reduce costs during licensing
  negotiations (in particular in busy districts, like D. Del.)
     • However, many NPEs have gotten smarter, using streamlined
       complaints that do not include indirect/willfulness claims to avoid this
       tactic (this is a recent adjustment to NPE strategy)
     • In some jurisdictions, transfer motions more successful against NPEs
       (as compared to other patent owners)
     • But, likelihood of transfer is lower in multi-defendant cases

 GOAL: Shift as much burden and cost to the NPE as possible
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Developing Non-Infringement Defenses

 Consider constructions of key terms
     • Teva v. Sandoz – factual conclusions that underpin claim construction
       rulings must be reviewed for “clear error”

 Consider testing the accused product (but be careful
  regarding privilege)
 Design-around as a way of avoiding infringement (more
  typical in Competitor cases)

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Attacking Validity

 Identify validity defenses early, particularly in jurisdictions
  having local rules requiring early disclosure
     • Strong validity defense will drive down settlement offer

 Consider filing an IPR petition
     • Do you have any non-prior art defenses left for trial (public use, on-sale
       prior art?)

 Consider a counterclaim [competitor case]
     • Pros: level discovery playing field, create an exchange chip for a walk
       away settlement
     • Cons: increased litigation costs

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Litigation Strategies Where There Are
Multiple Parties

 Trend towards multiple defendant cases
     • Emphasizes joint defense group (JDG) importance and advantages
     • If co-defendants are from disparate industries, presents both pros and
       cons
     • Potential cost savings
     • Bundled settlements
     • Check for supplier/customers/exhaustion issues

 Note that cases will likely be consolidated/coordinated for
  discovery and Markman hearing

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Litigation Strategies – Joint Defense
Groups (NPE)
 Trend toward hiring a single firm to represent multiple parties
 Potential conflicts and ethical considerations
     • Consider hiring different counsel for settlement
     • Consider handling preliminary settlement discussions in-house
     • When there are potentially divergent views among co-defendants
       represented by a single firm
 JDG participants from different levels of the supply chain
     • Logistics of working with competitors, suppliers
           Sharing sensitive information
           Exploring indemnity issues
           Pros and cons of multiple joint defense groups

 Coordinating discovery and ordering of trials where plaintiff has
  multiple on-going cases
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Litigation Strategies – Joint Defense
Groups (NPE)

 Benefits of Joint Defense Groups:
     • Share counsel and discovery costs
     • Share ideas for defenses (including prior art)
     • Force NPE into difficult infringement position at claim construction by
       strategically using claim terms that cannot cover products of multiple
       defendants

 Downsides of a Joint Defense Group
     • Potential loss of control of direction of case
     • What happens when a JDG member(s) settle
           Timing – settlement right before trial
           Ethical considerations

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Damages Issues

 NPE
     • Lost Profits – almost never
     • Damages calculated in the form of a reasonable royalty
     • Injunction post eBay – almost never
     • Going forward:
           Settlement: usually a fully paid up license
           Judgment: (if infringement is found) likely a compulsory license
           Consider design-around to mitigate

 Competitor cases
     • Likely will seek lost profit damages
     • Injunction
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Additional Defense Strategies

 Purchase (blocking) patents ahead of NPE
 Purchase NPE’s asserted patents
 Engage with defensive aggregator/licensing-pooling
  organization (e.g., RPX)
 Use your patents as currency - assign a patent or patents to
  the plaintiff with a covenant not to sue (consider impact on
  joint ventures)

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Challenging Patents at the USPTO

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Reasons to Consider AIA Proceedings at
the USPTO
 Lower cost alternative to litigation
 Limited discovery
 Fast to decision (18-24M) + appeal
 Low initiation standard – Reasonable likelihood that the petitioner
  would prevail with respect to at least one of the claims challenged
 No presumption of validity; preponderance of the evidence only
 Review by tech-savvy examiners
 Significant likelihood of stay in litigation (more than 80% of motions
  granted to date)
 BRI: “broadest reasonable interpretation”
 Likelihood of a win, although % success dropping

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IPRs Are Not Free

 Cost
     • Inter partes review can cost $150,000+ (just to initiation)
           Attorney’s fees
           Expert’s fees
           USPTO fees

 Stuck with the results
     • Estoppel: Bar reliance on prior art that the challenger “raised or
       reasonably could have raised”

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Legislative Initiatives

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Legislative Initiatives

 Innovation Act (H.R. 9)
     • Fee shifting (presumption of loser pays)
     • Heightened pleading standards
     • “Covered customer” stay provision
 The TROL Act (H.R. 2045)
     • Addresses bad faith demand letters; authorizes actions by FTC and states attorneys general
 The PATENT Act (S. 1137)
     • Heightened pleading standards
     • “Covered customer” stay provision
     • Stay of discovery during early dispositive motions (including motions to dismiss/transfer)
     • Fee shifting for discovery where losing party not “objectively reasonable”
 STRONG Patent Act (March 3, 2015)
     • Proposes changes to post-grant proceedings, including abandoning BRI (removes ability to
       amend during IPR) and mandating claims be presumed valid
     • Allows for divided infringement actions where steps not practiced by single entity (cf. Akamai)
     • Addresses bad faith demand letters
     • Eliminates Form 18 of FRCP (heightened pleading standards)
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Questions/Discussion

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