les aia stanford and effect of valuation 09 nov11

Recent Changes to U.S. Patent

Law and How They Impact

Patent Protection and

Valuation

Licensing Executives Society

Seattle Chapter Meeting

Seattle, Washington

November 9, 2011

PresentersGary M. Myles, Ph.D., Esq.

Shareholder / Partner

Schwabe, Williamson & Wyatt, P.C.

U.S. Bank Centre

1420 5th Avenue, Suite 3400

Seattle, WA 98101

Phone: 206.407.1513

E-Mail: [email protected]

Ron Epperson, CLP

National Director, Intellectual

Property Services

RSM McGladrey, Inc.

501 N. 44th Street, Suite 300

Phoenix, AZ 85008

Phone: 602.760.2865


Frank X. Curci, Esq.

Shareholder / Partner

Schwabe, Williamson & Wyatt, PC

1211 SW 5th Avenue, Suite 1900

Portland, OR 97204

Phone: 503.796.2914


Moderator

Agenda

Gary Myles

• Patent Reform under the “American Invents

Act” -- Recent Changes to the Patent System

• Stanford v. Roche -- What the Supreme Court

Thinks about Invention Ownership

Ron Epperson

• How do Recent Changes to the Patent Law

Affect Patent Valuation?

Introduction

• Patent Reform Act of 2011 (a/k/a

“Leahy-Smith America Invents Act”) – Signed into Law by President Obama on

September 16, 2011

– Most significant change in U.S. patent law since

U.S. Patent Act of 1952

Goals of the Act

• “Enhance and encourage innovation that improves

American competitiveness, economic prosperity and

job growth.” USPTO Commissioner Stoll

– International harmonization

• Refined definition of prior art

• Replace first-to-invent with first-inventor-to-file

– Improve the quality of patents

• Third-party pre-grant submissions

• Changes to post-grant review

Pre-issuance, Third-party Submissions

of Prior Art• Timing

– 12 Months after Enactment (Sept. 16, 2012)

• Showing of relevance + fee

• Timing restrictions, earlier of:

– Notice of Allowance, or

– Later of

• 6-months post publication, or

• Date of first rejection

Post-grant and Inter Partes Review

• Timing

– 12 Months after Enactment (September 16, 2012)

• Post-grant review

– Third-party can challenge patent within 9-months of issuance

– Not limited to invalidity based on prior art

– Only for first inventor to file patent applications

Post-grant and Inter Partes Review

• Inter partes review

– Replaces Inter partes reexamination

– After post-grant review period

– Initiated by third-party where “reasonable likelihood” of prevailing

• Replaces “substantial new question of patentability” standard

– Patent Trial and Appeal Board must complete within 18 months

Current Options for Post-Grant Patent

Review through the PTO

• Ex parte and Inter partes Reexamination

– Available to patentees and to 3rd parties

– Analysis of issued patent

• Based on substantial new question of patentability

• Based only on patents and printed publications

• Only relevant to claims

• Claims cannot be broadened

• Brought at any time during enforceability of patent

Current Options for Post-Grant Patent

Review through the PTO

• Reissue

– Available only to patentees

– Used to correct errors in specification or drawings,

or to change scope of claims

• Can broaden claim scope within two years of

issuance

• Can narrow claim scope at any time during life

of patent

Recent Changes to Post-Grant Review

• General Provisions

– Proceeding before the PTAB to review patent validity

– Based on any available patentability ground

• contrast with current reexamination – based on

patents and printed pubs

– Patentee can cancel claims or add claims to substitute

challenged claims

– Claim scope cannot be broadened; no new matter may

be introduced


• Timing

– Initiated within nine months of issuance of

patent/reissue

– Review completed within one year

• possible six-month extension for cause

– Cannot be initiated if petitioner has brought civil action

alleging invalidity


• Threshold showing to initiate action

– More likely than not that at least one of the

claims is unpatentable or

– Raises novel/unsettled legal question

important to other patents/applications

Recent Changes to Inter Partes Review

• General Provisions– Proceeding before PTAB to review patent validity

• Replaces inter partes reexamination

• Ex parte reexamination remains

– Basis limited to patents or printed publications and to issues of novelty/obviousness under 35 U.S.C. §§102/103

– Patentee can cancel claims or add claims to substitute challenged claims

– Claim scope cannot be broadened; no new matter may be introduced


• Timing– Life of patent after later of nine months from issuance

or termination of post-grant review

– Review completed within one year

• Possible six-month extension for cause

– Cannot be initiated if petitioner has brought civil action

alleging invalidity

– Proceeding cannot be initiated if petition is filed more

than six months after petitioner is served with

complaint alleging infringement of patent


• Showing– Reasonable likelihood petitioner would prevail with

respect to at least one claim

Benefits of Changes

• Post-Grant Review Procedures– Broaden scope of review by PTO (as opposed to courts)

– Reduce costs to challenge patents

– Increase patent quality

– Expedite PTO review process

– Encourage early review and analysis by affected parties

First-Inventor-to-File– Timing

– 18 months after enactment (March 16, 2013)

Conception

Jan. 1, 2013

RTP

Jan. 10, 2013

File App

Jul. 1, 2013

Conception

Feb. 1, 2013

RTP

Feb. 10, 2013

File App

May 1, 2013

First-to-Invent

First-Inventor-to-File


• 35 U.S.C. § 102(a)-(g) replaced with § 102(a)-(d)

• Almost absolute novelty requirement

– One year grace period for any inventor

publication, public use, offer for sale, or sale in

the U.S.

– Does not apply to third party disclosures, unless

after inventor’s disclosure w/in one year grace

period


• 35 U.S.C. § 102(a)(1) replaces § 102(a) and (b)

– Defines prior art

• 35 U.S.C. § 102(a)(2)

– Defines “derived” prior art

• 35 U.S.C. § 102(b)(1)

• Identifies exceptions to prior art under § 102(a)(1)

Changes in the Definition of Prior Art

• Removes

• “before the invention thereof by the applicant for

patent”

• “in this country”

Changes in the Definition of Prior Art

• Historically

• The “in this country” limit on 102 “use” or “on-sale”

were tied to what was feasible for an inventor to

determine in an era of limited communications

around the world.

• Under the America Invents Act of 2011

• “Use”, “on sale”, or “available to the public” now

extends this implied knowledge to anywhere in the

world.

Changes to the Definition of Prior Art

(a) NOVELTY; PRIOR ART. – A person shall be entitled

to a patent unless –

(2) the claimed invention was described in a patent

issued under section 151, or in an application for

patent published or deemed published under section

122(b), in which the patent or application, as the case

may be, names another inventor and was filed before

the effective filing date of the claimed invention.

Changes to the Definition of Prior Art

• Secret Prior Art• Historically, under §102(e), secret prior art was

limited to a U.S. national application

• Under the America Invents Act, §102(a)(2)

extends to foreign filings

Joint Research Agreement

• America Invents Act furthers the intent of the

Cooperative Research and Technology Enhancement

Act 2004 (CREATE)

• 35 U.S.C. § 102(c), Common Ownership under Joint

Research Agreement (JRA)

• Subject matter disclosed and claimed invention

deemed to be co-owned if

• Subject matter disclosed and claimed invention

made subject to JRA in effect before effective filing

date of claimed invention

• Claimed invention made per JRA

• Application discloses parties to JRA

Strategic Considerations

• Promptly file manuscripts and invention disclosures as provisional patent applications to establish early effective filing date

• Survey patent landscape to monitor for pre-issuance submission and post-grant review opportunities

• Remember that pre-filing publication within the one-year grace period will still impact the patentability of international patent applications

Stanford v. Roche

583 F3d 832 (CAFC 2010)

• 1985

– Cetus develops PCR methods for quantifying HIV levels in

blood

• 1988

– Cetus begins collaboration with a laboratory within

Stanford’s Department of Infectious Diseases to test new

AIDS drugs

– Inventor (Dr. Holodniy)

• Joins Stanford laboratory as a research fellow

• Signs Copyright and Patent Agreement where he

“agrees to assign” to Stanford his “right, title and

interest in” inventions resulting from his employment

at the University

Stanford v. Roche (CAFC 2010)

• Inventor begins work on quantifying HIV levels in blood using PCR

• Inventor is unfamiliar with PCR technology so he performs research at Cetus with Cetus employees

• Cetus requires that Inventor sign a Visitor’s Confidentiality Agreement

– Inventor “will assign and does hereby assign” to Cetus his “right, title and interest in each of the ideas, inventions and improvements” made “as a consequence of [his] access” to Cetus


• Inventor works with Cetus employees to develop testing method

• Inventor returns to Stanford

– Continues to work on testing method with support from an NIH grant

– Stanford reports finding to the NIH and elects to retain title

– Stanford obtains three patents on inventor’s work


• 1991

– Roche acquires Cetus PCR business including rights under Visitor’s Confidentiality Agreement

– Roche produces commercial test

• 2005

– Stanford sues Roche for patent infringement

• 2010

– Federal Circuit holds

• Stanford’s “agrees to assign” language within its Copyright and Patent Agreement does not constitute a current assignment

• Cetus’ “will assign and does hereby assign” does constitute a current assignment

Stanford v. Roche

563 U.S. __ (S. Ct. 2011)

• 2010

– Stanford appeals to U.S. Supreme Court

– Question Presented for Certiorari

• "Whether a federal contractor university’s statutory right under the Bayh-Dole Act, 35 U.S.C. §§ 200-212, in inventions arising from federally funded research can be terminated unilaterally by an individual inventor through a separate agreement purporting to assign the inventor’s rights to a third party.”

Stanford v. Roche (S. Ct. 2011)

• 2011

– Supreme Court upholds time-honored tenet of patent law that an inventor owns rights to his/her invention

– Bayh-Dole Act does not affect inventor’s ownership rights

– Breyer dissent

• Stanford should retain title because “patent law appears to have long specified that a present assignment of future inventions (as in both contracts here) conveyed equitable, but not legal, title.”

Impact on Patent Valuation

Overview of Valuation

Recent Court Decisions and the Impact

on Valuation

How to Protect Value in a Less Certain

World

Overview of Valuation

• “The determination of the economic value of an asset or

liability.”

• “the process of determining the current worth of an asset or

company.”

• Many factors enter in determining value, including

– Revenue

– Costs

– Capital Structure

– Stage of Development or Maturity

– Legal Rights

– Probability of achieving future revenue and profits

Most Common Valuation Methods

• Cost Method

– What it cost to develop the asset

• Market Method

– What have others paid for comparable assets, adjusted for

unique factors.

– Appraisal of real estate is essentially done by the market

method.

Most Common Valuation Methods

• Discounted Cash Flow Method

– Project future cash flows

– Adjust these cash flows for risk or probability of achieving

these cash flows

– Discount these cash flows to the current date (“time value of

money”)

– Probably the most common approach to valuing companies

and intellectual property

Remember One Thing About

Valuation from this Section

• Anything that increases uncertainty

around your intellectual property

reduces the value of your intellectual

property!

Significant Areas of Case Law

Post Verdict Injunctions

• eBay v MercExchange (Supreme Court, 2006)– Prior to eBay, post verdict injunctions were virtually automatic in patent

cases.

– This gave plaintiffs leverage throughout the patent infringement litigation

process; the threat of an injunction upon plaintiff’s success was a factor in

settlement negotiations, and the a post-verdict injunction caused many

other cases to settle prior to appeal.

– Since eBay, injunctions are no longer automatic, especially for NPE’s:

• Over the past 5 years, 131 out of 174 injunctions have been granted.

– Less certainty on injunctions appears to be resulting in defendants being

more wiling to roll the dice

– Without a credible injunction threat, plaintiffs need more cash and more

time to resolve cases, and the outcome is less certain.

– Results in lower valuations for patents.

Post Verdict Injunctions

• Recent ITC Trends– The ITC is a popular venue for patent plaintiffs

• Rapid resolution of cases; historically around 12 months start to finish

• Historically a high success rate for plaintiffs

• No damages

• Finding for plaintiff results in an automatic ban on importation of

infringing goods- provides settlement leverage for plaintiff

– However, caseload is up sharply after eBay

• Cases are taking longer

• Plaintiff success rate is dropping

• Patents are being invalidated at ITC, which almost never happened

before

• Cases are becoming more costly to move through ITC

– FTC is questioning whether ITC is managing the process correctly

• Should licensing companies be able to use this venue?

Licensing

• MedImmune v Genentech (Supreme Court 2007)– Prior to MedImmune, a licensee could not challenge the validity of a

licensed patent while in compliance with the terms of the license; licensee

needed to breach the agreement (typically, by not paying royalties) and

then be sued for infringement in order to bring a validity challenge

– The Court ruled that this was in opposition of long standing contract law;

forcing a licensee to take this much business risk in order to bring a

challenge is patent was basically unfair

– So is a license ever a done deal?

– This creates uncertainty, and ultimately reduces valuation

– Mitigation:

• Better license agreement language

• Mechanisms for dealing with licensee challenges

• More upfront royalties that are nonrefundable under a challenge

• Royalties that escalate after an unsuccessful challenge

Licensing

• SanDisk v STM Microelectronics (CAFC 2007)– Licensor approached a prospective licensee to take a license

– There were no threats of litigation, and in fact the licensor specifically told

the licensee that they would not sue them

– Despite this, licensee sued for declaratory judgment that they did not

infringe

– Prior to this case, courts had held that you could not file for DJ in a patent

case without more direct threat of litigation, and even that threat had to be

fairly explicit

– After SanDisk, the standard for DJ is much lower and traditional licensing

techniques can trigger a DJ

– Licensors now have to be much more careful to avoid a DJ and being in a

venue that they would not prefer

– Again, risk is increased and valuation is more uncertain.

Damages

• Lucent v Gateway (CAFC 2009)– Directly speaks to the market method of using comparable license

agreements

– Lucent’s experts used “comparable” license agreements from the

information technology industry, none of which covered the patents in suit

– The comparable agreements also had different royalty structures than what

the jury ultimately awarded

– Lucent’s expert never explained why the agreements used were

“comparable”

– Federal Circuit reversed on damages, and instructed district court to make

sure that evidence used for damages actually related to the patent in suit

– Analysis and presentation of damages now requires a greater degree of

transparency and a logical road map; “show your work”

– Implications mostly tied to litigation damages, but real world implications for

market method and how valuation analysts include comparables and adjust

for differences

43

Damages

• Uniloc v Microsoft (CAFC 2011)– The CAFC weighed in on a very common valuation method used in both

litigation and real world circumstances

– The “25% Rule” allocates the profits earned from exploiting a patent

between the patent owner and the party that utilizes the patent; 25% to the

patent owner and 75% to the patent user

– No real basis for the “rule” other than observations made in the 1950’s

about profit splits for licensing in the European chemical industry

– Often used to set a starting point for royalty rates when no other data exists

– CAFC found that this method was not reliable and was inadmissible under

Daubert; it can no longer be used in Federal Court

– Damages in patent cases are now much more difficult to calculate without

this very common rule

– Court ruling doesn’t necessarily rule out the use of the rule in real world

valuation, but analysts will be much more careful in using this approach

going forward

Inequitable Conduct

• Therasense v Becton Dickinson (CAFC May 2011)– Inequitable conduct is a very common defense used by defendants in

patent cases

– Implication is that the plaintiff withheld key information from the Patent

Office and that somehow caused the patent holder to obtain rights that they

otherwise would not have

– District courts used to have different standards, and often took the stance

that if the alleged conduct was material, you can infer that it was intentional

– CAFC instituted a “but for” test for inequitable conduct

– Reduces the likelihood that the defense is effective

– Generally plaintiff friendly

– Increases certainty and improves valuation

Inducement of Infringement

• Global Tech v SEB (Supreme Court, May 2011)– Formalizes the standard for inducement of infringement

– Now requires “knowledge” that the induced conduct infringes

– Knowledge can be shown by “willful blindness” versus the prior standard of

“deliberate indifference”

– Unclear what the real effect is of this ruling

– Unclear how this ruling impacts valuation

Ownership and Title• Stanford v Roche (Supreme Court June 2011)

– Deals with ownership of inventions

– Stanford researcher agreed as part of Stanford IP policy that he “will assign”

inventions to Stanford

– Stanford sent him to Roche to learn about a Roche technology

– He signed a visitor’s NDA stating that he “hereby assigns” all inventions

related to what he learns

– Stanford gets three patents

– Tries to license to Roche, Roche refuses, Stanford sues Roche

– Stanford argues that the Bayh-Dole Act trumped the NDA, and Stanford

owns the inventions since the work was federally funded

– Court disagreed; Constitution trumps Bayh-Dole

– Big implications for university inventions and start ups founded around

university inventions

– Expect more transaction due diligence, policy and procedure reviews at

universities, longer times to complete transactions

Trade Secret “Trends”

• Cautionary note: “data is not the plural form of anecdote”

– There is anecdotal evidence that companies are asserting trade

secret claims more aggressively

– There is anecdotal evidence that plaintiffs are pursing more trade

secret claims against competitors and business partners

– There is anecdotal evidence that plaintiffs are asking for far larger

damages in trade secret matters

– There have been some very large awards in trade secret matters

• Given increased uncertainty on patents, and some evidence of higher

trade secret values, will companies adopt more trade secret programs

and enforce them more aggressively?

• Does every entity need patents?

How to Protect Value in a Less

Certain World• There is quite a lot you can do:

– Be really on top of your entity’s business model and business objectives so

you can provide the best quality advice

– Policies and procedures that clearly support ownership and chain of title

– Well crafted license agreements

– Well crafted licensing campaigns

– Establishing some reference licenses to set value

– Transparent license negotiations; “show your work”

– Consider a portfolio with multiple forms of IP, not just patents

– Get involved in the policy side of IP through trade associations and other

interest groups

– Since patent litigation has always been uncertain, and is increasingly

becoming more uncertain for plaintiffs, find other ways to achieve your

goals, and consider how NPE’s might be able to manage that process for

you

Ron Epperson, CLPRon Epperson is the National Director of the Intellectual Property Services Practice, based in Phoenix, AZ. Mr. Epperson has over 30 years of corporate and consulting experience, including extensive experience in intellectual property matters such as counterfeiting and piracy, licensing, royalty investigations, valuation, litigation, technology commercialization, joint venture formation, academic technology transfer, intellectual property strategy and strategic planning. He has experience in the biotechnology, medical device, pharmaceutical, environmental, energy, chemical, software, high technology and aerospace industries as well as with U.S. Government National Laboratories, major research universities and academic medical centers. He also is experienced in international joint development and licensing arrangements, with responsibility for deals in Korea, Japan, The People's Republic of China, Singapore, Germany, Spain, Italy, Austria, Switzerland, The Netherlands, the United Kingdom, the Republic of South Africa, Australia and Mexico.

Mr. Epperson has participated in and led numerous intellectual property projects. He has assisted clients in discovering and capturing value from their legacy intellectual property portfolios. He has helped clients develop strategies to commercialize new products, license technologies and redirect research activities towards higher value technologies. He has helped clients investigate and prevent incidents of counterfeiting, IP piracy and grey market sales of products. He has worked with U.S. Government National Laboratories, academic medical centers and public/private consortia on commercialization of early stage life science products and services. He has also worked with counsel and corporate clients in disputes involving patents, trade secrets, trademarks, copyrights and counterfeit products. He has testified before Federal, state, regulatory and international forums. In his 20 year career in the chemical, energy and advanced material industries, Mr. Epperson built international joint ventures for technology development and licensing, led technology licensing business units and led due diligence teams for technology-driven merger and acquisition transactions. He also served as a process engineer and operations manager with responsibility for deploying leading edge technologies.

Mr. Epperson received his B.S. in Chemical Engineering from the Virginia Polytechnic Institute & State University, summa cum laude. He was one of the first professionals in Arizona to earn the Certified Licensing Professional credential. He is a member of the Biotechnology Industry Organization, the Arizona Bioindustry Association, the Licensing Executives Society, the Intellectual Property Owners Association (former Co-Chair of the Counterfeiting & Piracy Committee), the Association of University Technology Managers, and is an associate member of the American Bar Association IP Section. He also mentors early stage companies in intellectual property issues for the Northern Arizona Center for Entrepreneurship and Technology (NACET).

If you would like

more information

or assistance,

please contact

Ron Epperson at

602.760.2865 or

e-mail him at

Ron.Epperson@

mcgladrey.com.

National Director,

Intellectual

Property Services,

RSM McGladrey, Inc.

Gary M. Myles, Ph.D., Esq.Gary Myles focuses his practice on the protection of life science, biotechnology, pharmaceutical (small molecule), and medical device inventions, with special emphasis on patent counseling, patent application drafting and prosecution, and related licensing, evaluation, and dispute resolution. He has extensive experience in the formulation of freedom-to-operate, non-infringement, and invalidity opinions, and performs intellectual property due diligence reviews in the context of business transactions including M&A and venture financing.

Dr. Myles has deep knowledge in the areas of science and technology including molecular and cell biology, biochemistry, organic chemistry, physical chemistry, and immunology. He obtained his Ph.D in the laboratory of Aziz Sancar from the University of North Carolina, Department of Biochemistry and Biophysics where he studied the molecular mechanisms of nucleotide excision repair of damaged DNA. He spent six years as a post-doctoral and senior research fellow at the Fred Hutchinson Cancer Research Center where he researched the molecular mechanisms of signal transduction through structure function studies on the c-fms receptor tyrosine kinase and studied the effect of receptor mutants on the processes of cellular differentiation, proliferation, and transformation.

Dr. Myles has been recognized as a Washington Super Lawyer, which is an annual listing of outstanding lawyers who have attained a high degree of peer recognition and professional achievement.

Dr. Myles is an adjunct professor at the Seattle University School of Law where he teaches "Biotechnology and the Law" and is an adjunct professor and law, technology and arts fellow at the University of Washington School of Law, where he teaches the Advanced Patent Law Seminar to JD and LLM students. Dr. Myles is active with the American Cancer Society Cancer Action Network, the Washington State Bar, Washington Biotechnology and Biomedical Association, American Bar Association, Washington State Patent Law Association, American Intellectual Property Law Association, American Association for the Advancement of Science, Licensing Executives Society, Greater Seattle Chamber of Commerce, and the Association of University Technology Managers.

If you would like

more information

or assistance,

please contact

Gary M. Myles

at 206.407.1513

or email him at

[email protected]

Admitted to practice

in Washington.

Frank X. Curci, Esq.Frank X. Curci is a Shareholder/Partner in the West Coast firm of Schwabe, Williamson & Wyatt. He

represents bioscience companies, bioscience research institutions, and high technology companies

concerning domestic and international intellectual property and technology matters. He assists these

entities concerning patent / technology licensing, research collaborations, other multi-party collaborations

& consortia (in the life sciences and high tech industries), sponsored research, technology transfer, other

technology commercialization matters, clinical trial agreements, and the overall use of their intellectual

property rights. Frank has received the “Best Lawyers in America ®” award from 2009 to 2012 in the

Biotechnology Law field and the Technology Law field.

Since 1996, Frank has been an Adjunct Professor of Law teaching intellectual property law courses at

California, Oregon and Arizona law schools. He currently is an Adjunct Professor at Lewis & Clark Law

School in Portland, Oregon, where he teaches "Licensing & Technology Transfer." Recently, he was an

Adjunct Professor at the Sandra Day O'Connor School of Law at Arizona State University, where he taught

"High Technology Licensing." Prior to that he taught intellectual property courses at the University of the

Pacific, McGeorge School of Law in Sacramento, California.

Frank is active with bioscience and technology associations. He was recently elected to the Board of

Directors of the Cancer Research & Biostatistics Institute, a Seattle-based non-profit bioscience research

institution. He is currently active with the Oregon Bioscience Association and is a member of its Oregon

Biotech Roadmap Committee. In 2010 he was the Vice Chair of the Arizona BioIndustry Association

(AZBIO) and was a member of its statewide Board of Directors.

Frank was a “Visiting Attorney” at a Tokyo, Japan law firm in the 1990s and his practice has had an

international component since that time.

If you would like

more information

or assistance,

please contact

Frank X. Curci

at 503.796.2914

or email him at

[email protected]

Admitted to practice

in Arizona, New York

and Oregon.

Questions & Answers

This information is intended for general information purposes only and not as specific legal advice. You are urged

to consult an attorney concerning your situation and any specific legal questions you may have.

© 2011 All Rights Reserved.

les aia stanford and effect of valuation 09 nov11

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