In 2011, the Supreme Court will hear argument, and make a decision in Microsoft v. i4i about:
Whether the invalidity defense provided for in the Patent Act, 35 U.S.C. § 28[sic], must be proved by clear and convincing evidence.
That much you probably already know, but if you didn’t already, then check out Dennis Crouch’s comprehensive overview of the case, Gary, the Patent Hawk, Odom’s amusing editorial, or Peter Zura’s succinct summary. Crouch’s post mentions an earlier study which he points to as suggesting that “lowering the burden of proof would not have made any difference for 74%” of cases. Patent owners may be mislead by this statistic into thinking that this case won’t have a significant impact on patent value, but they would be wrong.
Incidentally, I doubt Microsoft’s decision to forge new law lowering the invalidity burden came lightly, as a victory against i4i likely comes at the expense of Microsoft’s own patent litigation. But that’s a separate discussion.
Notably, Zura mentions what is sure to be a thoroughly dissected, albeit non-bindng bit of the Supreme Court’s KSR decision:
We need not reach the question whether the failure to disclose Asano during the prosecution of Engelgau voids the presumption of validity given to issued patents, for claim 4 is obvious despite the presumption. We nevertheless think it appropriate to note that the rationale underlying the presumption – that the PTO, in its expertise, has approved the claim – seems much diminished here.
Of course, the Court can’t really do anything about the “presumption of validity” itself, since that’s encoded in the statute (35 U.S.C. 282), but they will decide whether that language means that juries need to be convinced (traditional “preponderance” standard) or clearly convinced (something more than preponderance). Patent bloggers seem resigned to accept the fact that the Supremes will, indeed, lower the burden of proof, at least for prior art that was not, or perhaps could not have been, considered by the USPTO during the original examination.
Zura titled his post: “Supreme Court Prepares to Chop Down “Clear and Convincing” Standard for Proving Patent Invalidity.” Meanwhile, Dennis Crouch said: “I expect that the court will agree that the statutory presumption of validity does not require a clear and convincing standard and that the standard should be lowered when a court is presented with evidence that is substantially different from that considered by the USPTO.” However, the award for the most colorful characterization goes to Patent Hawk: “The black-robed toads who feel beholden to uphold the powers that be are taking it upon themselves to look at a more open season for patent killing.”
IP owners need to take note of this case. If the Supreme Court agrees with Microsoft’s argument, every patent in your portfolio will have less value as a result. This is not hyperbole, and it will be true regardless of the actual merits of any invalidity claims against any particular patent. The reasons why are actually quite simple.
One measure of patent value is the amount of licensing revenue that can be obtained from licensees. As I’ve discussed previously, when presented with an opportunity to take a license, a company has three basic options: 1) pay for the license, 2) ignore the request, or 3) actively resist the patent owner’s collection attempts. Of course, since 1 can be followed by a period of 2 and/or 3, the value that can be extracted from the patent is roughly equivalent to the amount of money companies are willing to pay minus the expense incurred trying to collect that money.
From this, it follows that a patent is more valuable when it is more likely a company will pay a larger amount of money, and less valuable when a company is more likely to resist or only willing to pay a smaller amount of money. As the patent owner, the subjective opinion of a licensing target is largely outside of your control. To a certain degree, professionalism, confidence and knowledge of the subject matter play a role, but generally speaking, the decision of how much weight to give your arguments is up to each individual company. If a ruling by the Supreme Court makes a company believe that it is more likely to succeed in proving your patent invalid at trial, then the company is less likely to agree to a settlement, or more likely to hold out for a lower price. Whether or not the company actually has a strong invalidity defense is largely irrelevant. Thus, while your patents may very well be valid under either a preponderance, or a clearly and convincing standard, a lower burden of proof means patent owners will invariably have to spend more and possibly collect less. Patent owners would be wise to pay close attention to the prosecution of this case.