File this under things that seemed like a good idea at the time. A patent enforced against TD Ameritrade, clients of the well-respected IP firm Baker Botts, broadly described an encrypted data transmission process fundamental to modern electronic commerce. Not just fundamental in terms of its age–reaching back years before Netscape published its original SSL technology–but fundamental in the respect that web-servers and web-browsers deeply integrate this patented process for secure data transactions. Simply put, the patent is mature (i.e. near expiration) with broad implications (i.e. widely used, but naturally more vulnerable to attack). Re-examination seemed like an ideal strategy.
A re-examination request carried the potential to render the patent effectively worthless. Baker Botts’ request, granted in January 2011, would, on average, take 25.7 months to resolve, potentially extending past the patent’s May 2012 expiration date. Further, the patent office agrees to more than nine out of every ten re-examination requests, and either cancels or narrows about 75% of patents it re-examines. (See patent office statistics (pdf)). If the average timeline above held true, patent office rules would ultimately prohibit any amendment to the patent, leaving its owner with only the option of arguing in favor of the patent claims as they stood.
On the surface, this appeared to be a sound strategy, and one that leaves the patent owner with very few options. But just as an iceberg carries but 10% of its mass above the surface, this Titanic-esque re-exam strategy lay vulnerable to the unseen mass lurking below. Just like Captain Smith, TD Ameritrade’s trusted navigators at Baker Botts ignored the many iceberg warnings as nearly every other financial institution exited the litigation, opting instead to license this critical invention. In December 2010, after two years of pre-trial litigation and ample opportunity to change course and negotiate a license with the patent owner, Baker Botts convinced TD Ameritrade, to eschew the licensing process and run full-steam into the icy waters of re-examination.
So what makes the re-examination waters so icy? While a re-examination can delay, or sometimes derail, a patent owner’s licensing campaign by creating doubt about the patent’s validity. In addition, as the statistics above indicate, this strategy often succeeds, at least in part. However, when re-examination fails, the tables may be dramatically turned on the requester. Patent litigation generally carries significant risk for patent owners, motivating settlement. A defendant’s refusal to negotiate, and a botched attempt to knock the patent out in re-exam boosts the patent owner’s confidence, increasing the willingness to go to trial, and consequently influencing the patent owner to hold out for a larger settlement. Consider the confidence of Virnetx CEO Kendall Larsen, whose patent is once again being re-examined after surviving a first re-exam this past June. Larsen boasted, “We welcome these reexamination proceedings as we believe the outcome will only further validate our patent.”
Back to our story. On July 30, 2011, the lawyers working on the TD Ameritrade cases may very well have cried out, “Iceberg, right ahead!” after noticing a brief, but important, communique from the patent office. Far from striking down the patent, the patent office stated its intention to issue a Re-examination Certificate confirming patentability of all original claims, and adding several new claims. What’s more, the notice meant the process would resolve years ahead of schedule. On September 20, the certificate issued, confirming the validity of the patent despite 150 additional prior art documents not considered during the original examination.
True, TD Ameritrade and Baker Botts could press on, despite the many “iceberg” warnings, and despite (now) the iceberg’s visual confirmation. TD Ameritrade could take its chances at trial, and attempt to convince a judge and jury that the patent office got it wrong not once, but twice, or that some other, previously unknown document or resource–different from the 150 documents most recently considered–demonstrates that someone beat the inventor to the punch. Whether Baker Botts will lead its passengers closer to that unseen mass lurking below the water’s surface, or whether TD Ameritrade will let them, remains to be seen.
For more background, check out US Patent 5,412,730.