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IP, Patent, Risk Mangement

The Patent Will Go On … A Re-examination Cautionary Tale

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.



6 thoughts on “The Patent Will Go On … A Re-examination Cautionary Tale

  1. “take 25.7 months to resolve…”

    The last I saw was that number was in course, meaning no reexam procedure had been completed through appeal. Therefore, the eventual lapse will be considerably longer.

    Posted by Ben Ford | October 7, 2011, 8:20 am
  2. You are assuming that since the reexam concluded without claim cancellation or claim amemdments that it was unsuccessful. It may be that to get the claims allowed the Patentee disclaimed a certain interpretation or strengthened a non-infringement argument. Ex parte reexamination filings are rarely pursued with the expectation that the patent will be completed invalidated.

    Posted by Josh | October 10, 2011, 4:52 pm
    • Josh,

      As I said in the post, more than 75% of the time, re-exams are concluded with the claims at least being amended. I think it’s a safe bet that anyone requesting re-exam sets this outcome as a minimum expectation.

      I am aware of the recent case invoking intervening rights due to arguments raised in re-exam. Time will tell whether that decision will survive in the long-run.

      Posted by Patrick | October 11, 2011, 8:14 am
  3. What happens to the licensee of a patent that during reexamination is found to have all of its claims cancelled? The licensee essentially paid for the rights to the IP described in the patent’s claims by a seller who it turns out does not actually own the IP. The licensee not only paid for something that was never real, but may have designed their product to make use of the IP described, only to now find that the licensed patent didn’t grant them rights to the IP.

    What happens? Is the licensee just out of luck? Seems odd since the licensee clearly would not have licensed the patent had this been known, and could actually have created now vulnerable products based on the false pretense of the license sold to him.

    Posted by David | December 9, 2012, 7:04 pm
    • David –

      A license is a contract between the licensor and licensee, and each one is unique. The specific language in the contract will dictate the significant events, such as a subsequent invalidation during re-exam.

      Posted by Patrick | December 12, 2012, 8:39 am
      • Sure, that makes sense. Thank you for your reply. But what if the license doesn’t mention reexamination or “reduction of legal claims” or the like? It does mention invalidation and unenforceability, but in this case the patent license was paid to acquire 20 claims, but after examination only 1 remains (95% were cancelled, including claims 1-19 which as you know are the most valuable and our tech really only needed those claims). It seems reasonable to assume that if I buy (license) something with 20 claims and it’s now just 1 claim that I wouldn’t pay the same as I’m not getting the same and likely would not even buy it if that final claim has no value to us.

        Posted by David | December 12, 2012, 1:22 pm

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