Roundtable

The practice of intellectual property law is, of course, as timeworn as most. But it also is busier in California than many fields of law, especially in the area of patent litigation. Lawyers, courts, and legislators all are struggling to keep pace with one another and with escalating costs in patent litigation. Lawyers remain focused on the evolving rules and law governing pleadings and evidence. Courts are grappling with the same issues and with how to determine damages. And legislators are continuing to try to address myriad complaints from the field. One trend to look for: more detailed evidence in support of damage calculations, including market research data.

California Lawyer met for an update with panelists Robert Fram of Covington & Burling; Matthew D. Powers of Tensegrity Law Group; Vernon M. Winters of Sidley Austin; and Denise De Mory of Bunsow De Mory Smith & Allison. The roundtable was co-moderated by independent mediator Jeff Kichaven with California Lawyer and reported by Cherree P. Peterson of Barkley Court Reporters.

Jeff Kichaven: In the last several months what have been the most significant developments in the field of patent eligibility and what can we expect to see in the months ahead?

Matthew D. Powers: I think Alice Corp. v. CLS Bank Int'l (134 S. Ct. 2347 (2014)) is still the shiniest new toy in the toolbox for lots of people, and it's being grabbed in almost every case. And in my view there are two disturbing trends: One is procedural, and the other is substantive.

The procedural trend is to attempt to decide Alice at the very beginning of a case. That was doable for the cases where Alice was being used as it was intended, but Alice is now being used for cases that cannot be decided that early. The things that should keep cases from being decided that early are sometimes issues of claim construction which decide really what the claims preempt and don't preempt, sometimes the extent of preemption, and sometimes the question of what is truly inventive.

The challenge for the courts now is to sort through a protocol for when and how you can properly decide Alice motions as early as possible. It is in everybody's interest to decide that dispositive question as early as you can, but also recognize that it is more important to decide that question with the information required to decide it well than to decide it early at the cost of due process.

The substantive issues that are dangerous are, what is an abstract idea, and what is the inventive step. We're seeing Alice applied to servers and all sorts of hard-core technical inventions where it was not really designed to be applied. We're going to see other moves in the opposite direction because the issue's just being taken too far. Ariosa Diagnostics v. Sequenom (Fed. Cir. 2015) is a really good example. That has attracted a lot of attention in amicus briefs and otherwise.

robert Fram: Yes, the line is really blurred, even at the Federal Circuit. One problem arises, if you compare, let's say, DDR Holdings, LLC v. Hotels.com (Fed Cir. 2014) on the one hand and Internet Patents Corp. v. Active Network, Inc. (Fed. Cir. 2015) on the other, both Web cases. One involved taking elements from one website and incorporating them in another. Apparently that's concrete. The other involved the function of going back and forth within a transaction; apparently that's too abstract. So you look at those two technologies-both trying to make a Web page work better-and one's OK and the other's not.

The second problem is the district court enthusiasm has now gotten to the point where as the late Judge Mariana Pfaelzer in LA said, in Cal. Inst. of Tech. v. Hughes 59 F. Supp. 3d 974 (C.D. Cal. 2014), you're wiping out all software.

vernon m. Winters: If one steps back and thinks about the role of the court in this process, patent cases are unlike most civil litigation where you've got in almost every other civil context a way to resolve the case early. Class actions are the classic: There's a motion to challenge class certification, and the case rises or falls on that. Absent an Alice challenge, the patent law generally lacks tools to tee up early on the question of whether a case should go forward.

denise De Mory: In terms of cases where you're not talking about a combination of the conventional with the conventional, but instead you're talking about some improvement to existing technology that happened in the past, we have to do an analysis of whether it was inventive at the time, as set forth in DDR. And it is challenging to see how you can do that without some kind of factual analysis. There's still a lot of work to be done on the implementation of Alice in the district courts and implementing it consistently. It will be important to get some additional direction from the Federal Circuit on how to do that.

Fram: The McRO case (McRO, Inc. v. Sega of Am., 2014 WL 4749601 (C.D. Cal. Sept. 22, 2014)) may help the overall process in two respects. First of all, as Judge Pfaelzer said in her critique of McRO in Cal. Tech, Hold it a second. What about combinations?

And the second is this whole point you're making about conventional. That's an emerging issue, and Judge Pfaelzer says, Not so fast. The mere fact that it might have been around somewhere, in the prior art somewhere, doesn't mean it's-quote, unquote-"conventional."

De Mory: It's going to take regular pressure advocating for claim construction on the cases where these Section 101 motions are brought early, submitting expert declarations supporting what was known at the time. Software starts at a level of abstraction, and then it's written into computer code. So if we don't start looking at whether, at the moment when the application was filed, something was inventive or preemptive, there is a risk to software-related patents under the currently articulated tests, particularly as they are being applied.

Winters: I hear what you're saying, but I think that's aspirational or normative rather than a description of the positive law now. The current law clearly allows an early challenge, and the Federal Circuit has encouraged them.

Powers: On the procedural question, The Sedona Conference is taking that issue on, and probably in a couple of months there's going to be something coming out. And as everybody knows, this conference is a very balanced, neutral, non-ax-to-grind kind of organization that's trying to make the law better.

What they'll say is there are three ways to resolve 101 motions early because it is in everyone's interest to resolve it properly as early as you can. Those are: A, on the pleadings because there are cases that can be resolved then; B, on a limited question of claim construction or inventive step or extent of preemption; or C, if not, then during regular summary judgment motions.

Fram: One of the policy questions that will probably have to get resolved, and I think it will get resolved in the next six months or so, is the question about software-whether a processing of data is sufficiently concrete.

An issue in one of the appellate briefs I read recently is that the result of data processing doesn't matter. Whether you come up with a certain website that looks a certain way or it feels tangible doesn't matter. All that matters is the process for getting there and the processing data is itself abstract. That is a position that has been staked out. My prediction is that gets shot down, because that takes down all software with it. If that's affirmed, then game over on the rest of the stuff.

Kichaven: Are you still approached with many business method cases?

De Mory: I have not seen as much coming in the door. Bilski v. Kappos (561 U.S. 593 (2010)) says there are business method patents. So if you have a legitimate business method patent, you should be able to find someone to bring that claim. I don't see them, but I don't know if they are walking in the door elsewhere.

Kichaven: There are decisions coming out of the Federal Circuit with some regularity on the subject of damages. Maybe we ought to start with the Motorola v. Microsoft decision in July (No. 14-35393), since it was here in the Ninth Circuit, talking about fair, reasonable and nondiscriminatory, or FRAND, damages as they relate to standard-essential patents. Did the Ninth Circuit get it right?

Fram: The context I'd give that decision is, when you deal with historical licenses, they tend to be based on end products, whether it's a cell phone or a box dealing with video. But the Ninth Circuit in Microsoft addressed that question under the shadow of Apple Inc. v. Motorola 757 F.3d 1286 (Fed. Cir. 2014), where the Federal Circuit had said it's OK to look at historical licenses even if they have end products as the royalty base.

Now, the Ninth Circuit still got rid of all of them and used very conventional techniques to address why those historical licenses were not relevant. Fundamentally you're dealing with WiFi 802.11 and video H.264. And those patents are a trivial amount of value of the historical licenses. You've got to look at two other cases that had some FRAND to them: Ericsson, Inc. v. D-Link Systems, Inc. (773 F.3d 1201 (Fed. Cir. 2014)) and the appeal that's coming up in Cisco v. CSIRO (6:11-cv-00343-LED).

Kichaven: Does considering only the end product favor the plaintiff?

Fram: Yes, damages are calculated against the whole $500 cell phone versus a $20 chip or $30 chip.

Powers: The other big question that's unanswered is how you deal with a non-closed-in pool of patents. It's one thing when you have a known number of patents and a known amount of royalties and you can just do the math the way a third grader would. When you have an unknown much larger pool of patents that are relevant, the FRAND problem gets infinitely more complicated.

Kichaven: How do you have an unknown pool of patents when you have a physical device that either does or does not contain the patents?

Powers: Because different standards bodies have different rules about declaring patents essential. And some have what's called a patent pool, which is a known number of patents and a known amount of royalties being paid. And that patent pool divides up the royalties to be paid to each contributor based on the number of patents they've contributed to the pool.

Fram: It's particularly hard in WiFi be-cause you get generalized declarations. Pools are not going to be a driver there. You're right in the soup on the question of historical licenses.

The debate there is this: "OK," says the plaintiff, "Yeah, I've got a small little piece of a little component here. But without my little component, the whole big show doesn't go. You need me to make the whole thing work. I get a piece of the synergy value."

And the defendant says, "What about 'smallest saleable patent practice of the unit' don't you understand?" And, "By the way," says the defendant, "While we're at it, you're trying to capture the big unit-making the telephone work-just because of connectivity. But you don't own all of connectivity. You own your particular little piece of it."

De Mory: We have some guidelines, but we have no specifics. It's been mentioned you have standard-setting bodies that follow different rules so there's disparity as to whether certain things are disclosed, and there are amorphous numbers. You have the guidance of Ericsson, but you don't have the specifics of how we are going to value this one WiFi patent, say, in this device when the device as a whole also does all these other things.

Winters: To borrow a phrase, the arc of the patent law's damages jurisprudence is long, but it bends towards the real world. Perhaps that's cold comfort currently.

Kichaven: Well, Ericsson hardly provides guidance, does it? It simply says the Georgia-Pacific factors are not to be applied in a rote, mechanical way.

Powers: Part of the problem is people are looking for a one-size-fits-all rule here for something that is factually dependent. The overarching analytical framework is clear: You're trying to define what the actual contribution to the technology and the value of the product is based on the patented technology. But the standards question adds a wrinkle, which is, it was adopted as the standard, sometimes over alternatives, sometimes not. There may have been five other ways that could have been adopted as the standard to provide connectivity. But that's a fact-based question in an individual case.

Winters: In terms of the overarching analytical framework, it's well to bear in mind that the law should tolerate other damages models. Nothing in Judge Robart's decision or in the Ninth Circuit decision saying that a modified Georgia-Pacific was the sole or exclusive damages methodology. There are, no doubt, other methodologies that could be appropriate.

Kichaven: Will we now find more forum shopping? Will we find more inconsistency because this case will be going up to the regional circuits?

Fram: I'm not sure. The Ninth Circuit went out of its way to try to be careful about the Federal Circuit's views on historical licenses. So I'm not seeing a sharp debate yet. It's possible. Whether you package this as a matter of historical licenses or Georgia-Pacific factor one, it doesn't really matter-the labels don't matter much. The problem we have is a mismatch between the evidence, if you will, and where the law has moved.

Powers: The irony here is that you think of damages as being an ancient, well-developed body of law but there was almost no attention given to damages until about seven, eight years ago or so. It was always the last thing people thought of in a case. You had one expert who started work a few months, maybe a few weeks before the expert report was due, and they went through the Georgia-Pacific factors like the Bataan Death March. There was no analytic focus on it from the plaintiff or the defendant or the court. It was this body of law that was undeveloped since the New York district judge did Georgia-Pacific about 60 years ago.

De Mory: It's going to become the focus of much more discovery, more of a factual investigation. I think the way these cases are litigated is going to change because, before, plaintiffs had historical licenses and said this is how much it's worth, and it was a pretty simple analysis.

The guidance that we're getting now is to develop a story about damages. We spent our time developing stories about infringement and validity before, so you are going to have to put more things before a jury.

Kichaven: What are some of the kinds of stories you think will and won't sell going forward?

De Mory: Well, you're going to be developing facts around the value of the technology, so: Why did this make it into the standard? How important was it? And how did it come about?

Your technical experts will now, I think, be much more involved with your damages experts in terms of educating them on why this is a significant improvement to the state of the technology or not on the other side of it.

Winters: Talk with experts whose job it is in antitrust cases to value a product, look at price sensitivity and how to define markets. The analytical rigor that they bring to that task, compared with the typical damages expert's report in a patent case, is qualitatively different. One's an apple and one's a fish. And the experts who do both have never understood why the law has tolerated that.

Kichaven: Where would lawyers look to try to develop that evidence?

De Mory: Well, I agree with Vern [Winters] that the way antitrust damages are developed is much more robust than adding up a number of products and multiplying that times a historical number.

Powers: I think you're also going to see a different type of expert. You're going to see not a purely technical expert, not a purely quantitative expert, but someone on the marketing side who can speak to the contributed value of that particular technology or that functionality to the consumer.

De Mory: The accused infringers have many marketing documents, and that's a bit of an untapped area. The challenge everyone faces is characterizing the benefit of the patents. Companies make decisions about what to put in their products based on data. So far, people haven't pressed on that discovery as much as they will need to.

Winters: Let's note here the interrelation between what we're talking about now and where we started, which was Section 101. Because everything we're talking about now costs more for clients, imposes a bigger burden on the courts through at least discovery disputes, probably Daubert practice, and probably increases the length and certainly increases the complexity of trials-which means that we're now asking more of jurors in addition to judges. That will over time increase the pressure on courts to find ways to get rid of cases early.

Powers: It is weeding out cases where people don't have access to funding. It creates this side business of litigation funders who want to have their finger in the pie.

Winters: And you've seen new players in that market that have moved in precisely because they're looking for companies that don't have great balance sheets, but have what they view as great patents.

Fram: Not only is this information more expensive, but the pot of gold at the end of the rainbow is noticeably smaller. So Robart, if anything, established that. When the folks from Motorola walked in and said they want 2¼ percent of the price of the end product, they were just doing what had been done forever in that corporation. They just assumed that had to be FRAND.

Robart says it's going to be a minor fraction and, by the way, that will go to a jury who will award damages against you for doing it. So it's a completely new day and new game to a much smaller number.

Kichaven: There's much proposed legislation in front of Congress to reform the America Invents Act and other statutes. What do you think of these proposed reforms?

Powers: What's important to understand is that the current round of patent "reform"-and I'll put reform in quotes-is not a public policy debate, but a concerted effort by a small number of well-financed tech companies to change the rules of the road in cases that are brought against them.

There are a number of components of what's being argued in reform. Some of them are uncontroversial and some of them are just naked land grabs. So one is a question of heightened pleading requirements. I think most sensible plaintiffs' lawyers would say that's fine, we don't care about that as long as it's nonbinding at the beginning of the case and that it's bilateral because the current statute drafts have it just one way: Plaintiffs have to plead more specifically, and defendants don't.

Winters: It's easy to be specific about infringement allegations. You have the claims, you have the specification, you have the file history, and you have the product. And maybe you need to do some reverse engineering. A lot of times you don't.

But that analytical process is a relatively tightly-confined exercise and can be done relatively quickly. It's hard to develop invalidity contentions-and Matt [Powers] will remember this from his days as a defense lawyer-because it can be hard just to find the art. That is a very nontrivial task. So that asymmetry can be explained from that perspective, and it needn't be viewed as a land grab.

De Mory: I do think this is just a cost increase for everybody, not just the plaintiffs, which is perhaps what is intended.

What is set forth in the new rules is basically already codified in local rules in many venues. The proposed new pleading standards require a plaintiff to basically do infringement contentions in the complaint: identify the asserted claims, identify the theory of infringement, identify the asserted products, and identify the accused instrumentalities. In fact, "accused instrumentality" is the same phrase used in many patent local rules around the country.

We're moving this up, but the patent local rule system has matured to a point that people aren't litigating infringement contentions or invalidity contentions that much anymore because we know what's going to happen. Unless it's truly deficient, we're not going to spend our client's money either way litigating those issues. So plaintiff or defense, it doesn't matter. But the proposed rules would encourage motion practice at the pleading stage, which will increase costs.

Powers: So now if this portion of the bill is adopted, people will be forced to do Markmans without the discovery that judges have found to be essential to an efficient Markman. And that either produces terrible Markman decisions or seriatim Markmans, neither of which makes any sense.

Fram: A core part of the congressional move here has been to take a lot of this out of the courts altogether. And so moving over to the Patent Office, the key point is that the legal standards governing claim construction are different. The broadest reasonable construction standard makes it so much easier to invalidate a patent if it moves over to the Patent Office.

Powers: It's increasing the cost for everybody in patent litigation, which is sort of a constant theme here, that people complaining about the cost of patent litigation are the ones who push everything they can to increase the cost if it helps their agenda.

Winters: Well, but that's not really true because if you get an IPR accepted, it's often the case that the litigation is stayed and thus the litigation gets stayed before the lion's share of the costs have been incurred. Then the narrow technical question of validity is in effect litigated in a forum designed to specialize in deciding technical issues.

De Mory: The art gets divided up. Right? Some of it ends up in an IPR. The rest of it is held back for the district court case. It's a new process, so we haven't seen the life of it. But as a practical matter it does not look like, even when an IPR is filed, all 102 and 103 issues will be resolved. There are still going to be 102 and 103 issues in the district court after the IPR.

Kichaven: Is it justified by the difference in who the decision makers are?

Winters: Well, you can exaggerate that: In some cases obviously the PTAB examiners are quite skilled in a relevant area of technology. In other cases they have an EE degree from 25 years ago that may not aid in a decision about a modern-day semiconductor. I would be careful not to exaggerate that.

Powers: The good news about the reform question is that there appears to be widespread recognition among a substantial innovator community of the risks to American innovation that the current bills present. And a lot of the leadership in both houses are starting to see that.

There has been a whole series of op-ed pieces from innovators, the Silicon Valley Venture Capital Association has weighed in. And that's a positive thing.

Winters: And greater participation is in a larger sense positive because the process benefits when stakeholders have a voice. Historically, the tech community, at least in the Silicon Valley, has been focused on building their companies and businesses and less focused on what Washington, DC, may be doing. And in the meantime the government proceeds along as it does. My visceral sense is that the second round of patent reform has engaged, to a greater degree, not only tech but bio in ways that they hadn't really been engaged before.

Denise De Mory, the managing partner of Bunsow De Mory Smith & Allison, has litigated patent cases involving wireless handset and base station technology, WiFi and WiMax, semiconductor fabrication, circuit layout, circuit design software, database software, operating systems, medical devices, and other technology. Ms. De Mory's experience includes a patent trial verdict for her client of $61.3 million relating to cellular technology. She also has tried many other patent cases, as well as trademark and employment cases.

ddemory@bdiplaw.com bdiplaw.com

Robert Fram is one of the leaders of Covington & Burling's nationally recognized patent litigation group. Mr. Fram has substantial experience litigating patent, copyright, trade secret, and licensing cases for clients in a range of industries, including software, computer and electronic, semiconductor, and others. His trial experience includes proceedings in federal and state courts in California, New Jersey, and Texas, and proceedings before the International Trade Commission.

rfram@cov.com cov.com

Jeff Kichaven is an independent mediator with a nationwide practice and extensive experience in intellectual property cases. He has been named to the Daily Journal's list of California's Top Neutrals eight times and was a California Lawyer Attorney of the Year. He belongs to the American Law Institute and has taught the Master Class for Mediators for his alma mater, Harvard Law School. He has been cited in the New York Times and the Wall Street Journal.

jk@jeffkichaven.com jeffkichaven.com

Matthew D. Powers, founder of Tensegrity Law Group, tries cases involving patents, trade secrets, fraud, fiduciary duty, antitrust, and contracts. He has tried cases all over the country and directed litigation all over the world. Many of the world's leading companies have called on Mr. Powers and his teams in difficult cases. He has led teams that have won billion-dollar cases in many of the world's most important technologies and industries.

matthew.powers@tensegritylaw-

group.com

tensegritylawgroup.com

Vernon M. Winters is a partner in Sidley Austin's approximately 100-lawyer patent litigation group, which Chambers USA recognized as the nation's best twice in the last five years. He's been consistently ranked in Chambers since 2008. It has reported that he "impresses clients with his charismatic and persuasive style in the courtroom" and his ability "to take a very complex legal or technical subject matter and make it accessible and compelling to a lay audience."

vwinters@sidley.com sidley.com

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