Abstract
I. Introduction
I
II. The FTC Study Found Important Paradigms Utilized by PAEs in their Business Strategies
Recently, the Federal Trade Commission released the report, Patent Assertion Entity Activity (the “FTC Study”), as an attempt to define the various business strategies of PAEs, their effect on the judiciary and businesses, and potential legal reforms in response thereto. Patent assertion entities were defined as businesses that acquire patents from third parties and seek to generate revenue by asserting them against alleged infringers through licenses and/or litigation. 1 The FTC Study identified two distinct PAE business models, namely, the Portfolio PAEs and the Litigation PAEs.
The Portfolio PAEs are described as businesses that negotiate multimillion-dollar licenses covering large portfolios. The FTC Study found that the Portfolio PAEs were less litigious than the Litigation PAEs, and were accountable for the vast majority of the licensing revenue. 2 In contrast, the Litigation PAEs were found to be more litigious, the portfolios involved were small, and the licenses yielded royalties of less than $300,000. 3 The FTC stated that this approximated the lower bound of early-stage litigation costs in a patent infringement suit and that this number is consistent with nuisance litigation. 4
The FTC Study also found that of the patents held by the PAEs in the study, 88% fell under the Computers and Communications or Other Electrical and Electronic Technology categories. 5 The FTC Study stated that the targets of PAE activities included not only the manufacturers of the accused product but also the end users of the end products. The FTC concluded that while the patent system makes important contributions to innovation, consumer welfare, and U.S. prosperity, PAE litigation has asymmetries that require rectification and recommended correction through procedural and substantive reform. 6
III. The Risk from PAEs to Biotechnology Businesses Depends on the Type of Product Being Commercialized
As stated above, the FTC found that 88% of the PAE patents fall into electrical or electronics technology categories. In contrast, traditional products sold by the biotechnology industry typically fall into the following types of categories: 1) long polypeptides (such as proteins) which can be used by end users (such as patients) for a particular use (such as curing disease); 2) products (such as enzymes) made by organisms which may or may not be genetically modified; and 3) products which have themselves been biogenetically engineered (such as herbicidal resistant seeds). These three categories of products, for example, fall outside of the scope of the vast majority of patents owned by PAEs, which is indicative of a low risk of PAE activity in the traditional biotechnology sector. Moreover, certain products in the electronics industry, such as computers and smart phones, may individually be covered by a number of patents, which would make such an industry an easier target for PAEs since there are more patents that can be potentially infringed and more features that can fall within the scope of a patent. For example, different patents could potentially be directed to the following features of a single smart phone: the aesthetic design of the phone, advances in the speed of connection to a cellular tower, advances in Wi-Fi connections, advances in Bluetooth, video coding, built-in apps, audio coding, touch displays, processors, etc. In contrast, traditional biotechnology products are more specific and would not fall within the scope of large numbers of patents for a single product, since a comprehensive portfolio would typically include the compound, its use, its manufacture, and its formulation, which is much narrower than, for example, the many different patentable features in a smart phone. This further supports the low-risk environment for traditional biotechnology businesses with respect to PAEs.
Additionally, since the patents in the traditional biotechnology sector cover specific compositions of matter and/or their uses or manufacture, it is much easier to search for those patents to clear them. For example, U.S. Patent No. 6,090,382 is directed to Humira®, a blockbuster biotechnology drug. The first claim of U.S. Patent No. 6,090,382 reads as follows:
1. An isolated human antibody, or an antigen-binding portion thereof, that dissociates from human TNFα with a K
d
of 1x10−8 M or less and a K
off
rate constant of 1x10−3s−1 or less, both determined by surface plasmon resonance, and neutralizes human TNFα cytotoxicity in a standard in vitro L929 assay with an IC50 of 1x10−7 M or less.
As is clear from the above claim, the main feature is the neutralization of the toxicity of human TNFα. A biotechnology company that was interested in reducing such biotoxicity would have a relatively easy time finding this patent with a search for the term “TNFα” (or variants, thereof) in the claims of a patent. For example, a search in the U.S. Patent and Trademark office for patents which include either “TNH.alpha” or “TNH-alpha” in the claims results in around 1,900 hits. These could be evaluated and further narrowed to result in a manageable number of patents to review in detail. Since both the scope of what needs to be searched and the terminology is specific, a proper infringement search in a traditional biotechnology area should capture nearly all or all relevant patents and provide proper notice of existing patents and published patent applications.
In contrast, the scope of claims in electronics technologies, including software, may not be so specific and as easy to search as those in the traditional biotechnology sector. For example, U.S. Patent No. 6,266,674 was asserted by a patent assertion entity against a number of accused infringers. The first claim of U.S. Patent No. 6,266,675 reads as follows:
1. Method for storing information provided by a user which comprises: in response to user input, receiving and storing information; in response to user input, designating the information as data while the information is being received; in response to user input, designating at least a portion of the information as a label while the information is being received; in response to user input, traversing a data structure and providing an indication of a location in the data structure; in response to user input, storing the label at the location in the data structure; and associating the label with the data.
The terminology used in the above claim such as “information,” “input,” “user,” “data,” “label,” and “location” are so broadly used that a search for such terms in an infringement search would result in many irrelevant patents and patent applications being found, making it difficult to clear products which could fall within the scope of these types of claims. For example, a search in the U.S. Patent and Trademark Office for patents that include “information” in the claims, or a search for “input” in the claims, would each result in hundreds of thousands of hits, which would be highly burdensome to review from a clearance perspective. Therefore, a clearance search for a traditional biotechnology product would result in more relevant “hits” and be much more reliable than a search for many features in the electronics industry. Moreover, the development of biotechnology products can take years and cost millions of dollars, especially if clinical trials are needed. Accordingly, it would behoove a biotechnology company to conduct a proper infringement search to identify problematic patents and patent applications well in advance of spending significant resources on a particular product. As has been commented on before, biotech companies are savvy intellectual property owners. 7 This savviness should include a robust clearance process in advance of significant investments in a particular product, which would largely mitigate the risk of PAE activity.
Additionally, the biotechnology field is not as predictable as other fields, such as the software and electronics areas. Thus, an overly broad patent claim in the biotechnology sector can be subject to rejection at the U.S. Patent and Trademark Office as invalid for failure to meet the enablement or written description requirements. More predictable technologies, such as software and electronics products, could potentially avoid such rejections, resulting in broader claims and a higher risk of PAE activity.
In contrast to the “traditional” biotechnology industry, emerging biotechnology areas, however, may include complex medical devices such as DNA sequencing machines, algorithms for determining health risks, bioinformatics, and various diagnostic technologies. These emerging areas may result in situations in which multiple patents cover a single product or service and/or where the scope of patent claims is not as specific as with chemical structures. These types of emerging technologies in the biotechnology sector are closer to the computer and electronics areas and would be at higher risk for PAE activity. This risk is not merely academic since research has shown that digitization may fuel almost one-third of the growth and roughly 40% of the profitability in the pharmaceutical market by 2020. 8 Thus, the threat of PAEs in the biotechnology sector may grow simply because of the change in technologies and business practices in the biotech sector.
In sum, traditional biotechnology products are at low risk for PAE activities due to the narrower scope of claims, the easier search of relevant art, and the fact that the high barrier to entry (such as regulatory issues) encourage a robust clearance process prior to making huge investments in resources for commercializing a product. In contrast, emerging biotechnology technologies are at higher risk and may require greater vigilance and additional effort in clearance, as well as potentially mitigating legal changes as proposed by the FTC.
IV. The Litigation Reforms Proposed by the FTC Would Benefit Biotechnology Businesses
The FTC Study found that 77% of Litigation PAE licenses were valued at less than the estimated cost of defending a patent lawsuit through the end of discovery and stated that these litigation settlements might be considered nuisance value. 9 Additionally, the FTC Study stated that because PAEs do not develop or manufacture their products, they generally have less discoverable information, and are not subject to countersuit for patent infringement, giving them an advantage in litigation. 10 For at least these reasons, the FTC Study identified several potential changes to the U.S. legal system to address these issues.
The FTC Study provided six recommendations, as follows:
11
1) Amend Federal Rule of Civil Procedure 26 to require early disclosure of asserted claims and infringement and invalidity contentions in PAE litigation. 2) Institute provisions that would limit discovery before preliminary motions together with provisions for the motions to be decided in a timely manner. 3) Institute provisions for early disclosure of damages theories. 4) Amend Federal Rule of Civil Procedure 7.1 to reach a broader range of non-party interested entities or persons. 5) Establish procedures encouraging courts to stay a PAE infringement action against a customer or end user where the PAE has also sued the manufacturer of the accused product under the same theory of infringement. 6) Ensure that patent infringement complaints provide sufficient notice to alleged infringers.
Each of the proposals identified above are discussed below with respect to the biotechnology industry.
1) The requirement of early disclosure of asserted claims and infringement and invalidity contentions in PAE litigation would be helpful to provide better information sooner with respect to the litigation and potentially accelerate the process of litigation. Whether PAE litigation arises in the traditional biotechnology space or emerging biotechnology areas, it is in the best interest of biotechnology companies to have better information upfront about the litigation and to be able to resolve the litigation sooner and more efficiently. The first proposal of the FTC would therefore be favorable to the biotechnology industry.
2) Limiting discovery before preliminary motions and timely decisions on motions would expedite the litigation process by addressing important issues sooner and more efficiently. As stated above, efficient litigation would benefit the biotechnology industry and the second proposal of the FTC would therefore be favorable to the biotechnology industry.
3) Early disclosure of damages theories would provide notice to a defendant of potential liabilities in a lawsuit. This generally helps make litigation more efficient since the plaintiff is forced to concretely identify potential damages and the defendant has better knowledge of potential risks. This would allow both parties to gauge their position and manage a response accordingly early on in the litigation. In the event that a biotechnology company were the plaintiff, this would require additional work up front. However, considering the cost of litigation, it is likely that a biotechnology company would already have some information on damages prior to initiating a lawsuit, which would partially mitigate the additional requirements of this proposal. Accordingly, the third proposal of the FTC would also be favorable to the biotechnology industry as a whole due to more efficient litigation.
4) The identification of a broader range of non-party interested entities or persons would allow a biotechnology company to better know who a plaintiff is, which can be useful information for potential settlement negotiations. If a biotechnology company were the plaintiff, it is unlikely to try to hide its true identify through complicated corporate structures since it would be in the business of selling products and/or services to the public and trying to establish a good name for itself. Thus, the fourth proposal would be helpful if a biotechnology company is a defendant of a lawsuit and it would not be detrimental to a biotechnology company if it is the plaintiff. Thus, the fourth proposal of the FTC would be favorable to the biotechnology industry as a whole.
5) Establishing procedures to stay a PAE infringement action against a customer or end user where the PAE has also sued the manufacturer of the accused product would reduce the pressure on biotechnology industry customers in the event of litigation, and therefore reduce potential friction between customers and biotech manufacturers. Furthermore, shielding customers from lawsuits would mitigate some of the loss of good will toward a biotechnology company that would accompany a litigation against customers. Thus, the fifth proposal of the FTC would also be favorable to the biotechnology industry.
6) Ensuring that patent infringement complaints provide sufficient notice to alleged infringers would provide more information to better gauge the litigation and responses thereto, such as licensing. This generally helps make litigation more efficient and thus would be favorable to the biotechnology industry. In the event that a biotechnology company is the plaintiff, this would require additional work up front. However, considering the cost of and stakes of biotechnology litigation, it is likely that a biotechnology company would already have significant information on theories for infringement before filing a lawsuit and would already have the information for proper notice to a defendant. Thus, the sixth proposal of the FTC would also be favorable to the biotechnology industry.
In sum, for the reasons identified above, the biotechnology industry, as a whole, would benefit from all six proposals by the FTC to address PAE litigation.
V. Conclusion
Traditional biotechnology areas are low risk with respect to PAE activity due to the narrower scope of claims, the relative ease of conducting a clearance search, fewer patents reading on a single product, and the IP sophistication of biotech companies. Emerging biotechnology areas pose a higher risk of PAE activity due to potentially broader claim scope, more difficult clearances, and more patents potentially reading on a single product. A mitigating factor for biotech companies, especially those considering entering emerging technological areas, would be to re-evaluate their clearance processes and improve them to better manage risk. With respect to the FTC proposals for regulatory reform, all of the proposed actions are, as a whole, beneficial for the biotech industry.