Hot Topics in U.S. IP Litigation

Hot Topics in U.S. IP Litigation December 3, 2015 Panel Discussion

Introductions Sonal Mehta Durie Tangri Eric Olsen RPX Owen Byrd Lex Machina Chris Ponder Baker Botts Kathryn Clune Crowell & Moring

Hot Topics in U.S. IP Litigation Direct/indirect infringement trends including international sales PTAB trends NPE trends Fee shifting: enhanced damages Questions 3

International Sales Issues Plaintiffs are looking for ways to reach sales that have domestic and international components Declining per-unit royalties leave plaintiffs unsatisfied with an easily proved domestic royalty base Sales with domestic and international components are increasing in value» Growth in international markets» Complex corporate structures with U.S. and overseas subsidiaries or parents on the rise 4

Indirect Infringement 35 U.S.C. 271(f)(1): Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer. 5

Indirect Infringement Under 271(f)(1), can a single entity supply the components of the invention and actively induce itself to combine the components? 6

Promega Corp. v. Life Technologies Corp. 773 F.3d 1338 (Fed. Cir. 2014) LifeTech manufactured genetic testing kits used by law enforcement for forensic identification, and used for clinical research Kits contained several components, and were assembled and sold from LifeTech s U.K. manufacturing facility Taq polymerase component was made by LifeTech in the U.S., and shipped to the U.K. facility 7

Promega Corp. v. Life Technologies Corp. 773 F.3d 1338 (Fed. Cir. 2014) District court granted JMOL that Promega failed to prove liability under 271(f) for two reasons: A substantial portion of the components requires more than a single component to be supplied from the U.S. Actively induce the combination of components requires a third-party, and only LifeTech was involved in the assembly of the kits 8

Promega Corp. v. Life Technologies Corp. 773 F.3d 1338 (Fed. Cir. 2014) Held that actively induce does not require a third-party Acknowledged that induce can suggest that one is influencing or persuading another, but that induce also means to bring about, to cause Object of induce can be a person or a thing, and that the object of induce in the statute is the combination Congress could have written the statute to say induce another Relied on legislative history to show that Congress intended 271(f) to have a broader sweep 9

Promega Corp. v. Life Technologies Corp. 773 F.3d 1338 (Fed. Cir. 2014) Held that a substantial portion of the components can be met by a single component According to dictionaries, substantial means important or essential Ordinary meaning of portion does not require more than one 10

Indirect Infringement Under 271(f)(1), can a single entity supply the components of the invention and actively induce itself to combine the components? Yes, for now. 11

Promega Corp. v. Life Technologies Corp. 773 F.3d 1338 (Fed. Cir. 2014) Life Tech s petition for writ of certiorari is pending Argues that the Federal Circuit erred in its construction of actively induce and erred in finding that a single, commodity component of a multi-component invention can satisfy 271(f) On October 5, the Supreme Court asked the Solicitor General to submit a brief 12

Direct Infringement 35 U.S.C. 271(a): [W]hoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent. 13

Direct Infringement Under 271(a), can a product that was manufactured, delivered, and used entirely abroad have been sold in the United States? 14

Carnegie Mellon University v. Marvell --- F.3d ---- (Fed. Cir. Aug. 4, 2015) Marvell was found to infringe two patents relating to microchips it supplies to hard disk drive manufacturers Jury returned a verdict of $1.17 billion as a reasonable royalty (using a royalty rate of 50 cents) District court enhanced damages for willfulness by 23% Awarded an on-going royalty of 50 cents per infringing chip Duff & Phelps December 3, 2015 15

Carnegie Mellon University v. Marvell --- F.3d ---- (Fed. Cir. Aug. 4, 2015) Marvell argued that the district court erred in denying JMOL striking the portion of the damages award that rested on sales of foreign chips that were manufactured, sold, and used abroad without ever entering the United States. District court noted that Marvell had the opportunity to present evidence at trial that the sales took place only abroad and simply failed to do so. District court found that there was sufficient record evidence for the jury to find that the sales occurred in the U.S. 16

Carnegie Mellon University v. Marvell --- F.3d ---- (Fed. Cir. Aug. 4, 2015) Federal Circuit found that the record before it was not adequately developed to determine whether the foreign chips were sold in the U.S. and ordered a new trial to determine whether the sales are properly said to have been in the United States. Marvell is not entitled to JMOL that the sales did not occur in the United States. (emphasis in the original) On the other hand, we do not think that CMU is entitled to affirmance» The jury should have been instructed to find a domestic location of sale as to those chips not made or used in, or imported into, the United States. 17

Carnegie Mellon University v. Marvell --- F.3d ---- (Fed. Cir. Aug. 4, 2015) The standards for determining where a sale may be said to occur do not pinpoint a single, universally applicable fact that determines the answer, and it is not even settled whether a sale can have more than one location. Federal Circuit noted potentially relevant facts for the district court to consider on remand: place of inking the legal commitment to buy and sell and a place of delivery (citing Transocean) a place where other substantial activities of the sales transactions occurred (citing Halo) 18

Carnegie Mellon University v. Marvell --- F.3d ---- (Fed. Cir. Aug. 4, 2015) However, the Federal Circuit noted that the record suggests a substantial level of sales activity within the United States, even for chips manufactured, delivered, and used entirely abroad. Facilities in Northern California Plaintiff s industry expert showed that with the exception of the chip making all the activities related to designing, simulating, testing, evaluating, qualifying the chips by Marvell as well as by its customers occur[] in the United States. 19

Carnegie Mellon University v. Marvell --- F.3d ---- (Fed. Cir. Aug. 4, 2015) Additional record evidence: Samples and simulations of the chips were provided from California A stipulation that the defendant s engineers assisted customers during the sales process with implementing the chips into the customer s products Some evidence suggesting that specific contractual commitments for specific volumes of chips were made in the United States 20

Halo Electronics v. Pulse Electronics 769 F.3d 1371 (Fed. Cir. 2014) Defendant made and delivered infringing components outside of the U.S., and delivered them to contract manufacturers working for a U.S. company Sales meetings, regular engineering meetings, product samples, price negotiations, and post-sales support all occurred in the U.S. Defendant and the U.S. company had a general agreement that set forth manufacturing capacity, low price warranty, and lead times Overseas contract manufacturers placed all orders and paid overseas at to the U.S. company s direction 21

Halo Electronics v. Pulse Electronics 769 F.3d 1371 (Fed. Cir. 2014) The Federal Circuit found that there was no sale in the U.S. because all substantial activities of the sales transaction occurred outside the U.S.: The only binding contracts were the purchase orders issued by the contract manufacturers Payments, manufacturing, and delivery all occurred outside of the U.S. Any doubt was resolved by the presumption against the extraterritorial application of patent law 22

Direct Infringement Under 271(a), can a product that was manufactured, delivered, and used entirely abroad have been sold in the United States? Maybe. 23

PTAB Summary Source: 24

PTAB Trials Flow Source: 25

PTAB Grounds for Decision Source: 26

Stays Pending PTAB National Rates of Grant and Denial by Year Source: 27

Stays Pending PTAB ED Texas and Delaware Rates of Grant and Denial by Year Source: 28

New District Court Cases, 2007-2014 Source: 29

District Court Defendant-Case Pairs 2008-2014 Source: 30

New District Court Cases, By District 2015 (change from 2014) Source: 31

Patent Invalidated 2007-2014, for Lack of Patentable Subject Matter ( 101) Source: 32

Patent Invalidated 2007-2014, By Basis Source: 33

ITC Investigations Filed, 2007-2014 Source: 34

NPE Litigation Down in 2014 But Up in 2015 Total Defendants Added to NPE Campaigns 4,159 4,870 3,729 4,262-23% 3,272 +25% 4,076 Q4 Estimate Q1-Q3 3,057 New NPE Campaigns 2010 2011 2012 2013 2014 2015 Est. 374 422 380 362 329 Q1-Q3 = 261 Source:

More Litigation in Certain Sectors New Campaigns 2015 YTD Defendants Added 2015 YTD E-commerce and Software 70 Consumer Electronics and PCs 18 240 Medical Mobile Comm. and Devices 18 17 65 157 Networking 16 412 Semiconductors Media Content and Distribution Financial Services Automotive 11 10 10 9 111 156 151 88 Other Categories 130 863 1,323 Source: 36

Largest NPEs Represent >30% of Activity Top 10 NPEs by Defendants Named Through 3Q 2015 Rank NPE Defendants 1 Leigh M. Rothschild 141 2 Acacia Research Corporation 138 3 edekka LLC 121 4 Nicolas J. Labbit 108 5 ChriMar Holding Company LLC 96 6 Oberalis LLC 95 7 IPNav 94 8 USB Technologies LLC 92 9 Genaville LLC 88 10 Empire IP LLC 76 66% 34% All other NPEs Top 10 NPEs Share of 2015 Defendants 37

Terminations Additions NPE Defendant Declining in 2014-15 Active NPE Campaign Defendants Backlog 5,102 4,870 6,266 3,729 6,254 4,262 5,947-26% -12% 3,272 4,426 3,059 3,846-3,741-3,706-4,569-4,793-3,639 2010 Backlog (End-of-Year) 2011 Backlog 2012 Backlog 2013 Backlog 2014 Backlog Q3 2015 Backlog Active NPE Campaigns (End-of-Year) 1,032 1,021 1,051 964 Q3=821 Source: 38

Estimated NPE Cost to Industry $9.8B $10.8B $12.5B $12.2B $5.5B 3.0 $7.1B 4.0 5.4 5.9 7.6 7.9 2.6 3.1 4.4 4.9 4.9 4.2 2009 2010 2011 2012 2013 2014 Legal Defense Costs Settlement Costs Source: 39

Legal Costs Generally Exceed Settlements Settlement Legal Cost Total Cost to Resolve $0-10K $10-100K $100K-1M $1M-10M $10M-50M $50M+ Least Expensive Cases Most Expensive Cases Source: 40

USD $Million Wide Distribution of Resolution Costs Costs to Resolve an NPE Suit Up to $500M+ 20 18 95 th percentile $16.3M 16 14 12 10 8 6 4 2 25 th percentile $134K Median $482K 75 th percentile $1.7M 0 Legal Defense Costs Settlement or Judgment Costs Source: 41

Wide Mix of Portfolios Offered 2015 Pre-litigation Market Financial Services Other Sectors Media Content and Distribution 7% 3% 4% 26% E-commerce and Software Consumer Electronics and PCs 15% Networking 12% 14% Semiconductors 19% Mobile Communications and Devices Source: 42

Transaction Rate Approaches 40-50% Pre-litigation Market Portfolios 138 145 71 84 67 61 185 85 100 161 149 106 103 55 46 236 222 222 224 201 174 175 162 160 158 137 172 188 110 117 225 132 140 64 64 58 64 50 36 30 20 11 147 146 146 146 1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2011 2012 2013 2014 % Transacted 49% 42% 54% 34% 31% 37% 32% 33% 29% 23% 16% 19% 13% 5% 1% 0% Transacted as of Q4 2014 Not Transacted Source:

Fee Shifting Under 35 USC 285 35 USC 285 The court in exceptional cases may award reasonable attorney fees to the prevailing party Exceptionality was discretionary and based on the totality of circumstances In 1990s, Federal Circuit started to heighten proof required (e.g., changed burden to clear and convincing evidence) 44

Fee Shifting Under 35 USC 285 Brooks Furniture Mfg., Inc., Dutailier Int l, Inc., 393 F.3d 1378, 1381 82 (Fed. Cir. 2005) In 2005, the Federal Circuit issued Brooks Furniture, which abandoned the totality of circumstances test and held that a case is exceptional under 285 only when: There has been material inappropriate conduct related to the litigation (such as willful infringement, vexatious litigation conduct, inequitable conduct at PTO or Rule 11 conduct...), or The litigation is brought : (1) subjectively in bad faith, and (2) is objectively baseless. 45

Fee Shifting Under 35 USC 285 Brooks Furniture Mfg., Inc., Dutailier Int l, Inc., 393 F.3d 1378, 1381 82 (Fed. Cir. 2005) The Brooks Furniture test: Lasted for almost 10 years; During those years, a study** found that fees under 285 were awarded in less than 1% of cases (208 of 32,570 patent cases between 2003 and 2013); When fees were awarded, they were mostly to the plaintiff/ patentee. **Mark Liang & Brian Berliner, Fee Shifting in Patent Litigation, 18 Va. J.L. & Tech. 59, 87 & n.73 (2013). 46

Fee Shifting Under 35 USC 285 Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014) In Octane, the district court granted SJ of non-infringement to Octane, but denied its motion for attorney s fees based on Brooks Furniture because it did not find Icon s allegations baseless or brought in bad faith. ICON appealed the judgment of non-infringement, and Octane cross-appealed the denial of attorney's fees. The Federal Circuit affirmed both orders. In upholding the denial of attorney's fees, it rejected Octane's argument that the district court had "applied an overly restrictive standard in refusing to find the case exceptional under 285." The Federal Circuit declined to "revisit the settled standard for exceptionality. The Supreme Court granted certiorari and reversed. 47

Fee Shifting Under 35 USC 285 Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014) On appeal, the Supreme Court rejected the Brooks Furniture rigid and mechanical formulation and held: The two-prong willfulness test was an inflexible framework; Section 285 is inherently flexible and discretionary; and Plain language of the statute makes it patently clear that there is only one constraint on the district court s discretion that the case must be exceptional. 48

Fee Shifting Under 35 USC 285 Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014) The Supreme Court also set aside the clear and convincing burden of proof, holding: Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one. Indeed, patentinfringement litigation has always been governed by a preponderance of the evidence standard[.] 49

Fee Shifting Under 35 USC 285 Highmark v. Allcare Health Mgmt. Sys., 134 S. Ct. 1749 (2014) In Highmark, the companion case to Octane, the Supreme Court held: The district court s exceptional case determinations under 285 must be reviewed for an abuse of discretion, not de novo; The district court is better positioned to decide whether a case is exceptional and therefore its determinations should be given deference; Inherently factual determination are best left to district courts who have lived with nuances of the case for years. 50

Fee Shifting Under 35 USC 285 Impact of Octane / Highmark Decisions 200 180 160 140 120 100 80 60 40 20 0 200 170 +70% +45% 117 Base 47% 41% 35% 2008-2013 2014 2015 Motions Filed Percentage Increase Motions Granted (%) 51

Enhanced Damages under 35 U.S.C. 284 35 U.S.C. 284: Section 284 of the Patent Act provides the district courts "may increase...damages up to three times the amount found or assessed; Treble damages have been a part of U.S. patent law since the Patent Act of February 21, 1793; Neither 284 nor its predecessors conditioned enhanced damages on willfulness, bad faith or other exceptional circumstances. 52

Enhanced Damages under 35 U.S.C. 284 35 U.S.C. 284: Historically, the Federal Circuit held that enhanced damages may be appropriate in a variety of circumstances. A finding of willful infringement was only one such situation. Bad faith alone was sufficient To compensate the prevailing party if damages were inadequate Multi-factor discretionary test to determine whether and to what extent enhanced damages under 284 were appropriate. Read Corp. v Portec, 970 F.2d 816, 826 28 (Fed. Cir. 1992) 53

Enhanced Damages under 35 U.S.C. 284 In re Seagate Tech., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007) (en banc) Starting with Seagate (and its progeny), the landscape for willfulness and enhanced damages changed as the Federal Circuit: held that an award of enhanced damages requires a showing of willful infringement; and announced a more stringent test for willful infringement that no longer considered the totality of the circumstances. 54

Enhanced Damages under 35 U.S.C. 284 In re Seagate Tech., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007) (en banc) Willfulness (and thus enhanced damages) must be proven by first establishing with clear and convincing evidence that: the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent and this objectively-defined risk... was either known or so obvious that it should have been known to the accused infringer. 55

Enhanced Damages under 35 U.S.C. 284 In re Seagate Tech., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007) (en banc) The state of mind of the accused infringer is not relevant to the objective prong. Thus, arguments and theories developed solely for litigation and not previously known to the infringer can preclude a finding of objective recklessness, unless they are shown to be unreasonable by clear and convincing evidence. Defendants are free to copy patented inventions as long as they raise at least one viable defense. 56

Enhanced Damages under 35 U.S.C. 284 Stryker Corp. v. Zimmer, U.S., No. 14-1520; October 19, 2015 Jury and District Court found willfulness. District court awarded treble damages and attorney fees, based on totality of circumstances. Not a close case. The Federal Circuit reversed based on the objective prong of willfulness; Stryker sought en banc reconsideration of enhanced damages standard in light of the Octane and Highmark decision, but it was not granted. Duff & Phelps January 5, 2016 57

Enhanced Damages under 35 U.S.C. 284 Halo Electronics v. Pulse Electronics, No. 14-1513, October 19, 2015 Jury found Pulse s infringement was willful. District Court set it aside post-trial based on objective prong of willfulness, holding that Pulse s defenses were not objectively baseless, Federal Circuit affirmed finding of no willfulness, but Judges O Malley and Hughes filed a concurring opinion that they were bound by current precedent to affirm, but believed the Court needed to reconsider its willfulness standard in light of the Octane and Highmark decisions. Halo thereafter sought en banc reconsideration request based on Octane and Highmark decisions, which was denied. Duff & Phelps January 5, 2016 58

Questions Presented to Supreme Court Stryker, No. 14-1520, October 19, 2015 The following issues were granted in Stryker: 1. Has the Federal Circuit improperly abrogated the plain meaning of 35 U.S.C. 284 by forbidding any award of enhanced damages unless there is a finding of willfulness under a rigid, two-part test, when this Court recently rejected an analogous framework imposed on 35 U.S.C. 285, the statute providing for attorneys fee awards in exceptional cases? 2. Does a district court have discretion under 35 U.S.C. 284 to award enhanced damages where an infringer intentionally copied a direct competitor s patented invention, knew the invention was covered by multiple patents, and made no attempt to avoid infringing the patents on that invention? Duff & Phelps January 5, 2016 59

Questions Presented to Supreme Court Halo Electronics v. Pulse Electronics, No. 14-1513, October 19, 2015 In Halo, the Supreme Court only granted certioari on Question 1, which states: 1. Whether the Federal Circuit erred by applying a rigid, two-part test for enhancing patent infringement damages under 35 U.S.C. 284, that is the same as the rigid, two-part test this Court rejected last term in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014) for imposing attorney fees under the similarlyworded 35 U.S.C. 285. Duff & Phelps January 5, 2016 60

2016 Predictions Stryker, No. 14-1520 and Halo, No. 14-1513 Supreme Court will reverse in both cases; Under same framework used in Octane and Highmark, Court will reject rigid formula applied to even more flexible statutory language of 284; Willfulness standard reversed, rejecting rigid two-prong inquiry that separates objective inquiry from actual facts of the case; Increased motions for and awards of enhanced damages under more flexible approach, the preponderance of evidence burden, and the abuse of discretion standard of review; Strong deterrence against frivolous lawsuits; Congress less likely to issue patent reform against NPEs. Duff & Phelps January 5, 2016 61