Apple, VirnetX Battle in Review Dubbed Patent Death Squad

VirnetX Holding Corp. (VHC) won a $368 million jury verdict against Apple Inc. in 2012 -- and soon found itself under attack.

Not just by Apple, which a jury said infringed four VirnetX patents by using them in the iPad and iPhone without paying.

A company that says it has no affiliation with the case, New Bay Capital LLC, petitioned to have the U.S. government cancel the patents and then made VirnetX an offer: give us 10 percent of the jury award, and we’ll back off.

New Bay utilized a Patent and Trademark Office review process started 20 months ago as a low-cost alternative to litigation. While the reviews have become the third-most popular forum for patent disputes, behind courts in Texas and Delaware, they have raised questions about whether third parties such as New Bay are acting as hired guns for litigants or prospectors for cheap cash that shouldn’t be able to challenge patents.

“Are they related to some entity who has an important stake in these cases or are they a shakedown artist?” VirnetX lawyer Jason Cassady of Caldwell Cassady & Curry in Dallas said in an interview.

New Bay Vice President Joel Rothman, a patent lawyer in Boca Raton, Florida, declined to discuss the demand for a share of the verdict amount; in court papers New Bay’s lawyers said it was part of normal settlement discussions.

The case is one of 1,204 petitions filed since the agency’s inter partes reviews started in September 2012 through May 21, 2014, and is double what the agency expected.

‘Death Squad’

The earliest cases invalidated so many patents that Circuit Judge Randall Rader of the U.S. Court of Appeals for the Federal Circuit dubbed the process a patent “death squad.” The agency’s chief patent judge, James D. Smith, rejected the label at a May 22 meeting, saying “as the data set enlarged, the picture also has changed.”

Companies accused of infringing patents are lured to the agency’s Patent Trial and Appeal Board by the lower cost, faster process, and preferential rules compared to court. Statistics also show they have a high chance of winning.

So far, 480 reviews were begun after preliminary checks found “reasonable likelihood” of success, according to the patent office. There have been 54 final decisions, with 32 cases resulting in all challenged claims being canceled and nine with all challenged claims being upheld. The rest were a mix.

The 141 settlements were typically for less than those reached in court. Patent owners can’t leverage the high cost of litigation, said Jim Carmichael a former patent judge now with Miles & Stockbridge in Tysons Corner, Virginia. “They’ve gotten some indication from three judges with an engineering degree that their patents will be dead within a year.”

Computers, Drugs

Created as part of the patent system’s 2011 overhaul, the process is ramping up just as Congress considers more steps to curb abusive royalty demands and courts tighten litigation rules, in part to stop companies that buy patents solely for profit, known by the pejorative “patent trolls.”

It’s a popular alternative for companies targeted by patent-infringement lawsuits because decisions must come within 12 months and the agency allows the broadest interpretation of what a patent covers, which makes it easier to find evidence to prove the invention isn’t new.

More than 70 percent of the filings are in the electrical and computer fields, with about 5 percent in biotechnology or pharmaceuticals, according to the patent office.

Generic-drug companies are just discovering the process, “looking for more cost-effective ways to clear the paths” for selling copycats of branded medicines, said Scott McKeown, a patent lawyer with Oblon Spivak in Alexandria, Virginia.

Third Parties

Third-parties intervening to challenge patents at the agency like RPX Corp. (RPXC), a San Francisco patent risk management services company, and Unified Patents, a closely held firm in Los Altos, California, say they aren’t working for a single company but protecting a specific technology from patent claims.

Such groups can focus the challenge to the best arguments and lower costs, said Kevin Jakel, a former Intuit Inc. patent counsel who founded Unified Patents.

At the same time, they may insulate companies that would otherwise be limited in the type of arguments they might make on patent validity in district court.

Other firms may have different goals. Oblon Spivak’s McKeown in a December blog posting said there may be a rise of third-party firms seeking to challenge patent owners who’ve won big damages awards in trial, hoping for an easy payout.

“I’ve been approached by people who have proposed the same idea -- who were short sellers who were looking to damage a stock,” McKeown said.

‘Leveled Field’

For most defendants in patents suits, “this is evening the playing field,” said Cheryl Milone, chairman of Article One Partners, a New York-based advisory firm that helps find data to back up challenges. She said “there are a lot of low quality patents” being reviewed.

The best strategy for patent owners is to prevent the patent agency review from happening in the first place, leading to fights over who can file petitions.

At least 16 petitions were filed to have VirnetX virtual-private-networks patents reviewed, mostly by Apple (AAPL), Microsoft Corp. and RPX, whose investors include tech companies.

Apple’s were rejected because they were filed more than one year after district court suit began. Zephyr Cove, Nevada-based VirnetX is trying to block the RPX petitions as well, saying Apple is using the company to get around the deadline rules.

Patent Quality

New Bay said in an April 4 court filing it dropped its petitions after it was “faced with the substantial expense of defending against the barrage of subpoenas served by VirnetX.”

“I’m not a shill for Apple. I’m not a shakedown artist,” said Rothman, the company’s vice president. He likened New Bay to activist investors or a public interest group. “We share a mutual concern for patent quality,” he said.

VirnetX said in a court filing it would never pay New Bay, or any company, to drop a petition. Even so, VirnetX lawyer Cassady said, the review process skews against patent owners.

“At least to the public eye, it sure looks like the patent office’s marching order are to eliminate patents involved in lawsuits,” Cassady said.

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editors responsible for this story: Romaine Bostick at rbostick@bloomberg.net Elizabeth Wasserman

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