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Life During Wartime Part 2: A Likely Response from Industry March 31, 2014

Posted by Brian Schar in General.
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As I have outlined in the last few posts, the proposed “attributable ownership” rules are a missile aimed directly at the ability of privately-held companies to develop and hold IP.  It is quite literally impossible for small companies to comply with these rules.

In the last post I set out some thoughts about the implications of the attributable ownership rules on litigation.  

Now imagine what will happen once the compliance burden hits home, when CFOs of small private companies realize all of them face the same impossible burden – and when companies start seeing their IP and the IP of other small companies going abandoned because they cannot comply with the rules.

There will be deep and profound outrage, outside a chunk of the software/internet industry.  In the offices of semiconductor manufacturers and designers, of medical device companies, of battery makers, of LED designers – there will be a sudden and large pressure applied on the USPTO and Congress.  The USPTO will receive a wake-up call that not every patentee is a Silicon Valley software company.  Damage will be done, but this pressure, applied simultaneously with judicial pushback as described yesterday, will scuttle these rules in the same way that the continuation rules were unceremoniously struck down.

Life During Wartime: The “Pre-Markman” Hearing March 28, 2014

Posted by Brian Schar in USPTO.
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Imagine it is February 2015 and the attributable ownership rules, as currently proposed, have gone into effect.  Also imagine that the Green Bay Packers are playing in yet another Super Bowl, although that may be a topic for a different blog.

A fast-track application filed after the rules went into effect issued in January, and the owner is now suing on that patent in district court.  It’s the case scheduling conference.  Let’s listen in!

Experienced Judge: Let’s set the Markman hearing for June.

Plaintiff’s Attorney: That’s fine with us.

Defendant’s Attorney: Hold on a minute, your honor.  Before we have a Markman hearing, we need to find out if the patent is even valid.

J: The validity phase is after discovery closes.  How long have you been at this?

D: Long enough to pay attention to the rules.  The patent goes abandoned if the owner did not make the proper submissions under the attributable ownership rules.

P: Which we did, at great expense and time.  The file history shows multiple 100-page submissions that chase down an impossible number of people.

D: But we don’t know if it’s complete.  Or accurate.  We need to verify that you didn’t commit inequitable conduct, or even a simple error.  Before there’s even any thought of a Markman hearing, we need to get discovery on those submissions.

J: What kind of discovery?

D: We need the shareholder list at the time of filing the patent application, and records of every share transfer since then, including option grants.  I’m going to need every lease to real property and every financing agreement, to see if the plaintiff pledged its patent to anyone as collateral, and if it reported that.  I’m going to need the name of every spouse of every shareholder, the names of their children, and the shareholders’ wills.

P: All of that stuff is in our filings.  (Note to the reader – this would never happen because it is impossible.  Please bear with the hypothetical.)

D: But we don’t know that for sure.  While I’m at it, I will need every document and email in your possession relating to any financing agreement and any IPO preparation documents.

J: Are you insane?

At this point in our hypothetical glimpse into the future, I suspect that the judge’s head would explode.  Judges hate discovery.  But the new rules dump another giant truckload of discovery into each and every patent case – cases that already are overburdened with colossal amounts of date.  Judges also hate delay.  The Markman hearing has become a mainstay of patent litigation, and judges like to get those out of the way early to encourage settlement – indeed, the Markman ruling as to claim construction is often dispositive of the case.  However, the defendants of the future will rightly (and in my view legally correctly) challenge the patent’s validity itself, pre-Markman, to (1) throw all of the early discovery costs onto the plaintiff, and (2) knock out the patent early.

Will judges push back on this?  Almost certainly.  I suspect the reality is that very early in the life of these rules, if they were to be adopted in their present form, a judge would invite briefing as to whether the rules should be invalidated, or interpreted narrowly, and that judge would rule in a way to reduce the new burden dropped in his/her lap.

Next week, I’ll look at the likely response by the startup community to these rules, once it becomes understood they are a machine for destroying private company IP.

Attributable ownership and family law March 27, 2014

Posted by Brian Schar in USPTO.
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If you’re a patent person, you’re almost certainly an engineer or scientist first.   With a background like that, it would be almost inconceivable that you’d get into something all touchy-feely like family law, where you might have to reassure someone or even figure out their feelings.  Yeah, no.  Maybe some of you would be good at that, but that’s just not me.

Well, guess what?  With the proposed attributable ownership rules, you will get to dive head first into the morass of family law.

Why?  Because spouses, kids, and heirs have property rights under the proposed rules.

An inventor or shareholder, as an individual, is not the “ultimate parent entity” of his or her ownership rights of IP.  That’s because spouses have rights to marital property, either through community property or similar doctrines in non-community-property states.  You own a patent (as a solo inventor) or shares in a privately-held startup that owns IP?  If you die, that spouse will often get the entirety of your interest in the IP – meaning that he/she is an attributable owner.

What’s that?  Your spouse gets nothing when you die, because you’re giving it all to your kids?  Well, you’re a terrible person.  And you’ve just made your kids attributable owners as well.  Does your will establish a trust or give any interest in your estate to some kind of organization, whether for-profit or not?  They are attributable owners as well.

Now imagine that ex-spouses have property rights via a divorce settlement.  You’ll need to get a copy of that too!  And people love giving a total stranger a copy of their divorce settlement – especially a patent attorney.

So imagine the fun of prying the shareholder list out of the hands of your CFO.  Then imagine the order of magnitude greater pain when you have to contact each and every individual shareholder, find out if they’re married, get their spouse’s name, find out if they’re divorced, get a copy of the divorce settlement, find out if they have a will, and get a copy of the will.

Do you think you’ll be able to do that, successfully, for each and every one of the hundreds of individual shareholders of your privately-held venture-backed startup?  Me either.  Or, do you think that every single one of the investors you call is going to tell you what to do with your request for their personal information, slam down the phone, and then call your CFO and insist he/she fires you?   This is why the proposed rules are a machine for destroying startups that depend on IP.

The further you go down this rabbit hole, the more awful it is.

Testifying at the SF hearing for the proposed USPTO attributable ownership rules March 26, 2014

Posted by Brian Schar in General.
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I spoke this morning at the USPTO’s San Francisco hearing in regard to its new “attributable ownership” rules. Held at UC Hastings near SF City Hall and the California Supreme Court, this hearing provided an opportunity for several people to speak. I would like to thank Janet Gongola of the US Patent Office for setting up the hearing. The rules themselves can be found at this link.

I wanted to provide a short summary of what I testified about, my impressions of a couple of the other speakers’ points, and some thoughts I had upon reflection after the hearing.

I made three separate points.

The first was one of administrative law.  There is no statutory requirement to record an assignment of any transfer of ownership interest of a patent.  Consequently, there is not and cannot be a statutory requirement to simply inform the office of the existence of or a transfer of ownership interest of a patent.  As a result, without statutory authority, the office lacks the authority to implement rules to require informing the office of the existence of or a transfer of ownership interest.  It’s the same situation as the Tafas case of several years ago, where the office lost badly with regard to its much-maligned continuation rules package.

The second was that compliance with the proposed rules is impossible for small privately-held pre-IPO startups.   The USPTO panelists appeared quite interested in this.  Public companies are exempt from having to disclose their shareholder list – but not pre-IPO startups.  I advise wearing a helmet when you go see your CFO and tell him you (i) need the shareholder list and (ii) need to make it public in order to keep your company IP from going abandoned.  About 20% of a pre-IPO company’s shareholders will be family trusts, LLCs, investment companies, and the like.  You will need to hunt up their shareholder lists, investor lists, org charts, and so on – and if any of those are not natural persons, you will need to continue up the chain.  All it takes is for one of those entities to tell you to take a hike, and it’s then impossible to comply with the rules, and your patents go abandoned.  Another common situation is that a company licensed its IP outside its typical field, in order to raise money.  The licensor has no incentive to cooperate with you, and indeed has every incentive to not tell you its ownership structure; if the patent is invalid, then there are no more license fees to pay.

The end result is that private pre-IPO companies will be unable to get patents, or protect their innovations.

My impression (which I didn’t share out loud with them) was that the rules were simply not thought out thoroughly, rather than being intentionally impossible to comply with.   However, if the rules are intentionally punitive for small companies, we are all in serious trouble.

The third was that the definition of attributable ownership is unclear.  What about a lease?  Virtually every startup has a lease that grants a security interest in its IP to the landlord, because the IP is the only asset the company has.  Does the landlord thereby have an “attributable ownership” in the IP?  As I read the rules, it does; but who can be sure?  Because the penalty for failure to comply is so draconian, applicants and practitioners will err on the side of over-releasing information.  And does it really help the system to know that somebody’s landlord might someday own a patent if its patent-holding lessee goes bankrupt?

My final comments were two.  First, the rules would be much more palatable if they simply required the applicant to list any entity that would have the final ability to approve filing suit with that patent/patent application.  Second, the rules are a response to problems in certain fast-paced industries (cough, cough, software) that culturally do not perform freedom-t0-operate analyses.  Ownership of the patent is irrelevant to freedom-to-operate.  A cultural shift in that industry, and respect for the patent system, would go further than any rules the USPTO could put out in terms of reducing the number of demand letters sent.

The next speaker was a gentleman from the EFF who was an able spokesman for his pro-rules cause.  I was taken aback that even he appeared to repudiate the rules package by stating the real problem is patents in the last three years of life, and given that the final maintenance fee is payable well before then, the rules don’t address that problem.

The next speaker was a woman from Engine Advocacy, which appears to be some kind of software/internet company interest group.  It was her presentation that finally got me to understand the way the software/internet business perceives patents.  Her point was that knowing ownership of a patent was the single most important thing, so that a software company could know how seriously to take a demand letter from a patentee, or whether it could be ignored.  At no point in her presentation did she indicate there was any concern as to whether there was actual infringement of a patent for which a demand letter was received.  Further, at no point in her presentation did she acknowledge that her group’s members would ever participate in the patent system or obtain IP.  She at one point even stated that “patents are ill-gotten gains,” then quickly attempting to quality that statement; nevertheless, she showed her hand.  That’s when I realized that, for many if not most software/internet companies, they don’t have any interest in obtaining patents of their own, and don’t care if what they’re doing infringes someone else’s patent.  They are willing to kill the entire system for everyone so that they don’t have to deal with it.

That speaker addressed my earlier jab about freedom-to-operate analyses by saying, well, with 250,000 new patents a year, it’s impossible to keep track.  Cry me a river.  Companies perform freedom-to-operate analyses in the fields of medical device, data storage, semiconductor, automotive, oil & gas, and electronic design automation, to name just a few.  But we are to believe that the software/internet industries are composed of such special snowflakes that they cannot even come close to doing such an analysis?  Please.  They don’t do it because it’s not in their culture.  Their culture is to put their heads down and code, code, code.

Indeed, after thinking more about the Engine Advocacy presentation, it occurred to me that reason the so-called “troll” phenomenon hits software/internet companies more than others is that companies in that space cannot even conceive of the fact they could be infringing because they never bothered to check the prior art.  Infringement “just happens” to them; they are victims of evil “trolls,” rather than suffering the consequences of failing to perform even a rudimentary prior art search.

This has been somewhat rambling but I wanted to get it down before I forgot it all.  In the next few days I will explore some of the practical absurdities that follow from the proposed rules.